UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON,Washington, D.C. 20549
----------------------------------
FORMForm 10-Q
(MARK ONE)
[X](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 27, 1997 OR
[_]For the Quarterly Period Ended June 26, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROMFor the Transition Period from ________ TOto ________
COMMISSION FILE NUMBERCommission File Number 0-8771
---------------------------------------
EVANSEvans & SUTHERLAND COMPUTER CORPORATIONSutherland 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, UTAHKomas Drive, Salt Lake City, Utah 84108
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (801) 588-1000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ----- -----____
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding Shares at August 1, 1997
- ----------------------------------- ------------------------------------
COMMON STOCK,July 31, 1998
Common Stock, $0.20 PAR VALUE 9,046,546par value 10,080,830
FORMForm 10-Q
EVANSEvans & SUTHERLAND COMPUTER CORPORATIONSutherland Computer Corporation
QUARTER ENDED JUNE 27, 1997
PAGE NO.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Statements of Operations - Three Months
and Six Months Ended June 27, 1997 and June 28, 1996 3
Condensed Consolidated Balance Sheets - June 27, 1997 and
December 27, 1996 4
Condensed Consolidated Statements of Cash Flows - Six Months
Ended June 27, 1997 and June 28, 1996 5
Notes to Condensed Consolidated Financial Statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 7
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 10
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 10
SIGNATURE PAGE 1126, 1998
PART I - FINANCIAL INFORMATION Page No.
ITEM 1. Financial Statements
Condensed Consolidated Statements of Operations - Three Months
and Six Months Ended June 26, 1998 and June 27, 1997 3
Condensed Consolidated Balance Sheets - June 26, 1998 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 9
PART II - OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders 14
ITEM 6. Exhibits and Reports on Form 8-K 15
Signature Page 15
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 Six Months Ended
------------------------------ --------------------------------------------------------------- -----------------------------------
June 26, June 27, June 28,26, June 27,
June 28,1998 1997 19961998 1997
1996
------------- ------------ ------------ ---------------------------- --------------- ---------------- ----------------
Net sales $ 43,638 $ 37,907 $ 30,90786,059 $ 71,549 $ 57,594
Cost of sales 24,359 20,483 16,19249,655 38,997
30,385
------------- ------------ ------------ ---------------------------- --------------- ---------------- ----------------
Gross profit 19,279 17,424 14,71536,404 32,552
27,209
------------- ------------ ------------ ---------------------------- --------------- ---------------- ----------------
Expenses:
Marketing, general and administrative 9,326 8,632 7,88017,967 16,476 14,561
Research and development 6,808 6,746 5,49913,485 12,592
10,819
------------- ------------ ------------ -------------
TotalWrite-off of acquired research
and development (note 4) 27,925 - 27,925 -
--------------- --------------- ---------------- ----------------
Operating expenses 44,059 15,378 13,37959,377 29,068
25,380
------------- ------------ ------------ ---------------------------- --------------- ---------------- ----------------
Operating earnings (loss) (24,780) 2,046 1,336(22,973) 3,484 1,829
Other income, net 572 661 1,0721,118 1,238
1,798
------------- ------------ ------------ ---------------------------- --------------- ---------------- ----------------
Earnings (loss) before income taxes (24,208) 2,707 2,408(21,855) 4,722 3,627
Income tax expense 1,208 732 9151,972 1,336
1,377
------------- ------------ ------------ ---------------------------- --------------- ---------------- ----------------
Net earnings (loss) $ (25,416) $ 1,975 $ 1,493(23,827) $ 3,386
$ 2,250
============= ============ ============ ============================ =============== ================ ================
Earnings (loss) per share (note 1):
PrimaryBasic $ (2.84) $ 0.22 $ (2.64) $ 0.37
Diluted $ (2.84) $ 0.21 $ 0.16(2.64) $ 0.36 $ 0.25
Fully diluted $ 0.21 $ 0.16 $ 0.36 $ 0.24
Weighted average common and common
equivalent shares outstanding:
Primaryequivalentcsharestoutstanding:
Basic 8,939 9,017 9,009 9,042
Diluted 8,939 9,394 9,3289,009 9,414 9,180
Fully diluted 9,501 9,330 9,526 9,224
See accompanying notes to condensed financial statements.
3
EVANS & SUTHERLAND COMPUTER CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
June 27,26, December 27,31,
1998 1997
1996
-------------------- --------------- ------------------
(Unaudited)
Assets
----------
Assets
------
Current assets:
Cash and cash equivalents $ 9,96017,649 $ 16,5218,176
Marketable securities 56,831 46,45416,535 48,928
Accounts receivable, less allowance for doubtful
receivables of $618$1,940 in 1998 and $851 in 1997 and $563 in 1996 26,757 34,84243,228 36,066
Inventories (note 2) 21,893 20,20230,580 26,885
Costs and estimated earnings in excess of billings
on uncompleted contracts 39,994 34,16663,747 51,799
Deferred income taxes 5,691 4,8416,564 4,224
Prepaid expenses and deposits 1,604 2,187
--------------------4,529 3,620
--------------- ------------------
Total current assets 162,730 159,213182,832 179,698
Property, plant, and equipment, at cost 120,052 115,358129,880 123,168
Less accumulated depreciation and amortization 76,186 72,687
--------------------83,110 78,800
--------------- ------------------
Net property, plant, and equipment 43,866 42,67146,770 44,368
Investment securities 6,872 7,0573,228 5,000
Goodwill, net (note 4) 7,921 -
Deferred income taxes 5,123 3,802
Other assets 1,920 1,950
--------------------1,564 1,522
--------------- ------------------
Total assets $ 215,388247,438 $ 210,891
====================234,390
=============== ==================
Liabilities and Stockholders' Equity
--------------------------------------------------------------------------------------
Current liabilities:
Notes payable to banks $ 3,3115,000 $ 5,334950
Current portion of long-term debt 401 -
Accounts payable 4,620 6,37017,440 14,353
Accrued expenses 14,870 13,93325,879 18,061
Customer deposits 5,476 2,0585,223 6,574
Income taxes payable 1,052 -771 4,462
Billings in excess of costs and estimated earnings
on uncompleted contracts 5,651 4,595
--------------------8,404 6,341
--------------- ------------------
Total current liabilities 34,980 32,29063,118 50,741
Long-term debt, less current portion 18,443 18,015 18,015
Deferred income taxes - 114
Stockholders' equity:
Common stock, $.20 par value; authorized 30,000,000 shares;
issued and outstanding 9,001,56510,058,367 shares at June 27, 199726,
1998 and 9,056,8719,066,743 shares at December 27, 1996 1,800 1,81131, 1997 2,012 1,813
Additional paid-in capital 7,163 8,63931,840 8,025
Retained earnings 153,883 150,496131,749 155,576
Net unrealized loss on marketable securities (732) (541)(103) (68)
Cumulative translation adjustment 279 67
--------------------379 288
--------------- ------------------
Total stockholders' equity 162,393 160,472
--------------------165,877 165,634
--------------- ------------------
Total liabilities and stockholders' equity $ 215,388 $210,891
====================247,438 $ 234,390
=============== ==================
See accompanying notes to condensed consolidated financial statements.
4
EVANS & SUTHERLAND COMPUTER CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
(In thousands)
Six Months Ended
-------------------------------------------------------------------------
June 26, June 27,
June 28,1998 1997 1996
-------------- ---------------
Net cash provided by (used in) operating activities $ (14,215) $ 12,657
$ (15,443)-------------- ---------------
Cash flows from investing activities:
Capital expenditures (5,947) (5,929) (5,135)
Purchases of marketable securities (3,700) (36,046) (40,496)
Proceeds from sale of marketable securities 38,501 25,601
53,886Acquisition of businesses, less cash acquired (7,603) -
Proceeds from sale of investment securities 3,341 - 432
Purchases of other long-term assetsinvestment securities (310) - (1,450)
-------------- ---------------
Net cash provided by (used in) investing activities 24,282 (16,374)
7,237-------------- ---------------
Cash flows from financing activities:
Net proceeds from issuance of common stock 1,256 704 2,126
Net borrowings (payments) under line of credit agreement 4,142 (1,550) 1,340
Purchases of treasury stock (5,837) (2,190) -
-------------- ---------------
Net cash provided by (used in)used in financing activities (439) (3,036)
3,466-------------- ---------------
Effect of foreign exchange rate changes on cash (155) 192 93
-------------- ---------------
Net decreaseincrease (decrease) in cash and cash equivalents 9,473 (6,561) (4,647)
Cash and cash equivalents at beginning of year 8,176 16,521 5,023
-------------- ---------------
Cash and cash equivalents at end of period $ 9,96017,649 $ 3769,960
============== ===============
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest $ 664596 $ 677664
Income taxes $ 1,9006,943 $ 10,3941,900
See accompanying notes to condensed consolidated financial statements.
5
EVANS & SUTHERLAND COMPUTER CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands)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
six months ended June 27, 199726, 1998 should be read in conjunction with the
Company's annual report on Form 10-K for the year ended December 27,
1996.31,
1997.
The accompanying unaudited condensed consolidated balance sheets, and
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 periodthree and six
month periods ended June 27, 199726, 1998 are not necessarily indicative of the
results to be expected for the full year.
The Company has changed its fiscal year end from the last Friday in December to
a calendar year end.
Earnings (Loss) Per Common Share
- --------------------------------------------------
Earnings (loss) per common share is computed based on the
weighted averageweighted-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.
FullyBasic 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 earnings per sharecalculation. A reconciliation
between the basic and diluted weighted-average number of common shares
for the three months and six months ended June 26, 1998 and June 27,
1997, and June 28, 1996 were not materially different from primary earnings per
share.
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, Earnings per Share (SFAS 128). SFAS 128
establishes a different method of computing earningsis summarized as follows (in thousands):
Three Months Ended Six Months Ended
June 26, June 27, June 26, June 27,
1998 1997 1998 1997
------------------------ ------------------------
(Unaudited) (Unaudited)
Basic weighted-average number
of common shares outstanding
during the period 8,939 9,017 9,009 9,042
Weighted-average number of
common stock options outstanding
during the period - 377 - 372
------- ------- ------- -------
Diluted weighted-average number
of common shares outstanding
during the period 8,939 9,394 9,009 9,414
======= ======= ======= =======
6
EVANS & SUTHERLAND COMPUTER CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share than is currently
required under the provisions of Accounting Principles Board Opinion No. 15.
Under SFAS 128, the Company will be required to present both basic earnings per
share and diluted earnings per share. Basic earnings per share is expected to be
higher than the currently presented primary earnings per share as the effect of
dilutive stock options will not be considered in computing basic earnings per
share. Diluted earnings per share is expected to be comparable or slightly lower
than the currently presented primary earnings per share.
The Company plans to adopt SFAS 128 in its fiscal fourth quarter and at that
time all historical earnings per share data presented will be restated to
conform to the provisions of SFAS 128.amounts)
2. INVENTORIES
Inventories consist of the following:
June 27,26, December 27,31,
1998 1997
1996---------- ----------- ------------
(Unaudited)
Raw materials and supplies $10,898 $ 8,11722,343 $ 13,674
Work-in-process 8,080 11,2114,323 10,040
Finished Goods 2,915 874
------- -------
$21,893 $20,202
======= =======goods 3,914 3,171
---------- -----------
$ 30,580 $ 26,885
========== ==========
3. 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 Six Months Ended
June 26, June 27, June 26, June 27,
1998 1997 1998 1997
----------------------- ------------------------
(Unaudited) (Unaudited)
Net earnings (loss) $(25,416) $ 1,975 $ (23,827) $ 3,386
Unrealized gain (loss) on marketable
securities, net of income taxes and
reclassification adjustments (213) 100 (35) (191)
Foreign currency translation
adjustments, net of income taxes 37 45 91 212
--------- --------- ---------- ---------
Comprehensive earnings (loss) $(25,592) $ 2,120 $ (23,771) $ 3,407
========= ========= ========== =========
4. STOCK REPURCHASE PROGRAMBUSINESS ACQUISITIONS
On September 19, 1996,June 26, 1998, the Company announced that its boardacquired all of directors had
authorized the repurchaseoutstanding stock of
up to 500,000AccelGraphics, Inc. (AGI) for approximately $23.7 million in cash and
1,109,303 shares of itsthe Company's common stock, eitherstock. 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 will be included in the open market or in private transactions. AsCompany's consolidated
financial statements from June 26, 1998 forward. The excess of August 1, 1997,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 has repurchasedwrote off $26.8 million of in-process
research and retired 95,000 shares sincedevelopment on the announcementdate 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. 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 will be included in the
Company's consolidated financial statements from June 26, 1998
forward. The excess of the repurchase program.
6purchase 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
ITEMEVANS & SUTHERLAND COMPUTER CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
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 the
corresponding tax effect as a result of the reduction in cash and
marketable securities that would have occurred to acquire these
companies.
Six Months Ended
June 26, 1998 June 27, 1997
-----------------------------------
(Unaudited)
Net sales $ 102,796 $ 94,639
Net earnings (loss) $ (4,821) $ 3,716
Earnings (loss) per share:
Basic $ (0.48) $ 0.37
Diluted $ (0.48) $ 0.35
There can be no assurance that 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. SUBSEQUENT EVENT
On July 22, 1998, Intel Corporation purchased 901,408 shares of a series
of Preferred Stock, no par value, of the Company plus a warrant to
purchase an additional 378,462 shares at $33.28 per share for
approximately $24 million. These preferred shares have certain
liquidation and conversion rights, in addition to other rights and
preferences. In addition, the Company entered into an agreement to
accelerate development of high-end graphics and video subsystems for
Intel-based workstations and a cross-license agreement.
8
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 thereto included elsewhere herein.in Item 1 of Part I of this
form. All data in the tables are in thousands except for percentages. Except for
the historical information contained herein, this report on Form 10-Q contains
forward-looking statements that involve risks and uncertainties. The Company's
actual results may differ materially.materially from those indicated by such
forward-looking statements.
OVERVIEW
- --------
Evans & Sutherland Computer Corporation (E&S&S(R) or the Company) develops and
manufactures hardware and software for visual systems that produce vivid and
highly realistic 3D (three-dimensional)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 workstations and personal computers.computer workstations.
E&S is organized into six business units. Each business unit develops and
markets its products forto a worldwide customer base. These business units can be
grouped into two areas: core businesses and new start-ups.businesses. The core businesses
are the simulation-related units in which E&S has an established market presence
with significant market share and have historically been profitable.which represent the majority of the Company's
revenues and earnings. The start-upsnew businesses are in high growth markets where E&S
has superior technology which can be applieddirected 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 the world'sa leading independent supplier of
--------------------- visual
systems for flight simulators for commercial airline pilot
training.
.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 providesSystems) supplies high-performance,
high-margin board-level products for simulation, avionics, and vehicle
displays. Board Products is transitioning from a complete suiteproject-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 avionics displays for
---------------
cockpitthe Company's
Symphony(TM) line of products, combines the Company's REALimage(TM)
graphics technology with an onboard processor to create a compact and
flight training.
New business start-ups:
.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 graphicREALimage graphics accelerator technology for the
----------------
world's leading
workstation manufacturers and NT-based personal computers. Since
inaugural shipments in June 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.
AGI currently offers three distinct 3D graphics subsystem product
lines. AGI's products include a family of 3D graphics subsystems for
applications based on OpenGL and other 3D application programming
interfaces, such as Autodesk's Heidi and Microsoft's DirectX. Through
AGI's extensive experience in 3D algorithms, the interaction of 3D
applications with OpenGL and overall 3D graphics system integration,
AGI delivers robust, well-integrated subsystem solutions to the
professional 3D graphics market. AGI 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.
. Entertainmentindustries at a lower cost than traditional
proprietary technology. MindSet(TM) Virtual Studio System and
EducationFuseBox(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 world'sfirst 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.
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 provides virtual reality
experiencescontent development.
10
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 location-based entertainment centers, including
entertainment simulators.
7
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 (unaudited):period:
QuartersIncrease (decrease) Increase (decrease)
between Second Quarter 1998 between First Six Months Ended June 27, 1997 Ended June 27,of
1998
and Second Quarter 1997 and June 28, 1996 and June 28, 1996
---------------------- -------------------First Six Months of 1997
------------------------------- -------------------------------
(Unaudited) (Unaudited)
Net Sales $7,000 22.6% $13,955 24.2%sales $ 5,731 15.1% $ 14,510 20.3%
Cost of Sales 4,291 26.5% 8,612 28.3%sales 3,876 18.9% 10,658 27.3%
----------- ------------
---------
Gross Profit 2,709 18.4% 5,343 19.6%
------------ ---------profit 1,855 10.6% 3,852 11.8%
Expenses:
Marketing, general &and administrative 752 9.5% 1,915 13.2%694 8.0% 1,491 9.0%
Research &and development 1,247 22.7% 1,773 16.4%62 0.9% 893 7.1%
Write-off of acquired research and
development 27,925 - 27,925 -
------------ ---------
Total------------
Operating expenses 1,999 14.9% 3,688 14.5%28,681 186.5% 30,309 104.3%
------------ ---------------------
Operating earnings 710 53.1% 1,655 90.5%(loss) (26,826) (1,311.1%) (26,457) (759.4%)
Other income, net (411) (38.3%(89) (13.5%) (560) (31.1%(120) (9.7%)
------------ ---------------------
Earnings (loss) before income taxes 299 12.4% 1,095 30.2%(26,915) (994.3%) (26,577) (562.8%)
Income tax expense (183) (20.0%) (41) (3.0%)476 65.0% 636 47.6%
------------ ---------------------
Net earnings (loss) $ 482 32.3%(27,391) (1,386.9%) $ 1,136 50.5%(27,213) (803.7%)
============ =====================
SALESSales
- -----
Sales for the second quarter of 19971998 increased 22.6%15.1% to $37.9$43.6 million compared
to $30.9$37.9 million for the second quarter of 1996.1997. Sales for the six month period
ended June 27, 199726, 1998 increased 24.2%20.3% to $71.5$86.1 million compared to $57.6$71.5 million
for the six month period ended June 28, 1996.27, 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 Commercial Simulation
and Desktop Graphics business units. Domestic sales for the second quarter of
1998 increased approximately 86% over45% to $11.6 million as compared to $8.0 million for the second
quarter of 1996 as a result
of more commercial deliveries and the AMC VUE program. Foreign1997, while foreign sales for the second quarter increased approximatelyof 1998 decreased 3%
overto $16.8 million compared to $17.4 million for the second quarter of 1996.
COST OF SALES1997.
Domestic sales for the first six months of 1998 increased 53% to $27.9 million
as compared to $18.2 million for the first six months of 1997, while foreign
sales for the first six months of 1998 decreased 24.3% to $21.6 million compared
to $28.5 million for the first six months of 1997.
11
Cost of Sales
- -------------
Cost of sales, as a percentage of sales, was 55.8% for the second quarter of
1998 compared to 54.0% for the second quarter of
1997 compared to 52.4% for the second quarter 1996.1997. For the six month period
ended June 27, 1997,26, 1998, cost of sales as a percentage of sales was 54.5%57.7% compared
to 52.8%54.5% for the six month period ended June 28, 1996.27, 1997. The increase in cost of
sales, as a percentage of sales, for the second quarter and for the first six
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's move towards
accepting workCompany served as the prime
contractor. These higher costs were partially offset by lower cost of sales as a
prime contractor.percentage of sales on its Commercial Simulation and Desktop Graphics business
units. Royalties and commissions generated by Desktop Graphics have relatively
low associated costs. The Company experiencedCompany's Board Products business unit also had higher
cost of sales as a percentage of sales in its non-simulation business units which are in
the start-up phase. Costsecond quarter of sales1998 as a percentagecompared
to the second quarter of sales in the simulation
business units was slightly higher1997 reflecting the move to prime contracting in
Government Simulation.
EXPENSESeffects of certain design changes,
among other factors.
Expenses
- --------
Total expenses for the second quarter of 19971998 increased 14.9%186.5% to $15.4$44.1 million
compared to $13.4$15.4 million for the second quarter of 1996,1997, but decreased as a
percentage of sales, excluding the write-off of acquired research and
development, to 37.0% from 40.6% for the respective periods. Total expenses for
the first six months of 1998 increased 104.3% to $59.4 million compared to $29.1
million for the first six months of 1997, but decreased as a percentage of
sales, excluding the write-off of acquired research and development, to 36.5%
from 40.6% for the respective periods.
Marketing, General, and Administrative: Marketing, general, and administrative
expense for the second quarter of 1998 increased 8.0% to $9.3 million compared
to $8.6 million for the second quarter of 1997, but decreased as a percentage of
sales to 40.6%21.4% from 43.3% for the respective periods. Total
expenses for the six month period ended June 27, 1997 increased 14.5% to $29.1
million compared to $25.4 million for the six month period ended June 28, 1996,
but decreased as a percentage of sales to 40.6% from 44.1% for the respective
periods.
8
Marketing, General, and Administrative: Marketing, general, and administrative
- --------------------------------------
expenses for the second quarter of 1997 increased 9.5% to $8.6 million compared
to $7.9 million for the second quarter of 1996, but decreased as a percentage of
sales to 22.8% from 25.5% for the respective periods. Marketing, general, and
administrative expenses for the first six month period ended June 27, 1997months of 1998 increased 13.2%9.0% to $18.0
million compared to $16.5 million compared to $14.6 million for the first six month period ended
June 28, 1996,months of 1997, but
decreased as a percentage of sales to 23.0%20.9% from 25.3%23.0% for the respective
periods. The increaseincreases in marketing, general, and administrative expenses during
the second quarter isand the first six 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, tradeshow activity and administrative costs related to the start-up of the new business units.growth in operations.
Research and Development: Research and development expensesexpense for the second
- ------------------------
quarter of 19971998 increased 22.7%0.9% to $6.7$6.8 million compared to $5.5$6.7 million for the
second quarter of 1996,1997, but stayed constantdecreased as a percentage of sales atto 15.6% from
17.8% for the respective periods. Research and development expense for the first
six month
period ended June 27, 1997months of 1998 increased 16.4%7.1% to $13.5 million compared to $12.6 million compared to $10.8
million for
the first six month period ended June 28, 1996,months of 1997, but decreased as a percentage of sales to 17.6%15.7%
from 18.8%17.6% for the respective periods. The increaseincreases in research and development
expensesexpense during the second quarter isand the first six months of 1998 are primarily
due to increased headcount and activity related to the development of the
next generationCompany's Symphony line of products.
Write-off of Acquired Research and Development
- ----------------------------------------------
The write-off of acquired research and development of $27.9 million represents
management's estimated value of incomplete research and development projects
acquired through business and asset purchases made during the image generator product, Harmony.
OTHER INCOME, NETsecond quarter of
1998.
Other Income, Net
- -----------------
Other income, net, for the second quarter of 19971998 decreased 38.3%13.5% to $0.7$0.6
million compared to $1.1$0.7 million for the second quarter of 1996. For1997. Other income,
net, for the first six month
period ended June 27 1997, other incomemonths of 1998 decreased 31.1%9.7% to $1.1 million compared to
$1.2 million compared
to $1.8 million for the first six month period ended June 28, 1996.months of 1997. The decreasedecreases in other income for
the second quarter and first six month period ismonths of 1998 are primarily due to a decrease
in interest income due to lower average cash and marketable securities balances and
gains recognized on the sale of investment securities in 1996.
INCOME TAXESbalances.
12
Income Taxes
- ------------
The Company's combined federal, state and foreign effective income tax rate was
28.3%32.5% of earnings before income taxes excluding acquisition expenses related to
the write-off of in-process research and development of $27.9 million for the
second quarter and the first six months of 1997.1998. The tax rate for thethese same
periodperiods in 19961997 was 38%.27.0% and 28.3%, respectively. These rates are calculated
based on an estimated annual effective tax rate applied to income before income
taxes.
The improvement in 1997 over 1996 is
attributable to utilization of foreign loss carryforwards against U.S. taxable
income and increased benefit of the foreign sales corporation.
LIQUIDITY & CAPITAL RESOURCES
- -----------------------------
Working capital at June 27, 199726, 1998 was $127.7$119.7 million compared to $126.9$129.0 million
at December 27, 1996.31, 1997. This includes cash, cash equivalents and marketable
securities of $66.8$34.2 million and $63.0$57.1 million at June 27, 199726, 1998 and December 27,
1996,31,
1997, respectively. The Company's operations provided $12.7used $14.2 million during the first
six months of 1997,1998, compared to $15.4$12.7 million of cash used inprovided by operations
during the first six months of 1996.1997. Cash was alsoprimarily provided from 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 purchase marketable securities,
capital equipmentacquire new businesses, to repurchase and
treasuryretire shares of the Company's common stock, and to make payments on the line of credit.
On September 19, 1996,purchase capital equipment.
At June 26, 1998, the Company announced that its Boardhad unsecured credit facilities with foreign banks
with total availability of Directors had
authorizedapproximately $11 million, for which there were
approximately $5 million of borrowings outstanding, and a plan that allows the Company to repurchase up to 500,000 shares$5 million unsecured
line for letters of its common stock. As of August 1, 1997, the Company has repurchased and retired
95,000 shares of its common stock.credit with a U.S. bank.
Management believes that existing cash and marketable securities balances,
borrowings available under the line ofits credit facilities and cash generated from
operations will be adequatesufficient 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 through
June 1998.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.
SUBSEQUENT EVENTS
On July 22, 1998, Intel Corporation (Intel) purchased 901,408 shares of a series
of Preferred Stock, no par value, of the Company plus a warrant to purchase an
additional 378,462 shares at $33.28 per share for approximately $24 million.
These preferred shares have certain liquidation and conversion rights in
addition to other rights and preferences. In addition, the Company entered into
an agreement to accelerate development of high-end graphics and video subsystems
for Intel-based workstations and a cross-license agreement.
FORWARD-LOOKING STATEMENTS
This quarterly report on Form 10-Q may be deemed to contain certain
forward-
lookingforward-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.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.
913
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
ITEMItem 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Company held its Annual Meeting of Stockholders on May 22, 1997.21,
1998. Proxies for the meeting were solicited pursuant to
Regulation 14A.
(b) The Company's Board of Directors is divided into three classes
with
directors in each class serving for three-year terms.whose terms expire at successive annual meetings. Accordingly,
not all directors are elected at each Annual Meeting of
Stockholders. Peter O. CrispGerald S. Casilli and Ivan E. SutherlandJames R. Oyler were
re-elected as Directors and other continuing Directors are:
Stewart Carrell, Henry N. Christiansen, James R. Oyler,Peter O. Crisp, Ivan E. Sutherland and John E.
Warnock.
(c)
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 election of directors, for
each nominee, were as indicated.
1. To electElection of two directors to serve until the 20002001
Annual Meeting of Stockholders.
Nominees for Director
---------------------
PETER O. CRISPGERALD S. CASILLI
For: 7,813,382 Against: 74,174
IVAN E. SUTHERLAND7,802,387 Withheld: 44,529
JAMES R. OYLER
For: 7,814,132 Against: 73,4247,799,636 Withheld: 47,280
2. To approve an amendment toAdoption of the Evans & Sutherland 1995 Long-Term
Incentive Equity1998 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 to increase the numberfor Non-
Employee Directors.
For: 7,505,140 Against: 227,625 Abstained: 82,033
Unvoted: 1,108,475
4. Ratification of shares issuable
under such plan by 450,000 shares.
For: 5,824,770 Against: 2,055,592 Abstained: 7,194
Unvoted: 1,185,833
3. To ratify the appointment of KPMG Peat Marwick
LLP as independent auditors of the Company for the
fiscal year ending December 31, 1997.1998.
For: 7,874,1927,769,000 Against: 7,8931,958 Abstained: 5,47175,958
Unvoted: 1,185,833
ITEM1,076,357
14
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Regulation S-K
Exhibit No. Description
-------------- -----------2.1 Agreement and Plan of Merger, dated April
22, 1998, among the Company, E&S Merger
Corp., and AccelGraphics, Inc., filed as
Annex I to the Company's Registration
Statement on Form S-4, SEC File No.
333-51041, and incorporated herein by this
reference.
11 Earnings Per Share Calculation (filed as
part of electronic filing only)
27 Financial Data Schedule (filed as part of
electronic filing only)
(b) There were no reportsReports on Form 8-K
The company filed fora report on Form 8-K, dated July 13, 1998, relating
to the three-month period
endedacquisition of 100% of the issued and outstanding capital stock
of AccelGraphics, Inc. on June 27, 1997.
10
26, 1998.
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 AUGUST 11, 1997August 10, 1998 /S/ --------------- ---------------------------------------
JOHNJohn T. LEMLEY, VICE PRESIDENT
AND CHIEF FINANCIAL OFFICER
(PRINCIPAL FINANCIAL OFFICER)
11Lemley
-------------- -------------------------
John T. Lemley, Vice President
and Chief Financial Officer
(Principal Financial Officer)
15