-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, P2bsNeN3qYiMZRzrZvtW2+nYoGIxDr2lUVompkKyXUL4yu/Q/nOqjGBn50nzA2yL zX2j4B6Qfvgde4FJ0DH89g== 0000276283-98-000016.txt : 19980812 0000276283-98-000016.hdr.sgml : 19980812 ACCESSION NUMBER: 0000276283-98-000016 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980626 FILED AS OF DATE: 19980810 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: EVANS & SUTHERLAND COMPUTER CORP CENTRAL INDEX KEY: 0000276283 STANDARD INDUSTRIAL CLASSIFICATION: MISCELLANEOUS ELECTRICAL MACHINERY, EQUIPMENT & SUPPLIES [3690] IRS NUMBER: 870278175 STATE OF INCORPORATION: UT FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-08771 FILM NUMBER: 98680936 BUSINESS ADDRESS: STREET 1: 600 KOMAS DR CITY: SALT LAKE CITY STATE: UT ZIP: 84108 BUSINESS PHONE: 8015881000 MAIL ADDRESS: STREET 1: 600 KOMAS DR CITY: SALT LAKE CITY STATE: UT ZIP: 84108 10-Q 1 QUARTERLY REPORT ON FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-Q (Mark One) [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended June 26, 1998 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition Period from ________ to ________ Commission File Number 0-8771 Evans & Sutherland Computer Corporation (Exact name of registrant as specified in its charter) UTAH 87-0278175 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 600 Komas Drive, Salt Lake City, Utah 84108 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (801) 588-1000 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ____ Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Outstanding Shares at July 31, 1998 Common Stock, $0.20 par value 10,080,830 Form 10-Q Evans & Sutherland Computer Corporation QUARTER ENDED June 26, 1998 PART I - FINANCIAL INFORMATION Page No. ITEM 1. Financial Statements Condensed Consolidated Statements of Operations - Three Months and Six Months Ended June 26, 1998 and June 27, 1997 3 Condensed Consolidated Balance Sheets - June 26, 1998 and December 31, 1997 4 Condensed Consolidated Statements of Cash Flows - Six Months Ended June 26, 1998 and June 27, 1997 5 Notes to Condensed Consolidated Financial Statements 6 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 PART II - OTHER INFORMATION ITEM 4. Submission of Matters to a Vote of Security Holders 14 ITEM 6. Exhibits and Reports on Form 8-K 15 Signature Page 15
2 PART I - FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS EVANS & SUTHERLAND COMPUTER CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (In thousands except per share amounts)
Three Months Ended Six Months Ended ---------------------------------- ----------------------------------- June 26, June 27, June 26, June 27, 1998 1997 1998 1997 --------------- --------------- ---------------- ---------------- Net sales $ 43,638 $ 37,907 $ 86,059 $ 71,549 Cost of sales 24,359 20,483 49,655 38,997 --------------- --------------- ---------------- ---------------- Gross profit 19,279 17,424 36,404 32,552 --------------- --------------- ---------------- ---------------- Expenses: Marketing, general and administrative 9,326 8,632 17,967 16,476 Research and development 6,808 6,746 13,485 12,592 Write-off of acquired research and development (note 4) 27,925 - 27,925 - --------------- --------------- ---------------- ---------------- Operating expenses 44,059 15,378 59,377 29,068 --------------- --------------- ---------------- ---------------- Operating earnings (loss) (24,780) 2,046 (22,973) 3,484 Other income, net 572 661 1,118 1,238 --------------- --------------- ---------------- ---------------- Earnings (loss) before income taxes (24,208) 2,707 (21,855) 4,722 Income tax expense 1,208 732 1,972 1,336 --------------- --------------- ---------------- ---------------- Net earnings (loss) $ (25,416) $ 1,975 $ (23,827) $ 3,386 =============== =============== ================ ================ Earnings (loss) per share (note 1): Basic $ (2.84) $ 0.22 $ (2.64) $ 0.37 Diluted $ (2.84) $ 0.21 $ (2.64) $ 0.36 Weighted average common and common equivalentcsharestoutstanding: Basic 8,939 9,017 9,009 9,042 Diluted 8,939 9,394 9,009 9,414
3 EVANS & SUTHERLAND COMPUTER CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except share data)
June 26, December 31, 1998 1997 --------------- ------------------ (Unaudited) Assets ------ Current assets: Cash and cash equivalents $ 17,649 $ 8,176 Marketable securities 16,535 48,928 Accounts receivable, less allowance for doubtful receivables of $1,940 in 1998 and $851 in 1997 43,228 36,066 Inventories (note 2) 30,580 26,885 Costs and estimated earnings in excess of billings on uncompleted contracts 63,747 51,799 Deferred income taxes 6,564 4,224 Prepaid expenses and deposits 4,529 3,620 --------------- ------------------ Total current assets 182,832 179,698 Property, plant, and equipment, at cost 129,880 123,168 Less accumulated depreciation and amortization 83,110 78,800 --------------- ------------------ Net property, plant, and equipment 46,770 44,368 Investment securities 3,228 5,000 Goodwill, net (note 4) 7,921 - Deferred income taxes 5,123 3,802 Other assets 1,564 1,522 --------------- ------------------ Total assets $ 247,438 $ 234,390 =============== ================== Liabilities and Stockholders' Equity --------------------------------- Current liabilities: Notes payable to banks $ 5,000 $ 950 Current portion of long-term debt 401 - Accounts payable 17,440 14,353 Accrued expenses 25,879 18,061 Customer deposits 5,223 6,574 Income taxes payable 771 4,462 Billings in excess of costs and estimated earnings on uncompleted contracts 8,404 6,341 --------------- ------------------ Total current liabilities 63,118 50,741 Long-term debt, less current portion 18,443 18,015 Stockholders' equity: Common stock, $.20 par value; authorized 30,000,000 shares; issued and outstanding 10,058,367 shares at June 26, 1998 and 9,066,743 shares at December 31, 1997 2,012 1,813 Additional paid-in capital 31,840 8,025 Retained earnings 131,749 155,576 Net unrealized loss on marketable securities (103) (68) Cumulative translation adjustment 379 288 --------------- ------------------ Total stockholders' equity 165,877 165,634 --------------- ------------------ Total liabilities and stockholders' equity $ 247,438 $ 234,390 =============== ==================
4 EVANS & SUTHERLAND COMPUTER CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS Unaudited (In thousands)
Six Months Ended ------------------------------------ June 26, June 27, 1998 1997 -------------- --------------- Net cash provided by (used in) operating activities $ (14,215) $ 12,657 -------------- --------------- Cash flows from investing activities: Capital expenditures (5,947) (5,929) Purchases of marketable securities (3,700) (36,046) Proceeds from sale of marketable securities 38,501 25,601 Acquisition of businesses, less cash acquired (7,603) - Proceeds from sale of investment securities 3,341 - Purchases of investment securities (310) - -------------- --------------- Net cash provided by (used in) investing activities 24,282 (16,374) -------------- --------------- Cash flows from financing activities: Net proceeds from issuance of common stock 1,256 704 Net borrowings (payments) under line of credit agreement 4,142 (1,550) Purchases of treasury stock (5,837) (2,190) -------------- --------------- Net cash used in financing activities (439) (3,036) -------------- --------------- Effect of foreign exchange rate changes on cash (155) 192 -------------- --------------- Net increase (decrease) in cash and cash equivalents 9,473 (6,561) Cash and cash equivalents at beginning of year 8,176 16,521 -------------- --------------- Cash and cash equivalents at end of period $ 17,649 $ 9,960 ============== =============== Supplemental disclosures of cash flow information Cash paid during the period for: Interest $ 596 $ 664 Income taxes $ 6,943 $ 1,900
5 EVANS & SUTHERLAND COMPUTER CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except per share amounts) 1. SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation --------------------- The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and, therefore, do not include all information and footnotes necessary for a complete presentation of the results of operations, the financial position, and cash flows, in conformity with generally accepted accounting principles. This report on Form 10-Q for the three months and six months ended June 26, 1998 should be read in conjunction with the Company's annual report on Form 10-K for the year ended December 31, 1997. The accompanying unaudited condensed consolidated balance sheets, statements of operations and cash flows reflect all normal recurring adjustments which are, in the opinion of management, necessary for a fair presentation of the Company's financial position, results of operations and cash flows. The results of operations for the interim three and six month periods ended June 26, 1998 are not necessarily indicative of the results to be expected for the full year. Earnings (Loss) Per Common Share -------------------------------- Earnings (loss) per common share is computed based on the weighted-average number of common shares and, as appropriate, dilutive common stock equivalents outstanding during the period. Stock options are considered to be common stock equivalents. Basic earnings (loss) per common share is the amount of earnings (loss) for the period available to each share of common stock outstanding during the reporting period. Diluted earnings (loss) per share is the amount of earnings (loss) for the period available to each share of common stock outstanding during the reporting period and to each share that would have been outstanding assuming the issuance of common shares for all dilutive potential common shares outstanding during the period. In calculating earnings (loss) per common share, the earnings (loss) were the same for both the basic and diluted calculation. A reconciliation between the basic and diluted weighted-average number of common shares for the three months and six months ended June 26, 1998 and June 27, 1997, is summarized as follows (in thousands):
Three Months Ended Six Months Ended June 26, June 27, June 26, June 27, 1998 1997 1998 1997 ------------------------ ------------------------ (Unaudited) (Unaudited) Basic weighted-average number of common shares outstanding during the period 8,939 9,017 9,009 9,042 Weighted-average number of common stock options outstanding during the period - 377 - 372 ------- ------- ------- ------- Diluted weighted-average number of common shares outstanding during the period 8,939 9,394 9,009 9,414 ======= ======= ======= =======
6 EVANS & SUTHERLAND COMPUTER CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except per share amounts) 2. INVENTORIES Inventories consist of the following: June 26, December 31, 1998 1997 ---------- ----------- (Unaudited) Raw materials and supplies $ 22,343 $ 13,674 Work-in-process 4,323 10,040 Finished goods 3,914 3,171 ---------- ----------- $ 30,580 $ 26,885 ========== ========== 3. COMPREHENSIVE EARNINGS (LOSS) The Company adopted Statement of Financial Accounting Standards No. 130 (SFAS 130), "Reporting Comprehensive Income," effective January 1, 1998. SFAS 130 establishes standards for reporting and displaying comprehensive earnings (loss) and its components in financial statements. The components of the Company's comprehensive earnings (loss) are as follows:
Three Months Ended Six Months Ended June 26, June 27, June 26, June 27, 1998 1997 1998 1997 ----------------------- ------------------------ (Unaudited) (Unaudited) Net earnings (loss) $(25,416) $ 1,975 $ (23,827) $ 3,386 Unrealized gain (loss) on marketable securities, net of income taxes and reclassification adjustments (213) 100 (35) (191) Foreign currency translation adjustments, net of income taxes 37 45 91 212 --------- --------- ---------- --------- Comprehensive earnings (loss) $(25,592) $ 2,120 $ (23,771) $ 3,407 ========= ========= ========== =========
4. BUSINESS ACQUISITIONS On June 26, 1998, the Company acquired all of the outstanding stock of AccelGraphics, Inc. (AGI) for approximately $23.7 million in cash and 1,109,303 shares of the Company's common stock. AGI is based in Milpitas, California, and is a provider of high-performance, cost-effective, three-dimensional graphics subsystem products for the professional Windows NT and Windows 95 markets. The acquisition was accounted for by the purchase method and, accordingly, the results of operations of AGI will be included in the Company's consolidated financial statements from June 26, 1998 forward. The excess of the purchase price over the fair value of the net identifiable assets acquired of $7.5 million has been recorded as goodwill and is being amortized on a straight-line basis over 5 years. In connection with the acquisition, the Company wrote off $26.8 million of in-process research and development on the date of acquisition. Also on June 26, 1998, the Company acquired the assets and assumed certain liabilities of Silicon Reality, Inc. (SRI) for a purchase price of approximately $1.5 million. SRI is based in Federal Way, Washington, and designs and produces three-dimensional graphics hardware and software products for the personal computer marketplace. This acquisition was accounted for by the purchase method and, accordingly, the results of operations of SRI will be included in the Company's consolidated financial statements from June 26, 1998 forward. The excess of the purchase price over the fair value of the net identifiable assets acquired of $0.4 million has been recorded as goodwill and is being amortized on a straight-line basis over 5 years. In connection with the acquisition, the Company wrote-off $1.1 million of in-process research and development on the date of acquisition. 7 EVANS & SUTHERLAND COMPUTER CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except per share amounts) The following unaudited pro forma financial information presents the combined results of operations of the Company, AGI, and SRI as if the acquisitions had occurred as of the beginning of 1998 and 1997, after giving effect to certain adjustments, including, but not limited to, amortization of goodwill, reversal of in-process research and development charges recorded in 1998, and decreased interest income and the corresponding tax effect as a result of the reduction in cash and marketable securities that would have occurred to acquire these companies. Six Months Ended June 26, 1998 June 27, 1997 ----------------------------------- (Unaudited) Net sales $ 102,796 $ 94,639 Net earnings (loss) $ (4,821) $ 3,716 Earnings (loss) per share: Basic $ (0.48) $ 0.37 Diluted $ (0.48) $ 0.35 There can be no assurance that that the Company will be successful in integrating these separate companies, retaining key employees, or that these acquisitions will not be viewed as disadvantageous to existing AGI or SRI customers and/or existing E&S distributors that may consider themselves as competitors of the combined entity and thus adversely affect the Company's future operating results. 5. SUBSEQUENT EVENT On July 22, 1998, Intel Corporation purchased 901,408 shares of a series of Preferred Stock, no par value, of the Company plus a warrant to purchase an additional 378,462 shares at $33.28 per share for approximately $24 million. These preferred shares have certain liquidation and conversion rights, in addition to other rights and preferences. In addition, the Company entered into an agreement to accelerate development of high-end graphics and video subsystems for Intel-based workstations and a cross-license agreement. 8 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the condensed consolidated financial statements and notes included in Item 1 of Part I of this form. All data in the tables are in thousands except for percentages. Except for the historical information contained herein, this report on Form 10-Q contains forward-looking statements that involve risks and uncertainties. The Company's actual results may differ materially from those indicated by such forward-looking statements. OVERVIEW Evans & Sutherland Computer Corporation (E&S(R) or the Company) develops and manufactures hardware and software for visual systems that produce vivid and highly realistic three-dimensional (3-D) graphics and synthetic environments. The Company's product offerings include a full range of high-performance visual systems for simulation, training and virtual reality applications, as well as graphic accelerator products for personal computer workstations. E&S is organized into six business units. Each business unit develops and markets its products to a worldwide customer base. These business units can be grouped into two areas: core businesses and new businesses. The core businesses are the simulation-related units in which E&S has an established market presence with significant market share and which represent the majority of the Company's revenues and earnings. The new businesses are in high growth markets where E&S has superior technology which can be directed to new applications. Core businesses: Government Simulation Government Simulation provides visual systems for flight and ground training and related services to U.S. and international armed forces, NASA, and aerospace companies. E&S remains an industry leader for visual systems sales to various U.S. government agencies and more than 20 foreign governments for the primary purpose of trainng vehicle operators. E&S anticipates continued growth in this marketplace as simulation training increases in value as an alternative to other training methods, and as simulation training technology and cost-effectiveness improve. Future customer demands will include lower-cost PC-based systems, more open systems with interoperable databases, and custom display systems, all of which E&S believes it is well positioned to provide. Commercial Simulation Commercial Simulation is a leading independent supplier of visual systems for flight simulators for commercial airlines. The business unit's hardware platform, consisting of an ESIG(R) 3350GT image generator and ESCP 2000 raster/calligraphic projectors, provides high image quality, reliability, and ease-of use. E&S's Commercial Simulation systems have been approved by major aviation regulatory agencies. In the future, the Company believes it will enhance its industry position by using E&S Harmony(TM) image generators and advanced display products, and by expanding its product base to include other flight simulator products. New businesses: Board Products Board Products (formerly Display Systems) supplies high-performance, high-margin board-level products for simulation, avionics, and vehicle displays. Board Products is transitioning from a project-oriented model to being a product-based business, with desktop simulation solutions as its principal target. 9 The Board Product's Rhythm(TM) board, a member of the Company's Symphony(TM) line of products, combines the Company's REALimage(TM) graphics technology with an onboard processor to create a compact and cost-effective, low-end simulation solution. Board Products intends to develop full-capability board level image generators and advanced display products, and to participate more fully in the in-vehicle training marketplace. Desktop Graphics Desktop Graphics provides REALimage graphics accelerator technology for workstation manufacturers and NT-based personal computers. Since inaugural shipments in June 1997, 12 manufacturers of Windows NT-based computers have selected REALimage graphics acceleration technology. In March 1998, volume production of the third-generation REALimage chip design began, thereby keeping pace with introductions of new, more powerful processors from Intel. The Company plans two technology upgrades this year. REALimage technology supports the full range of professional OpenGL graphics applications, including, among others, design engineering, simulation, digital content creation, visualization, animation, and entertainment. On June 26, 1998, the Company acquired AccelGraphics, Inc.(AGI), a provider of high-performance, cost-effective, three-dimensional ("3D") graphics subsystem products for the professional Windows NT and Windows 95 markets, and Silicon Reality Inc. (SRI), a designer and producer of 3D graphics hardware and software products for the personal computer marketplace, to expand the Company's Desktop Graphics development, integration and distribution within the desktop graphics marketplace. AGI pioneered the development of professional 3D graphics subsystems for use with Microsoft's Windows NT operating system ("NT"). A 3D graphics subsystem integrates graphics acceleration chips (including E&S's REALimage graphics accelerator chips), specialized hardware, firmware, software and memory. AGI's 3D graphics subsystems, when included in an Intel Pentium, Pentium Pro, Pentium Pro II or Digital Alpha based computer, create a class of computer system called a "Personal Workstation." Personal Workstations, which often sell for less than $10,000, provide capabilities and performance comparable to more expensive 3D graphics RISC/UNIX workstations. AGI currently offers three distinct 3D graphics subsystem product lines. AGI's products include a family of 3D graphics subsystems for applications based on OpenGL and other 3D application programming interfaces, such as Autodesk's Heidi and Microsoft's DirectX. Through AGI's extensive experience in 3D algorithms, the interaction of 3D applications with OpenGL and overall 3D graphics system integration, AGI delivers robust, well-integrated subsystem solutions to the professional 3D graphics market. AGI sells its products through original equipment manufacturers and a worldwide network of value added resellers and distributors. Digital Studio Digital Studio provides virtual studio products and services for digital content production in the television, film, video, corporate training, and multimedia industries at a lower cost than traditional proprietary technology. MindSet(TM) Virtual Studio System and FuseBox(TM) control software enable the use of virtual sets with live talent for video. The MindSet system is in use at broadcast, production, postproduction, and educational institutions worldwide. As the first Windows NT-based virtual set system, MindSet earned immediate distinction at the 1997 National Association of Broadcasters annual conference by being cited as one of the ten best "Prime Time" digital products on exhibit. It also received an "Editors' Choice" Award from AV Video Multimedia Magazine, and a "1997 Product Innovation Award" from Computer Graphics World Magazine. Digital Theater Digital Theater focuses on hardware, software, and content development for digital theater venues, and is a leading supplier of digital planetarium projection systems (Digistar(R) II). Digital Theater is dedicated to the emerging, large format digital theater marketplace. Efforts are focused on hardware, software, and content development. 10 Digital Theater's highest performance system, StarRider(TM) Digital Theater, is designed to display full-color, computer-generated 3-D images, in either playback or real-time mode, onto a domed surface. StarRider was recently selected by two prestigious planetariums and are scheduled for completion in 1998 and 1999. RESULTS OF OPERATIONS The following table summarizes changes in results of operations for the periods indicated and presents the percentage of increase (decrease) by listed items compared to the indicated prior period:
Increase (decrease) Increase (decrease) between Second Quarter 1998 between First Six Months of 1998 and Second Quarter 1997 and First Six Months of 1997 ------------------------------- ------------------------------- (Unaudited) (Unaudited) Net sales $ 5,731 15.1% $ 14,510 20.3% Cost of sales 3,876 18.9% 10,658 27.3% ----------- ------------ Gross profit 1,855 10.6% 3,852 11.8% Expenses: Marketing, general and administrative 694 8.0% 1,491 9.0% Research and development 62 0.9% 893 7.1% Write-off of acquired research and development 27,925 - 27,925 - ------------ ------------ Operating expenses 28,681 186.5% 30,309 104.3% ------------ ------------ Operating earnings (loss) (26,826) (1,311.1%) (26,457) (759.4%) Other income, net (89) (13.5%) (120) (9.7%) ------------ ------------ Earnings (loss) before income taxes (26,915) (994.3%) (26,577) (562.8%) Income tax expense 476 65.0% 636 47.6% ------------ ------------ Net earnings (loss) $ (27,391) (1,386.9%) $ (27,213) (803.7%) ============ ============
Sales - ----- Sales for the second quarter of 1998 increased 15.1% to $43.6 million compared to $37.9 million for the second quarter of 1997. Sales for the six month period ended June 26, 1998 increased 20.3% to $86.1 million compared to $71.5 million for the six month period ended June 27, 1997. The quarter-to-date and year-to-date increases in sales during 1998 were primarily due to strong backlog levels going into 1998 and revenue growth in the Company's Commercial Simulation and Desktop Graphics business units. Domestic sales for the second quarter of 1998 increased 45% to $11.6 million as compared to $8.0 million for the second quarter of 1997, while foreign sales for the second quarter of 1998 decreased 3% to $16.8 million compared to $17.4 million for the second quarter of 1997. Domestic sales for the first six months of 1998 increased 53% to $27.9 million as compared to $18.2 million for the first six months of 1997, while foreign sales for the first six months of 1998 decreased 24.3% to $21.6 million compared to $28.5 million for the first six months of 1997. 11 Cost of Sales - ------------- Cost of sales, as a percentage of sales, was 55.8% for the second quarter of 1998 compared to 54.0% for the second quarter 1997. For the six month period ended June 26, 1998, cost of sales as a percentage of sales was 57.7% compared to 54.5% for the six month period ended June 27, 1997. The increase in cost of sales, as a percentage of sales, for the second quarter and for the first six months of 1998, as compared to the same periods in 1997, is primarily due to product mix, timing of shipments and completed contracts, and lower margin government simulation contracts in which the Company served as the prime contractor. These higher costs were partially offset by lower cost of sales as a percentage of sales on its Commercial Simulation and Desktop Graphics business units. Royalties and commissions generated by Desktop Graphics have relatively low associated costs. The Company's Board Products business unit also had higher cost of sales as a percentage of sales in the second quarter of 1998 as compared to the second quarter of 1997 reflecting the effects of certain design changes, among other factors. Expenses - -------- Total expenses for the second quarter of 1998 increased 186.5% to $44.1 million compared to $15.4 million for the second quarter of 1997, but decreased as a percentage of sales, excluding the write-off of acquired research and development, to 37.0% from 40.6% for the respective periods. Total expenses for the first six months of 1998 increased 104.3% to $59.4 million compared to $29.1 million for the first six months of 1997, but decreased as a percentage of sales, excluding the write-off of acquired research and development, to 36.5% from 40.6% for the respective periods. Marketing, General, and Administrative: Marketing, general, and administrative expense for the second quarter of 1998 increased 8.0% to $9.3 million compared to $8.6 million for the second quarter of 1997, but decreased as a percentage of sales to 21.4% from 22.8% for the respective periods. Marketing, general, and administrative expenses for the first six months of 1998 increased 9.0% to $18.0 million compared to $16.5 million for the first six months of 1997, but decreased as a percentage of sales to 20.9% from 23.0% for the respective periods. The increases in marketing, general, and administrative expenses during the second quarter and the first six months of 1998 are primarily due to increased labor costs related to increased headcount, wages and incentive bonuses due to higher profitability, consulting and professional services, travel costs, and administrative costs related to the growth in operations. Research and Development: Research and development expense for the second quarter of 1998 increased 0.9% to $6.8 million compared to $6.7 million for the second quarter of 1997, but decreased as a percentage of sales to 15.6% from 17.8% for the respective periods. Research and development expense for the first six months of 1998 increased 7.1% to $13.5 million compared to $12.6 million for the first six months of 1997, but decreased as a percentage of sales to 15.7% from 17.6% for the respective periods. The increases in research and development expense during the second quarter and the first six months of 1998 are primarily due to increased headcount and activity related to the development of the Company's Symphony line of products. Write-off of Acquired Research and Development - ---------------------------------------------- The write-off of acquired research and development of $27.9 million represents management's estimated value of incomplete research and development projects acquired through business and asset purchases made during the second quarter of 1998. Other Income, Net - ----------------- Other income, net, for the second quarter of 1998 decreased 13.5% to $0.6 million compared to $0.7 million for the second quarter of 1997. Other income, net, for the first six months of 1998 decreased 9.7% to $1.1 million compared to $1.2 million for the first six months of 1997. The decreases in other income for the second quarter and first six months of 1998 are primarily due to a decrease in interest income due to lower average cash and marketable securities balances. 12 Income Taxes - ------------ The Company's combined federal, state and foreign effective income tax rate was 32.5% of earnings before income taxes excluding acquisition expenses related to the write-off of in-process research and development of $27.9 million for the second quarter and the first six months of 1998. The tax rate for these same periods in 1997 was 27.0% and 28.3%, respectively. These rates are calculated based on an estimated annual effective tax rate applied to income before income taxes. LIQUIDITY & CAPITAL RESOURCES Working capital at June 26, 1998 was $119.7 million compared to $129.0 million at December 31, 1997. This includes cash, cash equivalents and marketable securities of $34.2 million and $57.1 million at June 26, 1998 and December 31, 1997, respectively. The Company's operations used $14.2 million during the first six months of 1998, compared to $12.7 million of cash provided by operations during the first six months of 1997. Cash was primarily provided from net proceeds of sales of marketable and investment securities, net borrowings under line of credit agreements, and proceeds from employee stock purchase and option plans. Cash was principally used to acquire new businesses, to repurchase and retire shares of the Company's common stock, and to purchase capital equipment. At June 26, 1998, the Company had unsecured credit facilities with foreign banks with total availability of approximately $11 million, for which there were approximately $5 million of borrowings outstanding, and a $5 million unsecured line for letters of credit with a U.S. bank. Management believes that existing cash and marketable securities balances, borrowings available under its credit facilities and cash generated from operations will be sufficient to meet the Company's anticipated operating requirements for the next twelve months. The Company's cash and marketable securities are available for strategic investments, mergers and acquisitions, other potential cash needs as they may arise, and to fund the continuation of its stock repurchase plan. On February 18, 1998, the Company's Board of Directors authorized the repurchase of up to 600,000 shares of the Company's common stock, including the 327,000 shares still available from the repurchase authorization approved by the board on November 11, 1996. Subsequent to February 18, 1998, the Company has repurchased 264,000 shares of its common stock; thus, 336,000 shares currently remain available for repurchase. Stock may be acquired in the open market or through negotiated transactions. Under the program, repurchases may be made from time to time, depending on market conditions, share price, and other factors. These repurchases are to be used primarily to meet current and near-term requirements for the Company's stock-based benefit plans. The Company has not paid dividends on its common stock in the past and has no present intention to do so in the future. SUBSEQUENT EVENTS On July 22, 1998, Intel Corporation (Intel) purchased 901,408 shares of a series of Preferred Stock, no par value, of the Company plus a warrant to purchase an additional 378,462 shares at $33.28 per share for approximately $24 million. These preferred shares have certain liquidation and conversion rights in addition to other rights and preferences. In addition, the Company entered into an agreement to accelerate development of high-end graphics and video subsystems for Intel-based workstations and a cross-license agreement. FORWARD-LOOKING STATEMENTS This quarterly report on Form 10-Q may be deemed to contain certain forward-looking statements. Any forward-looking statements involve risks and uncertainties, including but not limited to risk of product demand, market acceptance, economic conditions, competitive products and pricing, difficulties in product development, commercialization and technology, and other risks detailed in this filing and in the Company's most recent Form 10-K. Although the Company believes it has the product offerings and resources for continuing success, future revenue and margin trends cannot be reliably predicted. Factors external to the Company can result in volatility of the Company's common stock price. Because of the foregoing factors, recent trends are not necessarily reliable indicators of future stock prices or financial performance. 13 TRADEMARKS USED IN THIS FORM 10-Q Digistar, E&S, ESIG, FuseBox, Harmony, MindSet, REALImage Technology, Real Image, Rhythm, StarRider and Symphony are trademarks or registered trademarks of Evans & Sutherland Computer Corporation. All other product, service, or trade names or marks are the properties of their respective owners. PART II - OTHER INFORMATION Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Company held its Annual Meeting of Stockholders on May 21, 1998. Proxies for the meeting were solicited pursuant to Regulation 14A. The Company's Board of Directors is divided into three classes whose terms expire at successive annual meetings. Accordingly, not all directors are elected at each Annual Meeting of Stockholders. Gerald S. Casilli and James R. Oyler were re-elected as Directors and other continuing Directors are: Stewart Carrell, Peter O. Crisp, Ivan E. Sutherland and John E. Warnock. The matters described below were voted on at the Annual Meeting of Stockholders, and the number of votes cast with respect to each matter and, with respect to the election of directors, for each nominee, were as indicated. 1. Election of two directors to serve until the 2001 Annual Meeting of Stockholders. GERALD S. CASILLI For: 7,802,387 Withheld: 44,529 JAMES R. OYLER For: 7,799,636 Withheld: 47,280 2. Adoption of the Evans & Sutherland 1998 Stock Option Plan. For: 5,338,986 Against: 2,395,332 Abstained: 80,480 Unvoted: 1,108,475 3. Amendment to the 1989 Stock Option Plan for Non- Employee Directors. For: 7,505,140 Against: 227,625 Abstained: 82,033 Unvoted: 1,108,475 4. Ratification of the appointment of KPMG Peat Marwick LLP as independent auditors of the Company for the fiscal year ending December 31, 1998. For: 7,769,000 Against: 1,958 Abstained: 75,958 Unvoted: 1,076,357 14 Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits Regulation S-K Exhibit No. Description 2.1 Agreement and Plan of Merger, dated April 22, 1998, among the Company, E&S Merger Corp., and AccelGraphics, Inc., filed as Annex I to the Company's Registration Statement on Form S-4, SEC File No. 333-51041, and incorporated herein by this reference. 11 Earnings Per Share Calculation (filed as part of electronic filing only) 27 Financial Data Schedule (filed as part of electronic filing only) (b) Reports on Form 8-K The company filed a report on Form 8-K, dated July 13, 1998, relating to the acquisition of 100% of the issued and outstanding capital stock of AccelGraphics, Inc. on June 26, 1998. SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. EVANS & SUTHERLAND COMPUTER CORPORATION Registrant Date August 10, 1998 /S/ John T. Lemley -------------- ------------------------- John T. Lemley, Vice President and Chief Financial Officer (Principal Financial Officer) 15 EX-11 2 EARNINGS (LOSS) PER SHARE CALCULATION EVANS & SUTHERLAND COMPUTER CORPORATION EARNINGS (LOSS) PER SHARE CALCULATION EXHIBIT 11 Unaudited (In thousands except per share amounts)
Three Months Ended Six Months Ended ------------------------------------------- ------------------------------------------- June 26, 1998 June 27,1997 June 26, 1998 June 27,1997 ------------------- ------------------ ------------------- ------------------ Basic Diluted Basic Diluted Basic Diluted Basic Diluted -------- -------- ------- ------- -------- -------- ------- ------- Common shares outstanding during the entire period 8,934 8,934 9,077 9,077 9,067 9,067 9,059 9,059 Weighted average common shares issued (repurchased) during the period, net 5 5 (60) (60) (58) (58) (17) (17) -------- -------- ------- ------- -------- -------- ------- ------- Weighted average number of common shares outstanding 8,939 8,939 9,017 9,017 9,009 9,009 9,042 9,042 Weighted average number of dilutive common equivalent shares outstanding - - - 377 - - - 372 -------- -------- ------- ------- -------- -------- ------- ------- Weighted average common and dilutive common equivalent shares outstanding 8,939 8,939 9,017 9,394 9,009 9,009 9,042 9,414 ======== ======== ======= ======= ======== ======== ======= ======= Net earnings (loss) applicable to common stock ($25,416) ($25,416) $1,975 $1,975 ($23,827) ($23,827) $3,386 $3,386 ======== ======== ======= ======= ======== ======== ======= ======= Net earnings (loss) per common and dilutive common equivalent share outstanding ($2.84) ($2.84) $0.22 $0.21 ($2.64) ($2.64) $0.37 $0.36 ======== ======== ======= ======= ======== ======== ======= =======
EX-27 3 FINANCIAL DATA SCHEDULE
5 0000276283 EVANS & SUTHERLAND COMPUTER CORPORATION 1,000 3-MOS 6-MOS DEC-31-1998 DEC-31-1998 MAR-28-1998 JAN-01-1998 JUN-26-1998 JUN-26-1998 17,649 17,649 16,535 16,535 45,168 45,168 1,940 1,940 30,580 30,580 182,832 182,832 129,880 129,880 83,110 83,110 247,438 247,438 63,118 63,118 18,015 18,015 0 0 0 0 2,011 2,011 163,866 163,866 247,438 247,438 43,638 86,059 43,638 86,059 24,359 49,655 24,359 49,655 44,059 59,377 0 0 297 600 (24,208) (21,855) 1,208 1,972 (25,416) (23,827) 0 0 0 0 0 0 (25,416) (23,827) (2.84) (2.64) (2.84) (2.64)
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