-----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, DyutVPSZ2//q+E6VMhpPMMI1fVQI8E9Hw7wlsgRPi/RLr16H4i2bakMY6ksBlgju Pt06rmiLeDFwAE4FHEgcHQ== 0000276283-99-000020.txt : 19990817 0000276283-99-000020.hdr.sgml : 19990817 ACCESSION NUMBER: 0000276283-99-000020 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990702 FILED AS OF DATE: 19990816 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: 001-14677 FILM NUMBER: 99691584 BUSINESS ADDRESS: STREET 1: 600 KOMAS DR CITY: SALT LAKE CITY STATE: UT ZIP: 84108 BUSINESS PHONE: 8015881815 MAIL ADDRESS: STREET 1: 600 KOMAS DR CITY: SALT LAKE CITY STATE: UT ZIP: 84108 10-Q 1 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 July 2, 1999 ( ) 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 August 6, 1999 - --------------------------------- ----------------------------- Common Stock, $0.20 par value 9,420,440 EVANS & SUTHERLAND COMPUTER CORPORATION INDEX FORM 10-Q FOR THE QUARTER ENDED JULY 2, 1999 Page No. PART I - FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets as of July 2, 1999 and 3 December 31, 1998 Consolidated Statements of Income for the three months ended July 2, 1999 and June 26, 1998 4 Consolidated Statements of Income for the six months ended July 2, 1999 and June 26, 1998 5 Consolidated Statements of Comprehensive Income for the three and six months ended July 2, 1999 and June 26, 1998 6 Consolidated Statements of Cash Flows for the six months ended July 2, 1999 and June 26, 1998 7 Notes to Consolidated Financial Statements 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11 Item 3. Quantitative and Qualitative Disclosures About Market Risk 21 PART II - OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders 22 Item 6. Exhibits and Reports on Form 8-K 22 Signature 23 2 PART I - FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands, except share amounts)
July 2, December 31, 1999 1998 ------------ ------------ (Unaudited) Assets: Cash and cash equivalents $ 21,439 $ 1,834 Short-term investments 3,706 25,907 Accounts receivable, less allowance for doubtful receivables of $1,510 in 1999 and $1,616 in 1998 31,307 46,866 Inventories 53,386 53,319 Costs and estimated earnings in excess of billings on uncompleted contracts 73,290 58,682 Deferred income taxes 9,414 9,450 Prepaid expenses and deposits 8,223 7,278 ------------ ------------ Total current assets 200,765 203,336 Property, plant and equipment, net 51,093 53,693 Investment securities 4,603 3,380 Deferred income taxes 2,691 2,487 Goodwill and other intangible assets, net 9,925 11,351 Other assets 536 1,421 ----------- ------------ Total assets $ 269,613 $ 275,668 ============ ============ Liabilities and stockholders' equity: Line of credit agreements $ 3,399 $ 4,298 Accounts payable 14,894 24,667 Accrued expenses 28,116 27,147 Customer deposits 4,266 3,339 Income taxes payable 5,059 2,436 Billings in excess of costs and estimated earnings on uncompleted contracts 10,502 7,092 ------------ ------------ Total current liabilities 66,236 68,979 ------------ ------------ Long-term debt 18,024 18,062 ------------ ------------ Commitments and contingencies Redeemable convertible preferred stock, class B-1, no par value; authorized 1,500,000 shares; issued and outstanding 901,408 shares at July 2, 1999 and December 31, 1998 23,658 23,544 ------------ ------------ Stockholders' equity: Preferred stock, no par value; authorized 8,500,000 shares; no shares issued and outstanding - - Common stock, $.20 par value; authorized 30,000,000 shares; issued and outstanding 9,627,701 shares at July 2, 1999 and 9,597,660 shares at December 31, 1998 1,926 1,920 Additional paid-in capital 23,444 23,420 Retained earnings 136,209 139,498 Accumulated other comprehensive income 116 245 ----------- ------------ Total stockholders' equity 161,695 165,083 ------------ ------------ Total liabilities and stockholders' equity $ 269,613 $ 275,668 ============ ============
See accompanying notes to consolidated financial statements. 3 EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (In thousands, except per share amounts)
Three Months Ended --------------------------------------- July 2, June 26, 1999 1998 ------------- -------------- Sales $ 44,023 $ 43,638 Cost of sales 26,420 24,359 ------------- -------------- Gross profit 17,603 19,279 ------------- -------------- Operating expenses: Selling, general and administrative 11,943 9,318 Research and development 10,949 6,808 Amortization of goodwill and other intangible assets 713 8 Write-off of acquired in-process technology - 20,780 ------------- -------------- 23,605 36,914 ------------- -------------- Operating loss (6,002) (17,635) Other income, net 1,022 572 ------------- -------------- Loss before income taxes (4,980) (17,063) Income tax expense (benefit) (1,544) 1,208 ------------- -------------- Net loss (3,436) (18,271) Accretion of preferred stock 57 - ------------- -------------- Net loss applicable to common stock $ (3,493) $ (18,271) ============= ============== Net loss per common share: Basic $ (0.36) $ (2.04) Diluted $ (0.36) $ (2.04) Weighted average common and common equivalent shares outstanding: Basic 9,601 8,939 Diluted 9,601 8,939
See accompanying notes to consolidated financial statements. 4 EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (In thousands, except per share amounts)
Six Months Ended --------------------------------------- July 2, June 26, 1999 1998 ------------- ------------- Sales $ 93,769 $ 86,059 Cost of sales 53,788 49,655 ------------- ------------- Gross profit 39,981 36,404 ------------- ------------- Operating expenses: Selling, general and administrative 22,164 17,951 Research and development 22,029 13,485 Amortization of goodwill and other intangible assets 1,426 16 Write-off of acquired in-process technology - 20,780 ------------- ------------- 45,619 52,232 ------------- ------------- Operating loss (5,638) (15,828) Other income, net 1,037 1,118 ------------- ------------- Loss before income taxes (4,601) (14,710) Income tax expense (benefit) (1,426) 1,972 ------------- ------------- Net loss (3,175) (16,682) Accretion of preferred stock 114 - ------------- ------------- Net loss applicable to common stock $ (3,289) $ (16,682) ============= ============= Net loss per common share: Basic $ (0.34) $ (1.85) Diluted $ (0.34) $ (1.85) Weighted average common and common equivalent shares outstanding: Basic 9,602 9,009 Diluted 9,602 9,009
See accompanying notes to consolidated financial statements. 5 EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited, in thousands)
Three Months Ended --------------------------------------- July 2, June 26, 1999 1998 ------------- -------------- Net loss $ (3,436) $ (18,271) Other comprehensive income (loss): Foreign currency translation adjustments (442) 53 Unrealized gains (losses) on securities 10 (316) ------------- -------------- Other comprehensive loss before income taxes (432) (263) Income tax benefit related to items of other comprehensive loss (134) (85) ------------- -------------- Other comprehensive loss, net of income taxes (298) (178) ------------- -------------- Comprehensive loss $ (3,734) $ (18,449) ============= ==============
Six Months Ended --------------------------------------- July 2, June 26, 1999 1998 ------------- -------------- Net loss $ (3,175) $ (16,682) Other comprehensive income (loss): Foreign currency translation adjustments (197) 135 Unrealized gains (losses) on securities 10 (53) ------------- -------------- Other comprehensive loss before income taxes (187) 82 Income tax benefit related to items of other comprehensive loss (58) 27 ------------- -------------- Other comprehensive loss, net of income taxes (129) 55 ------------- -------------- Comprehensive loss $ (3,304) $ (16,627) ============= ==============
See accompanying notes to consolidated financial statements. 6 EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited, in thousands)
Six Months Ended --------------------------------------- July 2, June 26, 1999 1998 -------------- -------------- Cash flows from operating activities: Net loss $ (3,175) $ (16,682) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 8,019 5,005 Provision for losses on accounts receivable 241 62 Provision for write down of inventories 459 (228) Provision for warranty expense 389 79 Deferred income taxes (205) (923) Write-off of acquired in-process technology - 20,780 Other 223 (454) Changes in assets and liabilities: Accounts receivable 15,255 467 Inventories (5,242) (3,463) Costs and estimated earnings in excess of billings on uncompleted contracts, net (11,193) (9,806) Prepaid expenses and deposits (952) (789) Accounts payable (9,729) (1,487) Accrued expenses 599 (1,124) Customer deposits 926 (1,352) Income taxes 2,690 (4,300) -------------- -------------- Net cash used in operating activities (1,695) (14,215) -------------- -------------- Cash flows from investing activities: Purchases of short-term investments (3,450) (3,700) Proceeds from sale of short-term investments 25,651 38,501 Purchases of investment securities (636) (310) Proceeds from sale of investment securities - 3,341 Purchases of property, plant and equipment (5,373) (5,947) Proceeds from sale of certain manufacturing assets 6,010 - Acquisitions, net of cash acquired - (7,603) Increase in other assets (37) - -------------- -------------- Net cash provided by investing activities 22,165 24,282 -------------- -------------- Cash flows from financing activities: Borrowings under line of credit agreements - 4,166 Payments under line of credit agreements (629) (24) Proceeds from issuance of common stock 881 1,256 Payments for repurchase of common stock (769) (5,837) -------------- -------------- Net cash used in financing activities (517) (439) -------------- -------------- Effect of foreign exchange rate on cash and cash equivalents (348) (155) -------------- -------------- Net change in cash and cash equivalents 19,605 9,473 Cash and cash equivalents at beginning of year 1,834 8,176 -------------- -------------- Cash and cash equivalents at end of period $ 21,439 $ 17,649 ============== ============== Supplemental Disclosures of Cash Flow Information Interest $ 664 $ 596 Income taxes, net of refunds (3,635) 5,673 Accretion of preferred stock 114 -
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 six months ended July 2, 1999 should be read in conjunction with the Company's annual report on Form 10-K for the year ended December 31, 1998. The accompanying unaudited consolidated balance sheets and statements of income, comprehensive income and cash flows reflect all normal recurring adjustments which are, in the opinion of management, necessary for a fair presentation of the Company's financial position, results of operations and cash flows. The results of operations for the interim three and six month periods ended July 2, 1999 are not necessarily indicative of the results to be expected for the full year. Certain amounts in the 1998 consolidated financial statements and notes have been reclassified to conform to the 1999 presentation. Recent Accounting Pronouncements In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133 (SFAS 133), "Accounting for Derivative Instruments and Hedging Activities." SFAS 133, as amended by SFAS 137, is effective for fiscal years beginning after June 15, 2000. SFAS 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. It requires that all derivative instruments be recognized as either assets or liabilities in the consolidated balance sheet and measured at fair value. We are currently assessing the effects of adopting SFAS 133, and the impact of adopting this statement is not anticipated to be material to the financial statements. 2. PURCHASE COMMITMENTS AND SALE OF MANUFACTURING ASSETS On June 3, 1999, the Company sold certain manufacturing capital assets and inventory for $6.0 million as part of the Company's efforts to outsource the production of certain electronic products and assemblies. In addition, the Company entered into an Electronic Manufacturing Services Agreement with a third-party manufacturer. The agreement commits the Company to purchase a minimum of $22.0 million of electronic products and assemblies from the third-party manufacturer each year for three years from the date of the agreement. If the Company fails to meet these minimum purchase levels, subject to adjustment, the Company may be required to pay 25 percent of the difference between the $22.0 million and the amount purchased. 3. INVENTORIES Inventories consist of the following (in thousands): July 2, December 31, 1999 1998 ----------------- ---------------- (Unaudited) Raw materials $ 24,114 $ 26,084 Work-in-process 25,924 23,511 Finished goods 3,348 3,724 ----------------- ---------------- $ 53,386 $ 53,319 ================= ================ 8 4. SEGMENT AND RELATED INFORMATION During 1998, the Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" which changed the way the Company reports information about its operating segments. The Company's business units have been aggregated into three reportable segments: simulation, workstation products, 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 workstation products segment provides graphics accelerator products, including graphics chips and subsystems, to the personal PC workstation marketplace. The applications segment provides digital video applications for entertainment, educational, multimedia and real estate development industries. The Company evaluates segment performance based on income (loss) from operations before income taxes, interest income and expense, other income and expense and foreign exchange gains and losses. The Company's assets are not identifiable by segment (in thousands, unaudited).
Simulation Workstation Applications Total Products --------------- --------------- -------------- ------------ Three months ended July 2, 1999: Sales $ 35,492 $ 6,751 $ 1,780 $ 44,023 Operating income (loss) 331 (4,724) (1,609) (6,002) Three months ended June 26, 1998: Sales $ 40,108 $ 1,677 $ 1,853 $ 43,638 Operating income (loss) 5,559 (21,410) (1,784) (17,635) Six months ended July 2, 1999: Sales $ 75,755 $ 14,870 $ 3,144 $ 93,769 Operating income (loss) 3,632 (6,239) (3,031) (5,638) Six months ended June 26, 1998: Sales $ 79,850 $ 3,227 $ 2,982 $ 86,059 Operating income (loss) 9,686 (21,728) (3,786) (15,828)
5. 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, unaudited):
Three Months Ended Six Months Ended July 2, June 26, July 2, June 26, 1999 1998 1999 1998 --------------- --------------- -------------- -------------- United States $ 21,461 $ 20,172 $ 46,952 $ 47,381 United Kingdom 10,465 11,832 25,797 19,052 Europe (excluding United Kingdom) 7,590 4,192 13,869 8,066 Pacific Rim 4,267 6,521 6,726 10,024 Other 240 921 425 1,536 --------------- --------------- -------------- -------------- $ 44,023 $ 43,638 $ 93,769 $ 86,059 =============== =============== ============== ==============
9 5 GEOGRAPHIC INFORMATION (Continued) The following table presents property, plant and equipment by geographic location based on the location of the assets (in thousands, unaudited):
July 2, December 31, 1999 1998 --------------- ---------------- United States $ 50,403 $ 52,876 Europe 690 817 --------------- ---------------- Total property, plant and equipment, net $ 51,093 $ 53,693 =============== ================
6. EARNINGS PER COMMON SHARE Earnings per common share is computed based on the weighted-average number of common shares and, if appropriate, dilutive common stock equivalents outstanding during the period. Stock options are considered to be common stock equivalents. Basic earnings per common share is the amount of earnings for the period available to each share of common stock outstanding during the reporting period. Diluted earnings per share is the amount of earnings 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 per common share, earnings were the same for both the basic and diluted calculation. For the three months ended July 2, 1999, outstanding options to purchase 289,000 shares of common stock, 428,000 shares of common stock issuable upon conversion of the 6% Convertible Subordinated Debentures, 901,000 shares of common stock issuable upon conversion of the Company's Class B-1 Preferred Stock and 378,000 shares of common stock upon the exercise and conversion of warrants to purchase additional Class B-1 Preferred Stock were excluded from the computation of the diluted earnings per share because to include such shares would have had an anti-dilutive effect on earnings per common share. For the six months ended July 2, 1999, outstanding options to purchase 280,000 shares of common stock, 428,000 shares of common stock issuable upon conversion of the 6% Convertible Subordinated Debentures, 901,000 shares of common stock issuable upon conversion of the Company's Class B-1 Preferred Stock and 378,000 shares of common stock upon the exercise and conversion of warrants to purchase additional Class B-1 Preferred Stock were excluded from the computation of the diluted earnings per share because to include such shares would have had an anti-dilutive effect on earnings per common share. For the three months ended June 26, 1998, outstanding options to purchase 446,000 shares of common stock and 428,000 shares of common stock issuable upon conversion of the 6% Convertible Subordinated Debentures were excluded from the computation of the diluted earnings per share because to include such shares would have had an anti-dilutive effect on earnings per common share. For the six months ended June 26, 1998, outstanding options to purchase 414,000 shares of common stock and 428,000 shares of common stock issuable upon conversion of the 6% Convertible Subordinated Debentures were excluded from the computation of the diluted earnings per share because to include such shares would have had an anti-dilutive effect on earnings per common share. 10 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the consolidated financial statements and notes included in Item 1 of Part I of this form. 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 ("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 business, workstation products business, and applications business. 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 worldwide 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. Workstation Products Group The Workstation Products Group develops and sells graphics chips and graphics subsystems for the personal workstation marketplace. This group sells to most personal workstation OEMs and is gaining market share in the professional graphics market. The group anticipates continued growth in the Windows NT workstation marketplace with the market's transition from proprietary UNIX architecture systems to Microsoft and Intel-based open architecture systems. The Workstation Products Group provides a family of REALimage(TM) chip-based, 3D graphics subsystems and their associated software to personal workstation OEMs. These workstation products support a wide range of professional OpenGL(R) graphics applications, including mechanical computer automated design, engineering analysis, digital content creation, visualization, simulation, animation, entertainment and architectural, engineering and construction. To optimize its position in these markets, E&S maintains close working relationships with more than 40 independent software vendors that provide products into these markets. Consequently, E&S is certified and/or tested on most of the popular PC workstation applications. Applications Group The Applications Group is composed of new and synergistic businesses that use E&S core technology in growth markets. The group's products are applications that leverage the technology of the Company's Simulation or Workstation Products Groups and apply them to other growth markets. 11 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 hardware. The group provides turnkey solutions incorporating visual systems and sub-systems from the Simulation and Workstation Products 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 digital video products provide 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 offers 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 are all-inclusive system solutions that incorporate visual system components and subsystems from the Simulation and Workstation Products Groups. E&S MindSet(TM), Virtual Studio System(TM) and the FuseBo(TM) control software with real-time, frame-accurate camera tracking and enable live talent to perform in real time on a virtual set generated using E&S 3D computer technology. The video output of the set meets today's digital broadcast video standards. Systems are installed worldwide in production, postproduction, broadcast and educational applications. The Applications Group's products are sold directly to end-users by E&S as a prime contractor or selectively through dealers. On July 20, 1999, the Applications Group introduced its RAPIDsit(TM) product. RAPIDsite 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. RAPIDsite features fast 3D-model construction, accelerated graphics rendering performance and interactive exploration of a proposed development on a Windows NT computer with an Open GL graphics accelerator. 12 RESULTS OF OPERATIONS The following table presents the percentage of total sales represented by certain items for the Company for the periods presented (unaudited):
Three Months Ended Six Months Ended ------------------------- --------------------------- July 2, June 26, July 2, June 26, 1999 1998 1999 1998 ----------- ---------- ----------- ----------- Sales 100.0% 100.0% 100.0% 100.0% Cost of sales 60.0 55.8 57.4 57.7 ----------- ---------- ----------- ----------- Gross profit 40.0 44.2 42.6 42.3 Operating expenses: Selling, general and administrative 27.1 21.4 23.6 20.9 Research and development 24.9 15.6 23.5 15.7 Amortization of goodwill and other intangible assets 1.6 - 1.5 - Write-off of acquired in-process technology - 47.6 - 24.1 ----------- ---------- ----------- ----------- Operating expenses 53.6 84.6 48.6 60.7 ----------- ---------- ----------- ----------- Operating loss (13.6) (40.4) (6.0) (18.4) Other income, net 2.3 1.3 1.1 1.3 ----------- ---------- ----------- ----------- Loss before income taxes (11.3) (39.1) (4.9) (17.1) Income tax expense (benefit) (3.5) 2.8 (1.5) 2.3 ----------- ---------- ----------- ----------- Net loss (7.8) (41.9) (3.4) (19.4) Accretion of preferred stock 0.1 - 0.1 - ----------- ---------- ----------- ----------- Net loss applicable to common stock (7.9)% (41.9)% (3.5)% (19.4)% =========== ========== =========== ===========
Second Quarter 1999 Compared to Second Quarter 1998 Sales Sales increased to $44.0 million in the second quarter of 1999 from $43.6 million in the second quarter of 1998. Sales for simulation products decreased $4.6 million, or 12% ($35.5 million in the second quarter of 1999 compared to $40.1 million in the second quarter of 1998). The decrease in sales of simulation products is due to three more systems shipped to commercial customers in the second quarter of 1998 than in the same period of 1999. In addition, delays in some government programs in the second quarter of 1999 resulted in lower simulation products revenues than in the second quarter of 1998. Sales of workstation products increased $5.1 million, or 303% ($6.8 million in the second quarter of 1999 compared to $1.7 million in the second quarter of 1998). The increase in sales of workstation products is due to the acquisition of AccelGraphics, Inc. ("AGI") at the end of the second quarter of 1998 which introduced new workstation products and increased the volume of workstation products sold. Sales of application products decreased $0.1 million, or 4% ($1.8 million in the first quarter of 1999 compared to $1.9 million in the second quarter of 1998). The decrease in sales of application products is due to fewer shipments of MindSet virtual studios being shipped in the second quarter of 1999 than the same period in 1998. This decrease was partially offset by a greater number of Digistar shipments in the second quarter of 1999 compared with the second quarter of 1998. 13 Gross Profit Gross profit decreased $1.7 million, or 9% ($17.6 million in the second quarter of 1999 compared to $19.3 million in the second quarter of 1998). As a percent of sales, gross profit decreased to 40.0% in the second quarter of 1999 from 44.2% in the second quarter of 1998. The decrease in gross margin is due to lower margins in the Simulation Group during the second quarter of 1999 primarily due to lower margins on several contracts to commercial contracts. In addition, gross margin in the Workstation Products Group decreased in the second quarter of 1999 as it has changed its business model from one based on royalty income to one based on sales of graphics subsystems which has product costs consistent with a manufacturing operation. Selling, General and Administrative Selling, general and administrative expenses increased $2.6 million, or 28% ($11.9 million in the second quarter of 1999 compared to $9.3 million in the second quarter of 1998) and increased as a percent of sales (27.1% in the second quarter of 1999 compared to 21.4% in the second quarter of 1998). The increase in these expenses is due to increased selling, general and administrative expenses related to the operations of Evans & Sutherland Graphics Corporation ("ESGC"), formerly AGI, and increased labor costs due to increased headcount and related recruiting and relocation expenses. Research and Development Research and development expenses increased $4.1 million, or 61% ($10.9 million in the second quarter of 1999 compared to $6.8 million in the second quarter of 1998) and increased as a percent of sales (24.9% in the second quarter of 1999 compared to 15.6% in the second quarter of 1998). The increase in these expenses is due to increased research and development expenses related to the operations of ESGC to support increased research and development activity in the Workstation Products Group as well as higher costs in the Simulation Group relating to its Harmony(TM) image generator. Amortization of Goodwill and Other Intangible Assets Amortization of goodwill and other intangible assets increased $0.7 million ($0.7 million in the second quarter of 1999 compared to $8,000 in the second quarter of 1998). The increase in these expenses is due to the amortization of goodwill and other intangible assets related to the acquisitions of AGI and Silicon Reality, Inc. ("SRI") during the second quarter of 1998. The goodwill is being amortized using the straight-line method over an estimated useful life of seven years. The other intangible assets are being amortized using the straight-line method over estimated useful lives ranging from six months to seven years. Write-off of Acquired In-Process Technology In the second quarter of 1998, the Company recognized $20.8 million of expense to write-off acquired in-process technology related to the acquisitions of AGI and SRI. No such expense was recognized in the second quarter of 1999. Other Income, Net Other income, net increased $0.4 million ($1.0 million in the second quarter of 1999 compared to $0.6 million in the second quarter of 1998). Interest income was $1.3 million and $0.6 million in the second quarter of 1999 and the second quarter of 1998, respectively. The increase in interest income is due to interest received in 1999 for delayed income tax refunds. Income Taxes The effective tax rate was 31.0% and 32.5% of pre-tax earnings for the second quarter of 1999 and 1998, respectively. These rates are calculated based on an estimated annual effective tax rate applied to earnings before income taxes. 14 Six Months Ended July 2, 1999 Compared to Six Months Ended June 26, 1998 Sales In the first six months of 1999, sales increased $7.7 million, or 9% ($93.8 million in the first six months of 1999 million compared to $86.1 million in the first six months of 1998). Sales for simulation products decreased $4.1 million, or 5% ($75.8 million in the first six months of 1999 compared to $79.9 million in the first six months of 1998). The decrease in sales of simulation products is due to increased sales to commercial customers in the first six months of 1998 as compared to the first six months of 1999. The decrease is also due to delays in some government programs in the first six months of 1999. Sales of workstation products increased $11.7 million, or 361% ($14.9 million in the first six months of 1999 compared to $3.2 million in the first six months of 1998). The increase in sales of workstation products is due to the acquisition of AGI at the end of the second quarter of 1998. Sales of application products increased $0.1 million, or 5% ($3.1 million in the first six months of 1999 compared to $3.0 million in the first six months of 1998). The increase in sales of application products is due to increased sales volumes of Digistar planetarium systems. Gross Profit Gross profit increased $3.6 million, or 10% ($40.0 million in the first six months of 1999 compared to $36.4 million in the first six months of 1998). As a percent of sales, gross profit increased to 42.6% in the first six months of 1999 from 42.3% in the first six months of 1998. The increase in gross margin is due to higher margin contracts in the Simulation Group in the first six months of 1999. During the first quarter of 1998, a significant portion of revenues from the Simulation Group were derived from a contract in which the Company served as the prime contractor. These contracts have a lower gross margin than contracts in which the Company is the subcontractor. This was offset by lower margins in 1999 in the Workstation Products Group as it has changed its business model from one based on royalty income to one based on sales of graphics subsystems which has product costs consistent with a manufacturing operation. Selling, General and Administrative Selling, general and administrative expenses increased $4.2 million, or 23% ($22.2 million in the first six months of 1999 compared to $18.0 million in the first six months of 1998) and increased as a percent of sales (23.6% in the first six months of 1999 compared to 20.9% in the first six months of 1998). The increase in these expenses is due to increased selling, general and administrative expenses related to the operations of ESGC and increased labor costs due to increased headcount and related recruiting and relocation expenses. Research and Development Research and development expenses increased $8.5 million, or 63.4% ($22.0 million in the first six months of 1999 compared to $13.5 million in the first six months of 1998) and increased as a percent of sales (23.5% in the first six months of 1999 compared to 15.7% in the first six months of 1998). The increase in these expenses is due to increased research and development expenses related to the operations of ESGC to support increased research and development activity in the Workstation Products Group as well as higher costs in the Simulation Group relating to its Harmony image generator. 15 Amortization of Goodwill and Other Intangible Assets Amortization of goodwill and other intangible assets increased $1.4 million ($1.4 million in the first six months of 1999 compared to $16,000 in the first six months of 1998). The increase in these expenses is due to the amortization of goodwill and other intangible assets related to the acquisitions of AGI and SRI during the second quarter of 1998. The goodwill is being amortized using the straight-line method over an estimated useful life of seven years. The other intangible assets are being amortized using the straight-line method over estimated useful lives ranging from six months to seven years. Write-off of Acquired In-Process Technology In the second quarter of 1998, the Company recognized $20.8 million of expense to write-off acquired in-process technology related to the acquisitions of AGI and SRI. No such expense was recognized in the first six months of 1999. Other Income, Net Other income, net decreased $0.1 million ($1.0 million in the first six months of 1999 compared to $1.1 million in the first six months of 1998). Interest income was $1.5 million and $1.2 million in the first six months of 1999 and the first six months of 1998, respectively. The increase in interest income is due to interest received in 1999 for delayed income tax refunds which was offset by a decrease in the average cash and cash equivalents and short-term investments balances in the first six months of 1999 as compared to the first six months of 1998. Income Taxes The effective tax rate was 31.0% and 32.5% of pre-tax earnings for the first six months of 1999 and 1998, respectively. These rates are calculated based on an estimated annual effective tax rate applied to earnings before income taxes. LIQUIDITY & CAPITAL RESOURCES At July 2, 1999, the Company had working capital of $134.5 million, including cash, cash equivalents and short-term investments of $25.1 million, compared to working capital of $134.4 million at December 31, 1998, including cash, cash equivalents and short-term investments of $27.7 million. During the six months ended July 2, 1999, the Company used $1.7 million of cash in its operating activities, generated $22.2 million of cash from its investing activities and used $0.5 million of cash in its financing activities. The primary uses of cash from the Company's operating activities included a net increase in costs and estimated earnings in excess of billings on uncompleted contracts of $11.2 million, a decrease in accounts payable of $9.7 million, an increase in inventory of $5.2 million and an increase in prepaid expenses and deposits of $1.0 million. These primary uses of cash were partially offset by $15.3 million net cash flow from the collection of accounts receivable, $8.0 million of depreciation and amortization expense and $0.9 million net cash flow from customer deposits. The net increase in costs and estimated earnings in excess of billings on uncompleted contracts was primarily due to the delays in achieving billing milestones on projects related to the Company's Harmony image generator. The decline in the Company's accounts payable balance was due to a change in the timing of materials received which had resulted in a higher balance at December 31, 1998. The increase in the Company's inventory balance was due to an increase in raw materials and work-in-process inventory related to the Company's Harmony image generator. The decline in the Company's accounts receivable balance was due to an increased effort in collection of receivables and a reduced volume of new billings due to delays in achieving billing milestones on projects related to the Company's Harmony image generator. The Company's investing activities during the six months ended July 2, 1999 included capital expenditures of $5.4 million for building improvements and equipment. The Company has a capital commitment, as of August 6, 1999, of $0.8 million to construct a building in Salt Lake City, Utah to house its machine shop. Proceeds from the sale of short-term investments, net of purchases, provided $22.2 million of cash during the six months ended July 2, 1999. 16 On June 3, 1999, the Company sold certain manufacturing capital assets and inventory for $6.0 million as part of the Company's efforts to outsource the production of certain electronic products and assemblies. In addition, the Company entered into an Electronic Manufacturing Services Agreement with a third-party manufacturer. The agreement commits the Company to purchase a minimum of $22.0 million of electronic products and assemblies from the third-party manufacturer each year for three years from the date of the agreement. If the Company fails to meet these minimum purchase levels, subject to adjustment, the Company may be required to pay 25 percent of the difference between the $22.0 million and the amount purchased. The Company's financing activities during the six months ended July 2, 1999 included the use of $0.8 million for the repurchase of common stock and $0.6 million for repayments under line of credit agreements. Proceeds from the issuance of common stock relating to the exercise of stock options provided $0.9 million of cash during the six months ended July 2, 1999. On February 18, 1998, the Company's Board of Directors authorized the repurchase of up to 600,000 shares of the Company's common stock, including the 327,000 shares still available from the repurchase authorization approved by the Board of Directors on November 11, 1996. On September 8, 1998, the Company's Board of Directors authorized the repurchase of an additional 1,000,000 shares of the Company's common stock. Subsequent to February 18, 1998, the Company has repurchased 1,008,000 shares of its common stock; thus, 592,000 shares currently remain available for repurchase as of August 6, 1999. 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. In November 1998, the Company entered into a revolving line of credit agreement with U.S. Bank National Association. The revolving line of credit provides for borrowings by the Company of up to $20.0 million. Borrowings bear interest at the prevailing prime rate minus 1.0% or the LIBOR rate plus 1.0%. The revolving line of credit expires on November 10, 1999. The revolving line of credit, among other things, (i) requires the Company to maintain certain financial ratios; (ii) restricts the Company's ability to incur debt or liens; sell, assign, pledge or lease assets; merge with another company; and (iii) restricts the payment of dividends and repurchase of any of the Company's outstanding shares without prior consent of the lender if there are borrowings outstanding under the agreement. The revolving line of credit is unsecured. There were no borrowings under this agreement outstanding as of August 6, 1999. In addition, the Company has a $7.5 million unsecured line for letters of credit with U.S. Bank National Association for which there were approximately $6.0 million outstanding as of July 2, 1999. As of July 2, 1999, the Company had revolving line of credit agreements with foreign banks totaling approximately $6.3 million, of which approximately $3.0 million was unused and available. The Company has a letter of credit with another bank in the United States for $5.0 million as a guarantee for one of the Company's foreign line of credit agreements. In July 1998, the Company obtained approximately $24.0 million, less transaction costs of approximately $0.5 million, of financing through the sale of 901,408 shares of the Company's Class B-1 Preferred Stock, no par value, and issued warrants to purchase 378,462 additional shares of the Company's Class B-1 Preferred Stock at an exercise price of $33.28125 per share to Intel Corporation ("Intel"). The Class B-1 Preferred Stock has no dividend rights. Intel has certain contractual rights, including registration rights, a right of first refusal, and a right to require the Company to repurchase the 901,408 shares of Class B-1 Preferred Stock, 378,462 shares underlying the warrant, and shares of common stock of the Company issuable upon conversion of the Class B-1 Preferred Stock (the "Intel Shares") in the event of any transaction qualifying as a Corporate Event, as defined below. If Intel fails to exercise its right of first refusal as to a Corporate Event, Intel shall, upon the Company's entering into an agreement to consummate a Corporate Event, have the right to sell to the Company any or all of the Intel Shares. The potential mandatory redemption amount is the greater of (i) the original price per share purchase price paid by Intel or (ii) either the highest price per share of capital stock (or equivalent) paid in connection with a Corporate Event or, if the transaction involves the sale of a significant subsidiary or assets or the licensing of intellectual property, Intel's pro rata share of the consideration received, directly or indirectly, by the Company in such transaction based on its then fully-diluted ownership of the Company's capital stock. A Corporate Event shall mean any of the following, whether accomplished through one or a series of related transactions: (i) certain transactions that result in a greater than 33% change in the total outstanding number of voting securities of the Company immediately after such issuance; (ii) 17 an acquisition of the Company or any of its significant subsidiaries by consolidation, merger, share purchase or exchange or other reorganization or transaction in which the holders of the Company's or such significant subsidiary's outstanding voting securities immediately prior to such transaction own, immediately after such transaction, securities representing less than 50% of the voting power of the Company, any such significant subsidiary or the person issuing such securities or surviving such transaction, as the case may be; (iii) the acquisition of all or substantially all the assets of the Company or any significant subsidiary; (iv) the grant by the Company or any of its significant subsidiaries of an exclusive license for any material portion of the Company's or such significant subsidiary's intellectual property to a person other than Intel or any of its subsidiaries; or (v) any transaction or series of related transactions that result in the failure of the majority of the members of the Company's Board of Directors immediately prior to the closing of such transaction or series of related transactions failing to constitute a majority of the Board of Directors (or its successor) immediately following such transaction or series of related transactions. As of July 2, 1999, the Company had approximately $18.0 million of 6% Convertible Subordinated Debentures due in 2012 (the "6% Debentures"). The 6% Debentures are unsecured and are convertible at each bondholder's option into shares of the Company's common stock at a conversion price of $42.10 or 428,000 shares of the Company's common stock subject to adjustment. The 6% Debentures are redeemable at the Company's option, in whole or in part, at par. Management believes that existing cash, cash equivalents and short-term investment balances, borrowings available under its line of credit agreements and cash from future operations will be sufficient to meet the Company's anticipated working capital needs, research and development, routine capital expenditures and current debt service obligations for the next twelve months. The Company's cash, cash equivalents and short-term investments are available for working capital needs, research and development, capital expenditures, strategic investments, mergers and acquisitions, stock repurchases and other potential cash needs as they may arise. On a longer-term basis, if future cash from operations and existing line of credit agreements are not sufficient to meet the Company's cash requirements, the Company may be required to renegotiate its existing line of credit agreements or seek additional financing from the issuance of debt or equity securities. There can be no assurances that the Company would be successful in renegotiating its existing line of credit agreements or obtaining additional debt or equity financing. ACQUIRED IN-PROCESS TECHNOLOGY In connection with the acquisitions of AGI and SRI, the Company made allocations of the purchase price to various acquired in-process technology projects. These amounts were expensed as non-recurring charges in the quarter ended June 26, 1998 because the acquired in-process technology had not yet reached technological feasibility and had no future alternative uses. Failure to complete the development of these projects in their entirety, or in a timely manner, could have a material adverse impact on the Company's operating results, financial condition and results of operations. No assurance can be given that actual revenues and operating profit attributable to acquired in-process technology will not deviate from the projections used to value such technology in connection with each of the respective acquisitions. On-going operations and financial results for the acquired technology and the Company as a whole are subject to a variety of factors which may not have been known or estimable at the date of such acquisition, and the estimates discussed below should not be considered the Company's current projections for operating results for the acquired businesses or the Company as a whole. A description of the acquired in-process technology and the estimates made by the Company for each of the technologies is discussed below. Mid-range Professional Graphics Subsystem (2100). This technology is a graphics subsystem with built in VGA core and integral DMA engines. This technology provides superior graphics performance over previous technologies, and includes features such as stereo and dual monitor support and various texture memory configurations. The technology is used in the AccelGALAXY(TM) product, which was completed and began shipping to customers in late third quarter of 1998. The cost to complete this project subsequent to the acquisition of AGI was $0.3 million, $0.1 million over the budgeted amount and was funded by working capital. The project was also completed a month later than scheduled. The assigned value to this technology is $6.1 million. 18 CAD-focused Professional Graphics Subsystem (1200). This technology is a graphic subsystem with lower costs compared to the mid-range technology, resulting in a more cost-effective graphics solution for the end-user. It provides the cost sensitive user with adequate graphics performance, with few features, and a single texture configuration option. The technology is used in the E&S Lightning 120(TM) product, which was completed in March 1999 and began shipping to customers in April 1999. The cost to complete this project subsequent to the acquisition of AGI was $0.5 million, $0.2 million over the budgeted amount and was funded by working capital. The assigned value for this technology is $6.2 million. Multiple-Controller Graphics Subsystems (2200). This technology is a high-end graphics subsystem involving the parallel use of two or four controllers. This technology is aimed at super users in the graphics area who need significant increases in performance and features to accomplish their tasks and are willing to pay the increased price necessary to support those requirements. This technology is in development with its introduction date under review. As of July 2, 1999, the cost to complete this project subsequent to the acquisition of AGI was $0.9 million. Management estimates that additional costs to complete this project will be $0.5 million and it will be completed by the end of the third quarter of 1999. This project will be funded by working capital. The assigned value for this technology is $2.7 million. On-board Geometry Engine Graphics Subsystem (AccelGM(TM)). This technology is a mid-range graphics subsystem with a geometry engine on board. This technology is aimed at the performance intensive graphics end-user. It has fewer features than the mid-range professional technology, but faster geometry performance compared to the mid-range professional technology on Pentium II processors. This technology was completed in the third quarter of 1998 and the AccelGMX product that uses this technology began shipping to customers at that time. The cost to complete this project subsequent to the acquisition of AGI was $0.1 million and was funded by working capital. The assigned value of this technology was $5.3 million. The AccelGALAXY has performed below revenue estimates due to the delay in product introduction by the Company and a delayed design win at one major OEM. Management is unable to predict the long-term effect of this one-month delay. Subsequent to the Company's acquisition of AGI, the developer of the chip used on the AccelGMX also acquired a board company, Dynamic Pictures, and entered the graphics accelerator market in direct competition with the AccelGMX. As a result, the AccelGMX has performed below revenue estimates. The E&S Lightning 1200 has performed below revenue estimates due to the delay in product introduction by the Company. Management is unable to predict the long-term effect of this delay. The Company periodically reviews the value assigned to the separate components of goodwill, intangibles and other long-lived assets through comparison to anticipated, undiscounted cash flows of the underlying business to assess recoverability. In light of the events described above, during the third quarter of 1999 the Company is conducting a detailed evaluation of the assets acquired in connection with the acquisitions of AGI and SRI. If from such evaluation the Company determines that a portion of the acquired assets are impaired, an appropriate adjustment of the carrying value may be necessary to reflect the estimated fair value. YEAR 2000 ISSUE The Year 2000 issue is the result of potential problems with computer systems or any equipment with computer chips that store the year portion of the date as just two digits (for example, 98 for 1998). Systems using this two-digit approach will not be able to determine whether "00" represents the year 2000 or 1900. The problem, if not corrected, will make those systems fail altogether or, even worse, allow them to generate incorrect calculations causing a disruption of normal operations. The Company has created a company-wide Year 2000 team to identify and resolve Year 2000 issues associated either with the Company's internal systems or the products and services sold by the Company. As part of this effort, the Company is communicating with its main suppliers of technology products and services regarding the Year 2000 status of such products or services. The Company has identified and tested its main internal systems. The Company expects to complete implementation of needed Year 2000-related modifications to its information systems by the end of the third quarter of 1999. The Company has also assessed its internal non-information technology systems, and expects to complete testing and any needed modifications to these systems by the end of the third quarter of 1999. 19 The Company's total cost relating to these activities has not been and is not expected to be material to the Company's financial position, results of operations, or cash flows. The Company believes that necessary modifications will be made on a timely basis. However, there can be no assurance that there will not be a delay in, or increased costs associated with, the implementation of such modifications, or that the Company's suppliers will adequately prepare for the Year 2000 issue. It is possible that any such delays, increased costs, or supplier failures could have a material adverse impact on the Company's operations and financial results, by, for example, impacting the Company's ability to deliver products or services to its customers. The Company expects to finalize its assessment of and contingency planning for potential operational or performance problems related to Year 2000 issues with its information systems by the end of the third quarter of 1999. The Company's Year 2000 effort has included testing products currently or recently on the Company's price list for Year 2000 issues. Generally, for products that were identified as needing updates to address Year 2000 issues, the Company has prepared or is preparing updates, or has removed or is removing the product from its price list. Some of the Company's customers are using product versions that the Company will not support for Year 2000 issues; the Company is encouraging these customers to migrate to current product versions that are Year 2000 ready. For third party products which the Company distributes with its products, the Company has sought information from the product manufacturers regarding the products' Year 2000 readiness status. Customers who use the third-party products are directed to the product manufacturer for detailed Year 2000 status information. On its Year 2000 web site at www.es.com/investor/y2k_corp.html, the Company provides information regarding which of its products are Year 2000 ready and other general information related to the Company's Year 2000 efforts. The Company's total costs relating to these activities has not been and is not expected to be material to the Company's financial position or results of operations. Additionally, there can be no guarantee that one or more of the Company's current products do not contain Year 2000 date issues that may result in material costs to the Company. FORWARD-LOOKING STATEMENTS 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, including, among others, those statements preceded by, followed by or including the words "believes," "expects," "anticipates" 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, 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. TRADEMARKS USED IN THIS FORM 10-Q AccelGALAXY, AccelGMX, Digistar, E&S, E&S Lightning 1200, FuseBox, Harmony, MindSet, REALimage, RAPIDsite, StarRider, and Virtual Studio System are trademarks or registered trademarks of Evans & Sutherland Computer Corporation. All other product, service, or trade names or marks are the properties of their respective owners. 20 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 49% of the Company's total sales in the six months ended July 2, 1999 are concentrated in the United Kingdom, continental Europe and Asia. The Company manages its exposure to changes in foreign currency exchange rates by entering into most of its sales and purchase contracts for products and materials in U.S. dollars. Occasionally, the Company enters into sales and purchase contracts for products and materials denominated in currencies other than U.S. dollars and in those cases the Company enters into foreign exchange forward sales or purchase contracts to offset those exposures. Foreign currency purchase and sale contracts are entered into for periods consistent with related underlying exposures and do not constitute positions independent of those exposures. The Company does not enter into contracts for trading purposes and does not use leveraged contracts. As of July 2, 1999, the Company had no material sales or purchase contracts in currencies other than U.S. dollars and had no foreign currency sales or purchase contracts. The Company reduces its exposure to changes in interest rates by maintaining a high proportion of its debt in fixed-rate instruments. As of July 2, 1999, 84% of the Company's total debt was in fixed-rate instruments; however, the Company has a revolving line of credit that provides for borrowings by the Company of up to $20.0 million. The borrowings bear interest at a variable rate at the prevailing prime rate minus 1.0% or the LIBOR rate plus 1.0%. If the Company were to borrow all of the $20.0 million of the revolving line of credit and the $6.6 million of foreign lines of credit, 41% of the Company's total debt would be in fixed-rate instruments. 21 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 20, 1999. 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. Mr. Stewart Carrell was re-elected as a Director and other continuing Directors are: Peter O. Crisp, Ivan E. Sutherland, Gerald S. Casilli and James R. Oyler. The matters described below were voted on at the meeting and the results are as follows: 1. Election of Stewart Carrell to serve until the 2002 Annual Meeting of Stockholders For Against 8,103,359 195,368 2. Amendment to the Evans & Sutherland 1998 Stock Option Plan to increase the aggregate number of shares of the Company's common stock available for grant under the Plan from 400,000 shares to 850,000 shares For Against Abstain Non-Vote 4,926,311 3,202,962 169,448 6 3. The ratification of KPMG LLP as independent auditors of the Company for the fiscal year ending December 31, 1999 For Against Abstain Non-Vote 8,290,299 5,647 2,781 - Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits Exhibit No. Description 10.1 Master Agreement for Electronic Manufacturing Services, dated as of June 3, 1999, between Evans & Sutherland Computer Corporation and Sanmina Corporation 27.1 Financial Data Schedule (filed as part of electronic filing only) (b) Reports on Form 8-K None. 22 SIGNATURE 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 Date August 16, 1999 By: /s/ Mark C. McBride ------------------------------------ Mark C. McBride, Vice President, Corporate Controller and Corporate Secretary (Principal Financial Officer) 23 EX-10.1 2 MASTER AGREEMENT FOR MANUFACTURING SERVICES SANMINA CORPORATION, EVANS & SUTHERLAND COMPUTER CORPORATION MASTER AGREEMENT FOR ELECTRONIC MANUFACTURING SERVICES This Master Agreement for Electronic Manufacturing Services (the "Agreement") is made and entered into effective as of June 3, 1999, by and between Sanmina Corporation, a Delaware corporation ("Sanmina") and Evans & Sutherland Computer Corporation, a Utah Corporation ("Customer" or "E&S"). RECITALS Sanmina and E&S have entered into an Asset Purchase Agreement dated concurrently with the date of this Agreement (the "Purchase Agreement"), pursuant to which Sanmina is acquiring certain assets associated with E&S' Salt Lake City, Utah prototype, printed circuit board and other electronic assemblies manufacturing operation (the "Electronics Manufacturing Operation"). In connection with the execution and performance of the Purchase Agreement, and as a condition and inducement to the parties' undertakings therein, this Agreement is being executed to provide for a continuing relationship between Sanmina and E&S, pursuant to which Sanmina will perform manufacturing services for E&S, upon the terms and conditions set forth herein. AGREEMENT I. Manufacturing Services to be Performed A. Products. The products covered by this Agreement (collectively the "Products") are those electronic products and assemblies, including printed circuit boards, prototypes and Legacy Products (as defined below) which Customer may desire to have Sanmina manufacture for Customer during the term of this Agreement. "Legacy Products" means those electronics products, boards and assemblies having no identifiable, forecastable demand (i.e., driven solely by discreet orders) which were previously produced at the Electronics Manufacturing Operation, for which Customer may need replacements or additional inventory. B. Manufacturing Services. During the term of this Agreement, and in accordance with the provisions hereof, Sanmina will manufacture and sell Products to Customer. C. Scope of Agreement. All manufacturing and sales of Products by Sanmina, its subsidiaries and affiliates (collectively referred hereinafter as "Sanmina") for and to Customer during the term of this Agreement shall be governed by and subject to the terms and conditions of this Agreement. II. Orders and Acceptances for Products A. Purchase Orders and Acceptances. Customer will purchase Products by issuing purchase orders ("Order" or "Orders") to Sanmina. Orders will contain such things as quantity, prices, specified delivery dates, specifications, and Product number or designation, consistent with the terms of this Agreement. Repeat Orders for Products may initially be placed by electronic transmission, provided that Customer will make commercially reasonable efforts to send a confirmational written Order to Sanmina (except as otherwise agreed) within one week after the electronic order. Blanket Orders may be placed, with subsequent electronic or written instructions to authorize shipment and delivery of Products, up to the maximum quantities covered by the blanket Orders. Sanmina will sign and return written confirmation of each Order within five business days after receipt. All Orders and acceptances relating to Products will be governed by the terms of this Agreement, and nothing contained in any Order or acceptance will in any way modify the terms or conditions of this Agreement, unless expressly agreed to in writing by Sanmina and Customer. Sanmina and Customer hereby give notice of their objection to any additional or different terms. B. Placement of Orders; Delivery of Forecasts. Upon execution of this Agreement, Customer will submit an Order for Products deliverable over the first three months of the term of this Agreement. Thereafter, Customer will provide Orders to Sanmina on a monthly basis, including orders for Products to be delivered in the third month following the date of the Order, resulting in a rolling three month period covered by Orders. Upon execution of this Agreement, and on a monthly basis thereafter, concurrently with the submission of the monthly Orders referenced above, Customer will provide a rolling nine month forecast of Customer's anticipated Product purchases, for the nine month period immediately following the three month period covered by submitted Orders. Obligations to purchase Products, and any liability of the parties with respect to anticipated Product requirements, will arise only as actual Orders are submitted to Sanmina, with the sole exception that with respect to any long lead-time parts for which a forecast would cause procurement activity as provided herein, Customer shall have those obligations set forth in Section III below. Actual Orders may be different from forecasted numbers. Orders may be submitted other than at the monthly intervals provided above, consistent with the terms of this Agreement. Where appropriate, Customer will level load requirements for certain Products in order to provide a steady flow of Product to Customer and a steady production schedule for Sanmina. Sanmina will review forecasts provided by Customer and advise Customer if Sanmina anticipates that it will be unable to achieve the Product volumes reflected in such forecasts. C. Acceptance of Orders. Sanmina will accept all orders for Products submitted by Customer in accordance with the terms and conditions of this Agreement up to the greater of (i) 125% of the amount specified in the forecast delivered in the preceding month with respect to the period covered by such Orders, or (ii) the amount of Products for which Sanmina has purchased Materials, as provided herein. Sanmina will use its reasonable best efforts to accept Orders submitted by Customer for Products in excess of the committed volume levels. Orders submitted in excess of the committed quantity levels that Sanmina is unable to accept must be rejected within five business days after receipt by Sanmina. III. Materials Planning, Procurement Process and Liabilities A. Master Production Schedule. Based on the Orders and forecasts received from Customer as provided above, Sanmina will on a monthly basis generate a Master Production Schedule ("MPS") for a rolling twelve month period. This MPS will define the master plan on which Sanmina will base its procurement, internal capacity projections and commitments. The MPS created as described above will not impose any liability on either Sanmina or Customer, except that with respect to any long lead-time parts and that portion of the MPS related to firm orders as described in Section II paragraph B of this document, for which the MPS would cause procurement activity as provided herein, Customer shall have those obligations set forth in this Section III. B. Material Procurement Schedule. Sanmina will process the MPS through industry-standard MRP software that will convert the MPS reflecting Customer's Orders and forecasts into requirements for components utilized to make the applicable Products. In doing so, Sanmina will off-set the requirements for receipt of components or materials by allowing for the time required to build the Products per the following times: 1. In-Circuit Test/Functional Test - 5 Working Days 2. Assembly - 7 Working Days 3. Kitting - 2 Working Days 4. Material Handling - 2 Working Days Per this Agreement, Sanmina will plan and schedule material to be at Sanmina eleven working days before the Products are due to ship to Customer where no test is required, and sixteen working days before the Products are due to ship to Customer where testing is required. C. Sanmina Orders for Materials. Sanmina will release (launch) orders to suppliers of materials required in connection with the production of Products a reasonable period of time prior to the anticipated date that the material is needed (as set forth in the preceding paragraph). When these orders are launched will depend on the vendor lead time determined by Sanmina from time to time and maintained as a parameter of Sanmina's manufacturing or materials planning systems. Sanmina, through its MRP system, will also issue an instruction ("MRP signal") to its procurement group to buy a part approximately seven days before the order is due to be placed in accordance with this paragraph. Unless otherwise directed by Customer, Sanmina will purchase components for Products in accordance with a vendor list approved by Sanmina and Customer ("AVL"). In the event Sanmina for any reason cannot purchase any components from an approved vendor named on the AVL, Sanmina may purchase such components from an alternate vendor with the prior written consent of Customer. In no event will Sanmina, without the prior written consent of Customer, be authorized to purchase (or to impose obligations on Customer with respect to, pursuant to Section III of this Agreement), materials, parts and components beyond those necessary to support Orders actually delivered by Customer, with the exception of minimum quantity requirements imposed by vendors for parts being procured by Sanmina for Customer, and any anticipated Orders for the next 30 day period, as reflected in any forecasts delivered by Customer to Sanmina. Proto-type and Quick-turn Orders will not appear on the MPS, but will be managed on a manual basis due to the critical time factor and lot size of these orders. Customer agrees that it will be liable for all materials , including minimum purchase requirements, purchased for any Quick-turn or Proto-Type Order that Customer places with Sanmina. D. Materials Classifications and Periods of Supply. When Sanmina places an order with its suppliers in accordance with the preceding paragraph, Sanmina will order parts in various quantities (defined in periods-worth-of-supply) that are defined by the part's ABC classification. This classification, as well as the expected distribution or characteristics of various classes of parts, and the periods-worth-of-supply ("Periods-of-Supply") that will be bought for each class of part, are shown on the following table:
ABC Classifications, Descriptions and Periods-of-Supply - --------------------------- -------------------------- -------------------------- -------------------------- Part Class Expected Expected Periods Worth of Percentage of Total Percentage of Total Supply to be Bought Parts Value (of Gross With Each Order Requirements) A 3% 80% 4 Weeks - --------------------------- -------------------------- -------------------------- -------------------------- B 17% 17% 3 Months - --------------------------- -------------------------- -------------------------- -------------------------- C 80% 3% 12 Months - --------------------------- -------------------------- -------------------------- --------------------------
E. Materials Quantities Criteria. In addition to ordering parts for various Periods-of-Supply as referenced above, Sanmina will order parts according to appropriate minimum-buy quantities, tape and reel quantities, and multiples of packaging quantities. F. Customer Liability for Materials. In the event that Sanmina procures (other than pursuant to the terms of the Purchase Agreement) components, parts or materials unique to, and specifically for use in, Products ordered or forecasted by Customer (collectively "Materials"), consistent with the procurement procedures set forth above, and any such Materials become obsolete or surplus to Customer, so as to be unusable in current Orders for Products from Customer, then Sanmina will provide to Customer prompt notice of such obsolescence/surplus, and the potential cost to Customer hereunder as a result of such obsolescence or surplus. Sanmina shall use its reasonable best efforts (for a period of at least four weeks) to cancel any outstanding orders for any such Materials, use excess/uncancelable Materials for the manufacture of products for other customers, and return such Materials back to the original supplier or sell such Materials to the original supplier or a third party at the original purchase price, or on such other terms as Supplier and Customer may agree upon. After the exhaustion of such remedies, Sanmina will be entitled to: (a) sell to Customer any remaining obsolescent/surplus Materials, at an amount equal to 116% of Sanmina's out-of-pocket costs therefor (the "Materials Transfer Price"); and (b) invoice Customer for (i) the amount by which the Materials Transfer Price for any such Materials which Sanmina was able to sell to third parties as provided above exceeded the price obtained from such third parties with respect thereto, and (ii) the amount of any re-stocking or other fees charged to Sanmina with respect to any order cancellations and returns of obsolete/surplus Materials. Customer's obligations with respect to obsolete/surplus Materials as set forth herein shall not extend to any materials acquired by Sanmina pursuant to the terms of the Purchase Agreement. Customer's only obligations with respect to such Materials shall be as set forth in the Purchase Agreement. G. Acquisition of Tooling. If necessary and with the Customer's written consent, Sanmina will acquire any necessary tools and tooling to fulfill any Orders. All such tooling required by Sanmina shall remain the Customer's property, and Sanmina shall return such tooling (normal wear and tear excepted) to Customer upon request, following the completion of the relevant Order or the termination of this Agreement. Responsibility for the cost of tooling acquired pursuant to the terms of the Purchase Agreement shall be as set forth in the Purchase Agreement. Except as otherwise provided herein or agreed by the parties hereto, Customer will be responsible for the cost of all other tools and tooling required to be acquired by Sanmina hereunder. When requested by Customer, and agreed to in writing by Sanmina and Customer, the cost of such tooling will be amortized over the estimated volume of Products to be produced with such tooling. H. Limitations on Sanmina's Rights to Build Ahead. Although Orders cover up to 90 days and forecasts cover longer periods, Sanmina is not authorized to make unilateral decisions on the amount of Products to be built more than 30 days prior to scheduled delivery date, with the exception of agreed upon Kanban levels. Lot sizes and build-ahead quantities will be the result of a mutual agreement between Sanmina and Customer. IV. Reschedules A. Rescheduling Matrix. Customer may reschedule delivery dates for Products subject to the following matrix: Notice Prior to Percent of Original Original Quantity that can be Delivery Date Rescheduled 0 to 30 days 0% 31 to 60 days 25% 61 to 90 days 50% Beyond 90 days 100% As an example, if Customer notifies Sanmina in writing between 31 and 60 days prior to the scheduled deliver date of certain Products, Customer may reschedule the delivery of a maximum of 25% of the total amount of such Products. B. Revised Delivery Dates. Deliveries rescheduled as provided above shall be deferred to such date or dates, within 60 days following the original delivery date, as Customer may reasonably determine. A change in the delivery date of any Product for a period exceeding 60 days in the aggregate shall be deemed a cancellation by Customer with respect to such Product. V. Revisions In the event Customer requests an engineering change to a Product, Sanmina will notify Customer of any impact on the cost and/or scheduled delivery of such Product within five business days of the receipt of Customer's request. Unless Customer consents to the amended notification from Sanmina, the requested engineering change will be deemed canceled. Any changes (whether up or down) in the cost of Products resulting from an engineering change order ("ECO") will be applied to the applicable purchase price for such Products. Sanmina will charge a $250.00 administrative fee per ECO to partially cover Sanmina's processing costs involved in processing the ECO. VI. Cancellations Customer may cancel any Order, with the exception of Quick-turn and /or Proto-type Orders, by notifying Sanmina in writing at least 30 days prior to the delivery date of such Order. Within 10 days of such cancellation, Sanmina will provide Customer with the amount of Customer's obligations with respect to Materials and labor costs associated with the canceled order, as provided in Section III above. Customer will pay such cancellation amount to Sanmina on a net 30 day basis. After receipt of such cancellation amount, Sanmina shall deliver to Customer, at Customer's expense, any Materials purchased but unused as a result of such cancellation or scrap such Materials, at the discretion of Customer. VII. Product Pricing A. Initial Prices; Adjustments. The initial prices for Products listed in Exhibit A attached hereto will be as set forth in Exhibit A. For Products not listed in Exhibit A, or with no prices established therefor, the prices shall be established through the Sanmina-Customer quote process. Sanmina will respond to Customer's requests for quotes and proposals within 14 days after receipt of all necessary data. The initial prices for Products shown in Exhibit A will be evaluated on a quarterly basis for potential changes, in accordance with prior agreements with Customer. Customer expects improvements in efficiencies, material cost reductions and innovative processes to contribute to these reductions. Prices otherwise established as provided herein are subject to adjustment as provided herein to reflect ECOs and variations in the market prices of Materials and other components. Any cost reductions realized by Sanmina due to a reduction in material or labor costs or yield improvements will be shared equally with Customer at the time such reductions are realized. Any price decreases will apply immediately to all new Orders Price increases will apply to new Orders issued (i) after agreement by the parties of the price increase, or (ii) more than thirty (30) days following Customer's receipt of written notice of the increase. B. Computation of Prices; Taxes. All prices of Products are F.O.B. Sanmina's facility. All prices will be quoted and paid in U.S. dollars. All prices applicable to Products purchased pursuant to the terms of this Agreement will include all charges for packaging, packing, crating, storage and shipping and transportation costs to Customer's facility or other designated ship-to location, except as otherwise provided herein. Prices do not include any federal, state or local sales, use, excise VAT and similar taxes, that may be applicable to the Products. When Sanmina has the obligation to collect taxes, the appropriate amount may be added to Customer's invoice and will be paid by Customer unless Customer provides Sanmina with a valid tax exemption certificate authorized by the appropriate taxing authority and quantities. C. Most Favored Customer Pricing. In no event are the prices applicable to Products ordered by Customer hereunder to be higher than the lowest prices then offered by Sanmina to its most favored customers, for substantially similar products and quantities. VIII. Shipping and Delivery A. Delivery Terms. Customer's Orders will state delivery dates for Products in accordance with the terms of this Agreement, and time will be of the essence in meeting Customer's delivery requirements. Unless otherwise agreed in writing by the parties, delivery of all Products under this Agreement shall be F.O.B. Sanmina's plant, at which time risk of loss and title shall pass to Customer. B. Shipping. Sanmina will transport Products by the method specified by Customer, to Customer's address or to an address specified in writing by Customer. All freight, insurance and other shipping expenses from the delivery point shall be borne by Customer. All Products delivered pursuant to the terms of this Agreement will be suitably packed for shipment in a commercially reasonable manner in Sanmina's standard shipping cartons, unless otherwise designated by Customer. When special packaging is requested or, in the opinion of Sanmina, is required under the circumstances, the additional expenses related to such special packaging will be borne by Customer. Each shipping container will be marked to show Customer's Order number, Product description and identifying numbers, and quantity contained therein. If Products are delivered more than five days in advance of the specified delivery date, Customer may either return such Products at Sanmina's risk and expense for subsequent delivery on the specified delivery date or retain such Products and make payment when it would have been due based on the specified delivery date. If Products are returned to Sanmina then reshipped to Customer, Sanmina will bear the cost and risk of loss associated with such return and reshipment. In the event Products will be delivered more than five business days late, Customer may request such Products to be shipped and delivered via an expedited method of delivery. In such event, Sanmina agrees to pay or reimburse Customer for all transportation charges in excess of the normal charges. IX. Payment and Invoicing Payment terms will be net 30 days from invoice date, which will be no earlier than the date of delivery to Customer of the Products covered thereby. Sanmina will provide Customer with a credit limit]. In the event that Customer exceeds this credit limit or has outstanding invoices for more than 60 days, Sanmina may stop shipments of Products to Customer until Customer makes sufficient payment to bring its account consistent with terms outlined above. In the event of a material default by Customer of its payment obligations hereunder, Sanmina may reduce the credit limit, upon written notice to Customer. X. Quality Standards and Warranty Sanmina warrants that the Products will be manufactured in a good and workmanlike manner, consistent with industry standards, and will conform to and perform in accordance with applicable specifications, and that the Products (excluding components purchased from third-party vendors ("Vendor Components")) will be free from any defects in workmanship for a period of one year from the date of delivery to Customer. Warranty on Vendor Components is limited to the warranty provided by the component manufacturer. Sanmina will pass on any unexpired warranty for such Vendor Components provided by third-party vendors or passed on by such third-party vendors from the original manufacturers until the expiration of such warranties. As Customer's sole remedy under the warranty, Sanmina will, at no charge, rework, repair and retest, or replace, any Products returned to Sanmina and found not to be manufactured in accordance with the applicable specifications or that are otherwise defective. Warranty coverage does not include failures due to Customer's design, the supply or selection of improper or defective parts or materials designated by Customer, Customer requested changes, damages caused by Customer's misuses, unauthorized repair or negligence. Sanmina does not assume any liability for expendable items such as lamps and fuses. The performance of any repair or replacement by Sanmina does not extend the warranty period for any Products beyond the period applicable to the Products originally delivered. EXCEPT FOR THE ABOVE EXPRESS WARRANTIES, SANMINA MAKES AND THE CUSTOMER RECEIVES NO WARRANTIES ON THE PRODUCTS, EXPRESS, IMPLIED, STATUTORY, OR OTHERWISE, AND SANMINA SPECIFICALLY DISCLAIMS ANY IMPLIED WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. XI. Service of Legacy Products During the term of this Agreement, Sanmina will continue to manufacture and repair all Legacy Products as Customer may request, in accordance with such pricing schedule as may be mutually agreed upon by the parties from time to time, consistent with the Sanmina-Customer quote process referenced in Section VII above. XII. Design Services During the term of this Agreement, Sanmina will provide design services to Customer, in connection with the design and development of prototype and production electronic circuit boards, assemblies and Products, at such prices and on such terms as may be mutually agreed upon by the parties from time to time, consistent with the Sanmina-Customer quote process referenced in Section VII above. XIII. Minimum Work Commitment - "Take or Pay" Provision A. Minimum Order Requirement. During each of the three one year periods commencing from the effective date of this Agreement, Customer will undertake to submit to Sanmina Orders for Products and design services having an aggregate purchase price of at least $22,000,000 (subject to adjustment as provided below). If in any of such one year periods Customer should fail to submit Orders to Sanmina in such minimum aggregate amount, then Customer will make payments to Sanmina as provided below (and such payment obligations will be Customer's sole liability and Sanmina's sole remedy with respect to any such failure). B. Consequence of Missing First or Second Year Targets by More Than 20%. If, during the first or second one year period commencing from the effective date of this Agreement, Orders are submitted to Sanmina in an aggregate amount of less than 80% of the targeted minimum amount (or $17,600,000 in the first year), then within 60 days following the end of such one year period, Customer will pay to Sanmina a sum equal to the amount of such shortfall, multiplied by 25% (representing Sanmina's assumed profit margin with respect to the Orders represented by the shortfall). For example, if during the first year Customer submitted Orders to Sanmina aggregating $15,000,000, Customer would pay to Sanmina the sum of $7,000,000 x .25 = $1,750,000. C. Consequence of Missing First or Second Year Targets by Less Than 20%. If, during the first or second one year periods commencing from the effective date of this Agreement, Orders are submitted to Sanmina in an aggregate amount of at least 80% of the targeted minimum amount, then the amount of the shortfall will be added to the minimum commitment applicable to the following year, and any amount to be paid by Customer to Sanmina would be determined after completion of the following year. For example, if during the first year Customer submitted Orders to Sanmina aggregating $20,000,000, then the minimum order requirement applicable to the second year would be $24,000,000. D. Consequence of Missing Third Year Target. If, during the third one year period commencing from the effective date of this Agreement, Orders are submitted to Sanmina in an aggregate amount of less than the targeted minimum amount, then within 60 days following the end of such one year period, Customer will pay to Sanmina a sum equal to the amount of such shortfall, multiplied by 25% (representing Sanmina's assumed profit margin with respect to the Orders represented by the shortfall). For example, if during the third year Customer submitted Orders to Sanmina aggregating $20,000,000, and, as a result of a carry-over of $2,000,000 from the second year the minimum target applicable to the third year were $24,000,000, then Customer would pay to Sanmina the sum of $4,000,000 x .25 = $1,000,000. E. Carry-Over of Orders in Excess of Minimum. If, during the first or second one year periods commencing from the effective date of this Agreement, Orders are submitted to Sanmina in an aggregate amount in excess of that required to satisfy the minimum obligation set forth above (i.e., having an aggregate purchase price of $22,000,000 or such lesser amount which, when added to the excess Orders submitted during the prior year, would satisfy the minimum annual $22,000,000 requirement), then the amount by which the aggregate purchase price of such Orders exceed such targeted minimum amount (the "Surplus Amount") will be counted toward satisfaction of Customer's minimum Order requirement for the next one year period. F. Sale of Operations; Counting of Orders. If, at any time during the three year period that the requirements of this Section XIII are in effect, Customer sells any divisions or operations which have previously submitted Orders to Sanmina hereunder, then any Orders subsequently submitted to Sanmina by the purchaser with respect to products Sanmina is building for any such division or operation will be counted toward the satisfaction of the targeted minimum Order requirement hereunder, as if such Orders had been submitted hereunder by Customer to Sanmina. XIV. Right of First Refusal As Customer develops new products that require manufacturing of printed circuit boards or other electronics assemblies or components, or puts out to bid the manufacturing rights to the printed circuit boards or other electronics components of existing products, then to the extent such manufacturing rights are not contractually committed to any other party, and Sanmina demonstrates to the satisfaction of Customer that it can satisfactorily perform such manufacturing operations in terms of price competitiveness, quality, timeliness and production capacity, Customer will extend to Sanmina the right to perform such manufacturing services, on such terms as Customer may in its discretion determine to be appropriate. XV. Testing During the term of this Agreement, and in accordance with the following requirements, Sanmina will continue to maintain and support all in-circuit tests developed for the S790 test platform, and E&S will support, sustain and develop all functional test platforms, diagnostics and post production test hardware: 1. System Requirements. Sanmina will maintain the S770 and S790 systems. Sanmina has the option of converting to the S790 system, and Sanmina will convert all S770 fixtures and programs to the S790 as required by Order, thereby eliminating the requirement to maintain the S770 system once all S770 fixtures and programs have been converted. The conversion will be at E&S expense. 2. Fixture Requirements. a. Sanmina will preserve and maintain all S770 and S790 test fixtures in good working order. b. In the event that Customer requires changes to current test fixtures, Sanmina will provide services necessary to implement and maintain changes. In the event that the changes will require a new test fixture, Sanmina has the option to move the test to a different platform or system. Any of the above actions pursuant to this paragraph 2(b) will be at the expense of E&S. 3. Test Program Requirements. Sanmina will preserve and maintain all S790 test programs in good working order. In the event that Customer requires changes to current test programs, Sanmina will provide services necessary to implement and maintain changes, at E&S' expense. Prudent test program archival and back-up processes will be secured to prevent the loss of any test programs. 4. Status of Tools and Tooling. All tools and tooling relating to test fixtures and programs provided to and maintained by Sanmina will remain the property of Customer. XVI. Indemnification A. By Customer. Customer will indemnify and hold harmless Sanmina from and against any and all losses, damages, costs, liabilities or expenses (including court costs and the reasonable fees of attorneys and other professionals) to the extent that such losses, costs, liabilities or expenses arise out of, or in connection with, in whole or in part, (a) infringements of any patent, trademark, copyright or other intellectual property of Customer or (b) any negligence or willful misconduct by Customer, its employees or agents and subcontractors, including but not limited to any such act or omission that contributes to: (i) any bodily injury, sickness, disease, or death; (ii) any injury or destruction to tangible or intangible property of the injured party or any loss of use resulting therefrom; or (iii) any violation of any statute, ordinance or regulation. B. By Sanmina. Sanmina will indemnify and hold harmless Customer from and against any and all losses, damages, costs, liabilities and expenses (including court costs and the reasonable fees of attorneys and other professionals) to the extent that such losses, costs, liabilities or expenses arise out of, or in connection with, in whole or in part, (a) Sanmina having utilized in the manufacture of any Products any intellectual property rights of others, where such use has not been required by the specifications or instructions provided to Sanmina by Customer or (b) any negligence or willful misconduct by Sanmina, its employees or agents and subcontractors, including but not limited to any such act or omission that contributes to: (i) any bodily injury, sickness, disease, or death; (ii) any injury or destruction to tangible or intangible property of the injured party or any loss of use resulting therefrom; or (iii) any violation of any statute, ordinance or regulation. . XVII. Quality, Inspection and Reporting A. Inspection of Work. Customer will have the right at all reasonable times, upon reasonable advance notice, to visit Sanmina's plant to inspect the work performed on Products. Inspection of the work shall not relieve Sanmina of any of its obligations under this Agreement or any Orders. Sanmina will provide Customer with all mutually agreed upon quality reports at agreed upon intervals. Sanmina reserves the right to restrict Customer's access to the plant or any area within it as necessary to protect confidential information of Sanmina or its other customers. B. Inspection as Condition of Acceptance. If Customer demands inspection of any Products prior to the delivery of such Products as a condition of acceptance of such Products, Customer must inspect the Products within 48 hours of a transmission of written notice by facsimile or other electronic or telephonic delivery system from Sanmina informing Customer that the Products are ready to be shipped. C. Quality Improvement Program. Customer and Sanmina will implement a joint quality improvement program that will develop and implement continuous Product quality improvements. XVIII. Term and Termination A. Initial Term; Extension. This Agreement shall be in effect for a period of 36 months commencing from the effective date hereof as set forth above, unless earlier terminated or extended as provided herein. The parties may, by mutual agreement, extend this Agreement at any time prior to its expiration or termination. Except as otherwise specifically provided herein, in the event of the expiration or earlier termination of this Agreement, the Agreement shall remain in full force and effect with respect to, and shall be applicable to, any Orders issued by Customer and accepted by Sanmina prior to such expiration or termination. B. Termination. Either party may, without penalty, terminate this Agreement upon 60 days prior written notice to the other party in either one of the following events: 1. the other party materially breaches this Agreement and such breach remains uncured for thirty (30) days following written notice of breach from the non breaching party; or 2. the other party becomes involved in any voluntary or involuntary bankruptcy or other insolvency petition or proceeding for the benefit of its creditors, and such petition, assignment or proceeding is not dismissed within sixty (60) days after it was filed. C. Effect of Termination. Upon the expiration or earlier termination of this Agreement, Sanmina will provide Customer with an invoice of amounts owed to Sanmina hereunder. In addition, Customer will be liable for all work-in-progress at its value at the time of cancellation and any outstanding charges. Any work-in-progress and/or finished goods built beyond the mutually agreed-upon schedule will not be the responsibility of Customer. Upon termination, Customer will pay all invoiced charges in net thirty (30) days. XIX. Limitation of Liability IN NO EVENT WILL SANMINA OR CUSTOMER BE LIABLE FOR ANY SPECIAL, INDIRECT, CONSEQUENTIAL OR INCIDENTAL DAMAGES, HOWEVER CAUSED AND ON ANY THEORY OF LIABILITY, ARISING IN ANY WAY OUT OF THIS AGREEMENT. THIS LIMITATION WILL APPLY EVEN IF SUCH PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES, AND NOTWITHSTANDING ANY FAILURE OF ESSENTIAL PURPOSE OF ANY LIMITED REMEDY PROVIDED HEREIN. XX. Miscellaneous A. Governing Law. This Agreement will be governed by and interpreted under the laws of the State of Utah, without reference to conflict of laws principles. B. Jurisdiction. For any dispute arising out of this Agreement, the parties consent to personal and exclusive jurisdiction of and venue in the state and federal courts within Salt Lake County, Utah. C. Entire Agreement; Amendment and Waiver; Enforcement of Rights. This Agreement sets forth the entire agreement and understanding of the parties relating to the subject matter herein and merge all prior discussions between them. No modification of or amendment to this Agreement, nor any waiver of any rights under this Agreement, will be effective unless in writing signed by the party to be charged. The failure by either party to enforce any rights thereunder will not be construed as a waiver of any rights of such party. D. Assignment; Successors and Assigns. Neither party will have any right to assign its rights or obligations under this Agreement without the prior written consent of the other party. Subject to the foregoing, this Agreement, and the rights and obligations of the parties hereunder, will be binding upon, and inure to the benefit of, their successors and permitted assigns. E. Notices. Any required notices hereunder will be given in writing at the address of each party set forth on the signature pages hereof, or to such other address as either party may substitute by written notice to the other in the manner contemplated herein, and will be deemed served when delivered by facsimile or mail or when tendered in person. F. Force Majeure. Neither party will be liable to the other for any default hereunder if such default is caused by an event beyond such party's control, including without limitation acts or failures to act of the other party, strikes or labor disputes, component shortages, unavailability of transportation, floods, fires, governmental requirements and acts of God (a "Force Majeure Event"). In the event of threatened or actual non-performance as a result of any of the above causes, the non-performing party will exercise commercially reasonable efforts to avoid and cure such non-performance. Should a Force Majeure Event prevent a party's performance hereunder for a period in excess of ninety (90) days, then the other party may elect to terminate this Agreement by written notice thereof. G. Counterparts. This Agreement may be executed in two or more counterparts, each of which will be deemed an original and all of which together will constitute one and the same instrument. SANMINA: CUSTOMER: Sanmina Corporation Evans & Sutherland Computer Corporation By: /s/ Bertnard.J. Whitney By: /s/ William C. Gibbs Bernard J. Whitney, Executive William C. Gibbs, Vice President of Vice President and Chief Financial Corporate Development Officer Address: 355 East Trimble Road Address: 600 Komas Drive San Jose, California 95131 Salt Lake City, Utah 84108 EX-27 3 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY INFORMATION FROM THE EVANS & SUTHERLAND COMPUTER CORPORATION JULY 2, 1999 FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000276283 EVANS & SUTHERLAND COMPUTER CORPORATION 1,000 6-MOS DEC-31-1999 JAN-01-1999 JUL-02-1999 21,439 3,706 32,817 1,510 53,386 200,765 51,093 0 269,613 66,236 18,024 23,658 0 1,926 159,769 269,613 93,769 93,769 53,788 53,788 45,619 241 0 (4,601) (1,426) (3,175) 0 0 0 (3,289) (0.34) (0.34)
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