SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------------------------------------
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934,
For the quarterly period ended September 29, 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 November 3, 2000 was 9,756,868.
FORM 10-Q
Evans & Sutherland Computer Corporation
Quarter Ended September 29, 2000
Page No.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of September 29, 2000 and
December 31, 1999 3
Consolidated Statements of Operations for the three months
ended September 29, 2000 and October 1, 1999 4
Consolidated Statements of Operations for the nine months
ended September 29, 2000 and October 1, 1999 5
Consolidated Statements of Comprehensive Income (Loss) for
the three and nine months ended September 29, 2000
and October 1, 1999 6
Consolidated Statements of Cash Flows for the nine months
ended September 29, 2000 and October 1, 1999 7
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 21
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 22
Item 6. Exhibits and Reports on Form 8-K 23
SIGNATURES 23
2
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
September 29, December 31,
2000 1999
---------- ---------
(Unaudited)
Assets:
Cash and cash equivalents ................................................. $ 15,417 $ 22,110
Short-term investments .................................................... 1,877 748
Accounts receivable, less allowance for doubtful receivables of
$4,328 at September 29, 2000 and $1,338 at December 31, 1999 ........... 30,979 28,743
Inventories ............................................................... 42,927 40,588
Costs and estimated earnings in excess of billings on uncompleted contracts 68,990 80,457
Deferred income taxes ..................................................... -- 15,923
Prepaid expenses and deposits ............................................. 6,380 7,844
--------- ---------
Total current assets ............................................... 166,570 196,413
Property, plant and equipment, net ........................................... 48,992 52,184
Investment securities ........................................................ 11,851 4,467
Deferred income taxes ........................................................ -- 4,418
Goodwill and other intangible assets, net .................................... 418 552
Other assets ................................................................. 987 430
--------- ---------
Total assets ....................................................... $ 228,818 $ 258,464
========= =========
Liabilities and stockholders' equity:
Notes payable ............................................................. $ 308 $ 2,657
Accounts payable .......................................................... 30,049 19,575
Accrued expenses .......................................................... 42,870 40,119
Customer deposits ......................................................... 2,188 4,720
Billings in excess of costs and estimated earnings on uncompleted contracts 29,646 12,412
--------- ---------
Total current liabilities .......................................... 105,061 79,483
--------- ---------
Long-term debt ............................................................... 18,058 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 ........ 23,943 23,772
--------- ---------
Stockholders' equity:
Preferred stock, no par value; authorized 8,500,000 shares;
no shares issued and outstanding ....................................... -- --
Common stock, $.20 par value; authorized 30,000,000
shares; issued 9,745,398 shares at September 29, 2000 and
9,678,938 shares at December 31, 1999 .................................. 1,949 1,936
Additional paid-in capital ................................................ 24,590 24,086
Common stock in treasury, at cost; 352,500 shares ......................... (4,709) (4,709)
Retained earnings ......................................................... 60,579 115,816
Accumulated other comprehensive income (loss) ............................. (653) 65
--------- ---------
Total stockholders' equity ......................................... 81,756 137,194
--------- ---------
Total liabilities and stockholders' equity ......................... $ 228,818 $ 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
-----------------------
September 29, October 1,
2000 1999
-------- --------
Sales ................................................ $ 48,092 $ 48,704
Cost of sales ........................................ 33,288 27,997
Write-down of inventories ............................ -- 13,230
-------- --------
Gross profit ............................... 14,804 7,477
-------- --------
Operating expenses:
Selling, general and administrative ............... 7,575 10,479
Research and development .......................... 11,073 13,600
Amortization of goodwill and other intangibles .... 45 45
Impairment loss ................................... -- 9,693
Restructuring charge .............................. -- 1,460
-------- --------
Operating expenses ......................... 18,693 35,277
-------- --------
Operating loss ............................. (3,889) (27,800)
Other income (expense), net .......................... 4,337 (220)
-------- --------
Income (loss) before income taxes ......... 448 (28,020)
Income tax expense (benefit) ......................... 147 (10,044)
-------- --------
Net income (loss) .................................... 301 (17,976)
Accretion of preferred stock ......................... 57 57
-------- --------
Net income (loss) applicable to common stock $ 244 $(18,033)
======== ========
Net income (loss) per common share:
Basic and Diluted .......................... $ 0.03 $ (1.91)
Weighted average common and common
equivalent shares outstanding:
Basic ...................................... 9,383 9,436
Diluted .................................... 9,388 9,436
See accompanying notes to consolidated financial statements.
4
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share amounts)
Nine Months Ended
-------------------------
September 29, October 1,
2000 1999
--------- ---------
Sales ........................................... $ 119,636 $ 142,473
Cost of sales ................................... 101,022 81,785
Write-down of inventories ....................... -- 13,230
--------- ---------
Gross profit .......................... 18,614 47,458
--------- ---------
Operating expenses:
Selling, general and administrative .......... 26,567 32,643
Research and development ..................... 33,589 35,629
Amortization of goodwill and other intangibles 134 1,471
Impairment loss .............................. -- 9,693
Restructuring charge ......................... -- 1,460
--------- ---------
Operating expenses .................... 60,290 80,896
--------- ---------
(41,676) (33,438)
Gain on sale of business unit ................... 1,918 --
--------- ---------
Operating loss ........................ (39,758) (33,438)
Other income, net ............................... 3,781 817
--------- ---------
Loss before income taxes .............. (35,977) (32,621)
Income tax expense (benefit) .................... 19,090 (11,470)
--------- ---------
Net loss ........................................ (55,067) (21,151)
Accretion of preferred stock .................... 171 171
--------- ---------
Net loss applicable to common stock ... $ (55,238) $ (21,322)
========= =========
Net loss per common share:
Basic and Diluted ..................... $ (5.90) $ (2.23)
Weighted average common and common
equivalent shares outstanding:
Basic and Diluted ..................... 9,360 9,547
See accompanying notes to consolidated financial statements.
5
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
(In thousands)
Three Months Ended
-----------------------
September 29, October 1,
2000 1999
-------- --------
Net income (loss) ........................... $ 301 $(17,976)
Other comprehensive income (loss):
Foreign currency translation adjustments 58 (47)
Unrealized losses on securities ........ (324) (245)
-------- --------
Other comprehensive loss before income taxes (266) (292)
Income tax benefit related to items of other
comprehensive loss ..................... -- (91)
-------- --------
Other comprehensive loss, net of income taxes (266) (201)
-------- --------
Comprehensive income (loss) ................. $ 35 $(18,177)
======== ========
Nine Months Ended
-----------------------
September 29, October 1,
2000 1999
-------- --------
Net loss .................................... $(55,067) $(21,151)
Other comprehensive income (loss):
Foreign currency translation adjustments 108 (243)
Unrealized losses on securities ........ (826) (236)
-------- --------
Other comprehensive loss before income taxes (718) (479)
Income tax benefit related to items of other
comprehensive loss ..................... -- (148)
-------- --------
Other comprehensive loss, net of income taxes (718) (331)
-------- --------
Comprehensive loss .......................... $(55,785) $(21,482)
======== ========
See accompanying notes to consolidated financial statements.
6
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Nine Months Ended
-----------------------
September 29, October 1,
2000 1999
-------- --------
Cash flows from operating activities:
Net loss .................................................................. $(55,067) $(21,151)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Write-down of inventories .......................................... -- 13,230
Impairment loss .................................................... -- 9,693
Depreciation and amortization ...................................... 10,681 11,913
Gain on sale of business unit ...................................... (1,918) --
Gain on sale of investment securities .............................. (6,706) --
Loss on marketable securities ...................................... 1,939 --
Provision for losses on accounts receivable ........................ 3,644 398
Provision for write down of inventories ............................ 2,745 1,048
Provision for warranty expense ..................................... 832 650
Deferred income taxes .............................................. 20,598 (3,134)
Other .............................................................. (116) (24)
Changes in assets and liabilities:
Accounts receivable ............................................. (6,166) 4,292
Inventories ..................................................... (6,356) (5,275)
Costs and estimated earnings in excess of billings on
uncompleted contracts, net ................................... 28,705 (5,310)
Prepaid expenses and deposits ................................... 1,350 (519)
Accounts payable ................................................ 9,872 (6,561)
Accrued expenses ................................................ 1,919 (1,172)
Customer deposits ............................................... (2,532) 1,623
-------- --------
Net cash provided by (used in) operating activities ...... 3,424 (299)
-------- --------
Cash flows from investing activities:
Purchases of short-term investments ....................................... (1,875) (14,700)
Proceeds from sale of short-term investments .............................. 752 30,084
Purchase of investment securities ......................................... (500) (636)
Proceeds from sale of business unit ....................................... 1,250 --
Investment in joint venture ............................................... (711) --
Purchases of property, plant and equipment ................................ (7,828) (11,131)
Proceeds from sale of property, plant and equipment ....................... 1,532 6,010
Increase in other assets .................................................. (999) (33)
-------- --------
Net cash provided by (used in) investing activities ...... (8,379) 9,594
-------- --------
Cash flows from financing activities:
Borrowings from notes payable ............................................. 13,297 715
Payments of notes payable ................................................. (15,430) (691)
Proceeds from issuance of common stock .................................... 444 1,149
Payments for repurchase of common stock ................................... -- (4,381)
-------- --------
Net cash used in financing activities .................... (1,689) (3,208)
-------- --------
Effect of foreign exchange rates on cash and cash equivalents ................ (49) (402)
-------- --------
Net change in cash and cash equivalents ...................................... (6,693) 5,685
Cash and cash equivalents at beginning of year ............................... 22,110 1,834
-------- --------
Cash and cash equivalents at end of period ................................... $ 15,417 $ 7,519
======== ========
Supplemental Disclosures of Cash Flow Information
Cash paid (received) during the period for:
Interest .................................................................. $ 739 $ 1,265
Income taxes .............................................................. (5,646) (3,749)
Accretion of preferred stock ................................................. 171 171
See accompanying notes to consolidated financial statements.
7
EVANS & SUTHERLAND COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared
in accordance with the instructions to Form 10-Q and, therefore, do not include
all information and footnotes necessary for a complete presentation of the
results of operations, the financial position, and cash flows, in conformity
with generally accepted accounting principles. This report on Form 10-Q for the
three months and nine months ended September 29, 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 (loss) and cash flows reflect all normal
recurring adjustments which are, in the opinion of management, necessary for a
fair presentation of the Company's financial position, results of operations and
cash flows. The results of operations for the interim three and nine month
periods ended September 29, 2000 are not necessarily indicative of the results
to be expected for the full year.
Certain amounts in the 1999 condensed consolidated financial statements and
notes have been reclassified to conform to the 2000 presentation.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). SFAS 133, as amended by SFAS
137 and SFAS 138, is effective for all fiscal years beginning after June 15,
2000. SFAS 133 establishes new accounting and reporting standards for companies
to report information about derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives), and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the balance sheet and measure
those instruments at fair value. For a derivative not designated as a hedging
instrument, changes in the fair value of the derivative are recognized in
earnings in the period of change. The Company intends to adopt SFAS 133 by
January 1, 2001. The impact of adopting SFAS 133 is not anticipated to be
material to the financial statements.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB 101"). SAB
101 provides guidance on the recognition, presentation and disclosure of revenue
in financial statements. In June 2000, the Securities and Exchange Commission
issued SAB 101B which extends the implementation date of SAB 101 to the
Company's fourth quarter of 2000. The Company continues to evaluate the impact,
if any, of SAB 101 and subsequent interpretations of SAB 101 on its financial
statements.
2. BUSINESS DIVESTITURE
On March 28, 2000, the Company sold certain assets of its Applications Group
relating to digital video products to RT-SET Real Time Synthesized Entertainment
Technology Ltd. and its subsidiary, RT-SET America Inc., for $1.4 million in
cash, common stock of RT-SET Real Time Synthesized Entertainment Technology Ltd.
valued at approximately $1.0 million, and the assumption of certain liabilities.
On June 15, 2000, the Company received additional common stock of RT-SET Real
Time Synthesized Entertainment Technology Ltd. valued at $1.5 million related to
the successful development of a product included in the purchased assets.
8
EVANS & SUTHERLAND COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. INVENTORIES
Inventories consist of the following (in thousands):
September 29, December 31,
2000 1999
--------------- ---------------
(Unaudited)
Raw materials $ 30,461 $ 26,803
Work-in-process 9,967 11,479
Finished goods 2,499 2,306
--------------- ---------------
$ 42,927 $ 40,588
=============== ===============
4. INVESTMENTS
In the third quarter of 2000, the Company recognized a $6.7 million gain on the
sale of the Company's investment in Silicon Light Machines, Inc. to Cypress
Semiconductor, Inc. ("Cypress") in which the Company received shares of Cypress
stock. In addition, in the third quarter of 2000, the Company determined that
certain of its investments had incurred an other-than-temporary decline in value
and recorded a loss of $1.9 million. These amounts are recorded in other income
(expense), net in the Company's consolidated statements of operations.
5. INCOME TAXES
During the second quarter of 2000, the Company increased its deferred tax asset
valuation allowance by $20.6 million. As a result of the net operating loss in
the second quarter of 2000, the cumulative net operating losses for 2000, 1999
and 1998, and the cancellation of a significant contract and the related civil
complaint filed by Lockheed Martin Corporation as discussed in Note 10 to the
consolidated financial statements, the Company fully reserved its net deferred
tax assets which previously existed at the end of the first quarter of 2000 and
those deferred tax assets recognized through the third quarter of 2000. These
net deferred tax assets relate to temporary differences, tax credit
carryforwards and net operating loss carryforwards. The valuation allowance was
recorded in accordance with SFAS 109, which requires that a valuation allowance
be established when there is uncertainty as to the realizability of the deferred
tax assets. The Company evaluates the realizability of its deferred tax assets
on a quarterly basis. If the deferred tax assets are realized in the future, or
if a portion or all of the valuation allowance is no longer deemed to be
necessary, the related tax benefits will reduce future income tax provisions.
6. NOTES PAYABLE
On March 31, 2000, the Company entered into a financing facility (the
"Facility") with Zions First National Bank. The Facility provides for borrowings
of up to $15.0 million, which included a $7.0 million sublimit for the issuance
of letters of credit. Effective as of June 30, 2000, the Facility was amended to
allow the entire Facility amount to be used for the issuance of letters of
credit, modify certain covenants, increase the interest rate and allow for the
cash collateralization of up to $6.0 million of additional letter of credit
capacity beyond the $15.0 million Facility amount pursuant to the terms and
conditions of a supplemental letter of credit and reimbursement agreement and a
managed agency account assignment agreement. Borrowings under the Facility bear
interest at an indexed prime rate plus 4% per annum. The issuance of letters of
credit under the Facility and cash collateralized letters of credit outside the
Facility bear an annual issuance fee of 4% and 2%, respectively. The Facility
expires on March 30, 2001. Except for certain permitted exceptions as identified
in the Facility, among other things, the Facility prevents the Company from (a)
declaring or paying any dividends except as are mandatorily required on the
Company's preferred stock, (b) making any distribution of assets to the
Company's shareholders, investors, or equity holders, whether in cash, assets,
or in obligations of the Company, (c) allocating or otherwise setting apart any
sum for the payment of any dividend or distribution on, or for the purchase,
redemption, or retirement of any shares of its capital stock or equity interests
in excess of $2.0 million for any year, (d) making any other distribution by
reduction of capital or otherwise in respect of any shares of its capital stock
or equity interests in excess of $250,000, or (e) creating, incurring, assuming,
or suffering to exist any debt or any encumbrance, mortgage or lien upon certain
9
EVANS & SUTHERLAND COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
real and personal property of the Company. The Company's obligations under the
Facility are secured by substantially all of the Company's assets, subject to
certain liens permitted under the Facility. As of September 29, 2000, there were
no borrowings under the Facility and $12.3 million was reserved under the
Facility, due to outstanding letters of credit. Such amounts shall continue to
be reserved and shall not otherwise be available to be advanced to the Company,
until the expiration or termination of such letters of credit.
The Company has a $5.0 million cash collateralized letter of credit facility
with Wells Fargo Bank, N.A., of which approximately $2.6 million was unused and
available as of September 29, 2000. The Wells Fargo Bank letter of credit
facility matures on September 30, 2001, after which no further letters of credit
may be issued. The Company has unsecured letters of credit totaling
approximately $1.5 million outstanding with U.S. Bank, N.A. that expire between
September 2000 and June 2001. In addition, the Company has $1.4 million of cash
on deposit with Lloyds TSB Bank plc ("Lloyds") in a restricted cash collateral
account to support certain obligations that the bank guarantees.
Evans & Sutherland Computer Limited, a wholly owned subsidiary of Evans &
Sutherland Computer Corporation, has a $3.0 million overdraft facility (the
"Overdraft Facility") with Lloyds. Borrowings under the Overdraft Facility bear
interest at the bank's short-term offered rate plus 1.75% per annum. As of
September 29, 2000, there were no borrowings under the Overdraft Facility. The
Overdraft Facility is subject to reduction or demand repayment for any reason at
any time at Lloyds' discretion and expires on November 30, 2000. Evans &
Sutherland Computer Limited executed a letter of negative pledge in favor of
Lloyds against its assets. Covenants in the agreement restrict dividend payments
from Evans & Sutherland Computer Limited and require maintenance of certain
financial covenants.
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.
For the three months ended September 29, 2000, outstanding options to purchase
2,461,424 shares of common stock, 428,000 shares of common stock issuable upon
conversion of the 6% Convertible Subordinated Debentures, 901,000 shares of
common stock issuable upon conversion of the Company's Class B-1 Preferred Stock
and 378,000 shares of common stock issuable upon the exercise and conversion of
warrants to purchase additional Class B-1 Preferred Stock were excluded from the
computation of the diluted net income per common share because to include them
would have been anti-dilutive.
For the nine months ended September 29, 2000, outstanding options to purchase
2,668,250 shares of common stock, 428,000 shares of common stock issuable upon
conversion of the 6% Convertible Subordinated Debentures, 901,000 shares of
common stock issuable upon conversion of the Company's Class B-1 Preferred Stock
and 378,000 shares of common stock issuable upon the exercise and conversion of
warrants to purchase additional Class B-1 Preferred Stock were excluded from the
computation of the diluted net loss per common share because to include them
would have been anti-dilutive.
For the three and nine months ended October 1, 1999, outstanding options to
purchase 2,276,452 shares of common stock, 428,000 shares of common stock
issuable upon conversion of the 6% Convertible Subordinated Debentures, 901,000
shares of common stock issuable upon conversion of the Company's Class B-1
Preferred Stock and 378,000 shares of common stock issuable upon the exercise
and conversion of warrants to purchase additional Class B-1 Preferred Stock were
excluded from the computation of the diluted net income (loss) per common share
because to include them would have been anti-dilutive.
10
EVANS & SUTHERLAND COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. SEGMENT AND RELATED INFORMATION
The Company's business units have been aggregated into three reportable
segments: Simulation, REALimage(TM) Solutions, and Applications. These
reportable segments offer different products and services and are managed and
evaluated separately because each segment uses different technologies and
requires different marketing strategies. The Simulation segment provides a broad
line of visual systems for flight and ground simulators for training purposes to
government, aerospace and commercial airline customers. The REALimage Solutions
segment provides graphics accelerator products, including graphics chips and
subsystems, to the personal PC workstation marketplace. The Applications segment
provides products for the entertainment, educational and real-estate planning
industries that use technologies from the Simulation and REALimage Solutions
segments.
The Company evaluates segment performance based on income (loss) from operations
before income taxes, interest income and expense, other income and expense and
foreign exchange gains and losses. The Company's assets are not identifiable by
segment.
REALimage
(in thousands, unaudited) Simulation Solutions Applications Total
------------- ------------- ------------- -------------
Three months ended September 29, 2000
Sales $ 44,486 $ 1,196 $ 2,410 $ 48,092
Operating loss (1,878) (1,474) (537) (3,889)
Three months ended October 1, 1999
Sales $ 43,001 $ 4,231 $ 1,472 $ 48,704
Operating loss (9,293) (16,911) (1,596) (27,800)
Nine months ended September 29, 2000
Sales $ 106,608 $ 4,232 $ 8,796 $ 119,636
Operating income (loss) (35,849) (3,996) 87 (39,758)
Nine months ended October 1, 1999
Sales $ 118,756 $ 19,101 $ 4,616 $ 142,473
Operating loss (5,661) (23,150) (4,627) (33,438)
9. 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 Nine Months Ended
------------------------ ------------------------
September 29, October 1, September 29, October 1,
2000 1999 2000 1999
-------- -------- -------- --------
(Unaudited) (Unaudited)
United States $ 32,896 $ 27,260 $ 76,936 $ 74,212
United Kingdom 6,352 14,754 17,378 40,552
Europe (excluding United Kingdom) 6,666 4,089 15,709 17,958
Pacific Rim 383 2,547 5,960 9,273
Other 1,795 54 3,653 478
-------- -------- -------- --------
$ 48,092 $ 48,704 $119,636 $142,473
======== ======== ======== ========
11
EVANS & SUTHERLAND COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents property, plant and equipment by geographic
location based on the location of the assets (in thousands):
September 29, December 31,
2000 1999
------------- -------------
(Unaudited)
United States $ 48,377 $ 51,715
Europe 615 469
------------- -------------
$ 48,992 $ 52,184
============= =============
10. LEGAL PROCEEDINGS
On May 23, 2000, Lockheed Martin Corporation (the "Plaintiff") served the
Company with a civil complaint filed in the Circuit Court of the Ninth Judicial
Circuit in and for Orange County, Florida. The Plaintiff alleged in the
complaint that the Company breached a contract to provide certain visual systems
for the Combined Arms Tactical Trainer program for the United Kingdom Ministry
of Defence. The contract has an original value of $33.9 million. In the
complaint, the Plaintiff seeks compensatory damages of $8.5 million plus
interest as well as consequential damages and attorneys' fees. The $8.5 million
being sought from the Company by the Plaintiff was paid to the Company from May
1999 to March 2000 and was recognized as revenue by the Company during 1999. On
June 12, 2000, the Company filed its answer and counterclaim. In the
counterclaim, the Company alleges as grounds for recovery against the Plaintiff
(1) breach of contract, (2) breach of implied covenant of good faith and fair
dealing, (3) unjust enrichment, (4) unfair competition, (5) misappropriation of
trade secrets, (6) intentional interference with advantageous business
relationship, (7) replevin, and (8) promissory estoppel. In its counterclaim,
the Company seeks compensatory damages of not less than $10.0 million and not
more than $25.4 million. On June 14, 2000, the case was removed to the Orlando
Division of the United States District Court for the District of Florida where
it currently remains. On July 7, 2000, the Plaintiff answered the Company's
counterclaim but also filed a motion for dismissal of the Company's
counterclaims for unjust enrichment, unfair competition, promissory estoppel,
and incidental damages. On July 24, 2000, the Company filed its opposition to
the Plaintiff's motion to dismiss these certain counterclaims of the Company. On
October 20, 2000 the court denied the Plaintiff's motion to dismiss in its
entirety, without prejudice. Management disputes the Plaintiff's allegations in
the complaint and is vigorously defending the action and asserting its
counterclaims. Although management believes the Company will ultimately prevail
in defending the claims against it, an unfavorable outcome of these matters
would have a material adverse impact on the Company's financial condition and
operations.
Except as discussed in the preceding paragraph, the Company is not a party to
any other material legal proceeding. However, the Company from time to time is
involved in ordinary, routine litigation incidental to its business.
12
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the condensed
consolidated financial statements and notes included in Item 1 of Part I of this
Form 10-Q. Except for the historical information contained herein, this
quarterly report on Form 10-Q includes certain "forward-looking statements"
within the meaning of that term in Section 27A of the Securities Act of 1933 and
Section 21E of the Exchange Act of 1934, including, among others, those
statements preceded by, followed by or including the words "estimates,"
"believes," "expects," "anticipates," "plans," "projects" or similar
expressions.
These forward-looking statements are based largely on our current expectations
and are subject to a number of risks and uncertainties. Our actual results could
differ materially from these forward-looking statements. Important factors to
consider in evaluating such forward-looking statements include risk of product
demand, market acceptance, economic conditions, competitive products and
pricing, cancellation of contracts or significant penalties due to delays in the
timely delivery of the Company's products, difficulties in product development,
commercialization and technology and other risks detailed in this filing and in
the Company's most recent Form 10-K. Although the Company believes it has the
product offerings and resources for continuing success, future revenue and
margin trends cannot be reliably predicted. Factors external to the Company can
result in volatility of the Company's common stock price. Because of the
foregoing factors, recent trends are not necessarily reliable indicators of
future stock prices or financial performance and there can be no assurance that
the events contemplated by the forward-looking statements contained in this
quarterly report will, in fact, occur.
OVERVIEW
Evans & Sutherland Computer Corporation ("Evans & Sutherland," "E&S(R)," or the
"Company"), is an established high-technology company with outstanding computer
graphics technology and a worldwide presence in high-performance 3D visual
simulation. In addition, E&S is now applying this core technology into
higher-growth personal computer ("PC") products for both simulation and
workstations. The Company's core computer graphics technology is shared among
the Company's Simulation, REALimage Solutions, and Applications Groups.
Simulation Group
The Simulation Group provides a broad line of visual systems for flight and
ground training and related services to the United States and international
armed forces, NASA and aerospace companies. E&S remains an industry leader for
visual systems sales to various United States government agencies and more than
20 foreign governments for the primary purpose of training military vehicle
operators. The Simulation Group is also a leading independent supplier of visual
systems for flight simulators for commercial airlines. This group provides over
50 percent of the visual systems installed in full-flight training simulators
for civil airlines, training centers, simulator manufacturers and aircraft
manufacturers.
The group's visual systems create dynamic, high quality, out-the-window scenes
that simulate the view vehicle operators see when performing tasks under actual
operating conditions. The visual systems are an integral part of full mission
simulators, which incorporate a number of other components, including cockpits
or vehicle cabs and large hydraulic motion systems.
REALimage Solutions Group
The REALimage Solutions Group develops and sells graphics chips and graphics
subsystems for the personal workstation marketplace. This group sells to
personal workstation OEMs and to end-users.
In February 2000, the Company changed the strategic focus of the REALimage
Solutions Group to the high-end digital content creation ("DCC") segment. The
group will provide the base graphics and video processing technology to leading
hardware system-solution providers in the high-end DCC segment. The goal of the
group is to provide a "studio-on-a-chip" to bring together real-time graphics
and video in a unique and effective way to support all aspects of visual content
creation for broadcasting and netcasting applications.
13
Applications Group
The Applications Group is composed of synergistic businesses that use E&S core
technology in growth markets. The group's products are applications that
leverage the technology of the Company's Simulation and REALimage Solutions
Groups and apply them to other growth markets.
The Applications Group's digital theater products include hardware, software,
and content for both the entertainment and educational marketplaces. Digital
theater focuses on immersive all-dome theater applications combining colorful
digitally-produced imagery, full-spectrum audio, and audience-participation
capability. The group provides turnkey solutions incorporating visual systems
and sub-systems from the Simulation and REALimage Solutions Groups. E&S
integrates these systems with projection equipment, audio components, and
audience-participation systems from other suppliers. Products include
Digistar(R), a calligraphic projection system designed to compete with analog
star projectors in planetariums, and StarRider(R), a full-color, interactive,
domed theater experience. The group is a leading supplier of digital display
systems in the planetarium marketplace.
The Applications Group's E&S RAPIDsite(TM) product is a photo-realistic
visualization tool designed for use by real-estate developers, consulting
engineers, architects and municipal planners involved with urban, suburban and
environmentally sensitive development projects. E&S RAPIDsite features fast
3D-model construction, accelerated graphics rendering performance and
easy-to-use interactive exploration of a proposed development on a Windows NT
computer with an Open GL(R) graphics accelerator.
Until March 28, 2000, the Application Group's digital video products provided
Windows NT, open system, standard platform based virtual studio systems for
digital content production in the television broadcast, film, video, corporate
training and multimedia industries. The E&S solution offered significant
improvement in cost, ease of use and flexibility compared with the traditional,
proprietary UNIX-based systems common in this developing market. The group's
products were all-inclusive system solutions that incorporated visual system
components and subsystems from the Simulation and REALimage Solutions Groups.
E&S MindSet(TM), Virtual Studio System(TM) and the FuseBox(TM) controlled
software with real-time, frame-accurate camera tracking and enabled live talent
to perform in real time on a virtual set generated using E&S 3D computer
technology. On March 28, 2000, certain assets of this business unit were sold to
RT-SET Real Time Synthesized Entertainment Technology Ltd. and its subsidiary,
RT-SET America Inc.
14
RESULTS OF OPERATIONS
The following table presents the percentage of total sales represented by
certain items of the Company for the periods presented:
Three Months Ended Nine Months Ended
--------------------- ---------------------
September 29, October 1, September 29, October 1,
2000 1999 2000 1999
-------- -------- -------- --------
(Unaudited) (Unaudited)
Sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 69.2 57.5 84.4 57.4
Write-down of inventory -- 27.2 -- 9.3
-------- -------- -------- --------
Gross profit 30.8 15.3 15.6 33.3
-------- -------- -------- --------
Operating expenses:
Selling, general and administrative 15.8 21.5 22.2 22.9
Research and development 23.0 27.9 28.1 25.0
Amortization of goodwill and other
intangible assets 0.1 0.1 0.1 1.1
Impairment loss -- 19.9 -- 6.8
Restructuring charge -- 3.0 -- 1.0
-------- -------- -------- --------
Operating expenses 38.9 72.4 50.4 56.8
-------- -------- -------- --------
(8.1) (57.1) (34.8) (23.5)
Gain on sale of business unit -- -- 1.6 --
-------- -------- -------- --------
Operating loss (8.1) (57.1) (33.2) (23.5)
Other income (expense), net 9.0 (0.4) 3.2 0.6
-------- -------- -------- --------
Income (loss) before income taxes 0.9 (57.5) (30.0) (22.9)
Income tax expense (benefit) 0.3 (20.6) 16.0 (8.0)
-------- -------- -------- --------
Net Income (loss) 0.6 (36.9) (46.0) (14.9)
Accretion of preferred stock 0.1 0.1 0.1 0.1
-------- -------- -------- --------
Net income (loss) applicable to
common stock 0.5% (37.0%) (46.1%) (15.0%)
======== ======== ======== ========
Third Quarter 2000 Compared to Third Quarter 1999
Sales
In the third quarter of 2000, sales decreased $0.6 million, or 1% ($48.1 million
in the third quarter of 2000 compared to $48.7 million in the third quarter of
1999). Sales in the Simulation Group increased $1.5 million, or 3% ($44.5
million in the third quarter of 2000 compared to $43.0 million in the third
quarter of 1999). Sales in the REALimage Solutions Group decreased $3.0 million,
or 72% ($1.2 million in the third quarter of 2000 compared to $4.2 million in
the third quarter of 1999). Sales in the Applications Group increased $0.9
million, or 64% ($2.4 million in the third quarter of 2000 compared to $1.5
million in the third quarter of 1999). The increase in sales in the Simulation
Group is due to increased sales volume of visual systems to commercial airline
customers, increased sales volume of the Company's simFUSION(TM)
workstation-based product and increased sales related to customer service and
support. These increases in sales in the Simulation Group are partially offset
by lower sales recognized on a percent-complete basis to U.S. and international
government customers. The decrease in sales in the REALimage Solutions Group is
due to a decrease in the number of units sold and decreased selling prices of
existing products due to increased competition and delays in the introduction of
new products. Management anticipates sales in the REALimage Solutions Group for
the remaining quarter of 2000 will continue to decline due to similar factors
that caused the decline in the third quarter of 2000. The increase in sales in
15
the Applications Group was due to an increase in sales volume of large-format
entertainment products and planetarium systems. This increase in sales was
partially offset by decreased sales of the Company's digital video products due
to the sale of this business to RT-SET Real Time Synthesized Entertainment
Technology Ltd., and its subsidiary RT-SET America Inc. (together "RT-SET") in
the first quarter of 2000.
Gross Profit
Gross profit increased $7.3 million, or 98% ($14.8 million in the third quarter
of 2000 compared to $7.5 million in the third quarter of 1999). As a percent of
sales, gross profit increased to 30.8% in the third quarter of 2000 compared to
15.3% in the third quarter of 1999. Gross profit in the third quarter of 1999
was impacted by a $13.2 million write-down of obsolete, excess and overvalued
inventories relating to Harmony(TM) image generators and end-of-life REALimage
product lines. Excluding the impact of the write-down of inventories, gross
profit decreased $5.9 million, or 29% ($14.8 million in the third quarter of
2000 compared to $20.7 million in the third quarter of 1999). Excluding the
impact of the write-down of inventories, gross profit as a percent of sales
decreased to 30.8% in the third quarter of 2000 compared to 42.5% in the third
quarter of 1999. The decrease in gross profit is primarily due to higher costs
associated with several contracts to government customers which include the
Harmony image generator. In the second quarter of 2000 the Company increased the
estimated costs to complete these long-term contracts resulting in lower gross
margins on these contracts until their completion. Gross profit in the REALimage
Solutions Group decreased due to lower revenue attributed to a decrease in the
number of units sold and decreased selling prices of existing products due to
increased competition and delays in the introduction of new products. Gross
profit in the Applications Group increased due to increased revenue from sales
of large-format entertainment products and planetarium systems which was
partially offset by decreased sales of the Company's digital video products.
Selling, General and Administrative
Selling, general and administrative expenses decreased $2.9 million, or 28%
($7.6 million in the third quarter of 2000 compared to $10.5 million in the
third quarter of 1999). As a percent of sales, selling, general and
administrative expenses were 15.8% in the third quarter of 2000 compared to
21.5% in the third quarter of 1999. Selling, general and administrative expenses
in the Simulation Group declined due to lower marketing consulting expenses and
lower labor-related costs. Selling, general and administrative expenses in the
REALimage Solutions Group declined due to a reduction in labor-related costs
caused by a reduction in the number of employees at the end of the third quarter
of 1999. Selling, general and administrative expenses in the Applications Group
declined due to the reduction of employees and related expenses as a result of
the sale of certain assets relating to the Company's digital video products
business to RT-SET.
Research and Development
Research and development expenses decreased $2.5 million, or 19% ($11.1 million
in the third quarter of 2000 compared to $13.6 million in the third quarter of
1999). As a percent of sales, research and development expenses decreased to
23.0% in the third quarter of 2000 compared to 27.9% in the third quarter of
1999. Research and development expenses in the Simulation Group were essentially
unchanged in the third quarter of 2000 compared to the third quarter of 1999 as
increased expenses relating to the Company's simFUSION workstation-based product
offset a decrease in expenses related to the Company's iNTegrator(R) software.
Research and development expenses relating to the REALimage Solutions Group
decreased in the third quarter of 2000 compared to the third quarter of 1999 due
to lower headcount as a result of the group's restructuring in the third quarter
of 1999.
Impairment Loss
The Company recognized an impairment loss of $9.7 million in the third quarter
of 1999 and there was no such charge in the third quarter of 2000. The
impairment loss was determined in accordance with Statement of Financial
Accounting Standards No. 121 ("SFAS 121") "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be disposed of" and related to
the write-down to fair value of goodwill, intangibles and other long-lived
assets acquired in the Company's acquisitions of AccelGraphics, Inc. and Silicon
Reality, Inc. in the second quarter of 1998. The impairment loss consisted of
the write-off of $4.9 million of goodwill, $4.4 million of intangible assets and
$0.4 million of property, plant and equipment.
16
Restructuring Charge
The Company recognized a restructuring charge of $1.5 million in the third
quarter of 1999 and there was no such charge in the third quarter of 2000. The
charge related to the termination of 28 employees in the REALimage Solutions
Group.
Other Income (Expense), Net
Other income (expense), net increased $4.5 million (net income of $4.3 million
in the third quarter of 2000 compared to net expense of $0.2 million in the
third quarter of 1999). In the third quarter of 2000, the Company recognized a
$6.7 million gain on the sale of the Company's investment in Silicon Light
Machines, Inc. ("SLM") to Cypress Semiconductor, Inc. ("Cypress") in which the
Company received shares of Cypress stock. There was no such event in the third
quarter of 1999. In addition, in the third quarter of 2000, the Company
determined that certain of its investments had incurred an other-than-temporary
decline in value and recorded a loss of $1.9 million. There was essentially no
change in interest income or interest expense in the third quarter of 2000
compared to the third quarter of 1999.
Income Taxes
Income tax expense (benefit) increased $10.1 million (expense of $0.1 million in
the third quarter of 2000 compared to a benefit of $10.0 million in the third
quarter of 1999). The income tax expense in the third quarter of 2000 relates to
the income tax expense of a foreign subsidiary of the Company. The income tax
benefit in the third quarter of 1999 represents the estimated income tax benefit
related to the pretax loss incurred during the quarter. The Company has recorded
a valuation allowance against its net deferred tax assets in accordance with
SFAS 109. These net deferred tax assets relate to temporary differences, tax
credit carryforwards and net operating loss carryforwards. If the deferred tax
assets are realized in the future, or if a portion or all of the valuation
allowance is no longer deemed to be necessary, the related tax benefits will
reduce future income tax provisions.
Nine Months Ended September 29, 2000 Compared to Nine Months
Ended October 1, 1999
Sales
In the first nine months of 2000, sales decreased $22.9 million, or 16% ($119.6
million in the first nine months of 2000 compared to $142.5 million in the first
nine months of 1999). Sales in the Simulation Group decreased $12.2 million, or
10% ($106.6 million in the first nine months of 2000 compared to $118.8 million
in the first nine months of 1999). Sales in the REALimage Solutions Group
declined $14.9 million, or 78% ($4.2 million in the first nine months of 2000
compared to $19.1 million in the first nine months of 1999). Sales in the
Applications Group increased $4.2 million, or 91% ($8.8 million in the first
nine months of 2000 compared to $4.6 million in the first nine months of 1999).
The decrease in sales in the Simulation Group is due to the cancellation of the
contract with Lockheed Martin Corporation ("Lockheed") for the delivery of
visual systems to the United Kingdom Ministry of Defence ("UK MOD") for the
Combined Arms Tactical Trainer program ("UK CATT") and an adjustment to revenue
on percent complete contracts where a review of the estimated costs to complete
the contracts resulted in a negative adjustment to revenue of $10.9 million in
the second quarter of 2000. The decrease was partially offset by increased sales
volume of visual systems to commercial airline customers, increased sales volume
of the Company's simFUSION workstation-based product and increased sales related
to customer service and support. The decrease in sales in the REALimage
Solutions Group is due to a decrease in the number of units sold and decreased
selling prices of existing products due to increased competition and delays in
the introduction of new products. Management anticipates sales in the REALimage
Solutions Group for the remaining quarter of 2000 will continue to decline due
to similar factors that caused the decline in the first nine months of 2000. The
increase in sales in the Applications Group is due to an increase in sales
volume of large-format entertainment products and planetarium systems which is
partially offset by decreased sales of the Company's digital video products due
to the sale of this business to RT-SET in the first quarter of 2000.
17
Gross Profit
Gross profit decreased $28.9 million, or 61% ($18.6 million in the first nine
months of 2000 compared to $47.5 million in the first nine months of 1999). As a
percent of sales, gross profit decreased to 15.6% in the first nine months of
2000 compared to 33.3% in the first nine months of 1999. Gross profit in the
first nine months of 1999 was impacted by a $13.2 million write-down of
obsolete, excess and overvalued inventories relating to Harmony image generators
and end-of-life REALimage product lines. Excluding the impact of the write-down
of inventories, gross profit decreased $42.1 million, or 69% ($18.6 million in
the first nine months of 2000 compared to $60.7 million in the first nine months
of 1999). Excluding the impact of the write-down of inventories, gross profit as
a percent of sales decreased to 15.6% in the first nine months of 2000 compared
to 42.6% in the first nine months of 1999. Gross profit in the first nine months
of 2000 was negatively impacted by the cancellation of the UK CATT contract due
to the loss of revenue and the write-off of obsolete and excess inventory
specific to the UK CATT contract. The gross profit impact of the adjustment for
estimated actual costs at completion of contract on percent complete contracts
was $16.7 million ($10.9 million as a reduction in sales as discussed
previously, and $5.8 million as an increase in cost of sales relating to
contracts with total estimated actual costs that exceed the contract value).
Gross profit also decreased in the first nine months of 2000 compared to the
first nine months of 1999 due to higher costs on several contracts to government
customers which include the Harmony image generator. Gross profit in the
REALimage Solutions Group decreased due to lower revenue attributed to a
decrease in the number of units sold and decreased selling prices of existing
products due to increased completion and delays in the introduction of new
products. Gross profit in the Applications Group increased due to increased
revenue from sales of large-format entertainment products and planetarium
systems which was partially offset by decreased sales of the Company's digital
video products.
Selling, General and Administrative
Selling, general and administrative expenses decreased $6.0 million, or 19%
($26.6 million in the first nine months of 2000 compared to $32.6 million in the
first nine months of 1999). As a percent of sales, selling, general and
administrative expenses were 22.2% in the first nine months of 2000 compared to
22.9% in the first nine months of 1999. The decrease in these expenses in the
Simulation Group is due primarily to lower marketing consulting expenses. The
decrease in these expenses in the REALimage Solutions Group is due to decreased
sales volume resulting in decreased commissions and other selling-related costs
and decreased labor and associated costs due to the lower headcount as a result
of the restructuring which took place at the end of the third quarter of 1999.
The decrease in these expenses in the Applications Group is due to the reduction
of employees and related expenses as a result of the sale of certain assets of
the Company's digital video products business to RT-SET.
Research and Development
Research and development expenses decreased $2.0 million, or 6% ($33.6 million
in the first nine months of 2000 compared to $35.6 million in the first nine
months of 1999). As a percent of sales, research and development expenses were
28.1% in the first nine months of 2000 compared to 25.0% in the first nine
months of 1999. The increase in research and development expenses as a percent
of sales is due to a significant decrease in sales in the first nine months of
2000 compared to the first nine months of 1999. Research and development
expenses relating to the Simulation Group increased in the first nine months of
2000 compared to the first nine months of 1999 due to increased efforts of the
continued development of the Company's simFUSION workstation-based product.
Research and development expenses relating to the REALimage Solutions Group
decreased in the first nine months of 2000 compared to the first nine months of
1999 due to significantly decreased headcount as a result of the group's
restructuring at the end of the third quarter of 1999.
Amortization of Goodwill and Other Intangible Assets
Amortization of goodwill and other intangible assets decreased $1.4 million, or
91% ($0.1 million in the first nine months of 2000 compared to $1.5 million in
the first nine months of 1999). The decrease in this expense is due to the
write-off of $9.3 million of goodwill and other intangible assets during the
third quarter of 1999.
18
Impairment Loss
The Company recognized an impairment loss of $9.7 million for the first nine
months of 1999 and there was no such charge in the first nine months of 2000.
The impairment loss was determined in accordance with SFAS 121 and related to
the write-down to fair value of goodwill, intangibles and other long-lived
assets acquired in the Company's acquisitions of AccelGraphics, Inc. and Silicon
Reality, Inc. in the second quarter of 1998. The impairment loss consisted of
the write-off of $4.9 million of goodwill, $4.4 million of intangible assets and
$0.4 million of property, plant and equipment.
Restructuring Charge
The Company recognized a restructuring charge of $1.5 million in the first nine
months of 1999 and there was no such charge in the first nine months of 2000.
The charge related to the termination of 28 employees in the REALimage Solutions
Group.
Gain on Sale of Business Unit
During the first nine months of 2000, the Company sold certain assets of its
Applications Group relating to its digital video business and recognized $1.9
million of gain on the transaction. There was no such event in 1999.
Other Income (Expense), Net
Other income (expense), net increased $3.0 million, or 363% ($3.8 million in the
first nine months of 2000 compared to $0.8 million in the first nine months of
1999). In the first nine months of 2000, the Company recognized a $6.7 million
gain on the sale of the Company's investment in SLM to Cypress in which the
Company received shares of Cypress stock. There was no such event in the first
nine months of 1999. In addition, in the first nine months of 2000, the Company
determined that certain of its investments had incurred an other-than-temporary
decline in value and recorded a loss of $1.9 million. There was no such event in
the first nine months of 1999. Interest income decreased $1.2 million ($0.5
million in the first nine months of 2000 compared to $1.7 million in the first
nine months of 1999). The decrease in interest income is due to interest
received in 1999 for delayed income tax refunds.
Income Taxes
Income tax expense (benefit) increased $30.6 million (expense of $19.1 million
in the first nine months of 2000 compared to a benefit of $11.5 million in the
first nine months of 1999). During the second quarter of 2000, the Company
increased its deferred tax asset valuation allowance by $20.6 million. As a
result of the net operating loss in the second quarter of 2000, the cumulative
net operating losses for 2000, 1999 and 1998, and the cancellation of a
significant contract and the related civil complaint filed by Lockheed Martin
Corporation as discussed in Note 10 to the consolidated financial statements,
the Company fully reserved its net deferred tax assets which previously existed
at the end of the first quarter of 2000 and those deferred tax assets recognized
during the second quarter of 2000. These net deferred tax assets relate to
temporary differences, tax credit carryforwards and net operating loss
carryforwards. The valuation allowance was recorded in accordance with SFAS 109,
which requires that a valuation allowance be established when there is
significant uncertainty as to the realizability of the deferred tax assets. The
Company evaluates the realizability of its deferred tax assets on a quarterly
basis. If the deferred tax assets are realized in the future, or if a portion or
all of the valuation allowance is no longer deemed to be necessary, the related
tax benefits will reduce future income tax provisions.
LIQUIDITY & CAPITAL RESOURCES
At September 29, 2000, the Company had working capital of $61.5 million,
including cash, cash equivalents and short-term investments of $17.3 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 nine months of 2000, the Company generated $3.4 million of cash from its
operating activities, used $8.4 million of cash in its investing activities and
used $1.7 million of cash in its financing activities.
19
Cash from operating activities of the Company was provided by a $28.7 million
decrease in net costs and estimated earnings in excess of billings on
uncompleted contracts, a $20.6 million decrease in deferred income taxes, and a
$9.9 million increase in accounts payable. The decrease in net costs and
estimated earnings in excess of billings on uncompleted contracts was due to the
achievement of billing milestones during the nine months and the adjustment to
revenue on percent complete contracts due to the change in estimated actual
costs to complete the contracts. Cash used in the Company's operating activities
included a net loss for the nine months ended September 30, 2000 of $55.1
million, a $6.2 million increase in accounts receivable, a $2.5 million decrease
in customer deposits and a $6.4 million increase in inventory.
The Company's investing activities included capital expenditures of $7.8 million
for building improvements and equipment, purchases of short-term investments of
$1.9 million, proceeds from sale of property, plant and equipment of $1.5
million and proceeds from the sale of certain assets of its digital video
business of $1.3 million.
The Company's financing activities during the first nine months of 2000 included
repayments of notes payable, net of borrowings of $2.1 million.
On March 31, 2000, the Company entered into a financing facility (the
"Facility") with Zions First National Bank. The Facility provides for borrowings
of up to $15.0 million, which included a $7.0 million sublimit for the issuance
of letters of credit. Effective as of June 30, 2000, the Facility was amended to
allow the entire Facility amount to be used for the issuance of letters of
credit, modify certain covenants, increase the interest rate and allow for the
cash collateralization of up to $6.0 million of additional letter of credit
capacity beyond the $15.0 million Facility amount pursuant to the terms and
conditions of a supplemental letter of credit and reimbursement agreement and a
managed agency account assignment agreement. Borrowings under the Facility bear
interest at an indexed prime rate plus 4% per annum. The issuance of letters of
credit under the Facility and cash collateralized letters of credit outside the
Facility bear an annual issuance fee of 4% and 2%, respectively. The Facility
expires on March 30, 2001. Except for certain permitted exceptions as identified
in the Facility, among other things, the Facility prevents the Company from (a)
declaring or paying any dividends except as are mandatorily required on the
Company's preferred stock, (b) making any distribution of assets to the
Company's shareholders, investors, or equity holders, whether in cash, assets,
or in obligations of the Company, (c) allocating or otherwise setting apart any
sum for the payment of any dividend or distribution on, or for the purchase,
redemption, or retirement of any shares of its capital stock or equity interests
in excess of $2.0 million for any year, (d) making any other distribution by
reduction of capital or otherwise in respect of any shares of its capital stock
or equity interests in excess of $250,000, or (e) creating, incurring, assuming,
or suffering to exist any debt or any encumbrance, mortgage or lien upon certain
real and personal property of the Company. The Company's obligations under the
Facility are secured by substantially all of the Company's assets, subject to
certain liens permitted under the Facility. As of September 29, 2000, there were
no borrowings under the Facility and $12.3 million was reserved under the
Facility, due to outstanding letters of credit. Such amounts shall continue to
be reserved and shall not otherwise be available to be advanced to the Company,
until the expiration or termination of such letters of credit.
The Company has a $5.0 million cash collateralized letter of credit facility
with Wells Fargo Bank, N.A., of which approximately $2.6 million was unused and
available as of September 29, 2000. The Wells Fargo Bank letter of credit
facility matures on September 30, 2001, after which no further letters of credit
may be issued. The Company has unsecured letters of credit totaling
approximately $1.5 million outstanding with U.S. Bank, N.A. that expire between
September 2000 and June 2001. In addition, the Company has $1.4 million of cash
on deposit with Lloyds TSB Bank plc ("Lloyds") in a restricted cash collateral
account to support certain obligations that the bank guarantees.
Evans & Sutherland Computer Limited, a wholly owned subsidiary of Evans &
Sutherland Computer Corporation, has a $3.0 million overdraft facility (the
"Overdraft Facility") with Lloyds. Borrowings under the Overdraft Facility bear
interest at the bank's short-term offered rate plus 1.75% per annum. As of
September 29, 2000, there were no borrowings under the Overdraft Facility. The
Overdraft Facility is subject to reduction or demand repayment for any reason at
any time at Lloyds' discretion and expires on November 30, 2000. The Company is
currently negotiating with Lloyds to extend the maturity date and modify certain
terms of the Overdraft Facility. Evans & Sutherland Computer Limited executed a
letter of negative pledge in favor of Lloyds against its assets. Covenants in
the agreement restrict dividend payments from Evans & Sutherland Computer
Limited and require maintenance of certain financial covenants.
20
On February 18, 1998, the Company's Board of Directors authorized the repurchase
of up to 600,000 shares of the Company's common stock, including the 327,000
shares still available from the repurchase authorization approved by the Board
of Directors on November 11, 1996. On September 8, 1998, the Company's Board of
Directors authorized the repurchase of an additional 1,000,000 shares of the
Company's common stock. Subsequent to February 18, 1998 through December 1999,
the Company repurchased 1,136,500 shares of its common stock, leaving 463,500
shares available for repurchase as of November 3, 2000. The Company has not
repurchased any shares of the Company's common stock during the nine months
ended September 29, 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 September 29, 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.
The Company also maintains trade credit arrangements with certain of its
suppliers. The unavailability of a significant portion of, or the loss of, the
various borrowing facilities of the Company or trade credit from suppliers would
have a material adverse effect on the Company's financial condition and
operations.
In the event the Company's various borrowing facilities became unavailable or
the Company was unable to timely deliver products pursuant to the terms of
various agreements with third parties, the Company may be unable to meet its
anticipated working capital needs, routine capital expenditures, and current
debt service obligations on a short-term and long-term basis.
Management believes that existing cash, cash equivalents, short-term
investments, borrowings available under its various borrowing facilities and
expected cash from future operations will be sufficient to meet the Company's
anticipated working capital needs, routine capital expenditures and current debt
service obligations for the next twelve months provided that the Company will be
able to renegotiate its existing borrowing facilities or secure replacement
financing. The Company's Facility expires on March 30, 2001 and the Overdraft
Facility expires on November 30, 2000. There can be no assurances that the
Company will be successful in renegotiating its existing borrowing facilities or
obtaining additional debt or equity financing. The Company's cash, cash
equivalents and short-term investments, subject to various restrictions
previously set forth, are available for working capital needs, capital
expenditures, strategic investments, mergers and acquisitions, stock repurchases
and other potential cash needs as they may arise.
TRADEMARKS USED IN THIS FORM 10-Q
Digistar, E&S, E&S RAPIDsite, Harmony, iNTegrator, REALimage, simFUSION and
StarRider are trademarks or registered trademarks of Evans & Sutherland Computer
Corporation. All other product, service, or trade names or marks are the
properties of their respective owners.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The principal market risks to which the Company is exposed are changes in
foreign currency exchange rates and changes in interest rates. The Company's
international sales, which accounted for 36% of the Company's total sales in the
nine months ended September 29, 2000 are concentrated in the United Kingdom,
continental Europe and Asia. The Company manages its exposure to changes in
foreign currency exchange rates by entering into most of its sales and purchase
contracts for products and materials in U.S. dollars. Occasionally, the Company
enters into sales and purchase contracts for products and materials denominated
in currencies other than U.S. dollars and in those cases the Company may enter
into foreign exchange forward sales or purchase contracts to offset those
exposures. Foreign currency purchase and sales contracts are entered into for
periods consistent with related underlying exposures and do not constitute
positions independent of those exposures. As of September 29, 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.
21
The Company reduces its exposure to changes in interest rates by maintaining a
high proportion of its debt in fixed-rate instruments. As of September 29, 2000,
100% of the Company's total debt was in fixed-rate instruments; however, the
Company has revolving facilities that provide for borrowings by the Company of
up to $18.0 million at variable rates of interest. If the Company were to draw
on all remaining revolving facilities available, 76% 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.
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
On May 23, 2000, Lockheed Martin Corporation (the "Plaintiff") served the
Company with a civil complaint filed in the Circuit Court of the Ninth Judicial
Circuit in and for Orange County, Florida. The Plaintiff alleged in the
complaint that the Company breached a contract to provide certain visual systems
for the Combined Arms Tactical Trainer program for the United Kingdom Ministry
of Defence. The contract has an original value of $33.9 million. In the
complaint, the Plaintiff seeks compensatory damages of $8.5 million plus
interest as well as consequential damages and attorneys' fees. The $8.5 million
being sought from the Company by the Plaintiff was paid to the Company from May
1999 to March 2000 and was recognized as revenue by the Company during 1999. On
June 12, 2000, the Company filed its answer and counterclaim. In the
counterclaim, the Company alleges as grounds for recovery against the Plaintiff
(1) breach of contract, (2) breach of implied covenant of good faith and fair
dealing, (3) unjust enrichment, (4) unfair competition, (5) misappropriation of
trade secrets, (6) intentional interference with advantageous business
relationship, (7) replevin, and (8) promissory estoppel. In its counterclaim,
the Company seeks compensatory damages of not less than $10.0 million and not
more than $25.4 million. On June 14, 2000, the case was removed to the Orlando
Division of the United States District Court for the District of Florida where
it currently remains. On July 7, 2000, the Plaintiff answered the Company's
counterclaim but also filed a motion for dismissal of the Company's
counterclaims for unjust enrichment, unfair competition, promissory estoppel,
and incidental damages. On July 24, 2000, the Company filed its opposition to
the Plaintiff's motion to dismiss these certain counterclaims of the Company. On
October 20, 2000 the court denied the Plaintiff's motion to dismiss in its
entirety, without prejudice. Management disputes the Plaintiff's allegations in
the complaint and is vigorously defending the action and asserting its
counterclaims. Although management believes the Company will ultimately prevail
in defending the claims against it, an unfavorable outcome of these matters
would have a material adverse impact on the Company's financial condition and
operations.
Except as discussed in the preceding paragraph, the Company is not a party to
any other material legal proceeding. However, the Company from time to time is
involved in ordinary, routine litigation incidental to its business.
22
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
No. Description
- ------- -------------------------------------------------------------------
10.1 Amendment to employment agreement between Evans & Sutherland
Computer Corporation and James R. Oyler, dated September 22, 2000.
10.2 Amendment to employment agreement between Evans & Sutherland
Computer Corporation and Richard J. Gaynor, dated September 22, 2000.
10.3 Amendment to employment agreement between Evans & Sutherland
Computer Corporation and David B. Figgins, dated September 22, 2000.
10.4 Amendment to employment agreement between Evans & Sutherland
Computer Corporation and George K. Saul, dated September 22, 2000.
10.5 Amendment to employment agreement between Evans & Sutherland
Computer Corporation and Robert H. Ard, dated September 22, 2000.
10.6 Amendment to employment agreement between Evans & Sutherland
Computer Corporation and Thomas Atchison, dated September 22, 2000.
10.7 Employment agreement between Evans & Sutherland Computer
Corporation and Nicholas J. Iuanow, dated September 22, 2000.
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EVANS & SUTHERLAND COMPUTER CORPORATION
Date: November 13, 2000 By: /S/ Richard J. Gaynor
------------------------------------
Richard J. Gaynor, Vice President
and Chief Financial Officer
(Principal Financial Officer)
23