SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------------------------------------
FORM 10-Q
(MarkOne)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934,
For the quarterly period ended March 31, 2000
or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934,
For the transition period from _____ to _____
Commission file number 0-8771
--------------------------------------------------
EVANS & SUTHERLAND COMPUTER CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
Utah 87-0278175
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
600 Komas Drive, Salt Lake City, Utah 84108
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (801) 588-1000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ____
The number of shares of the registrant's Common Stock (par value $0.20 per
share) outstanding at May 5, 2000 was 9,713,630.
1
FORM 10-Q
Evans & Sutherland Computer Corporation
Quarter Ended March 31, 2000
Page No.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of March 31, 2000 and December 31, 1999 3
Consolidated Statements of Operations for the three months ended March
31, 2000 and April 2, 1999 4
Consolidated Statements of Comprehensive Income for the three months
ended March 31, 2000 and April 2, 1999 5
Consolidated Statements of Cash Flows for the three months ended March
31, 2000 and, April 2, 1999 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk 17
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 19
2
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
March 31, December 31,
2000 1999
--------------- ----------------
(Unaudited)
Assets:
Cash and cash equivalents $ 16,696 $ 22,110
Short-term investments 67 748
Accounts receivable, less allowance for doubtful receivables of
$1,440 at March 31, 2000 and $1,338 at December 31, 1999 43,017 28,743
Inventories 39,273 40,588
Costs and estimated earnings in excess of billings on uncompleted contracts 87,909 80,457
Deferred income taxes 13,474 15,923
Prepaid expenses and deposits 7,907 7,844
--------------- ----------------
Total current assets 208,343 196,413
Property, plant and equipment, net 50,600 52,184
Investment securities 5,380 4,467
Deferred income taxes 4,669 4,418
Goodwill and other intangible assets, net 508 552
Other assets 918 430
--------------- ----------------
Total assets $ 270,418 $ 258,464
=============== ================
Liabilities and stockholders' equity:
Notes payable $ 8,268 $ 2,657
Accounts payable 24,159 19,575
Accrued expenses 35,373 39,057
Customer deposits 3,324 4,720
Income taxes payable - 1,062
Billings in excess of costs and estimated earnings on uncompleted contracts 23,348 12,412
--------------- ----------------
Total current liabilities 94,472 79,483
--------------- ----------------
Long-term debt 18,015 18,015
--------------- ----------------
Commitments and contingencies
Redeemable convertible preferred stock, class B-1, no par value; authorized
1,500,000 shares; issued and outstanding 901,408 shares 23,829 23,772
--------------- ----------------
Stockholders' equity:
Preferred stock, no par value; authorized 8,500,000 shares;
no shares issued and outstanding - -
Common stock, $.20 par value; authorized 30,000,000
shares; issued and outstanding 9,700,829 shares at
March 31, 2000 and 9,678,938 shares at December 31, 1999 1,940 1,936
Additional paid-in capital 24,272 24,086
Common stock in treasury, at cost; 352,500 shares (4,709) (4,709)
Retained earnings 112,587 115,816
Accumulated other comprehensive income 12 65
--------------- ----------------
Total stockholders' equity 134,102 137,194
--------------- ----------------
Total liabilities and stockholders' equity $ 270,418 $ 258,464
=============== ================
See accompanying notes to consolidated financial statements.
3
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share amounts)
Three Months Ended
--------------------------------------
March 31, April 2,
2000 1999
------------- -------------
Sales $ 45,955 $ 49,746
Cost of sales 29,842 27,368
------------- -------------
Gross profit 16,113 22,378
------------- -------------
Operating expenses:
Selling, general and administrative 10,289 10,221
Research and development 11,532 11,080
Amortization of goodwill and other intangibles 45 713
------------- -------------
Operating expenses 21,866 22,014
------------- -------------
(5,753) 364
Gain on sale of business unit 1,102 -
------------- -------------
Operating income (loss) (4,651) 364
Other income (expense), net (176) 15
------------- -------------
Income (loss) before income taxes (4,827) 379
Income tax expense (benefit) (1,655) 118
------------- -------------
Net income (loss) (3,172) 261
Accretion of preferred stock 57 57
------------- -------------
Net income (loss) applicable to common stock $ (3,229) $ 204
============= =============
Income (loss) per common share:
Basic $ (0.35) $ 0.02
Diluted $ (0.35) $ 0.02
Weighted average common and common equivalent shares outstanding:
Basic 9,338 9,603
Diluted 9,338 9,873
See accompanying notes to consolidated financial statements.
4
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(In thousands)
Three Months Ended
------------------------------
March 31, April 2,
2000 1999
----------- ------------
Net income (loss) $ (3,172) $ 261
Other comprehensive income (loss):
Foreign currency translation adjustments 35 244
Unrealized gains (losses) on securities (135) 1
----------- ------------
Other comprehensive income (loss) before income taxes (100) 245
Income tax expense (benefit) related to items of other
comprehensive income (loss) (47) 76
------------ ------------
Other comprehensive income (loss), net of income taxes (53) 169
------------ ------------
Comprehensive income (loss) $ (3,225) $ 430
============ ============
See accompanying notes to consolidated financial statements.
5
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Three Months Ended
------------------------------
March 31, April 2,
2000 1999
------------ ------------
Cash flows from operating activities:
Net income (loss) $ (3,172) $ 261
Adjustments to reconcile net income (loss) to net cash used in operating
activities:
Depreciation and amortization 3,332 3,980
Gain on sale of business unit (1,102) -
Provision for losses on accounts receivable 168 36
Provision for write down of inventories 244 314
Provision for warranty expense 253 183
Deferred income taxes 2,241 (187)
Other 49 470
Changes in assets and liabilities:
Accounts receivable (11,019) 12,986
Inventories 526 (5,697)
Costs and estimated earnings in excess of billings on uncompleted
contracts, net 3,486 (16,213)
Prepaid expenses and deposits (316) (1,631)
Accounts payable 4,600 (7,278)
Accrued expenses (4,329) (2,345)
Customer deposits (1,396) (320)
Income taxes (4,256) 401
------------ ------------
Net cash used in operating activities (10,691) (15,040)
------------ ------------
Cash flows from investing activities:
Proceeds from sale of short-term investments 684 23,356
Purchase of investment securities - (360)
Proceeds from sale of business unit 1,000 -
Purchases of property, plant and equipment (1,773) (2,048)
Proceeds from sale of property, plant and equipment 52 -
Increase in other assets (496) (38)
------------ ------------
Net cash provided by (used in) investing activities (533) 20,910
------------ ------------
Cash flows from financing activities:
Borrowings from notes payable 6,293 -
Payments of notes payable (526) (179)
Proceeds from issuance of common stock 162 355
Payments for repurchase of common stock - (769)
------------ ------------
Net cash provided by (used in) financing activities 5,929 (593)
------------ ------------
Effect of foreign exchange rate on cash and cash equivalents (119) 36
------------ ------------
Net change in cash and cash equivalents (5,414) 5,313
Cash and cash equivalents at beginning of year 22,110 1,834
------------ ------------
ash and cash equivalents at end of period $ 16,696 $ 7,147
============ ============
Supplemental Disclosures of Cash Flow Information
Cash paid during the period for:
Interest $ 540 $ 547
Income taxes 359 64
Accretion of preferred stock 57 57
See accompanying notes to consolidated financial statements.
6
EVANS & SUTHERLAND COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared
in accordance with the instructions to Form 10-Q and, therefore, do not include
all information and footnotes necessary for a complete presentation of the
results of operations, the financial position, and cash flows, in conformity
with generally accepted accounting principles. This report on Form 10-Q for the
three months ended March 31, 2000 should be read in conjunction with the
Company's annual report on Form 10-K for the year ended December 31, 1999.
The accompanying unaudited consolidated balance sheets and statements of
operations, comprehensive income and cash flows reflect all normal recurring
adjustments which are, in the opinion of management, necessary for a fair
presentation of the Company's financial position, results of operations and cash
flows. The results of operations for the interim three month period ended March
31, 2000 are not necessarily indicative of the results to be expected for the
full year.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS No. 133"). SFAS No. 133 established
new accounting and reporting standards for companies to report information about
derivative instruments, including certain derivative instruments embedded in
other contracts (collectively referred to as derivatives), and for hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the balance sheet and measure those instruments at fair
value. For a derivative not designated as a hedging instrument, changes in the
fair value of the derivative are recognized in earnings in the period of change.
The Company intends to adopt SFAS No. 133 by January 1, 2001. The impact of
adopting SFAS No. 133 is not anticipated to be material to the financial
statements.
In December 1999, the Securities and Exchange Commission staff released Staff
Accounting Bulletin No. 101, "Revenue Recognition" ("SAB No. 101") to provide
guidance on the recognition, presentation and disclosure of revenue in financial
statements; however, SAB No. 101 does not change existing literature on revenue
recognition. SAB No. 101 explains the staff's general framework for revenue
recognition, stating that four criteria need to be met in order to recognize
revenue. The four criteria, all of which must be met, are: (i) there must be
persuasive evidence of an arrangement; (ii) delivery must have occurred or
services must have been rendered; (iii) the selling price must be fixed or
determinable; and (iv) collectibility must be reasonably assured. The Company
intends to adopt SAB No. 101 in the second quarter of fiscal 2000 and the
Company is currently evaluating the impact, if any, that this will have on its
financial statements.
The FASB issued Interpretation No. 44, "Accounting for Certain Transactions
Involving Stock Compensation--an Interpretation of APB Opinion No. 25" ("FIN No.
44") in March 2000. The interpretation clarifies the application of Opinion 25
for only certain issues such as the following: (i) the definition of employee
for purposes of applying Opinion 25, (ii) the criteria for determining whether a
plan qualifies as a noncompensatory plan, (iii) the accounting consequences of
various modifications to the terms of a previously fixed stock option or award,
and (iv) the accounting for an exchange of stock compensation awards in a
business combination. The Company intends to adopt FIN No. 44 by July 1, 2000.
The impact of adopting FIN No. 44 is not anticipated to be material to the
financial statements.
7
EVANS & SUTHERLAND COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. BUSINESS DIVESTITURE
On March 28, 2000, the Company sold certain assets of its Applications Group
relating to digital video products to RT-SET Real Time Synthesized Entertainment
Technology Ltd. and its subsidiary, RT-SET America Inc., for $1.4 million in
cash, common stock of RT-SET Real Time Synthesized Entertainment Technology Ltd.
valued at approximately $1.0 million, and the assumption of certain liabilities.
The Company may receive additional common stock of RT-SET Real Time Synthesized
Entertainment Technology Ltd. valued up to $3.0 million in the event that a
product currently being developed and included in the purchased assets meets
certain specified performance criteria within a specified time period.
3. INVENTORIES
Inventories consist of the following (in thousands):
March 31, December 31,
2000 1999
----------------- ----------------
(Unaudited)
Raw materials $ 27,758 $26,803
Work-in-process 9,129 11,479
Finished goods 2,386 2,306
----------------- ----------------
$ 39,273 $40,588
================= ================
4. NOTES PAYABLE
On March 31, 2000, the Company entered into a financing facility with Zions
First National Bank (the "Facility"). The Facility provides for borrowings of up
to $15.0 million, which includes a $7.0 million sublimit for the issuance of
letters of credit. Borrowings under the Facility bear interest at an indexed
prime rate. If certain financial covenants are not met the interest rate will
increase to the indexed prime rate plus a margin of 2.5% per annum. The Facility
requires the Company to pay (a) letter of credit fees, which increase if the
Company fails to satisfy certain financial covenants, and (b) a commitment fee,
which increases if the Company fails to satisfy certain financial covenants. The
Facility expires on March 30, 2001. Except for certain permitted exceptions as
identified in the Facility, among other things, the Facility prevents the
Company from (a) declaring or paying any dividends except as are mandatorily
required on the Company's preferred stock, (b) making any distribution of assets
to the Company's shareholders, investors, or equity holders, whether in cash,
assets, or in obligations of the Company, (c) allocating or otherwise setting
apart any sum for the payment of any dividend or distribution on, or for the
purchase, redemption, or retirement of any shares of its capital stock or equity
interests in excess of $2.0 million for any year, (d) making any other
distribution by reduction of capital or otherwise in respect of any shares of
its capital stock or equity interests in excess of $250,000, or (e) creating,
incurring, assuming, or suffering to exist any debt or any encumbrance, mortgage
or lien upon certain real property of the Company. The Company's obligations
under the Facility are secured by substantially all of the Company's assets,
subject to other liens permitted under the Facility. As of March 31, 2000, $5.0
million was outstanding under the Facility and an additional $4.9 million was
reserved under the Facility due to the issuance of letters of credit. Such
amounts shall continue to be reserved and shall not otherwise be available to be
advanced to the Company, until the expiration or termination of such letters of
credit.
8
EVANS & SUTHERLAND COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company has a $5.0 million unsecured letter of credit facility with First
Security Bank, N.A., of which approximately $2.7 million was unused and
available as of March 31, 2000. The First Security Bank letter of credit
facility expires on September 30, 2000 and requires the Company to pay letter of
credit fees. In addition, the Company has unsecured letters of credit totaling
approximately $3.6 million outstanding with U.S. Bank, N.A. that expire between
July 2000 and June 2001.
As of March 31, 2000, the Company had a revolving line of credit agreement with
a foreign bank totaling approximately $4.6 million, of which approximately $1.3
million was unused and available. The Company had a letter of credit with Bank
One, N.A. for $4.6 million as a guarantee for the foreign line of credit
agreement. As of April 30, 2000, the Company had repaid the borrowings under the
line of credit with the foreign bank. The line of credit with the foreign bank
and the letter of credit with Bank One, N.A. expired April 30, 2000.
5. SEGMENT AND RELATED INFORMATION
The Company's business units have been aggregated into three reportable
segments: Simulation, REALimage Solutions, and Applications. These reportable
segments offer different products and services and are managed and evaluated
separately because each segment uses different technologies and requires
different marketing strategies. The Simulation segment provides a broad line of
visual systems for flight and ground simulators for training purposes to
government, aerospace and commercial airline customers. The REALimage Solutions
segment provides graphics accelerator products, including graphics chips and
subsystems, to the personal PC workstation marketplace. The Applications segment
provides digital video applications for entertainment, educational and
multimedia industries.
The Company evaluates segment performance based on income (loss) from operations
before income taxes, interest income and expense, other income and expense and
foreign exchange gains and losses. The Company's assets are not identifiable by
segment.
(in thousands, unaudited) Simulation REALimage Applications Total
Solutions
--------------- --------------- -------------- ------------
Three months ended March 31, 2000
Sales $ 40,388 $ 1,491 $ 4,076 $ 45,955
Operating income (loss) (3,720) (1,432) 501 (4,651)
Three months ended April 2, 1999
Sales 40,263 8,119 1,364 49,746
Operating income (loss) 3,301 (1,515) (1,422) 364
9
EVANS & SUTHERLAND COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. GEOGRAPHIC INFORMATION
The following table presents sales by geographic location based on the location
of the use of the product or services. Sales to individual countries greater
than 10% of consolidated sales are shown separately (in thousands):
Three Months Ended
---------------------------------
March 31, April 2,
2000 1999
-------------- ---------------
(Unaudited)
United States $ 27,965 $ 25,491
United Kingdom 8,473 15,332
Europe (excluding United Kingdom) 5,362 6,279
Pacific Rim 3,010 2,459
Other 1,145 185
-------------- ---------------
$ 45,955 $ 49,746
============== ===============
The following table presents property, plant and equipment by geographic
location based on the location of the assets (in thousands):
March 31, December 31,
2000 1999
----------------- -----------------
(Unaudited)
United States $ 50,170 $ 51,715
Europe 430 469
----------------- -----------------
$ 50,600 $ 52,184
================= =================
7. NET INCOME (LOSS) PER COMMON SHARE
Net income (loss) per common share is computed based on the weighted-average
number of common shares and, as appropriate, dilutive common stock equivalents
outstanding during the period. Stock options, warrants, Class B-1 Preferred
Stock and Convertible Subordinated Debentures are considered to be common stock
equivalents.
Basic net income (loss) per common share is the amount of net income (loss) for
the period available to each share of common stock outstanding during the
reporting period. Diluted net income (loss) per share is the amount of net
income (loss) for the period available to each share of common stock outstanding
during the reporting period and to each share that would have been outstanding
assuming the issuance of common shares for all dilutive potential common shares
outstanding during the period.
Following is a reconciliation between the basic and diluted weighted-average
number of common shares for all periods presented (in thousands):
Three Months Ended
---------------------------------
March 31, April 2,
2000 1999
-------------- ---------------
(Unaudited)
Basic weighted-average number of common shares
outstanding during the period 9,338 9,603
Weighted-average number of dilutive common
stock options outstanding during the period - 270
-------------- ---------------
Diluted weighted-average number of common
shares outstanding during the period 9,338 9,873
============== ===============
10
EVANS & SUTHERLAND COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In calculating net income (loss) per common share, net income (loss) was the
same for both the basic and diluted calculations for all periods presented.
For the three months ended March 31, 2000, outstanding options to purchase
2,388,423 shares of common stock, 428,000 shares of common stock issuable upon
conversion of the 6% Convertible Subordinated Debentures, 901,000 shares of
common stock issuable upon conversion of the Company's Class B-1 Preferred Stock
and 378,000 shares of common stock upon the exercise and conversion of warrants
to purchase additional Class B-1 Preferred Stock were excluded from the
computation of the diluted net income (loss) per common share because to include
them would have been anti-dilutive.
For the three months ended April 2, 1999, outstanding options to purchase
213,000 shares of common stock, 428,000 shares of common stock issuable upon
conversion of the 6% Convertible Subordinated Debentures, 901,000 shares of
common stock issuable upon conversion of the Company's Class B-1 Preferred Stock
and 378,000 shares of common stock upon the exercise and conversion of warrants
to purchase additional Class B-1 Preferred Stock were excluded from the
computation of the diluted net income (loss) per common share because to include
them would have been anti-dilutive.
11
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the condensed
consolidated financial statements and notes included in Item 1 of Part I of this
Form 10-Q. Except for the historical information contained herein, this
quarterly report on Form 10-Q includes certain "forward-looking statements"
within the meaning of that term in Section 27A of the Securities Act of 1933 and
Section 21E of the Exchange Act of 1934, including, among others, those
statements preceded by, followed by or including the words "estimates,"
"believes," "expects," "anticipates," "plans," "projects" or similar
expressions.
These forward-looking statements are based largely on our current expectations
and are subject to a number of risks and uncertainties. Our actual results could
differ materially from these forward-looking statements. Important factors to
consider in evaluating such forward-looking statements include risk of product
demand, market acceptance, economic conditions, competitive products and
pricing, delays in the timely delivery of the Company's products, difficulties
in product development, commercialization and technology and other risks
detailed in this filing and in the Company's most recent Form 10-K. Although the
Company believes it has the product offerings and resources for continuing
success, future revenue and margin trends cannot be reliably predicted. Factors
external to the Company can result in volatility of the Company's common stock
price. Because of the foregoing factors, recent trends are not necessarily
reliable indicators of future stock prices or financial performance and there
can be no assurance that the events contemplated by the forward-looking
statements contained in this quarterly report will, in fact, occur.
OVERVIEW
Evans & Sutherland Computer Corporation ("Evans & Sutherland," "E&S(R)," or the
"Company"), is an established high-technology company with outstanding computer
graphics technology and a worldwide presence in high-performance 3D visual
simulation. In addition, E&S is now applying this core technology into
higher-growth personal computer ("PC") products for both simulation and
workstations. The Company's core computer graphics technology is shared among
the Company's Simulation, REALimage Solutions, and Applications Groups.
Simulation Group
The Simulation Group provides a broad line of visual systems for flight and
ground training and related services to the United States and international
armed forces, NASA and aerospace companies. E&S remains an industry leader for
visual systems sales to various United States government agencies and more than
20 foreign governments for the primary purpose of training military vehicle
operators. The Simulation Group is also a leading independent supplier of visual
systems for flight simulators for commercial airlines. This group provides over
50 percent of the visual systems installed in full-flight training simulators
for civil airlines, training centers, simulator manufacturers and aircraft
manufacturers.
The group's visual systems create dynamic, high quality, out-the-window scenes
that simulate the view vehicle operators see when performing tasks under actual
operating conditions. The visual systems are an integral part of full mission
simulators, which incorporate a number of other components, including cockpits
or vehicle cabs and large hydraulic motion systems.
REALimage Solutions Group
The REALimage Solutions Group develops and sells graphics chips and graphics
subsystems for the personal workstation marketplace. This group sells to
personal workstation OEMs and to end users.
In February 2000, the Company changed the strategic focus of the REALimage
Solutions Group to the high-end digital content creation ("DCC") segment. The
group will provide the base graphics and video processing technology to leading
hardware system-solution providers in the high-end DCC segment. The goal of the
group is to provide a "studio-on-a-chip" to bring together real-time graphics
and video in a unique and effective way to support all aspects of visual content
creation for broadcasting and netcasting applications.
12
Applications Group
The Applications Group is composed of synergistic businesses that use E&S core
technology in growth markets. The group's products are applications that
leverage the technology of the Company's Simulation or REALimage Solutions
Groups and apply them to other growth markets.
The Applications Group's digital theater products include hardware, software,
and content for both the entertainment and educational marketplaces. Digital
theater focuses on immersive all-dome theater applications combining colorful
digitally-produced imagery, full-spectrum audio, and audience-participation
capability. The group provides turnkey solutions incorporating visual systems
and sub-systems from the Simulation and REALimage Solutions Groups. E&S
integrates these systems with projection equipment, audio components, and
audience-participation systems from other suppliers. Products include
Digistar(R), a calligraphic projection system designed to compete with analog
star projectors in planetariums, and StarRider(R), a full-color, interactive,
domed theater experience. The group is a leading supplier of digital display
systems in the planetarium marketplace.
The Applications Group's E&S RAPIDsite(TM) product is a photo-realistic
visualization tool designed for use by real-estate developers, consulting
engineers, architects and municipal planners involved with urban, suburban and
environmentally sensitive development projects. E&S RAPIDsite features fast
3D-model construction, accelerated graphics rendering performance and
easy-to-use interactive exploration of a proposed development on a Windows NT
computer with an Open GL(R) graphics accelerator.
Until March 28, 2000, the Application Group's digital video products provided
Windows NT, open system, standard platform based virtual studio systems for
digital content production in the television broadcast, film, video, corporate
training and multimedia industries. The E&S solution offered significant
improvement in cost, ease of use and flexibility compared with the traditional,
proprietary UNIX-based systems common in this developing market. The group's
products were all-inclusive system solutions that incorporate visual system
components and subsystems from the Simulation and REALimage Solutions Groups.
E&S MindSet(TM), Virtual Studio System(TM) and the FuseBox(TM) controlled
software with real-time, frame-accurate camera tracking and enabled live talent
to perform in real time on a virtual set generated using E&S 3D computer
technology. The video output of the set meets today's digital broadcast video
standards. Systems are installed worldwide in production, postproduction,
broadcast and educational applications. On March 28, 2000, certain assets of
this business unit were sold to RT-SET Real Time Synthesized Entertainment
Technology Ltd. and its subsidiary, RT-SET America Inc.
13
RESULTS OF OPERATIONS
The following table presents the percentage of total sales represented by
certain items for the Company for the periods presented:
Three Months Ended
-------------------------------------
March 31, April 2,
2000 1999
--------------- ---------------
(Unaudited)
Sales 100.0% 100.0%
Cost of sales 64.9 55.0
--------------- ---------------
Gross profit 35.1 45.0
Operating expenses:
Selling, general and administrative 22.4 20.6
Research and development 25.1 22.3
Amortization of goodwill and other intangible assets 0.1 1.4
--------------- ---------------
Operating expenses 47.6 44.3
--------------- ---------------
(12.5) 0.7
Gain on sale of business unit 2.4 -
--------------- ---------------
Operating income (loss) (10.1) 0.7
Other income (expense), net (0.4) -
--------------- ---------------
Income (loss) before income taxes (10.5) 0.7
Income tax expense (benefit) (3.6) 0.2
--------------- ---------------
Net income (loss) (6.9) 0.5
Accretion of preferred stock 0.1 0.1
--------------- ---------------
Net income (loss) applicable to common stock (7.0%) 0.4%
=============== ===============
First Quarter 2000 Compared to First Quarter 1999
Sales
In the first quarter of 2000, sales decreased $3.7 million, or 8% ($46.0 million
in the first quarter of 2000 compared to $49.7 million in the first quarter of
1999). Sales in the Simulation Group increased $0.1 million, or less than 1%
($40.4 million in the first quarter of 2000 compared to $40.3 million in the
first quarter of 1999). Sales in the REALimage Solutions Group decreased $6.6
million, or 82% ($1.5 million in the first quarter of 2000 compared to $8.1
million in the first quarter of 1999). The decline in sales in the REALimage
Solutions Group is due to a decrease in the number of units sold and decreased
selling prices of existing products due to increased competition and delays in
introduction of new products. Management anticipates sales in the REALimage
Solutions Group for each of the remaining quarters of 2000 to be consistent with
sales in the first quarter of 2000. Sales in the Applications Group increased
$2.7 million, or 199% ($4.1 million in the first quarter of 2000 compared to
$1.4 million in the first quarter of 1999). The increase in sales in the
Applications Group was due to increased sales volume of planetarium systems and
large-format entertainment product contracts. This increase was partially offset
by a decline in the number of shipments of virtual studio systems.
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Gross Profit
Gross profit declined $6.3 million, or 28% ($16.1 million in the first quarter
of 2000 compared to $22.4 million in the first quarter of 1999). As a percent of
sales, gross profit declined to 35.1% in the first quarter of 2000 compared to
45.0% in the first quarter of 1999. The decrease in gross margin is due to lower
margins in the Simulation Group primarily due to higher costs on several
contracts to government customers which include the Harmony(TM) image generator.
In addition, gross margin in the REALimage Solutions Group decreased as a result
of decreased selling prices of existing products.
Selling, General and Administrative
Selling, general and administrative expenses increased $0.1 million, or 1%
($10.3 million in the first quarter of 2000 compared to $10.2 million in the
first quarter of 1999). As a percent of sales, selling, general and
administrative expenses were 22.4% in the first quarter of 2000 compared to
20.6% in the first quarter of 1999. The increase in these expenses is due to
increased expenses in the Simulation Group offset by lower expenses in the
REALimage Solutions Group due to the restructuring in the third quarter of 1999.
Research and Development
Research and development expenses increased $0.4 million, or 4% ($11.5 million
in the first quarter of 2000 compared to $11.1 million in the first quarter of
1999). As a percent of sales, research and development expenses increased to
25.1% in the first quarter of 2000 compared to 22.3% in the first quarter of
1999. The increase in these expenses is due to increased research and
development expenses related to the Harmony, iNTegrator(R) and Ensemble(TM)
products in the Simulation Group offset by lower research and development
expenses in the REALimage Solutions Group due to the restructuring in the third
quarter 1999.
Amortization of Goodwill and Other Intangible Assets
Amortization of goodwill and other intangible assets decreased $0.7 million, or
94% ($45,000 in the first quarter of 2000 compared to $0.7 million in the first
quarter of 1999). The decrease in this expense is due to the write-off of $9.3
million of goodwill and other intangible assets during the third quarter of
1999.
Gain on Sale of Business Unit
During the first quarter of 2000, the Company sold certain assets of its
Applications Group relating to digital video products resulting in a gain of
$1.1 million. There was no such event in the first quarter of 1999.
Other Income (Expense), Net
Other income (expense), net decreased $0.2 million (net expense of $0.2 million
in the first quarter of 2000 compared to net income of $15,000 in the first
quarter of 1999). The decrease is due to a decrease in interest income and
increase in miscellaneous expenses.
Income Taxes
The effective tax rate was 34.3% and 31.1% of pre-tax earnings for the first
quarter of 2000 and 1999, respectively. These rates are calculated based on an
estimated annual effective tax rate applied to earnings before income taxes.
15
LIQUIDITY & CAPITAL RESOURCES
At March 31, 2000, the Company had working capital of $113.9 million, including
cash, cash equivalents and short-term investments of $16.8 million, compared to
working capital of $116.9 million at December 31, 1999 including cash, cash
equivalents and short-term investments of $22.9 million. During the first
quarter of 2000, the Company used $10.7 million in its operating activities,
used $0.5 million in its investing activities and generated $5.9 million from
its financing activities.
The primary uses of cash from the Company's operating activities included a
$11.0 million increase in accounts receivable, a $4.3 million decrease in
accrued expenses and a $4.3 million decrease in income taxes payable. These uses
of cash were partially offset by a $4.6 million increase in accounts payable and
a $3.5 million decrease in costs and estimated earning in excess of billings on
uncompleted contracts, net. The increase in accounts receivable and net decrease
in costs and estimated earnings in excess of billings on uncompleted contracts
were due to achieving certain billing milestones near the end of the quarter.
The Company's investing activities during the first quarter of 2000 included
capital expenditures of $1.8 million for building improvements and equipment and
proceeds of $1.0 million for the sale of certain assets of the Company's Digital
Video business unit.
The Company's financing activities during the first quarter of 2000 included
$6.3 million in borrowings from notes payable.
On March 31, 2000, the Company entered into a financing facility with Zions
First National Bank (the "Facility"). The Facility provides for borrowings of up
to $15.0 million, which includes a $7.0 million sublimit for the issuance of
letters of credit. Borrowings under the Facility bear interest at an indexed
prime rate. If certain financial covenants are not met the interest rate will
increase to the indexed prime rate plus a margin of 2.5% per annum. The Facility
requires the Company to pay (a) letter of credit fees, which increase if the
Company fails to satisfy certain financial covenants, and (b) a commitment fee,
which increases if the Company fails to satisfy certain financial covenants. The
Facility expires on March 30, 2001. Except for certain permitted exceptions as
identified in the Facility, among other things, the Facility prevents the
Company from (a) declaring or paying any dividends except as are mandatorily
required on the Company's preferred stock, (b) making any distribution of assets
to the Company's shareholders, investors, or equity holders, whether in cash,
assets, or in obligations of the Company, (c) allocating or otherwise setting
apart any sum for the payment of any dividend or distribution on, or for the
purchase, redemption, or retirement of any shares of its capital stock or equity
interests in excess of $2.0 million for any year, (d) making any other
distribution by reduction of capital or otherwise in respect of any shares of
its capital stock or equity interests in excess of $250,000, or (e) creating,
incurring, assuming, or suffering to exist any debt or any encumbrance, mortgage
or lien upon certain real property of the Company. The Company's obligations
under the Facility are secured by substantially all of the Company's assets,
subject to other liens permitted under the Facility. As of March 31, 2000, $5.0
million was outstanding under the Facility and an additional $4.9 million was
reserved under the Facility due to the issuance of letters of credit. Such
amounts shall continue to be reserved and shall not otherwise be available to be
advanced to the Company, until the expiration or termination of such letters of
credit.
The Company has a $5.0 million unsecured letter of credit facility with First
Security Bank, N.A., of which approximately $2.7 million was unused and
available as of March 31, 2000. The First Security Bank letter of credit
facility expires on September 30, 2000 and requires the Company to pay letter of
credit fees. In addition, the Company has unsecured letters of credit totaling
approximately $3.6 million outstanding with U.S. Bank, N.A. that expire between
July 2000 and June 2001.
As of March 31, 2000, the Company had a revolving line of credit agreement with
a foreign bank totaling approximately $4.6 million, of which approximately $1.3
million was unused and available. The Company had a letter of credit with Bank
One, N.A. for $4.6 million as a guarantee for the foreign line of credit
agreement. As of April 30, 2000, the Company had repaid the borrowings under the
line of credit with the foreign bank. The line of credit with the foreign bank
and the letter of credit with Bank One, N.A. expired April 30, 2000.
16
On February 18, 1998, the Company's Board of Directors authorized the repurchase
of up to 600,000 shares of the Company's common stock, including the 327,000
shares still available from the repurchase authorization approved by the Board
of Directors on November 11, 1996. On September 8, 1998, the Company's Board of
Directors authorized the repurchase of an additional 1,000,000 shares of the
Company's common stock. Subsequent to February 18, 1998, the Company repurchased
1,136,500 shares of its common stock, leaving 463,500 shares available for
repurchase as of May 5, 2000. Stock may be acquired in the open market or
through negotiated transactions. Under the program, repurchases may be made from
time to time, depending on market conditions, share price, and other factors.
As of March 31, 2000, the Company had approximately $18.0 million of 6%
Convertible Subordinated Debentures due in 2012 (the "6% Debentures"). The 6%
Debentures are unsecured and are convertible at each bondholder's option into
shares of the Company's common stock at a conversion price of $42.10 or 428,000
shares of the Company's common stock subject to adjustment. The 6% Debentures
are redeemable at the Company's option, in whole or in part, at par.
Management believes that existing cash, cash equivalents and short-term
investment balances, borrowings available under its Facility and expected cash
from future operations will be sufficient to meet the Company's anticipated
working capital needs, routine capital expenditures and current debt service
obligations for the next twelve months. The Company's cash, cash equivalents and
short-term investments are available for working capital needs, capital
expenditures, strategic investments, mergers and acquisitions, stock repurchases
and other potential cash needs as they may arise. On a longer-term basis, if
future cash from operations and its existing Facility are not sufficient to meet
the Company's cash requirements, the Company may be required to renegotiate its
existing Facility or seek additional financing from the issuance of debt or
equity securities. There can be no assurances that the Company would be
successful in renegotiating its existing Facility or obtaining additional debt
or equity financing.
TRADEMARKS USED IN THIS FORM 10-Q
AccelGALAXY, AccelGMX, Digistar, E&S, E&S Lightning 1200, E&S RAPIDsite,
Ensemble, FuseBox, Harmony, iNTegrator, MindSet, REALimage, StarRider, and
Virtual Studio System are trademarks or registered trademarks of Evans &
Sutherland Computer Corporation. All other product, service, or trade names or
marks are the properties of their respective owners.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The principal market risks to which the Company is exposed are changes in
foreign currency exchange rates and changes in interest rates. The Company's
international sales, which accounted for 39% of the Company's total sales in the
three months ended March 31, 2000 are concentrated in the United Kingdom,
continental Europe and Asia. The Company manages its exposure to changes in
foreign currency exchange rates by entering into most of its sales and purchase
contracts for products and materials in U.S. dollars. Occasionally, the Company
enters into sales and purchase contracts for products and materials denominated
in currencies other than U.S. dollars and in those cases the Company enters into
foreign exchange forward sales or purchase contracts to offset those exposures.
Foreign currency purchase and sale contracts are entered into for periods
consistent with related underlying exposures and do not constitute positions
independent of those exposures. The Company does not enter into contracts for
trading purposes and does not use leveraged contracts. As of March 31, 2000, the
Company had no material sales or purchase contracts in currencies other than
U.S. dollars and had no foreign currency sales or purchase contracts.
The Company reduces its exposure to changes in interest rates by maintaining a
high proportion of its debt in fixed-rate instruments. As of March 31, 2000, 69%
of the Company's total debt was in fixed-rate instruments; however, the Company
has a financing facility that provides for borrowings by the Company of up to
$15.0 million. The borrowings bear interest at a variable rate at an indexed
prime rate. If the Company were to borrow all of the $15.0 million of the
financing facility, 55% of the Company's total debt would be in fixed-rate
instruments. In addition, the Company maintains an average maturity of its
short-term investment portfolio under twelve months to avoid large changes in
its market value.
17
PART II - OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit No. Description
----------- ---------------------------------------------------
10.1 Loan Agreement by and between Zions First National Bank, a
national banking association, and Evans & Sutherland
Computer Corporation, dated March 31, 2000.
10.2 $15,000,000 Promissory Note in favor of Zions First National
Bank, a national banking association, dated March 31, 2000.
10.3 Trust Deed, Assignment of Rents, Security Agreement and
Fixture Filing executed by Evans & Sutherland Computer
Corporation to Zions First National Bank, a national banking
association, in favor of Zions First National Bank, a
national banking association, dated March 31, 2000.
10.4 Assignment of Tenant's Interest in Ground Lease for Security
executed by Evans & Sutherland Computer Corporation and
Zions First National Bank, a national banking association,
dated March 31, 2000.
10.5 Assignment of Lease by Evans & Sutherland Computer
Corporation and Zions First National Bank, a national
banking association, dated March 31, 2000.
10.6 Commercial Credit and Security Agreement, dated
March 2, 1998, between Evans & Sutherland Computer
Corporation and First Security Bank, N.A.
10.7 Modification Agreement dated February 22, 2000, between
Evans & Sutherland Computer Corporation and First Security
Bank, N.A.
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None.
18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EVANS & SUTHERLAND COMPUTER CORPORATION
Date May 15, 2000 By: /S/ Richard J. Gaynor
-------------------------
Richard J. Gaynor, Vice President
and Chief Financial Officer
(Principal Financial Officer)
19