UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q10-Q/A
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 25,June 26, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition Period from ________ to ________
Commission File Number 0-8771
Evans & Sutherland Computer Corporation
(Exact name of registrant as specified in its charter)
UTAH 87-0278175
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
600 Komas Drive, Salt Lake City, Utah 84108
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (801) 588-1000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ____
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding Shares at October 30,July 31, 1998
- ----------------------------------- --------------------------------------
Common Stock, $0.20 par value 9,910,236
110,080,830
Form 10-Q10-Q/A
Evans & Sutherland Computer Corporation
Quarter Ended September 25,QUARTER ENDED June 26, 1998
Page No.
PART IThis Amendment on Form 10-Q/A amends the Registrant's Quarterly Report on Form
10-Q, as filed by the Registrant on August 10, 1998, and is being filed to
reflect the restatement of the Registrant's condensed consolidated financial
statements. See Note 2 - FINANCIAL INFORMATION
ITEM 1.Restatement of Quarterly Financial Statements Condensed Consolidated Statements of Operations -
Three Months and Nine Months Ended September 25,
1998 and September 26, 1997............................ 3
Condensed Consolidated Balance Sheets -
September 25, 1998 and December 31, 1997............... 4
Condensed Consolidated Statements of Cash Flows -
Nine Months Ended September 25, 1998 and
September 26, 1997..................................... 5in Notes
to Condensed Consolidated Financial Statements............................................. 6
ITEM 2. Management's Discussion and AnalysisStatements for a discussion of Financial
Condition and Results of Operations ...................... 9
PART II - OTHER INFORMATION
ITEM 2. Changes in Securities and Use of Proceeds................. 15
ITEM 6. Exhibits and Reports on Form 8-K.......................... 16
Signature Page............................................................the basis for
such restatement.
Page No.
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
Condensed Consolidated Statements of Operations - Three Months
and Six Months Ended June 26, 1998 (as restated) and
June 27, 1997 3
Condensed Consolidated Balance Sheets - June 26, 1998 (as
restated) and December 31, 1997 4
Condensed Consolidated Statements of Cash Flows - Six
Months Ended June 26, 1998 and June 27, 1997 5
Notes to Condensed Consolidated Financial Statements 6
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
PART II - OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders 16
ITEM 6. Exhibits and Reports on Form 8-K 17
Signature Page 17
2
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
EVANS & SUTHERLAND COMPUTER CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands except per share amounts)
Three Months Ended NineSix Months Ended
---------------------------------- -----------------------------------
September 25, SeptemberJune 26, September 25, SeptemberJune 27, June 26, June 27,
1998 1997 1998 1997
--------------- --------------- ---------------- ----------------
(Restated - See (Restated - See
Note 2) Note 2)
Net sales $ 47,26243,638 $ 38,45137,907 $ 133,32186,059 $ 110,00071,549
Cost of sales 26,625 19,167 76,280 58,16424,359 20,483 49,655 38,997
--------------- --------------- ---------------- ----------------
Gross profit 20,637 19,284 57,041 51,83619,279 17,424 36,404 32,552
--------------- --------------- ---------------- ----------------
Expenses:
Marketing, general and administrative 9,326 8,632 17,967 16,476
Research and development 6,808 6,746 13,485 12,592
Acquired in-process technology 20,780 - 20,780 -
--------------- --------------- ---------------- ----------------
Operating expenses:
Marketing, general and administrative 11,495 8,679 29,462 25,155
Research and development 8,804 5,822 22,289 18,414
Write-off of acquired research
and development (note 4) - - 27,925 -
--------------- --------------- ---------------- ----------------
Total operating expenses 20,299 14,501 79,676 43,56936,914 15,378 52,232 29,068
--------------- --------------- ---------------- ----------------
Operating earnings (loss) 338 4,783 (22,635) 8,267(17,635) 2,046 (15,828) 3,484
Other income, net 443 319 1,561 1,557572 661 1,118 1,238
--------------- --------------- ---------------- ----------------
Earnings (loss) before income taxes 781 5,102 (21,074) 9,824(17,063) 2,707 (14,710) 4,722
Income tax expense 275 1,277 2,247 2,6131,208 732 1,972 1,336
--------------- --------------- ---------------- ----------------
Net earnings (loss) $ 506(18,271) $ 3,8251,975 $ (23,321)(16,682) $ 7,2113,386
=============== =============== ================ ================
Earnings (loss) per share (note 1):share:
Basic $ 0.05(2.04) $ 0.420.22 $ (2.50)(1.85) $ 0.800.37
Diluted $ 0.05(2.04) $ 0.400.21 $ (2.50)(1.85) $ 0.760.36
Weighted average common and common
equivalentcsharestoutstanding:
Basic 10,011 9,056 9,343 9,0478,939 9,017 9,009 9,042
Diluted 10,890 9,597 9,343 9,4778,939 9,394 9,009 9,414
See accompanying notes to condensed consolidated financial statements.
3
EVANS & SUTHERLAND COMPUTER CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
September 25,June 26, December 31,
1998 1997
----------------------------- ----------------
(Restated - See
Note 2)
Assets (Unaudited)
------
Assets
------
Current assets:
Cash and cash equivalents $ 28,19217,649 $ 8,176
Marketable securities 27,10116,535 48,928
Accounts receivable, less allowance for doubtful
receivables of $1,545$1,940 in 1998 and $851 in 1997 44,27343,228 36,066
Inventories (note 2) 36,36430,580 26,885
Costs and estimated earnings in excess of billings
on uncompleted contracts 52,02963,747 51,799
Deferred income taxes 6,8857,555 4,224
Prepaid expenses and deposits 4,3494,529 3,620
----------------------------- ----------------
Total current assets 199,193183,823 179,698
-------------- ----------------
Property, plant, and equipment, at cost 131,562129,880 123,168
Less accumulated depreciation and amortization 84,44783,110 78,800
----------------------------- ----------------
Net property, plant, and equipment 47,11546,770 44,368
-------------- ----------------
Investment securities 3,2143,228 5,000
Goodwill, net (note 4) 7,561 -16,118 101
Deferred income taxes 5,4583,164 3,802
Other assets 1,514 1,522
-------------- ----------------
17,747 10,324
--------------1,479 1,421
--------------- ----------------
Total assets $ 264,055254,582 $ 234,390
============================= ================
Liabilities and Stockholders' Equity
------------------------------------------------------------------------------
Current liabilities:
Notes payable to banks $ 3,5745,000 $ 950
Current portion of long-term debt 304401 -
Accounts payable 14,10917,440 14,353
Accrued expenses 28,63125,879 18,061
Customer deposits 4,2505,223 6,574
Income taxes payable 719771 4,462
Billings in excess of costs and estimated earnings
on uncompleted contracts 8,2358,404 6,341
----------------------------- ----------------
Total current liabilities 59,82263,118 50,741
-------------- ----------------
Long-term debt, less current portion 18,43318,443 18,015
-------------- ----------------
Redeemable preferred stock, class B-1, no par value; authorized
1,500,000 shares; issued and outstanding 901,498 shares at
September 25, 1998 and no shares at December 31, 1997 (note 5) 23,149 -
-------------- ----------------
Stockholders' equity:
Common stock, $.20 par value; authorized 30,000,000 shares;
issued and outstanding 9,889,30210,058,367 shares at September 25,June 26,
1998 and 9,066,743 shares at December 31, 1997 1,9782,012 1,813
Additional paid-in capital 28,03631,840 8,025
Retained earnings 132,255138,893 155,576
Net unrealized loss on marketable securities (65)(103) (68)
Cumulative translation adjustment 447379 288
----------------------------- ----------------
Total stockholders' equity 162,651173,021 165,634
----------------------------- ----------------
Total liabilities and stockholders' equity $ 264,055254,582 $ 234,390
============================= ================
See accompanying notes to condensed consolidated financial statements.
4
EVANS & SUTHERLAND COMPUTER CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
(In thousands)
NineSix Months Ended
---------------------------------
September 25, September------------------------------------
June 26, June 27,
1998 1997
-------------- ----------------------------
Net cash provided by (used in) operating activities $ (8,062)(14,215) $ 8,59212,657
-------------- ----------------------------
Cash flows from investing activities:
Capital expenditures (8,757) (8,184)(5,947) (5,929)
Purchases of marketable securities (15,298) (59,479)(3,700) (36,046)
Proceeds from sale of marketable securities 39,604 55,55838,501 25,601
Acquisition of businesses, less cash acquired (7,603) -
Proceeds from sale of investment securities 3,341 -
Purchases of investment securities (310) (3,650)-
-------------- ----------------------------
Net cash provided by (used in) investing activities 10,977 (15,755)24,282 (16,374)
-------------- ----------------------------
Cash flows from financing activities:
Net proceeds from issuance of common stock 1,809 2,4431,256 704
Net borrowings (payments) under line of credit and other agreements 2,386 (3,816)
Net proceeds from issuance of preferred stock 23,149 -agreement 4,142 (1,550)
Purchases of treasury stock (10,231) (2,974)(5,837) (2,190)
-------------- ----------------------------
Net cash provided by (used in)used in financing activities 17,113 (4,347)(439) (3,036)
-------------- ----------------------------
Effect of foreign exchange rate changes on cash (12) 346(155) 192
-------------- ----------------------------
Net increase (decrease) in cash and cash equivalents 20,016 (11,164)9,473 (6,561)
Cash and cash equivalents at beginning of year 8,176 16,521
-------------- ----------------------------
Cash and cash equivalents at end of period $ 28,19217,649 $ 5,3579,960
============== ============================
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest $ 1,177596 $ 1,325664
Income taxes $ 7,0186,943 $ 1,909
Non cash items during the period for:
Depreciation and amortization $ 8,230 $ 7,1481,900
See accompanying notes to condensed consolidated financial statements.
5
EVANS & SUTHERLAND COMPUTER CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
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
ninesix months ended September 25,June 26, 1998 should be read in conjunction with the
Company's annual report on Form 10-K for the year ended December 31,
1997.
The accompanying unaudited condensed consolidated balance sheets,
statements of operations 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 ninesix
month periods ended September 25,June 26, 1998 are not necessarily indicative of the
results to be expected for the full year.
Earnings (Loss) Per Common Share
--------------------------------
Earnings (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 are
considered to be common stock equivalents.
Basic earnings (loss) per common share is the amount of earnings (loss)
for the period available to each share of common stock outstanding during
the reporting period. Diluted earnings (loss) per share is the amount of
earnings (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 earnings (loss) per common share, the earnings (loss) were
the same for both the basic and diluted calculation. Weighted-average
shares of 930,287 and 7,308 for the three months ended September 25, 1998
and September 26, 1997, respectively, and 400,882 and 6,164 for the nine
months ended September 25, 1998 and September 26, 1997, respectively,
were not included in the computation of diluted earnings per share
because to do so would have been anti-dilutive for the period. A reconciliation
between the basic and diluted weighted-average number of common shares
for the three months and ninesix months ended September 25,June 26, 1998 and September 26,June 27,
1997, is summarized as follows (in thousands):
Three Months Ended NineSix Months Ended
September 25, SeptemberJune 26, September 25, SeptemberJune 27, June 26, June 27,
1998 1997 1998 1997
------------------------------ ------------------------------------------- ------------- ------------ ------------
(Unaudited) (Unaudited)
Basic weighted-average number of
common shares outstanding during
the period 10,011 9,056 9,343 9,0478,939 9,017 9,009 9,042
---------- ---------- --------- ----------
Weighted-average number of dilutive common
stock options outstanding during
the period 235 541 - 430
Weighted-average number of
redeemable preferred shares
outstanding during the period 644 - - -
------- ------- ------- -------377 372
---------- ---------- --------- ----------
Diluted weighted-average number of
common shares outstanding during
the period 10,890 9,597 9,343 9,477
======= ======= ======= =======8,939 9,394 9,009 9,414
========== ========== ========= ==========
6
EVANS & SUTHERLAND COMPUTER CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
2. RESTATEMENT OF QUARTERLY FINANCIAL STATEMENTS
Subsequent to the issuance of the Company's June 26, 1998 condensed
consolidated financial statements, the SEC issued guidelines on its views
regarding the valuation methodology used in determining acquired
in-process technology expensed on the date of acquisition. As a result of
these guidelines, the Company has modified its methods used to value the
acquired in-process technology and other intangible assets in connection
with the acquisitions of AccelGraphics, Inc. and Silicon Reality, Inc.
Initial calculations of the value of the acquired in-process technology
were based on the cost required to complete each project, the after-tax
cash flows attributable to each project, and the selection of an
appropriate rate of return to reflect the risk associated with the stage
of completion of each project. Revised calculations of the value of the
acquired in-process technology are based on adjusted after-tax cash flows
that give explicit consideration to the SEC's views on acquired
in-process technology as set forth in its September 15, 1998 letter to
the American Institute of Certified Public Accountants. As a result of
the revised valuations, the amount of purchase price allocated to
in-process technology decreased from $27,925 to $20,780 and the amount
ascribed to other intangible assets, goodwill and deferred income taxes
increased from $7,921 to $16,032. The Company also reclassified $84 of
goodwill from other noncurrent assets.
The following table outlines the revisions to the previously reported
condensed consolidated financial statements:
Three Months Ended Six Months Ended
June 26, 1998 June 26, 1998
As Restated As Previously As Restated As Previously
Reported Reported
--------------- ---------------- -------------- ----------------
(Unaudited) (Unaudited)
Acquired in-process technology $ 20,780 $ 27,925 $ 20,780 $ 27,925
Operating earnings (loss) (17,635) (24,780) (15,828) (22,973)
Earnings (loss) before income taxes (17,063) (24,208) (14,710) (21,855)
Income tax expense 1,208 1,208 1,972 1,972
Net earnings (loss) (18,271) (25,416) (16,682) (23,827)
Basic and diluted earnings (loss)
per share (2.04) (2.84) (1.85) (2.64)
At June 26, 1998
As Restated As Previously
Reported
--------------- ----------------
(Unaudited)
Deferred tax asset, current $ 7,555 $ 6,564
Goodwill, net 16,118 7,921
Deferred tax asset, noncurrent 3,164 5,123
Retained earnings 138,893 131,749
Total stockholders' equity 173,021 165,877
EVANS & SUTHERLAND COMPUTER CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
3. INVENTORIES
Inventories consist of the following:
September 25,June 26, December 31,
1998 1997
------------ ------------
(Unaudited)
Raw materials and supplies $ 23,31522,343 $ 13,674
Work-in-process 9,4184,323 10,040
Finished goods 3,6313,914 3,171
----------- -------------------------- --------------
$ 36,36430,580 $ 26,885
=========== ===========
3.=============== ==============
4. COMPREHENSIVE EARNINGS (LOSS)
The Company adopted Statement of Financial Accounting Standards No. 130
(SFAS 130), "Reporting Comprehensive Income," effective January 1, 1998.
SFAS 130 establishes standards for reporting and displaying comprehensive
earnings (loss) and its components in financial statements. The
components of the Company's comprehensive earnings (loss) are as follows:
Three Months Ended NineSix Months Ended
September 25, SeptemberJune 26, September 25, SeptemberJune 27, June 26, June 27,
1998 1997 1998 1997
----------------------------- ------------------------------------------ -------------- -------------- -------------
(Unaudited) (Unaudited)
Net earnings (loss) $ 506(25,416) $ 3,8251,975 $ (23,321)(23,827) $ 7,2113,386
Unrealized gain (loss) on marketable
securities, net of income taxes and
reclassification adjustments 38 41 3 (150)(213) 100 (35) (191)
Foreign currency translation
adjustments, net of income taxes 68 (41) 159 171
---------- --------- ----------- ----------37 45 91 212
-------------- -------------- -------------- -------------
Comprehensive earnings (loss) $ 612(25,592) $ 3,8252,120 $ (23,159)(23,771) $ 7,232
========== ========= =========== ==========3,407
============== ============== ============== =============
4.5. BUSINESS ACQUISITIONS
On June 26, 1998, the Company acquired all of the outstanding stock of
AccelGraphics, Inc. (AGI) for approximately $23.7 million$23,731 in cash and 1,109,303
shares of the Company's common stock.stock valued at $25,695. In addition, the
Company converted all outstanding AGI options into options to purchase
approximately 351,000 shares of common stock of the Company with a fair
value of $3,400 and incurred transaction costs of approximately $1,100.
AGI is based in Milpitas, California, and is a provider of
high-performance, cost-effective, three-dimensional graphics subsystem
products for the professional Windows NT and Windows 95 markets. The
acquisition was accounted for by the purchase method and, accordingly,
the results of operations of AGI have beenwill be included in the Company's
consolidated financial statements from June 26, 1998 forward. The excess of the purchase price over the
fair value of the net identifiable assets acquired of $7.5 million has
been recorded as goodwill and is being amortized on a straight-line basis
over 5 years. In connection with the acquisition, the Company wrote off
$26.8 million of in-process research and development on the date of
acquisition.
Also on June 26, 1998, the Company acquired the assets and assumed
certain liabilities of Silicon Reality, Inc. (SRI) for a purchase price
of approximately $1.5 million.$1,207, including transaction costs of approximately
$250. SRI is based in Federal Way, Washington, and designs and produces
three-dimensional graphics hardware and software products for the
personal computer marketplace. This acquisition was accounted for by the
purchase method and, accordingly, the results of operations of SRI have beenwill
be included in the Company's consolidated financial statements from June
26, 1998 forward. The excess of the
purchase price over the fair value of the net identifiable assets
acquired of $0.4 million has been recorded as goodwill and is being
amortized on a straight-line basis over 5 years. In connection with the
acquisition, the Company wrote-off $1.1 million of in-process research
and development on the date of acquisition.
7
EVANS & SUTHERLAND COMPUTER CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
The total purchase price and final allocation among the tangible and
intangible assets and liabilities acquired (including acquired in-process
technology) is summarized as follows:
Total Purchase Price:
Total cash consideration $ 24,688
Total stock consideration 25,695
Value of options assumed 3,400
Transaction costs 1,350
---------------
$ 55,133
===============
Amortization
Period
(Months)
---------------
Purchase Price Allocation:
Net tangible assets $ 17,329
Intangible assets:
Workforce-in-place 1,019 60
Customer list 250 60
AccelGraphics name 699 36
Current products 5,640 6 - 24
Core technology 1,754 84
Goodwill 7,662 84
In-process technology 20,780 Expensed
----------------
$ 55,133
================
The following unaudited pro forma financial information presents the
combined results of operations of the Company, AGI, and SRI as if the
acquisitions had occurred as of the beginning of 1998 and 1997, after
giving effect to certain adjustments, including, but not limited to,
amortization of goodwill, reversal of in-process research and development
charges recorded in 1998, and decreased interest income and entries to
conform to the corresponding tax effectCompany's accounting policies. The $20,780 charge for
acquired in-process technology has been excluded from the pro forma
results as it is a result of the reduction in cash and
marketable securities that would have occurred to acquire these
companies.
Ninematerial non-recurring charge.
Six Months Ended
September 25,June 26, 1998 September 26,June 27, 1997
------------------ ---------------------------------- ----------------
(Unaudited)
Net sales $ 150,058102,796 $ 137,25594,639
Net earnings (loss) $ (4,315)(7,130) $ 5,7401,407
Earnings (loss) per share:
Basic $ (0.43)(0.70) $ 0.570.14
Diluted $ (0.43)(0.70) $ 0.540.13
There can be no assurance that the Company will be successful in
integrating these separate companies, retaining key employees, or that
these acquisitions will not be viewed as disadvantageous to existing AGI
or SRI customers and/or existing E&S distributors that may consider
themselves as competitors of the combined entity and thus adversely
affect the Company's future operating results.
5. PREFERRED STOCK
EVANS & SUTHERLAND COMPUTER CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
6. SUBSEQUENT EVENT
On July 22, 1998, Intel Corporation purchased 901,408 shares of a series
of Class B-1 Preferred Stock, no par value, of the Company plus a warrant to
purchase an additional 378,462 shares of the Company's Class B-1
Preferred Stock at an exercise price of $33.28125$33.28 per share for
approximately $24 million, less transaction costs of approximately $850.million. These preferred shares have certain
liquidation and conversion rights, in addition to other rights and
preferences. Intel Corporation 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") for any
transaction qualifying as a Corporate Event, as defined below. If Intel
Corporation fails to exercise its right of first refusal as to a
Corporate Event, Intel Corporation shall, upon the Company's entering
into an agreement to consummate a Corporate Event, have the right to sell
to the Company any or all of the Intel Shares. A Corporate Event shall
mean any of the following, whether accomplished through one or a series
of related transactions: (a) certain transactions that result in a
greater than 33% change in the total outstanding number of voting
securities of the Company immediately after such issuance; (b) an
acquisition of the Company or any of its significant subsidiaries by
consolidation, merger, share purchase or exchange or other reorganization
or transaction in which the holders of the Company's or such significant
subsidiary's outstanding voting securities immediately prior to such
transaction own, immediately after such transaction, securities
representing less than 50% of the voting power of the Company, any such
significant subsidiary or the person issuing such securities or surviving
such transaction, as the case may be; (c) the acquisition of all or
substantially all the assets of the Company of any significant
subsidiary; (d) the grant by the Company or any of its significant
subsidiaries of an exclusive license for any material portion of the
Company's or such significant subsidiary's intellectual property to a
person other than Intel Corporation or any of its subsidiaries; or (e)
any transaction or series of related transactions that result in the
failure of the majority of the members of the Company's Board of
Directors immediately prior to the closing of such transaction or series
of related transactions failing to constitute a majority of the Board of
Directors (or its successor) immediately following such transaction or
series of related transactions. In addition, the Company entered into a
cross-license agreement and an agreement to
accelerate development of high-end graphics and video subsystems for
Intel-based workstations.
8workstations and a cross-license agreement.
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. All data in the tables are in thousands except for percentages. Except for
the historical information contained herein, this report on Form 10-Q10-Q/A 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 (E&S(R) or the Company) develops and
manufactures hardware and software for visual systems that produce vivid and
highly realistic three-dimensional (3-D) graphics and synthetic environments.
The Company's product offerings include a full range of high-performance visual
systems for simulation, training and virtual reality applications, as well as
graphic accelerator products for personal computer workstations.
E&S is organized into six business units. Each business unit develops and
markets its products to a worldwide customer base. These business units can be
grouped into two areas: core businesses and new businesses. The core businesses
are the simulation-related units in which E&S has an established market presence
with significant market share and which represent the majority of the Company's
revenues and earnings. The new businesses are in high growth markets where E&S
has superior technology which can be directed to new applications.
Core businesses:
Government Simulation
Government Simulation provides visual systems for flight and ground
training and related services to U.S. and international armed forces,
NASA, and aerospace companies. E&S remains an industry leader for
visual systems sales to various U.S. government agencies and more than
20 foreign governments for the primary purpose of trainng vehicle
operators.
E&S anticipates continued growth in this marketplace as simulation
training increases in value as an alternative to other training
methods, and as simulation training technology and cost-effectiveness
improve. Future customer demands will include lower-cost PC-based
systems, more open systems with interoperable databases, and custom
display systems, all of which E&S believes it is well positioned to
provide.
Commercial Simulation
Commercial Simulation is a leading independent supplier of visual
systems for flight simulators for commercial airlines.
The business unit's hardware platform, consisting of an ESIG(R) 3350GT
image generator and ESCP 2000 raster/calligraphic projectors, provides
high image quality, reliability, and ease-of use. E&S's Commercial
Simulation systems have been approved by major aviation regulatory
agencies. In the future, the Company believes it will enhance its
industry position by using E&S Harmony(TM) image generators and
advanced display products, and by expanding its product base to include
other flight simulator products.
New businesses:
Board Products
Board Products (formerly Display Systems) supplies high-performance,
high-margin board-level products for simulation, avionics, and vehicle
displays. Board Products is transitioning from a project-oriented model
to being a product-based business, with desktop simulation solutions as
its principal target.
9
The Board Product's Rhythm(TM) board, a member of the Company's
Symphony(TM) line of products, combines the Company's REALimage(TM)
graphics technology with an onboard processor to create a compact and
cost-effective, low-end simulation solution. Board Products intends to
develop full-capability board level image generators and advanced
display products, and to participate more fully in the in-vehicle
training marketplace.
Desktop Graphics
Desktop Graphics provides REALimage graphics accelerator technology for
workstation manufacturers and NT-based personal computers. InauguralSince
inaugural shipments began in June 1997.1997, 12 manufacturers of Windows NT-based
computers have selected REALimage graphics acceleration technology. In
March 1998, volume production of the third-generation REALimage chip
design began, thereby keeping pace with introductions of new, more
powerful processors from Intel. The Company plans two technology
upgrades this year. REALimage technology supports the full range of
professional OpenGL graphics applications, including, among others,
design engineering, simulation, digital content creation,
visualization, animation, and entertainment.
On June 26, 1998, the Company acquired AccelGraphics, Inc.(AGI), a
provider of high-performance, cost-effective, three-dimensional ("3D")
graphics subsystem products for the professional Windows NT and Windows
95 markets, and Silicon Reality Inc. (SRI), a designer and producer of
3D graphics hardware and software products for the personal computer
marketplace, to expand the Company's Desktop Graphics development,
integration and distribution within the desktop graphics marketplace.
AGI pioneered the development of professional 3D graphics subsystems
for use with Microsoft's Windows NT operating system ("NT"). A 3D
graphics subsystem integrates graphics acceleration chips (including
E&S's REALimage graphics accelerator chips), specialized hardware,
firmware, software and memory. AGI's 3D graphics subsystems, when
included in an Intel Pentium, Pentium Pro, Pentium Pro II or Digital
Alpha based computer, create a class of computer system called a
"Personal Workstation." Personal Workstations, which often sell for
less than $10,000, provide capabilities and performance comparable to
more expensive 3D graphics RISC/UNIX workstations.
Following the Company's acquisition of AGI AGI's name was changed to
Evans & Sutherland Graphics Corporation (ESGC). ESGC currently offers a
range ofthree distinct 3D graphics subsystem product
lines. ESGC'sAGI's products include a family of 3D graphics subsystems for
applications based on OpenGL and other 3D application programming
interfaces.interfaces, such as Autodesk's Heidi and Microsoft's DirectX. Through
ESGC'sAGI's extensive experience in 3D algorithms, the interaction of 3D
applications with OpenGL and overall 3D graphics system integration,
ESGCAGI delivers robust, well-integrated subsystem solutions to the
professional 3D graphics market. ESGCAGI sells its products through
original equipment manufacturers and a worldwide network of value added
resellers and distributors.
Digital Studio
Digital Studio provides virtual studio products and services for
digital content production in the television, film, video, corporate
training, and multimedia industries at a lower cost than traditional
proprietary technology. MindSet(TM) Virtual Studio System and
FuseBox(TM) control software enable the use of virtual sets with live
talent for video. The MindSet system is in use at broadcast,
production, postproduction, and educational institutions worldwide.
As the first Windows NT-based virtual set system, MindSet earned
immediate distinction at the 1997 National Association of Broadcasters
annual conference by being cited as one of the ten best "Prime Time"
digital products on exhibit. It also received an "Editors' Choice"
Award from AV Video Multimedia Magazine, and a "1997 Product Innovation
Award" from Computer Graphics World Magazine.
10
Digital Theater
Digital Theater focuses on hardware, software, and content development
for digital theater venues, and is a leading supplier of digital
planetarium projection systems (Digistar(R) II). Digital Theater is
dedicated to the emerging, large format digital theater marketplace.
Efforts are focused on hardware, software, and content development.
Digital Theater's highest performance system, StarRider(TM) Digital
Theater, is designed to display full-color, computer-generated 3-D
images, in either playback or real-time mode, onto a domed surface.
StarRider was recently selected by two prestigious planetariums and are
scheduled for completion in 1998 and 1999.
RESULTS OF OPERATIONS
The following table summarizes changes in results of operations for the periods
indicated and presents the percentage of increase (decrease) by listed items
compared to the indicated prior period ($ in thousands):period:
Increase (decrease) Increase (decrease)
between third quarterSecond Quarter 1998 between first nine monthsBetween First Six Months of
and Second Quarter 1997 1998
and third quarter 1997 and first nine monthsAnd First Six Months of 1997
------------------------------- ------------------------------------------------------------- ------------------------------
(Unaudited) (Unaudited)
Net sales
$ 22.9%5,731 15.1% $ 21.2%
8,811 23,32114,510 20.3%
Cost of sales 7,458 38.9% 18,116 31.1%3,876 18.9% 10,658 27.3%
------------ ------------
Gross profit 1,353 7.0% 5,205 10.0%1,855 10.6% 3,852 11.8%
Expenses:
Marketing, general and administrative 2,816 32.4% 4,307 17.1%694 8.0% 1,491 9.0%
Research and development 2,982 51.2% 3,875 21.0%
Write-off of acquired research and62 0.9% 893 7.1%
Acquired in-process technology 20,780 - 20,780 - 27,925 -
development
------------ ------------
Operating expenses 5,798 40.0% 36,107 82.9%21,536 140.0% 23,164 79.7%
------------ ------------
Operating earnings (loss) (4,445) (92.9%(19,681) (961.9%) (30,902) (373.8%(19,312) (554.3%)
Other income, net 124 38.9% 4 0.3%(89) (13.5%) (120) (9.7%)
------------ ------------
Earnings (loss) before income (4,321) (84.7%taxes (19,770) (730.3%) (30,898) (314.5%(19,432) (411.5%)
taxes
Income tax expense (1,002) (78.5%) (366) 14.0%476 65.0% 636 47.6%
------------ ------------
Net earnings (loss) $ (3,319) (86.8%(20,246) (1,025.1%) $(30,532) (423.4%$ (20,068) (592.7%)
============ ============
Sales
Sales for the thirdsecond quarter of 1998 increased 22.9%15.1% to $47.3$43.6 million compared
to $38.5$37.9 million for the thirdsecond quarter of 1997. Sales for the ninesix month period
ended September 25,June 26, 1998 increased 21.2%20.3% to $133.3$86.1 million compared to $110.0$71.5 million
for the ninesix month period ended September 26,June 27, 1997. The quarter-to-date and
year-to-date increases in sales during 1998 were primarily due to strong backlog
levels going into 1998 and revenue growth in the Company's Government Simulation, Commercial Simulation
and Desktop Graphics business units and three months of ESGC sales (formerly
AGI, a business acquired at the beginning of the third quarter of 1998).units. Domestic sales for the thirdsecond quarter of
1998 increased 77.5%45% to $24.5$11.6 million as compared to $13.8$8.0 million for the thirdsecond
quarter of 1997, while foreign sales for the thirdsecond quarter of 1998 decreased 7.7%3%
to $22.8$16.8 million compared to $24.7$17.4 million for the thirdsecond quarter of 1997.
Domestic sales for the first ninesix months of 1998 increased 70.3%53% to $72.9$27.9 million
as compared to $42.8$18.2 million for the first ninesix months of 1997, while foreign
sales for the first ninesix months of 1998 decreased 10.1%24.3% to $60.4$21.6 million compared
to $67.2$28.5 million for the first ninesix months of 1997.
11
Cost of Sales
Cost of sales, as a percentage of sales, was 56.3%55.8% for the thirdsecond quarter of
1998 compared to 49.8%54.0% for the thirdsecond quarter of 1997. For the ninesix month period
ended September 25,June 26, 1998, cost of sales as a percentage of sales was 57.2%57.7% compared
to 52.9%54.5% for the ninesix month period ended September 26,June 27, 1997. The increase in cost of
sales, as a percentage of sales, for the thirdsecond quarter and for the first ninesix
months of 1998, as compared to the same periods in 1997, is primarily due to
product mix, timing of shipments and completed contracts, and lower margin
government simulation contracts in which the Company served as the prime
contractor. In addition,These higher costs were partially offset by lower cost of sales as a
percentage of sales was negatively impactedon its Commercial Simulation and Desktop Graphics business
units. Royalties and commissions generated by the addition of
ESGC whoseDesktop Graphics have relatively
low associated costs. The Company's Board Products business unit also had higher
cost of sales as a percentage of sales was 77.1% duringin the thirdsecond quarter of 1998.
Operating1998 as compared
to the second quarter of 1997 reflecting the effects of certain design changes,
among other factors.
Expenses
Total operating expenses for the thirdsecond quarter of 1998 increased 40.0%140.0% to $20.3$36.9 million
compared to $14.5$15.4 million for the thirdsecond quarter of 1997, and
also increasedbut decreased as a
percentage of sales, excluding the write-off of acquired in-process technology,
to 42.9%37.0% from 37.7%40.6% for the respective periods. Total operating expenses for the first ninesix
months of 1998 increased 82.9%79.7% to $79.7$52.2 million compared to $43.6$29.1 million for
the first ninesix months of 1997, but actually decreased as a percentage of sales, excluding
the write-off of acquired research and development, to 38.8%36.5% from 39.6%40.6% for the
respective periods. The primary reasons for the increase in
operating expenses are growth in overall operations and sales combined with
additional operating expenses incurred by ESGC of $2.8 million during the
third quarter of 1998.
Marketing, General, and Administrative: Marketing, general, and administrative
expense for the thirdsecond quarter of 1998 increased 32.4%8.0% to $11.5$9.3 million compared
to $8.7$8.6 million for the thirdsecond quarter of 1997, and increasedbut decreased as a percentage of
sales to 24.3%21.4% from 22.6%22.8% for the respective periods. Marketing, general, and
administrative expenses for the first ninesix months of 1998 increased 17.1%9.0% to $29.5$18.0
million compared to $25.2$16.5 million for the first ninesix months of 1997, but
decreased slightly as a percentage of sales to 22.1%20.9% from 22.9%23.0% for the respective
periods. The increases in marketing, general, and administrative expenses during
the thirdsecond quarter and the first ninesix months of 1998 are primarily due to
increased labor costs related to increased headcount, wages and incentive
bonuses due to higher profitability, consulting and professional services,
travel costs, and administrative costs related to operational growth.
In addition, ESGC incurred additional marketing, general and
administrative expenses of $1.8 million during the third quarter of
1998.growth in operations.
Research and Development: Research and development expense for the thirdsecond
quarter of 1998 increased 51.2%0.9% to $8.8$6.8 million compared to $5.8$6.7 million for the
thirdsecond quarter of 1997, and increasedbut decreased as a percentage of sales to 18.6%15.6% from
15.1%17.8% for the respective periods. Research and development expense for the first
ninesix months of 1998 increased 21.0%7.1% to $22.3$13.5 million compared to $18.4$12.6 million for
the first ninesix months of 1997, but remained flatdecreased as a percentage of sales at 16.7%.to 15.7%
from 17.6% for the respective periods. The increases in research and development
expense during the thirdsecond quarter and the first ninesix months of 1998 are primarily
due to increased headcount and activity related to the development of the
Company's Symphony line of products and the additional research and development
activities of ESGC, which totaled approximately $1.0 million during
the third quarter of 1998.
Write-off ofproducts.
Acquired Research and DevelopmentIn-Process Technology
The write-off of acquired researchin-process technology represents a non-recurring
charge of $20.8 million, associated with the acquisitions of AGI and development of $27.9 millionSRI
completed in June 1998, for the
nine months ended September 25, 1998 represents management's estimated
value of incomplete researchtechnology which had not reached technological
feasibility and development projects acquired through
business and asset purchases made duringhad no alternative future use.
Other Income, Net
Other income, net, for the second quarter of 1998.1998 decreased 13.5% to $0.6
million compared to $0.7 million for the second quarter of 1997. Other income,
net, for the first six months of 1998 decreased 9.7% to $1.1 million compared to
$1.2 million for the first six months of 1997. The decreases in other income for
the second quarter and first six months of 1998 are primarily due to a decrease
in interest income due to lower average cash and marketable securities balances.
Income Taxes
The Company's combined federal, state and foreign effective income tax rate was
35.0% of earnings before income taxes for the third quarter of 1998.
The effective income tax rate was 32.8%32.5% of earnings before income taxes excluding acquisition expenses related to
the write-off of in-process research and developmenttechnology of $27.9$20.8 million for the second quarter
and the first ninesix months of 1998. The tax rate for these same periods in 1997
was 25.0%27.0% and 26.6%28.3%, respectively. These rates are calculated based on an
estimated annual effective tax rate applied to income before income taxes.
12
LIQUIDITY & CAPITAL RESOURCES
Working capital at September 25,June 26, 1998 was $139.4$120.7 million compared to $129.0 million
at December 31, 1997. This includes cash, cash equivalents and marketable
securities of $55.3$34.2 million and $57.1 million at September 25,June 26, 1998 and December 31,
1997, respectively. The Company's operations used $8.1$14.2 million during the first
ninesix months of 1998, compared to $8.6$12.7 million of cash provided by operations
during the first ninesix months of 1997. Cash was primarily provided from net proceeds for the issuance of 901,408 shares of the Company's Class B-1
Preferred Stock during the third quarter of 1998 (see discussion below), net
proceeds of sales of marketable and investment securities, net borrowings under
line of credit agreements, and proceeds from employee stock purchase and option
plans. Cash was principally used to acquire new businesses, to repurchase and
retire shares of the Company's common stock, to purchase marketable securities,
and to purchase capital equipment.
At September 25,June 26, 1998, the Company had unsecured credit facilities with foreign banks
with total availability of approximately $11 million, for which there were
approximately $3.6$5 million of borrowings outstanding, and a $5 million unsecured
line for letters of credit with a U.S. bank.
On July 22, 1998, the Company obtained approximately $24.0 million, less
transaction costs of approximately $850,000, 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. The Investor 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 "Investor Shares") for any transaction qualifying as a Corporate
Event, as defined below. If the Investor fails to exercise its right of first
refusal as to a Corporate Event, the Investor shall, upon the Company's entering
into an agreement to consummate a Corporate Event, have the right to sell to the
Company any or all of the Intel Shares. A Corporate Event shall mean any of the
following, whether accomplished through one or a series of related transactions:
(a) certain transactions that result in a greater than 33% change in the total
outstanding number of voting securities of the Company immediately after such
issuance; (b) an acquisition of the Company or any of its significant
subsidiaries by consolidation, merger, share purchase or exchange or other
reorganization or transaction in which the holders of the Company's or such
significant subsidiary's outstanding voting securities immediately prior to such
transaction own, immediately after such transaction, securities representing
less than 50% of the voting power of the Company, any such significant
subsidiary or the person issuing such securities or surviving such transaction,
as the case may be; (c) the acquisition of all or substantially all the assets
of the Company of any significant subsidiary; (d) the grant by the Company or
any of its significant subsidiaries of an exclusive license for any material
portion of the Company's or such significant subsidiary's intellectual property
to a person other than the Investor or any of its subsidiaries; or (e) any
transaction or series of related transactions that result in the failure of the
majority of the members of the Company's Board of Directors immediately prior to
the closing of such transaction or series of related transactions failing to
constitute a majority of the Board of Directors (or its successor) immediately
following such transaction or series of related transactions. See "Part II, Item
2. Changes in Securities and Use of Proceeds."
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
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
604,000 shares of its common stock; thus, 996,000 shares currently remain
available for repurchase. Stock may be acquired in the open market or through
negotiated transactions. Under the stock repurchase 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.
13
Management believes that existing cash and marketable securities balances,
borrowings available under its credit facilities and cash generated from
operations will be sufficient to meet the Company's anticipated operating
requirements for the next twelve months. The Company's cash and marketable
securities are available for strategic investments, mergers and acquisitions,
other potential cash needs as they may arise, and to fund the continuation of
its stock repurchase plan.
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
on November 11, 1996. Subsequent to February 18, 1998, the Company has
repurchased 264,000 shares of its common stock; thus, 336,000 shares currently
remain available for repurchase. 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.
The Company has not paid dividends on its common stock in the past and has no
present intention to do so in the future.
YEAR 2000 ISSUE
The Year 2000 issue is the resultSUBSEQUENT EVENTS
On July 22, 1998, Intel Corporation (Intel) purchased 901,408 shares of potential problems with computer systems or
any equipment with computer chips that store the year portiona series
of Preferred Stock, no par value, of the date as
just two digits (e.g. 98Company plus a warrant to purchase an
additional 378,462 shares at $33.28 per share for 1998). Systems using this two-digit approach will
not be ableapproximately $24 million.
These preferred shares have certain liquidation and conversion rights in
addition 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 identifyother rights 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,preferences. In addition, the Company is communicating with its main suppliersentered into
an agreement to accelerate development of technology productshigh-end graphics and services
regarding the Year 2000 status of such products or services. The Company has
identifiedvideo subsystems
for Intel-based workstations and is testing its main internal systems and expects to complete
testing in early 1999. Throughout 1998 and 1999 the Company expects to complete
implementation of any needed Year 2000-related modifications to its information
systems. The Company is also currently assessing its internal non-information
technology systems, and expects to complete testing and any needed modifications
to these systems in early 1999.
The Company's total cost relating to these activities has not been and is not
expected to be material to the Company's financial position, results of
operations, or cash flows. The Company believes that necessary modifications
will be made on a timely basis. However, there can be no assurance that there
will not be a delay in, or increased costs associated with, the implementation
of such modifications, or that the Company's suppliers will adequately prepare
for the Year 2000 issue. It is possible that any such delays, increased costs,
or supplier failures could have a material adverse impact on the Company's
operations and financial results, by, for example, impacting the Company's
ability to deliver products or services to its customers. The Company expects in
mid-1999 to finalize its assessment of and contingency planning for potential
operational or performance problems related to Year 2000 issues with its
information systems.
The Company's Year 2000 effort has included testing products currently or
recently on the Company's price list for Year 2000 issues. Generally, for
products that were identified as needing updates to address Year 2000 issues,
the Company has prepared or is preparing updates, or has removed or is removing
the product from its price list. Some of the Company's customers are using
product versions that the Company will not support for Year 2000 issues; the
Company is encouraging these customers to migrate to current product versions
that are Year 2000 ready.
For third party products which the Company distributes with its products, the
Company has sought information from the product manufacturers regarding the
products' Year 2000 readiness status. Customers who use the third-party products
are directed to the product manufacturer for detailed Year 2000 status
information. On its Year 2000 web site at www.es.com/investor/y2k_corp.html, the
Company provides information regarding which of its products are Year 2000 ready
and other general information related to the Company's Year 2000 efforts. The
Company's total costs relating to these activities has not been and is not
expected to be material to the Company's financial position or results of
operations.
The Company believes its current products, with any applicable updates, are
well-prepared for Year 2000 date issues, and the Company plans to support these
products for date issues that may arise related to the Year 2000. However, there
can be no guarantee that one or more current Company products do not contain
Year 2000 date issues that may result in material costs to the Company.
14
cross-license agreement.
FORWARD-LOOKING STATEMENTS
This quarterly report on Form 10-Q may be deemed to contain certain
forward-looking statements. Any forward-looking statements involve risks and
uncertainties, including but not limited to 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.
TRADEMARKS USED IN THIS FORM 10-Q
Digistar, E&S, ESIG, FuseBox, Harmony, MindSet, REALImage Technology, Real
Image, Rhythm, StarRider and Symphony 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.
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USEItem 4. SUBMISSION OF PROCEEDS
(a) On JulyMATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of Stockholders on May 21,
1998,1998. Proxies for the Company filed a Certificate of Designation,
Preferences and Other Rights of the Class B-1 Preferred Stock of the Company
designating 1,500,000 shares of Preferred Stock as Class B-1 Preferred Stock, no
par value. In the event of any voluntary or involuntary liquidation,
dissolution, or winding up of the Company, holders of the Class B-1 Preferred
Stock are entitled to receive the same cash or other property which the holders
of the Class B-1 Preferred Stock would have received if on such date such Class
B-1 Preferred Stock holdersmeeting were the holders of record of the number of shares
of common stock into which the shares of Class B-1 Preferred Stock are then
convertible. At any time after July 22, 1998, the Class B-1 Preferred Stock
entitles the holders to convert any or all of the shares of Class B-1 Preferred
Stock into shares of common stock at the current effective conversion ratio of
one-for-one, which is subject to adjustment as set forth in the Company's
Certificate of Designation, Preferences and Other Rights of the Class B-1
Preferred Stock. The holders of Class B-1 Preferred Stock have no voting rights.
If any dividend or other distribution payable in cash or other property is
declared on the common stock, the holders of the Class B-1 Preferred Stock on
the record date for such dividend or distribution shall be entitled to receive
on the date of payment or distribution of such dividend or other distribution
the same cash or other property which such holders would have received if on
such record date such holders were the holders of record of the number of shares
of common stock into which the shares of Class B-1 Preferred Stock are then
convertible.
(b) None.
(c) On July 22, the Company issued 901,408 shares of Class B-1 Preferred Stock,
no par value, and warrants to purchase 378,462 shares of the Company's Class B-1
Preferred Stock at an exercise price of $33.28125 per share to an "accredited
investor" as defined by Rule 501 of Regulation D promulgated by the Securities
and Exchange Commission under the Act for an aggregate consideration of
approximately $24.0 million, less transaction costs of approximately $850,000.
This transaction was exempt from the registration provision of the Actsolicited pursuant to
section 4(2) of the Act for transactions not involving a public offering,
based on the fact that the securities were offered and sold to one investor who
had access to financial and other relevant data concerning the Company, its
financial condition, business, and assets. At any time after July 22, 1998, the
Class B-1 Preferred Stock entitles the holders to convert any or all of the
shares of Class B-1 Preferred Stock into shares of common stock at the current
effective conversion ratio of one-for-one, which is subject to adjustment as set
forth in the Company's Certificate of Designation, Preferences and Other Rights
of the Class B-1 Preferred Stock. See "Liquidity and Capital Resources."Regulation 14A.
The
Investor 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 "Investor Shares") for any transaction qualifying as a
15
Corporate Event, as defined below. If the Investor fails to exercise its right
of first refusal as to a Corporate Event, the Investor shall, upon the Company's
entering into an agreement to consummate a Corporate Event, have the right to
sell to the Company any or all of the Intel Shares. A Corporate Event shall mean
any of the following, whether accomplished through one or a series of related
transactions: (a) certain transactions that result in a greater than 33% change
in the total outstanding number of voting securities of the Company immediately
after such issuance; (b) an acquisition of the Company or any of its significant
subsidiaries by consolidation, merger, share purchase or exchange or other
reorganization or transaction in which the holders of the Company's or such
significant subsidiary's outstanding voting securities immediately prior to such
transaction own, immediately after such transaction, securities representing
less than 50% of the voting power of the Company, any such significant
subsidiary or the person issuing such securities or surviving such transaction,
as the case may be; (c) the acquisition of all or substantially all the assets
of the Company of any significant subsidiary; (d) the grant by the Company or
any of its significant subsidiaries of an exclusive license for any material
portion of the Company's or such significant subsidiary's intellectual property
to a person other than the Investor or any of its subsidiaries; or (e) any
transaction or series of related transactions that result in the failure of the
majority of the members of the Company's Board of Directors immediately prioris divided into three classes
whose terms expire at successive annual meetings. Accordingly,
not all directors are elected at each Annual Meeting of
Stockholders. Gerald S. Casilli and James R. Oyler were
re-elected as Directors and other continuing Directors are:
Stewart Carrell, Peter O. Crisp, Ivan E. Sutherland and John E.
Warnock.
The matters described below were voted on at the Annual Meeting
of Stockholders, and the number of votes cast with respect to
each matter and, with respect to the closingelection of such transaction or seriesdirectors, for
each nominee, were as indicated.
1. Election of related transactions failingtwo directors to constitute a majorityserve until the 2001
Annual Meeting of Stockholders.
GERALD S. CASILLI
For: 7,802,387 Withheld: 44,529
JAMES R. OYLER
For: 7,799,636 Withheld: 47,280
2. Adoption of the BoardEvans & Sutherland 1998 Stock Option
Plan.
For: 5,338,986 Against: 2,395,332 Abstained: 80,480
Unvoted: 1,108,475
3. Amendment to the 1989 Stock Option Plan for Non-Employee
Directors.
For: 7,505,140 Against: 227,625 Abstained: 82,033
Unvoted: 1,108,475
4. Ratification of Directors (or its successor) immediately
following such transaction or seriesthe appointment of related transactions.
(d) Not required.KPMG Peat Marwick
LLP as independent auditors of the Company for the
fiscal year ending December 31, 1998.
For: 7,769,000 Against: 1,958 Abstained: 75,958
Unvoted: 1,076,357
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Regulation S-K
Exhibit No. Description
3.1 Certificate2.1 Agreement and Plan of Designation, Preferences and
Other Rights of the Class B-1 Preferred Stock of the
Company.
4.1 Certificate of Designation, Preferences and Other
Rights of the Class B-1 Preferred Stock ofMerger, dated April
22, 1998, among the Company, E&S Merger
Corp., and AccelGraphics, Inc., filed herewith as
Exhibit 3.1.
4.2 Series B Preferred StockAnnex I to the Company's Registration
Statement on Form S-4, SEC File No.
333-51041, and Warrant purchase
Agreement dated as of July 20, 1998, between the
Company and Intel Corporation.
4.3 Warrant to Purchase Series B Preferred Stock dated
as of July 22, 1998, between the Company and Intel
Corporation.
11.1incorporated herein by this
reference.
11 Earnings Per Share Calculation (filed as
part of electronic filing only)
27.127 Financial Data Schedule (filed as part of
electronic filing only)
(b) Reports on Form 8-K
The Companycompany filed a report on Form 8-K, dated July 13, 1998, relating
to the acquisition of 100% of the issued and outstanding capital stock
of AccelGraphics, Inc. on June 26, 1998.
16
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EVANS & SUTHERLAND COMPUTER CORPORATION
Registrant
Date November 9, 1998February 12, 1999 /S/ John T. Lemley
---------------- ----------------------------------------- --------------------
John T. Lemley, Vice President
and Chief Financial Officer
(Principal Financial Officer)
17