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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington,WASHINGTON, D.C. 20549
--------------------------
FORM 10-K
(Mark One)
[X](MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
[ ]2001
/ / 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
FOR THE TRANSITION PERIOD FROM ________________ TO ________________
COMMISSION FILE NUMBER 0-8771
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EVANS & SUTHERLAND
COMPUTER CORPORATION
(Exact nameName of registrantRegistrant as specifiedSpecified 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)Its Charter)
UTAH 87-0278175
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
600 KOMAS DRIVE, SALT LAKE CITY, UTAH 84108
(Address of Principal Executive (Zip Code)
Offices)
Registrant's telephone number, including area code: (801) 588-1000
Securities Registered Pursuantregistered pursuant to Section 12(b) of the Act:
"None""NONE"
Securities Registered Pursuantregistered pursuant to Section 12(g) of the Act:
Title of Class
Common Stock,TITLE OF CLASS
COMMON STOCK, $.20 par valuePAR VALUE
6% Convertible Debentures DueCONVERTIBLE DEBENTURES DUE 2012
Preferred Stock Purchase RightsPREFERRED STOCK PURCHASE RIGHTS
------------------------------
Indicate by check mark whether the Registrantregistrant (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
Registrantregistrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X/X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (ss. 229.405 of this chapter) is not contained herein, and will not be contained, to the
best of Registrant'sregistrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]/ /
The aggregate market value of the voting stockand non-voting Common Stock held by
non-affiliates of the Registrantregistrant as of February 27, 1998March 1, 2002 was approximately
$186,775,000.$33,242,000, based on the closing market price of the Common Stock on such date,
as reported by The Registrant had issued and outstanding 8,925,444Nasdaq Stock Market.
The number of shares of its common
stock on February 27, 1998.the registrant's Common Stock outstanding at
March 1, 2002 was 10,398,314.
DOCUMENTS INCORPORATED BY REFERENCE
Those sections or portionsPortions of the Registrant's 1997 Proxy Statement for itsthe 2002 Annual Meeting of Shareholders
to be held on May 21, 199816, 2002 are incorporated by reference into Part III hereof.
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2
EVANS & SUTHERLAND COMPUTER CORPORATION
FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2001
PART I
Item 1. Business 5
Item 2. Properties 15
Item 3. Legal Proceedings 15
Item 4. Submission of Matters to a Vote of Security Holders 17
PART II
Item 5. Market For Registrant's Common Equity and Related
Stockholder Matters 19
Item 6. Selected Consolidated Financial Data 20
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 22
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 42
Item 8. Financial Statements and Supplementary Data 43
Report of Management 44
Report of Independent Auditors 44
Consolidated Balance Sheets 45
Consolidated Statements of Operations 46
Consolidated Statements of Comprehensive Loss 47
Consolidated Statements of Stockholders' Equity 48
Consolidated Statements of Cash Flows 49
Notes to Consolidated Financial Statements 50
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 73
PART III
Item 10. Directors and Executive Officers of the Registrant 73
Item 11. Executive Compensation 73
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters 73
Item 13. Certain Relationships and Related Transactions 73
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K 74
Signatures 82
3
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4
FORM 10-K
PART I
ITEM 1. BUSINESS
GENERAL
Evans & Sutherland Computer Corporation (Evans("Evans & Sutherland, E&S(R)," "E&S," "we,"
"us," or the Company)"our") was founded by Drs. David C. Evans and Ivan E. Sutherland and
incorporated under the laws ofin the State of Utah on May 10, 1968. An
established high-technology company, E&S becameis a publicly ownedworldwide leader in providing
visual system solutions for simulation. E&S visual systems are used in military
and commercial training simulators, planetariums and interactive domed theaters,
as well as engineering and other applications. E&S is unique among visual
simulation companies in that it offers a complete range of solutions from low
cost, PC-based products to the most advanced systems in the world. All E&S
products are backed by unrivaled customer service and support, ensuring
customers low life-cycle cost and the best value in visual simulation.
E&S's principal offices are located at 600 Komas Drive, Salt Lake City, Utah
84108, and its telephone number is (801) 588-1000. E&S's home page on the
Internet is www.es.com. You can learn more about E&S by reviewing SEC filings on
the E&S web site. The SEC also maintains a web site at www.sec.gov that contains
reports, proxy statements and other information regarding SEC registrants,
including E&S. E&S makes its web site content available for information purposes
only. It should not be relied upon for investment purposes, nor is it
incorporated by reference into this Form 10-K.
During 2001, our core computer graphics technology was shared among three
business groups:
(1) Simulation Group, which produces a full range of image generators,
software, databases, and display systems for military and commercial
simulation;
(2) REALimage Solutions Group, which provides graphics acceleration
technology for PC-based simulation, the professional digital content
creation (DCC) market, and video processing technology for animation,
broadcasting, and netcasting applications; and
(3) Applications Group, which leverages our core technologies and applies
them to other growth markets, such as digital theaters and visualization
software for real estate development applications.
RESTRUCTURING
Early in 2001, we announced our intention to spin out or sell our REALimage
Solutions Group. In the third quarter of 2001, E&S sold the REALimage Group to
Real Vision, Inc., a Japanese company that has been a partner with E&S in 1978.the
development of technology for professional video applications. The Companysale was for
a maximum value of $12 million, consisting of cash of $6.3 million plus future
royalties, on a when and if earned basis, of up to $6 million for REALimage
technology, other assets, and the performance of certain development support
during a seven-month transition period leading to closing the transaction in
April 2002. Real Vision has its principal executiveindicated it will continue the development of the
technology, and operations facilitiesE&S is maintaining a technical staff to support Real Vision in
Salt Lake City Utah,during the transition period. Shortly after the sale of the
REALimage Group, E&S closed its offices in Seattle, Washington, and San Jose,
California.
Throughout 2001, we had been actively seeking sale or spin-off opportunities
for our RAPIDsite-TM- visualization solutions business which is part of the
Applications Group. The general economic downturn made it difficult to sell this
business. In December, we decided to discontinue the RAPIDsite business and
incorporate its technology into the core simulation business.
In the third quarter of 2001, we initiated a restructuring plan focused on
reducing the operating cost structure of E&S. As part of the plan, we recorded a
36-acre campuscharge of $2.1 million relating to a reduction
5
in force of approximately 80 employees. In the fourth quarter of 2001, we
extended the restructuring plan initiated in the Universitythird quarter. As part of Utah Research Park.the
plan, we recorded a charge of $0.7 million relating to a reduction in force of
approximately 12 employees. We estimate that this restructuring plan will reduce
expenses by $8.2 million per year going forward. As of December 31, 2001, we had
paid $1.9 million in severance benefits. The Company also has officesmajority of the remaining benefits
will be paid out over the next two quarters. The charge was recorded in
Boston,
Massachusetts; Dallas, Texas; Orlando, Florida; Beijing, China; Dubai, United
Arab Emirates; Horsham, England;accordance with Emerging Issues Task Force Issue 94-03 "Liability Recognition
for Certain Employee Termination Benefits and Munich, Germany.
A leaderOther Costs to Exit (Including
Certain Cost Incurred in computera Restructuring)" and Staff Accounting Bulletin
No. 100, "Restructuring and Impairment Charges".
In the third quarter of 1999, E&S initiated a restructuring plan focused on
reducing the operating cost structure of its REALimage Solutions Group. As part
of the plan, E&S recorded a charge of $1.5 million relating to 28 employee
terminations, including 17 employees in San Jose and 11 employees in Salt Lake
City. The charge was recorded in accordance with Emerging Issues Task Force
Issue 94-03, "Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit (Including Certain Costs Incurred in a Restructuring)."
During 2000, after all employee severance costs were incurred, E&S reversed
$0.8 million of the restructuring charge as a result of certain employees being
transferred within E&S rather than being terminated and estimated severance and
related charges being lower than expected for the terminated employees.
FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS
This annual report, including all documents incorporated herein by
reference, includes certain "forward-looking statements" within the meaning of
that term in Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Exchange Act of 1934, as amended, including, among others,
those statements preceded by, followed by or including the words "estimates,"
"believes," "expects," "anticipates," "plans," "projects," and similar
expressions.
These forward-looking statements include, but are not limited to, the
following statements:
- the successful execution of the Big 6 programs by the end of 2002;
- we will generate $5 million of cash per quarter and will be profitable in
the second half of 2002;
- projections of sales and net income and issues that may affect sales or
net income;
- projections of capital expenditures;
- plans for future operations;
- financing needs or plans;
- plans relating to our products and services;
- Simulation Group will experience growth in its markets as simulation
training increases in value as an alternative to other training methods,
and as simulation training technology and cost-effectiveness improve;
- additional enhancements to iNTegrator will expand its functionality and
help secure E&S's dominant position in its main target markets, both
commercial and military simulation;
- E&S is able to compete effectively in the simulation market and will
continue to be able to do so in the foreseeable future;
- approximately two-third's of Simulation Group's 2001 backlog will be
converted to sales in 2002 and replaced with new orders;
6
- the Applications Group's new product will be launched in the first half of
2002;
- our properties are suitable for our immediate needs;
- total research and development spending will be lower in 2002 than in
2001;
- E&S will ultimately prevail in the litigation with Lockheed Martin
Corporation;
- E&S will not be liable for any further material liquidated damages and
late delivery penalties during 2002;
- existing cash, cash equivalents, borrowings available under E&S's various
borrowing facilities, other asset-related cash sources and expected cash
from future operations will be sufficient to meet E&S's anticipated
working capital needs, routine capital expenditures and current debt
service obligations for the next twelve months;
- the guarantees of E&S issued in connection with the services of our joint
venture entity, Quest Flight Training Ltd., to the UK Ministry of Defence
or other parties will not be called upon for payment or performance;
- revenue is expected to contract by 10% from 2001 to 2002; and
- assumptions relating to the foregoing.
Forward-looking statements are inherently subject to risks and
uncertainties, some of which cannot be predicted or quantified. Future events
and actual results could differ materially from those set forth in, contemplated
by, or underlying the forward-looking information. Our actual results could
differ materially from these forward-looking statements. In addition to the
other risks described in the "Factors That May Affect Future Results" discussion
under Item 7--Management's Discussion and Analysis of Financial Condition and
Results of Operations on page 35 of this annual report, 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, product delays, commercialization
and technology, and E&S's ability to maintain credit facilities to support its
operations on favorable and acceptable terms. In light of these risks and
uncertainties, there can be no assurance that the events contemplated by the
forward-looking statements contained in this annual report will, in fact, occur.
REPORTABLE SEGMENTS
During 2001, our business units were aggregated into the following three
reportable segments: the Simulation Group, the REALimage Solutions Group, and
the Applications Group. The three groups benefit from shared core graphics
since 1968, E&S developstechnology, and manufactureseach group's new products are based on open Intel and Microsoft
hardware and software for visual systems that produce vivid and highly realistic
3D (three-dimensional) graphics and synthetic environments. The Company's
product offerings include a full range of high-performance visual systems for
simulation, training, and virtual reality applications, as well as graphic
accelerator products for personal computer workstations.
RECENT DEVELOPMENTS AND STRATEGIC ACTIVITIES
Evans & Sutherland continues to follow a three-point growth strategy,
consisting of growing existing businesses, developing new businesses internally,
and selectively acquiring businesses. E&S formed the Digital Studio business
unit during 1997, repositioned the Digital Theater business unit (formerly
Education and Entertainment), and announced several new products utilizing the
Company's Symphony(TM) strategy. E&S also made a strategic minority investment
in a technology company. A summary of recent developments and key strategic
activities that occurred in the past year are summarized below.
The Company formed its Digital Studio business unit on January 8, 1997.
The unit provides affordable, state-of-the-art, real-time systems for digital
content production in the television, film, video, corporate training, and
multimedia industries. Digital Studio products are built around an open-systems
architecture and the Windows NT operating environment. The business unit's
MindSet(TM) Virtual Studio System and FuseBox(TM) software is in use at
broadcast and video studios throughout the world.
E&S announced several new products in its Symphony strategy, which is a
full range of hardware and software products based on Intel/NT open systems
architectures. Harmony(TM) is the highest performance system of the Symphony
strategy. It is intended for applications that demand superior image quality and
deterministic real-time control. At the same time, Harmony delivers superior
price/performance, making it the technology of choice for complex training
requirements. The first customer shipment of the Harmony system is planned for
the second quarter of 1998. For low-end applications, E&S shipped its first
Rhythm(TM) system in 1997, a single-channel image generator on a card with
on-board CPU and REALimage(TM) graphics rendering technology. iNTegrator(TM) is
the software suite that creates and controls the synthetic environments
displayed by the hardware.
Continuing with its commitment to invest in innovative, emerging
technologies, on September 26, 1997, E&S invested in Silicon Light Machines
(SLM), a privately held company. The investment provides additional funds to SLM
to further develop and commercialize its patented digital high-resolution
display technology, called Grating Light Valve(TM) (GLV(TM)) technology.
Commercialization of the technology is expected to benefit display systems used
by E&S in government and commercial simulation and in digital theater
applications. James R. Oyler, President and Chief Executive Officer of E&S, was
also appointed to SLM's board of directors.
In December 1997, the Entertainment & Education business unit was
renamed Digital Theater. The change reflects the business unit's increased focus
on hardware, software and content development for digital theater venues
including entertainment centers, planetariums, science centers, and
universities.
Evans & Sutherland's high quality electronics manufacturing and
software development was recognized by earning ISO 9001 certification, which
acknowledges that the Company's processes comply with international quality
standards as defined by the International Standards Organization (ISO). The
Company's operations in Salt Lake City, Utah received certification for its
manufacturing and research and development during 1996, and the ISO 9001
certification was expanded to include all Salt Lake City operations in July
1997. In addition, the Company's operations in Horsham, England earned ISO 9001
certification in February 1998; the Company's operations in Munich, Germany are
expected to earn certification later this year.
On December 31, 1997, the Company wrote-down to fair market value its
investment in Iwerks Entertainment, Inc. The write-down amounted to $1.5 million
and was due to a decline in fair value considered to be other than temporary. In
addition, the Company wrote down its investments in non-marketable securities
$8.1 million.
On February 18, 1998, the Company's Board of Directors authorized the
repurchase of up to 600,000 shares of the Company's common stock, including the
327,000 shares still available from the repurchase authorization approved by the
board on November 11, 1996. Subsequent to February 18, 1998, the Company has
repurchased 189,000 shares of its common stock; thus, 411,000 shares currently
remain available for repurchase. Stock may be acquired in the open market or
through negotiated transactions. Under the program, repurchases may be made from
time to time, depending on market conditions, share price, and other factors.
These repurchases are to be used primarily to meet current and near-term
requirements for the Company's stock-based benefit plans.
BUSINESS UNITS AND STRATEGY
E&S is organized into six business units.standards. Each business unit develops
andreportable segment markets its products to
a worldwide customer base. TheseAs described above under the heading "Restructuring",
we sold the REALimage Solutions Group and discontinued the RAPIDsite business units can
be grouped into two areas: core businesses and new businesses. The core
businesses arein
the simulation-related units in which E&S has an established
market presence with significant market share and which represent the majorityApplications Group. Financial information by reportable segment for each of
the Company's revenues and earnings. The new businesses arethree years ended December 31, 2001 is included in high growth
markets whereNote 18 of the Notes to
Consolidated Financial Statements included in Part II of this annual report.
SIMULATION GROUP
E&S has superior technology which can be directed to new
applications. The Company's business units are further described below.
Core Businesses
Government Simulation
Government Simulation providesis an industry leader in providing visual systems to both government and
commercial simulation customers. The Simulation Group provides more than 30% of
the worldwide market for flightgovernment and groundmilitary applications and commercial
airline training and
related services to the U.S. and international armed forces, NASA, and aerospace
companies. E&S remains the industry leader for visual systems sales to the U.S.
and 22 foreign governments for the purpose of training vehicle operators. 1997
marked a record year for sales, profitability, and backlog.
During 1997, the business unit was awarded a $35 million long-term contract to
supply six visual systems for the Medium Support Helicopter Aircrew Training
Facility (MSHATF) being built for the U.K. Royal Air Force.simulators. The visual systems
will be based on the Company's new Harmony image generator technology.
Evans & Sutherlandgroup anticipates continued growth in this marketplacethese markets as
simulation training increases in value as an alternative to other training
methods, and as simulation training technology and cost-effectiveness improve.
Future customer demands7
Throughout 2001, we continued development of our
iNTegrator-Registered Trademark- software product, which provides the real-time
control and modeling tools for the Symphony-TM- family of hardware platforms.
Performance optimizations and new functionality have continuously been added
with each new software release to meet existing contract requirements and to
increase the product performance. While the majority of iNTegrator development
is complete, some additional enhancements are planned in 2002, which management
believes will include lower-cost PC-basedexpand its functionality and help secure our dominant position in
our main target markets, both commercial and military.
In addition to continued development of iNTegrator software, we completed
the major development efforts on our most advanced image generator product,
Harmony-Registered Trademark-. All major Harmony programs are now in training or
in final stages of completion and acceptance.
PRODUCTS & MARKETS
The Simulation Group provides a complete line of visual systems more open
systems with interoperable databases,for flight
and custom display systems, all of whichground training and related services to the United States and international
armed forces, NASA, commercial airlines, and aerospace companies. E&S remains an
industry leader in visual systems sales to many U.S. government agencies and
more than 20 foreign governments for training military vehicle operators. The
Simulation Group is well positioned to provide.
Commercial Simulation
Commercial Simulation is the world'salso a leading independent supplier of visual systems for
commercial airline flight simulators for commercial airlines. The continued strength in
sales of commercial aircraft contributed to a record sales year for this
business unit. It captured approximately 75 percentsimulators. This group provides over 30% of the worldwide available
market for visual
systems installed in full-flight training simulators for civilcommercial airlines,
training centers, simulator manufacturers, and airframeaircraft manufacturers.
Commercial Simulation won contracts for multi-unit orders from major airlines
around the world, and sold its first system to the Airbus Beijing Training
Center in China.
The business unit's hardware platform, consisting of an ESIG(R) 3350GT image
generator and ESCP 2000 raster/calligraphic projectors, continues to set the
standard for image quality, reliability, and ease-of-use. Its systems have been
approved by all major aviation regulatory agencies. In the future, the Company
believes it will enhance its industry-leading position by using E&S Harmony
image generators and advanced display products, and by expanding its product
base to include other flight simulator products.
New Businesses
Board Products
Board Products (formerly Display Systems) supplies high-performance, high-margin
board-level products for simulation, avionics, and vehicle displays. Board
Products is transitioning from a project-oriented model to being a product-based
business, with desktop simulation solutions as its principal target.
The Company believes that the Board Product's Rhythm board, a member of the
Company's Symphony line of products, is the highest density image generator in
the world. It combines the Company's powerful REALimage graphics technology with
an onboard processor to create a compact and very cost-effective, low-end
simulation solution. Board Products intends to develop full-capability board
level image generators and advanced display products, and to participate more
fully in the in-vehicle training marketplace.
Desktop Graphics
Desktop Graphics provides REALimage graphics accelerator technology for the
world's leading manufacturers of NT-based personal computer workstations. Since
inaugural shipments in June 1997, REALimage graphics acceleration technology has
been selected by 12 manufacturers of Windows NT-based computers, earning it the
majority of new-system design wins. In March 1998, volume production of the
third-generation REALimage chip design began, thereby keeping pace with
introductions of new, more powerful processors from Intel. The Company plans two
technology upgrades per year.
Real Image Technology(TM) supports the full range of professional OpenGL
graphics applications, including design engineering, simulation, digital content
creation, visualization, animation, and entertainment, among others.
Digital Studio
Digital Studio provides virtual studio products and services for digital content
production in the television, film, video, corporate training, and multimedia
industries at a fraction of the price of traditional proprietary technology.
MindSet Virtual Studio System and FuseBox control software enable the use of
virtual sets with live talent for the video. The MindSet system is in use at
broadcast, production, postproduction, and educational institutions throughout
the world. In December 1997, E&S announced an order from China Central
Television (CCTV).
As the first Windows NT-based virtual set system, MindSet earned immediate
distinction at the 1997 National Association of Broadcasters annual conference
by being cited as one of the ten best "Prime Time" digital products on exhibit.
It also received an "Editors' Choice" Award from AV Video Multimedia Magazine,
and a "1997 Product Innovation Award" from Computer Graphics World Magazine.
The Company is discussing potential alliances with industry-leading providers of
physical studio sets, weather information and data, and virtual set content for
the television broadcast industry. The Company believes that, once signed, these
and similar agreements will improve customer acceptance of its system and
accelerate market penetration.
Digital Theater
Digital Theater focuses on hardware, software, and content development for
digital theater venues, and is the world's leading supplier of digital
planetarium projection systems (Digistar(R) II). Digital Theater is dedicated
entirely to the emerging, large format digital theater marketplace. Efforts are
focused on hardware, software, and content development. That focus is
all-inclusive, from fundamental technology to building a portfolio of content
for digital theater presentations.
Digital Theater's highest performance system, StarRider Digital Theater, is
designed to display full-color, computer-generated 3D images, in either playback
or real-time mode, onto a domed surface. Exploration Place in Wichita, Kansas
was first to select StarRider; followed by Chicago's prestigious Adler
Planetarium; both are scheduled to open in 1999.
NEW PRODUCT STRATEGY
Building upon 30 years of expertise in the computer graphics industry,
Evans & Sutherland's new Symphony family of products is designed to meet the
needs of developers and users of highly realistic synthetic environments. At the
core of its technology is an open architecture based on Intel and Microsoft
hardware and software standards, with front-end computation controlled by the
Windows NT(R) operating system. The product strategy scales easily with
technology improvements, and supports leading and widely available graphics
software.
Industry standard technologies used in the Company's Symphony family of
products include:
1. Windows NT: The operating system for hosting modeling software and
tools, as well as administrative and control functions in the new E&S
products.
2. Pentium(R) Processors: The leading processors used in most NT
workstations are also used for geometry processing in the Company's new
image generators. Future generations of E&S products will track or
mirror the performance improvements of Intel processors, which are
increasing at the fastest rate in the industry. E&S is working with
Intel to deliver its high-performance REALimage graphics technology
when systems based on Intel's Merced processor become available,
currently expected in 1999.
3. OpenGL(R): Image database elements are rendered through the OpenGL
graphics library and Applications Programming Interface (API). However,
new E&S products are structured in a completely modular fashion to
allow future use of Direct3D(R) and other graphics API's as they become
accepted for professional applications.
4. PCI(R) and AGP(R): REALimage is compatible with PCI and Intel's
Accelerated Graphics Port (AGP), offering a full graphics feature set
and OpenGL compatibility to workstation users with either requirement.
PRODUCTS AND MARKETS
Evans & Sutherland provides a broad line of visual system products and
related services for use in simulators and trainers for military, commercial,
and entertainment applications. The Company's product offerings include: (1)
visual system components and technology, such as Harmony and ESIG image
generators and REALimage controller chip technology; (2) fully integrated
systems, such as the StarRider(TM) domed theater system or the MindSet virtual
set; and (3) related services, such as system integration and database creation.
These offerings, described below, are used in a wide variety of applications.
The product and service offerings are all grounded in Evans & Sutherland's
graphics technology. The Company's new products are based on open systems
architecture and the Windows NT operating environment. The goal has been to
continuously improve the core technology and offer it more broadly in existing
markets, as well as extend it into new markets. E&S products are sold worldwide.
Generally, E&S products consist of four major components. These
components are available as subsystems, but are commonly sold as part of a
complete visual system delivered to an operator or prime contractor.
1. Image generators (IG) create a computer-generated image and send this
image to a display device, such as a projector or CRT. Primary E&S IG
offerings include ESIG, Liberty(R), Harmony, and REALimage technology.
REALimage graphics technology is currently manufactured and sold by
Mitsubishi as part of a chipset.
2. Display systems consist of a combination of projectors, display
screens, CRT screens, and specialized optics. These display systems are
offered in a broad range of configurations, from onboard instrument
displays to domes offering 360-degree field of view, depending on the
applications.
3. Databases of the synthetic environment are offered as standard options
or as custom creations. Military databases are commonly customized and
often cover large areas of terrain. E&S provides database development
as well as database tools, such as EaSIEST(R) and iNTegrator. Databases
developed using iNTegrator are a key element of the Symphony product
family. These can be run on a full range of image generators, from
REALimage-powered desktop graphics accelerators to high-end Harmony
systems.
4. System integration, installation, and support services are also key
elements of most all systems and components sold.
These components and subsystems are often integrated and sold as
complete systems solutions. For example, the Digistar II and StarRider systems
consist of E&S developed image generators, databases of synthetic worlds, and
display systems. These are integrated by E&S with components from other
suppliers, such as audience participation systems or the dome itself. E&S
combines and installs all these components into a complete system solution for
the planetarium and science center market.
In the simulation training market, Evans & Sutherland'sgroup's visual systems create dynamic, high-quality, interactive, out-the-window
scenes that represent the viewrealistically simulate what vehicle operators see when performing tasks under actual
operating conditions. The Company's 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.
MARKETING
Evans & Sutherland'sGenerally, the Simulation Group's visual systems products consist of the six
major components listed below. These components are available as subsystems, but
are typically sold together as a complete visual system solution delivered to an
end user or prime contractor.
(1) Image generators (IGs) create computer-generated real-time images and
send these images to display devices, such as projectors or computer
monitors. The group's primary IG offerings include the Symphony family of
products from Harmony on the high end to OpenGL, PC-based simFUSION-TM-
at the low end, and its legacy ESIG-Registered Trademark- products, which
continue to show strong sales. E&S offers a complete, high-to-low family
of IGs that can use the same software and databases. Harmony is our
flagship for highest performance, Ensemble-TM- is the first PC-based true
image generator offering deterministic performance and
simulation-specific functionality, and simFUSION is the first OpenGL
PC-based hardware platform targeted at low-cost applications. E&S is the
only visual system provider offering a complete line of compatible and
scalable products for real-time simulation and visualization.
(2) Display systems consist of projectors, display screens, computer
monitors, and specialized optics. These display systems are offered in a
broad range of configurations, from onboard instrument displays to domes
offering a 360-degree field of view, depending on the applications.
(3) Databases depicting synthetic environments are offered as options or as
custom solutions. The group provides database development as well as
database development tools such as iNTegrator and
EaSIEST-Registered Trademark-. Databases developed using iNTegrator are a
key element of the Symphony product family. These can be run on a full
range of image generators.
(4) Simulation of sensor imagery such as radar, infrared, and night vision
goggles (NVG) is often provided with the visual systems for
high-performance fixed and rotary wing aircraft. E&S develops and
manufactures a variety of hardware and software products to achieve
realistic
8
sensor simulation, including the Vanguard-Registered Trademark- radar
image generator, infrared postprocessors, and customized systems for
either simulated or stimulated NVG solutions.
(5) System integration and installation services are offered in support of
the total simulator system. We have the capability to act as the main
prime contractor for large commercial and military contracts requiring
total systems integration.
(6) A full range of customer support services is offered to prime
contractors, system integrators, and military or commercial end users.
Service and Support product offerings include customized support
packages, called Encore(SM), that provide complete maintenance, spares,
and round-the-clock technical support; SimTech Training, which provides
training to the customers' simulation technicians and engineers; and
Computer-Based Training.
E&S also develops complete simulation solutions for specific training
applications. In 2001, we announced two new products, the Mission Command
Trainer, or MCT-TM-, and the Air Traffic Control Trainer, or ATCT-TM-. The MCT
is a low-cost tactics simulator that provides realistic command training,
mission planning, and mission rehearsal in a virtual environment against an
intelligent virtual enemy, all in the safety and security of a classroom.
Developed in a partnership with MicroNav, Ltd., one of the world's leading
producers of air traffic control training software, the ATCT is a complete,
advanced 3D tower simulator for licensing, refresher training, and conversion
training.
The Simulation Group's products are marketed worldwide by the Company or
its agents. The Company's productsE&S and qualified
distributors. Products and services are sold directly to end users by E&S as a
prime contractor, through subcontractors or othersimulator prime contractors with E&S acting as a
subcontractor, and through system original equipment manufacturers (OEM).OEMs. E&S continues to
develop and form both domestic and
international marketing alliances which are
provingwith aerospace and simulation companies that dominate
their respective market segments. Such strategic alliances have proved to be an
effective method of reachingfor accessing specific markets. In addition, the
Company haswe have OEM and
Value Added Reseller agreements for its visual system products with companies such as
STN Atlas Elektronik GmbHseveral major distributors in Germany,Europe and
Mitsubishi Precision Co., Ltd. in
Japan, and a non-exclusive partnership with Mitsubishi Electronics to
manufacture and sell REALimage-based chipsets. In most cases where E&S sells
through OEM suppliers, the sales, marketing, and product support functions are
provided by those OEM suppliers.
SIGNIFICANT CUSTOMERS
Worldwide customers using E&S products include most major airlines,
U.S. and international armed forces, NASA, aerospace companies, film and video
studios, laboratories, museums, planetariums, science centers, and
location-based entertainment centers.
Customers accounting for more than 10% of the Company's net sales in
1997 included the U.S. government and Thomson Training and Simulation, Ltd.
(Thomson). In 1996, the U.S. government, Thomson, Hughes Training, Inc.
(Hughes), recently acquired by Raytheon, and Rikei Corporation (Rikei) each
accounted for more than 10% of the Company's sales, and in 1995, the U.S.
government, Hughes, and Loral Corporation (Loral), now Lockheed Martin
Information Systems, Inc., each accounted for more than 10% of the Company's
sales. Sales to the U.S. government and prime contractors under U.S. government
contracts were $45.5 million in 1997 (29% of total sales), $25.8 million in 1996
(20% of total sales), and $54.7 million in 1995 (48% of total sales). A portion
of these sales is also included in sales to Hughes and Loral. Sales to Thomson
were $19.3 million in 1997 (12% of total sales), $15.8 million in 1996 (12% of
total sales), and $4.0 million in 1995 (4% of total sales). Sales to Hughes were
$14.0 million in 1997 (9% of total sales), $14.9 million in 1996 (11% of total
sales), and $11.0 million in 1995 (10% of total sales). Sales to Rikei were $8.1
million in 1997 (5% of total sales), $14.3 million in 1996 (11% of total sales),
and $8.8 million in 1995 (8% of total sales). Sales to Loral were $6.9 million
in 1996 (5% of total sales) and $34.3 million in 1995 (30% of total sales). See
footnote 13 of "Notes to Consolidated Financial Statements" in Part II of this
report.
Asia.
COMPETITIVE CONDITIONS
Primary competitive factors for the Company'sSimulation Group's products are
performance, price, service, and product availability. Because competitors are
constantly striving to improve their products, E&Sthe group must ensure that it
continues to offer products with the best performance at a competitive price.
Prime contractors, including Lockheed Martin, Flight Safety International (FSI),
Thales Training & Simulation Ltd., and CAE Electronics, Ltd. (CAE), Lockheed Martin, and Thomson, offer
competing visual systems in the government simulation market. The Company
believes it isWe believe we are able to
compete effectively in this environment and will continue to be able to do so intoin
the foreseeable future. In 1997,2001, the Commercial
Simulation business unitgroup was awarded several highly
competitive orders against FSI and gained market share against CAE, and FlightSafety International, Inc., the principal competitors in the
commercial simulation market. In both the government and commercialmilitary simulation markets, competition for graphics computers
also comes frommarket, the group
competes primarily with Silicon Graphics, Inc. The Desktop Graphics business unitand CAE. In the low-cost,
PC-based market, our simFUSION product competes against companies like
Intergraph, Inc.that focus on
PC simulation using graphics accelerator cards, such as Quantum 3D.
In February 2001, a team of industry leaders led by Evans & Sutherland was
selected by the U.S. Army Simulation, Training, and Instrumentation Command
(STRICOM) to receive an Indefinite Delivery/Indefinite Quantity (ID/IQ)
contract. Under the terms of the contract, the E&S team is prequalified to bid
as a system OEMprime contractor on STRICOM contracts valued at up to $4 billion over the
next eight years.
A team comprised of E&S and others is one of 17 prime contractor teams
selected by STRICOM for the Virtual Domain, one of four business domains that
uses its own chip design,include Constructive, Live, and 3DlabsTest-Instrumentation. Core members of the E&S
team include Cubic Applications, Inc., Ltd. that sells chipsets to board manufacturers. Digital Studio competitors
consist primarily of smaller companies. This market is stillCACI, J.F. Taylor, Inc., Raydon, and MTI.
The team also includes 13 subcontractors with extensive backgrounds in its infancy and
may experience significant change. Board Productsmilitary
simulation.
9
E&S is also a member of two contractor teams selected by STRICOM last fall
for the Constructive Domain. These key contract awards position Evans &
Sutherland to provide its state-of-the-art visual systems support, including
image generation, display systems, and database development, for future STRICOM
programs.
BACKLOG
The Simulation Group's backlog was $104.2 million on December 31, 2001,
compared with $134.6 million on December 31, 2000. It is anticipated that
approximately two-thirds of the 2001 backlog will be converted to sales in 2002.
BUSINESS SUBJECT TO GOVERNMENT CONTRACT RENEGOTIATION
A significant portion of the Simulation Group's business is dependent on
contracts and subcontracts associated with government business. The U.S.
Government, and other governments, may terminate any of our government contracts
and, in general, subcontracts, at their convenience as well as for default based
on performance. If any of our government contracts were to be terminated for
convenience, we generally would be entitled to receive payment for work
completed and allowable termination or cancellation costs.
Upon termination for convenience of a fixed-price type contract, we normally
are entitled, to the extent of available funding, to receive the purchase price
for delivered items, reimbursement for allowable costs for work-in-progress and
an allowance for profit on the contract or adjustment for loss if completion of
performance would have resulted in a highly fragmentedloss. Upon termination for convenience of a
cost reimbursement contract, we normally are entitled, to the extent of
available funding, to reimbursement of allowable costs plus a portion of the
fee. The amount of the fee recovered, if any, is related to the portion of the
work accomplished prior to termination and is determined by negotiation.
U.S. government contracts also are conditioned upon the continuing
availability of Congressional appropriations. Long-term government contracts and
related orders are subject to cancellation if appropriations for subsequent
performance periods become unavailable. Congress usually appropriates funds on a
fiscal-year basis even though contract performance may extend over many years.
Consequently, at the outset of a program, the contract is usually partially
funded, and Congress annually determines if additional funds are to be
appropriated to the contract.
REALIMAGE SOLUTIONS GROUP
The REALimage Solutions Group was sold to Japan-based Real Vision, Inc., in
September 2001. As part of Real Vision, the group is continuing to develop the
"Studio-on-a-Chip" technology, which brings together real-time graphics and
video in a unique and effective way to support all aspects of visual content
creation for broadcasting and netcasting applications. The sale was for a
maximum value of $12 million, consisting of cash of $6.3 million plus future
royalties, on a when and if earned basis, up to $6 million for REALimage
technology, other assets, and the performance of certain development support
during a seven-month transition period leading to closing the transaction in
April 2002. Real Vision has indicated it will continue the development of the
technology, and E&S is maintaining a technical staff to support Real Vision in
Salt Lake City during the transition period. Shortly after the sale of the
REALimage Group, E&S closed its offices in Seattle, Washington, and San Jose,
California.
PRODUCTS & MARKETS
Prior to 2002, the REALimage Solutions Group developed and sold graphics
chips and graphics subsystems for professional PC workstations. Early in 2000,
the group's strategic focus changed from development and manufacture of graphics
accelerator cards for professional digital content creation customers to
development of the next generation REALimage chip, the RI 5000. This chip,
referred to
10
as "Studio-on-a-Chip", brings together both graphics and video processing
technology on a single chip for digital video content creation and
post-production.
The group also began to establish a new application and market where consultive engineeringfor REALimage
technology in 2000 when REALimage chips were selected by Honeywell for use in
cockpit navigation systems for military aircraft and business jets.
COMPETITIVE CONDITIONS
Due to the sale of the REALimage Solutions Group to Real Vision, Inc. of
Japan, we do not compete in this industry or market any longer.
BACKLOG
Because of the shift in strategic focus, the in-process development of the
new RI 5000 chipset, and the sale of REALimage, the group has no backlog as of
December 31, 2001, compared to $0.7 million as of December 31, 2000.
APPLICATIONS GROUP
The Applications Group is composed of synergistic businesses that use E&S
core technology in growth markets. The group's products are applications that
leverage E&S's technology and apply them to other growth markets. After these
applications have been developed and produced, our strategy is to spin them off
or sell them to companies involved in complementary businesses.
PRODUCTS & MARKETS
The Applications Group's digital theater products include hardware,
software, and content for both the primary mechanismentertainment and educational marketplaces.
Digital theater focuses on immersive all-dome theater applications combining
colorful, digitally produced imagery, full-spectrum audio, and audience-
participation capability. The group provides turnkey solutions incorporating
visual systems and subsystems from the Simulation Group. E&S integrates these
systems with projection equipment, audio components, and audience-participation
systems from other suppliers. Products include Digistar-Registered Trademark-
II, a calligraphic star projection system designed to compete with analog star
projectors in planetariums, and StarRider-Registered Trademark-, a full-color,
domed theater experience available in interactive or video playback formats. The
Applications Group is a leading supplier of digital display systems in the
planetarium marketplace. In addition to projection and theater systems, the
Applications Group develops and markets show content for winning orders.planetariums and domed
theaters.
In 2001, the Digital TheaterApplications Group achieved several important milestones. The
Applications Group launched its second interactive show called Crack the Cosmic
Code. The show debuted at the StarRider theater at Exploration Place in Wichita,
Kansas. The Applications Group continued its development of its new product,
which will be launched in the first half of 2002, as well as several new domed
theater shows, which are available to theaters around the world for licensing.
In 2001, the Applications Group continued to expand the market for E&S
RAPIDsite-TM-. E&S RAPIDsite is a photorealistic visualization tool designed for
use by real-estate developers, consulting engineers, architects, and municipal
planners involved with all types of land development projects. RAPIDsite
features fast 3D-model construction, accelerated graphics rendering performance
and easy-to-use interactive exploration of a proposed development on a Windows
NT computer with an OpenGL graphics accelerator.
Throughout 2001, we had been actively seeking sale or spin-off opportunities
for our RAPIDsite-TM- visualization solutions business which is part of the
Company's DIGISTAR IIApplications Group. The general economic
11
downturn made it difficult to sell this business. In December, we decided to
discontinue the RAPIDsite business.
COMPETITIVE CONDITIONS
Primary competitive factors for the Applications Group's products are
functionality, performance, price, and access to customers and distribution
channels. Our digital planetarium
product competestheater products compete with traditional
optical-mechanical products. Competitors
includeproducts and digital display systems offered by Minolta
Planetarium Co. Ltd., GotoGoTo Optical Mfg. Co., Carl Zeiss Inc., and Spitz, Inc. See "Competitive Environment" under "Factors That May Affect
Future Results" under Item 7 "Managements Discussion,
Trimension, Inc. and Analysis of Financial
Condition and Results of Operations" in Part II of this report.Sky-Skan, Inc.
BACKLOG
The Company'sApplications Group's backlog was $154.9$2.7 million December 31, 2001,
compared with $7.4 million on December 31, 1997, compared
with $127.4 million on December 27, 1996, and $76.8 million on December 29,
1995. The predominant portion of the backlog as of December 31, 1997 was for
visual simulation products.2000. It is anticipated that most of
the 19972001 backlog will be converted to revenuesales in 1998.
INTERNATIONAL SALES2002.
SIGNIFICANT CUSTOMERS
Worldwide customers using E&S products include U.S. and international armed
forces, NASA, aerospace companies, most major airlines, laboratories, museums,
planetariums, and science centers.
Sales of product known to be ultimately installed outside the U.S. are
considered internationalgovernment, either directly or indirectly through sales by the Companyto
prime contractors or subcontractors, accounted for $69.5 million or 48% of total
sales, $66.7 million or 40% of total sales, and were $94.6$84.5 million $88.4
million, and $44.5 million in 1997, 1996, and 1995, respectively. International
Sales represented 59%, 68%, and 39%or 42% of total
sales in 1997, 1996,2001, 2000, and 1995,1999, respectively. To take full advantageSales to the United Kingdom
Ministry of thisDefense, either directly or indirectly through sales pattern, the Company operated
a wholly-owned Foreign Sales Corporation subsidiary through fiscal year 1997,
the useto prime
contractors or subcontractors, accounted for $13.6 million or 9% of total sales,
$22.3 million or 13% and $33.8 million or 17% of total sales in 2001, 2000 and
1999, respectively.
In 2001, sales to Thales Training & Simulation Ltd. totaled $23.9 million or
16.4% of total sales of which resulted in tax benefits in 199757% related to U.S. government and United Kingdom
Ministry of approximately $0.2 million.
For additional information, see footnote 13Defence contracts and sales to The Boeing Company totaled
$15.1 million or 10% of "Notestotal sales of which 100% related to Consolidated Financial
Statements" in Part IIU.S. government and
United Kingdom Ministry of this report. See "International Business" under
"Factors That May Affect Future Results" under Item 7 "Managements DiscussionDefence contracts.
In 2000, sales to Lockheed Martin Corporation were $22.5 million or 14% of
total sales, of which 100% related to U.S. government and AnalysisUnited Kingdom
Ministry of Financial ConditionDefence contracts and Resultssales to Thales Training & Simulation Ltd.
were $19.6 million or 12% of Operations" in Part IItotal sales, of this report.which 58% related to United Kingdom
Ministry of Defence contracts.
In 1999, sales to Lockheed Martin Corporation were $35.8 million or 18% of
total sales, of which 100% related to U.S. government and United Kingdom
Ministry of Defence contracts and sales to The Boeing Company were
$25.4 million or 13% of total sales, of which 100% related to U.S. government
and United Kingdom Ministry of Defence contracts.
All of our sales to significant customers are within the Simulation Group.
DEPENDENCE ON SUPPLIERS
Most of our current parts and assemblies used by E&S are readily available through
multiple sources in the open market; however, a limited number are available
only from a single source. In these instances the Company stockscases, we stock a substantial inventory, or
obtain the agreement of the vendor to maintain adequate stock for future
demands, and/or attemptsattempt to develop alternative components or sources where
appropriate.
See "PeriodOn June 3, 1999, we entered into an electronic manufacturing services
agreement with Sanmina Corporation (now Sanmina-SCI). The agreement commits us
to Period Fluctuations" under "Factors That May Affect
Future Results" under Item 7 "Managements Discussionpurchase a minimum of $22 million of electronic products and Analysisassemblies from
Sanmina-SCI each year until June 3, 2002. If we fail to meet these minimum
purchase levels, subject to adjustment, we may be required to pay 25 percent of
Financial
Conditionthe
12
difference between the $22 million and Results of Operations" in Part IIthe amount purchased. We have fully
satisfied the requirements of this report.
PATENTS AND TRADEMARKScontract, which ends in June 2002. Various
alternatives, which include a renewed contract with Sanmina-SCI, are being
evaluated.
SEASONALITY
E&S believes there is no inherent seasonal pattern to its business. Sales
volume fluctuates quarter-to-quarter due to relatively large and nonrecurring
individual sales and customer-established shipping dates.
INTELLECTUAL PROPERTY
E&S owns a number of patents and trademarks and is a licensee under several
others. In the U.S. and internationally, we hold active patents that cover many
aspects of our graphics technology. Several patent applications are presently
pending in the United
States,U.S., Japan, and several European countries. E&S copyrights chip masks
designed by the Companycountries, and has instituted copyright procedures for these masksother patent
applications are in Japan. E&S does not rely on, and is not dependent on, patent and trademark
ownership to maintain its competitive position. In the event any or all patents
and/or trademarks were held to be invalid, management believes the Company would
not suffer significant long-term damage. However,preparation. E&S actively pursues patents on its new
technology. E&S routinely copyrights software, documentation, and chip masks
designed by us and institutes copyright registration for such software,
documentation, and masks when appropriate.
RESEARCH & DEVELOPMENT
The Company'sE&S considers the timely development and introduction of new products to be
essential to maintaining its competitive position and capitalizing on market
opportunities. Our research and development expenses were $25.5$28.8 million,
$21.8$44.3 million, and $19.4$44.4 million in 1997, 1996,2001, 2000, and 1995,1999, respectively. As a
percentage of sales, research and development expenses were 16%20%, 17%27%, and 17%22% in
1997, 1996,2001, 2000, and 1995,1999, respectively. The Company continuesWe continue to fund substantially all
research and development efforts internally. It is anticipated that high levels
of research and development will be needed to continue in order to ensure that the
Company maintainswe
maintain technical excellence, leadership, and market competitiveness. See "ResearchHowever,
due to the sale of the REALimage Solutions Group, the discontinuation of the
RAPIDsite business and Development"the reduction of effort required to develop our Harmony
and "Product DevelopmentiNTegrator products, management expects that the total research and
Introduction" under
"Factors That May Affect Future Results" under Item 7 "Managements Discussiondevelopment spending necessary to continue the timely development of products
will be lower in 2002 than in 2001.
INTERNATIONAL SALES
Sales of products known to be ultimately installed outside the United States
are considered international sales by E&S and Analysiswere $49.5 million,
$60.9 million, and $86.7 million in 2001, 2000, and 1999, respectively.
International sales represented 34%, 36%, and 43% of total sales in 2001, 2000,
and 1999, respectively. For additional information, see Note 19 of Notes to
Consolidated Financial Condition and Results of Operations"Statements included in Part II of this annual report.
EMPLOYEES
As of March 1, 2002, Evans & Sutherland and its subsidiaries employed a
total of 724 persons compared to 847 employees as of March 2, 2001. We believe
our relations with our employees are good. None of our employees is subject to
collective bargaining agreements.
ENVIRONMENTAL STANDARDS
The Company believes itsWe believe our facilities and operations are within standards fully
acceptable to the Environmental Protection Agency and that all facilities and
procedures are in accordance with environmental rules and regulations, and
international, federal, state, and local laws.
EMPLOYEES13
STRATEGIC RELATIONSHIPS
In October 2001, we announced an agreement with NVIDIA-Registered Trademark-
Corporation. As part of February 28,this agreement, NVIDIA Corporation acquired certain key
3D-graphics patents from E&S and the companies agreed to a broad cross-license
of technologies.
This agreement with NVIDIA allows E&S to leverage its general graphics
technology into high volume markets, while adding new capabilities including
NVIDIA's programmable Shader technology to E&S's base of unique technology and
patents for the simulation industry.
During the fourth quarter of 2001, E&S entered into a multiyear agreement
with graphics technology leader ATI Technologies Inc., under which ATI will
provide graphics accelerator chips for our next-generation PC-based visual
systems. ATI chips will replace REALimage chips in E&S's next-generation
Ensemble and simFUSION image generators.
On July 22, 1998, Intel purchased 901,408 shares of E&S's preferred stock
plus a warrant to purchase an additional 378,462 shares of the preferred stock
at an exercise price of $33.28125 per share for approximately $24.0 million. In
March 2001, Intel converted the 901,408 shares of E&S's preferred stock into
901,408 shares of E&S's common stock. In March 2001, Intel and E&S amended the
preferred stock and warrant purchase agreement to terminate certain contractual
rights of Intel, including registration rights, board and committee observation
rights, right of first refusal, right of participation, right of maintenance,
standstill agreement, and right to require E&S to repurchase the preferred stock
in the event of any transaction qualifying as a specific corporate event. E&S
also entered into an agreement to accelerate development of high-end graphics
and video subsystems for Intel-based workstations in July 1998.
ACQUISITIONS AND DISPOSITIONS
Early in 2001, we announced our intention to spin out or sell our REALimage
Solutions Group. In the third quarter of 2001, E&S sold the REALimage Solutions
Group to Real Vision, Inc., a Japanese company that has been a partner with E&S
in the development of technology for professional video applications. The sale
was for a maximum value of $12 million, consisting of cash of $6.3 million plus
future royalties, on a when and if earned basis, up to $6 million for REALimage
technology, other assets, and the performance of certain development support
during a seven-month transition period leading to closing the transaction in
April 2002. Real Vision has indicated it will continue the development of the
technology, and E&S is maintaining a technical staff to support Real Vision in
Salt Lake City during the transition period. As part of the sale of the
REALimage Group, E&S closed its offices in Seattle, Washington, and San Jose,
California.
In December 2000, we completed the divestiture of our German subsidiary via
a management-led buyout and recorded a loss of $0.3 million. The former
subsidiary, which was called Evans & Sutherland Computer GmbH, now operates
under a new name. The divested company has no remaining connection with E&S. We
will continue to operate in Germany and throughout Europe under our own name,
providing marketing, sales, and support for our growing visual systems business
and traditional customer base.
On March 28, 2000, we sold certain assets of our Application Group relating
to digital video products to RT-SET Real Time Synthesized Entertainment
Technology Ltd. and its subsidiaries
employedsubsidiary, RT-SET America Inc., for $1.4 million in
cash, common stock of RT-SET Real Time Synthesized Entertainment
Technology Ltd. valued at approximately $1.0 million, and the assumption of
certain liabilities. On June 15, 2000, we received additional common stock of
RT-SET Real Time Synthesized Entertainment Technology Ltd. valued at
$1.5 million related to the successful development of a totalproduct included in the
purchased assets.
14
On June 3, 1999, we sold certain of 831 persons.our manufacturing capital assets and
inventory of $6.0 million to Sanmina Corporation (now Sanmina-SCI) as part of
our efforts to outsource the production of certain electronic products and
assemblies. In addition, we entered into an electronic manufacturing services
agreement with Sanmina-SCI. The Company believes its relations with its
employees are good. Noneelectronic manufacturing services agreement
commits us to purchase a minimum of $22.0 million of electronic products and
assemblies from Sanmina-SCI each year until June 3, 2002. If we fail to meet
these minimum purchase levels, subject to adjustment, we may be required to pay
25% of the Company's employees are subject to collective
bargaining agreements.
SEASONALITY
E&S believes there is no inherent seasonal pattern to its business.
Sales volume fluctuates quarter-to-quarter due to relatively largedifference between the $22.0 million and nonrecurring individual sales and customer-established shipping dates. Although
the Company's volume has been skewed towardamount purchased. We
have fully satisfied the fourth quarter, the Company has
worked diligently to smooth quarter-to-quarter revenues and expects further
success in achieving this goal. See "Period to Period Fluctuations" under
"Factors That May Affect Future Results" under Item 7 "Managements Discussion
and Analysis of Financial Condition and Results of Operations" in Part IIrequirements of this report.contract, which ends in
June 2002. Various alternatives, which include a renewed contract with
Sanmina-SCI, are being evaluated.
On June 26, 1998, E&S, through its wholly-owned subsidiary, Evans &
Sutherland Graphics Corporation ("ESGC"), acquired all of the outstanding stock
of AccelGraphics, Inc. ("AGI") to expand E&S's workstation graphics development,
integration and distribution within the workstation graphics marketplace. To
acquire AGI, E&S paid approximately $23.7 million in cash and 1,109,303 shares
of E&S's common stock, which was valued at $25.7 million. In addition, E&S
converted all outstanding AGI options into options to purchase approximately
351,000 shares of common stock of E&S with a fair value of $3.4 million and
incurred transaction costs of approximately $1.1 million.
To further expand E&S's presence within the workstation graphics
marketplace, on June 26, 1998, E&S acquired the assets and assumed certain
liabilities of Silicon Reality, Inc. ("SRI"), a designer and developer of 3D
graphics hardware and software products for the PC workstation marketplace. E&S
paid approximately $1.2 million and incurred transaction costs of approximately
$250,000.
ITEM 2. PROPERTIES
Evans & Sutherland's principal executive, engineering, manufacturing engineering, and
operations facilities for each of its business segments are located in the
University of Utah Research Park, in Salt Lake City, Utah, where it owns sixseven
buildings totaling approximately 440,000450,000 square feet. E&S occupies four
buildings and leases outone of the remaining three buildings to other businesses.
The remaining two buildings.buildings are vacant. We plan to sell the three buildings we
do not occupy. The buildings are located on land leased from the University of
Utah on 40-year land leases. Two(the "U of U Property") with an initial term of 40-years or longer. Five of
the buildings have options to renew the land leases for an additional 40 years, and fourthat expire in 2030, with a ten-year renewal
option. The remaining two buildings have options to renew the land leases for
10 years. The Company also owns 46 acresthat expire in 2012 and
2014 respectively, with 40-year renewal options. All of landour interests in North Salt Lake. E&S has no
encumbrance on anythe U
of U Property are subject to a lien by Foothill Capital Corporation to secure
repayment of the real property. The Companyborrowing facility as set forth in the Liquidity and Capital
Resources section of the Management's Discussion and Analysis of Financial
Condition and Results of Operations. E&S and its subsidiaries hold leases on
several sales, operations, service and production facilities located throughout
the United States, Europe and Asia.Asia, none of which is material to our
manufacturing, engineering or operating facilities. E&S believes that these
properties are suitable for its immediate needs and it does not currently plan
to expand its facilities or relocate.
ITEM 3. LEGAL PROCEEDINGS
NeitherLOCKHEED MARTIN CORPORATION V. EVANS & SUTHERLAND COMPUTER CORPORATION
(UNITED STATES (MIDDLE) DISTRICT COURT (FLORIDA), CASE NO. 6:00-CV-755-ORL-19C,
FILED ON MAY 23, 2000). On May 23, 2000, Lockheed Martin Corporation served E&S
with a civil complaint filed in the Company nor anyCircuit Court of the Ninth Judicial Circuit
in and for Orange County, Florida. Lockheed alleged in the complaint that we
breached a contract to provide certain visual systems for the Combined Arms
Tactical Trainer program for the United Kingdom Ministry of Defence. The
contract has an original value of $33.9 million. In the complaint, Lockheed
seeks compensatory damages of $8.5 million plus interest as well as
consequential damages and attorneys' fees. The $8.5 million being sought from
E&S by Lockheed was paid to us from May 1999 to March 2000 and was recognized as
revenue by us during 1999. On June 12, 2000, we filed our answer and
counterclaim. In the counterclaim, we allege as grounds for
15
recovery against Lockheed (1) breach of contract, (2) breach of implied covenant
of good faith and fair dealing, (3) unjust enrichment, (4) unfair competition,
(5) misappropriation of trade secrets, (6) intentional interference with
advantageous business relationship, (7) replevin, and (8) promissory estoppel.
In our counterclaim, we seek compensatory damages of not less than
$10.0 million and not more than $25.4 million.
On June 14, 2000, the case was removed to the Orlando Division of the United
States District Court for the District of Florida where it currently remains. On
July 7, 2000, Lockheed answered our counterclaim but also filed a motion for
dismissal of our counterclaims for unjust enrichment, unfair competition,
promissory estoppel, and incidental damages. On July 24, 2000, we filed our
opposition to Lockheed's motion to dismiss our counterclaims. On October 20,
2000 the court denied Lockheed's motion to dismiss in its subsidiariesentirety, without
prejudice. On January 16, 2001, we filed a motion for partial summary judgment,
asking the court to dismiss all of Lockheed's breach of contract claims. The
court denied that motion on August 30, 2001, citing the existence of material
disputed facts. On September 6, 2001 the court granted Lockheed's leave to amend
its complaint, which was filed on September 17, 2001. We filed a motion to
dismiss these new claims on October 4, 2001, and Lockheed has opposed it. The
court currently has that motion under advisement.
Discovery in the matter is scheduled to conclude on September 30, 2002. A
trial date is currently set for March, 2003. We dispute Lockheed's allegations
in the complaint, are vigorously defending the action, and are vigorously
prosecuting our counterclaims. Although management believes E&S will ultimately
prevail in the litigation, an unfavorable outcome of these matters would have a
party to any
material adverse impact on our financial condition and operations.
In the normal course of business, E&S has various other legal proceeding. However,claims and
other contingent matters, including items raised by government contracting
officers and auditors. Although the Company is involved in ordinary routine
litigation incidental to its business.final outcome of such matters cannot be
predicted, we believe the ultimate disposition of these matters would have a
material adverse effect on our consolidated financial condition, liquidity or
results of operations.
16
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of fiscal year 1997.
2001.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following sets forth certain information regarding the executive
officers of the CompanyE&S as of March 31, 1998:
Name Age Position
- ----------- --- ---------------------------------------
Stewart Carrell 64 Chairman of the Board of Directors
James R. Oyler 52 President and Chief Executive Officer
John T. Lemley 54 Vice President and Chief Financial
Officer
Stuart J. Anderson 581, 2002:
NAME AGE POSITION
- ---- -------- ------------------------------------------
James R. Oyler 55 President and Chief Executive Officer
David B. Figgins 53 Vice President and General Manager,
Product Marketing
L. Eugene Frazier 56 Vice President and General Manager,
Strategic Visualization
William M. Thomas 47 Vice President, Chief Financial Officer,
Treasurer and Corporate Secretary
E. Thomas Atchison 53 Vice President, Manufacturing, Service,
and Support
Nicholas Gibbs 43 Vice President and General Manager,
Simulation Systems
Richard Flitton 39 Vice President and General Manager, of
Commercial Simulation
Gene R. Chidester 49 Vice President of Manufacturing
Bruce E. Erickson 53 Vice President and General Manager of
Digital Studio
Charles R. Maule 47 Vice President and General Manager of
Desktop Graphics
Mark C. McBride 36 Vice President, Corporate Controller and
Corporate Secretary
C. Grant Schultz 54 Vice President and Treasurer
Ronald R. Sutherland 59 Vice President and General Manager of
Government Simulation
Allen H. Tanner 44 Vice President and General Manager of
Board Products
Stanley E. Walker 44 Vice President and General Manager of
Digital Theater
Mr. Carrell was elected Chairman of the Board of Directors of the Company on
March 7, 1991. He has been a member of the Board for 14 years. He also serves as
the Chairman of Seattle Silicon Corporation, and he is a director of Tripos,
Inc. From mid-1984 until October 1993, Mr. Carrell was Chairman and Chief
Executive Officer of Diasonics, Inc., a medical imaging company. From November
1983 until early 1987, Mr. Carrell was also a General Partner in Hambrecht &
Quist LLC, an investment banking and venture capital firm.
Mr. Oyler was appointed President and Chief Executive Officer of the CompanyE&S and a
member of the Board of Directors in December 1994. He is also a director of Ikos
Systems, Inc. and Silicon Light Machines. Previously,Before joining Evans & Sutherland, Mr. Oyler served as President
of AMG, Inc. from mid-1990 throughuntil December 1994, and asa Senior Vice President offor
Harris Corporation from 1976 through mid-1990. He has threeseven years of service
with the Company.E&S.
Mr. LemleyFiggins was appointed Vice President, Product Marketing, in
January 2002. He joined the Company in November 1995E&S as Vice President and Chief
Financial Officer.General Manager, PC
Simulation, in April of 1998, and was appointed Vice President of the Simulation
Group in January 1999. In June 2001, he was appointed Vice President and
Operating Officer, Simulation Group. Before joining E&S, Mr. Figgins served as
Vice President of Business Development and Marketing for Raytheon Training,
where he was employed from May 1986 to April 1998. Mr. Figgins has over
25 years experience in the simulation and training industry and has held
increasingly responsible technical, marketing and management positions in small,
medium and large organizations with senior executive positions in the last
decade. Mr. Figgins is a graduate of Royal Air Force Halton and holds a M.S in
Management from Purdue University. He has four years of service with E&S.
Mr. Frazier was appointed Vice President, Strategic Visualization, in
January 2002. He joined E&S in September 1997 as Vice President, Programs. In
June of 1998, Mr. Frazier was appointed Vice President, Programs and Shared
Technology. In April of 1999, he was appointed Vice President and General
Manager, Systems. Mr. Frazier served as Vice President and General Manager of
Simulation Systems until June of 2001, when he was appointed Vice President and
Operating Officer for Simulation. Prior to coming to the Company,his assignment at E&S, he was
SeniorDirector, Technology Development and Advanced Programs at Lockheed Martin
Tactical Defense Systems. Before working with Lockheed Martin, he held
increasingly responsible assignments in Simulation for LORAL Corporation. He has
four years of service with E&S.
Mr. Thomas was appointed Vice President and Chief Financial Officer at Megahertzin
December 2000 and Corporate Secretary in February 2001. He became Treasurer in
January 2002. He joined E&S in
17
August 2000 as Vice President, Finance, for the Simulation Group. From May 1998
to August 2000, Mr. Thomas was Executive Vice President and Chief Financial
Officer for Edge Technologies, Inc. During the three year period from 1995 to
1998, Mr. Thomas was Chief Financial Officer for Stanley Aviation Corporation.
Previously, he was with
Medtronic, Inc., where hea Director of Finance for a Hughes Aircraft Company
subsidiary, Financial Executive and Strategic Planner for a Large Scale
Information Technology Business Unit, and Senior Business Manager and Assistant
Controller for multiple divisions of Hughes. Mr. Thomas was Corporate Controller and Acting Chief Financial
Officer. Prioremployed by Hughes
from 1982 to Medtronic, Mr. Lemley spent 17 years in a variety of financial
management positions with Hewlett Packard Company.1995. He has two yearsone year of service with the Company.E&S.
Mr. Anderson has beenAtchison was appointed Vice President, Manufacturing, Service, and
General ManagerSupport, in October 2001. He joined E&S in 1998, when E&S acquired Silicon
Reality, Inc. in June 1998, and served as Director, Materials, until July of
Commercial
Simulation since 1994.1999, when he was appointed Vice President, Manufacturing. At Silicon Reality,
Mr. Atchison was Vice President, Operations, Chief Operating Officer, and Chief
Financial Officer from October 1997 to June 1998. Prior to joining the Company,Silicon Reality, he
served as General
Manager ofwas Vice President, Investor Relations and Business Development for Hughes Rediffusion Simulation Ltd. from 1992
to 1994,Alphatec,
and numerous other positions with Rediffusion Simulation beginning in
1961.managed production control for National Semiconductor/ Fairchild. He has
three years of service with E&S.
Mr. Gibbs is the Company.Vice President and General Manager of the Simulation
Systems Business Unit. Prior to this role, he served as General Manager of the
Service and Support Division. He has also held management positions in Supply
Chain Management and Quality Assurance. Mr. ChidesterGibbs received a B.S. in Mathematics
from the University of Utah. Mr. Gibbs has been Vice President of Manufacturing since 1994. He previously
served as Director of Graphics Workstation Manufacturing and has nine years of
service with the Company.E&S for over 15 years.
Mr. EricksonFlitton was appointed Vice President and General Manager for the
Commercial Simulation division of Digital Studio
onEvans & Sutherland in January 1, 1997. He previously served as Vice President of New Market
Development2002.
Mr. Flitton has been in the Government Simulation business unit, Vice President of the
Government Business Group,simulation industry since 1979, and in other capacities with E&S. He has 11 years of
service with the Company.
Mr. Maule has been Vice President and General Manager of Desktop Graphics since
February 1996. Prior to joining the Company, he was Vice President of Marketing
and Strategy for Concurrent Computer Corporation from October 1994 to February
1996. Previously, Mr. Maule served as Director of Business Development for
Lockheed Missiles & Space Company from November 1992 to September 1994. He has
two years of service with
the Company.
Mr. McBride has been Vice President and Corporate Controller since September
1996 and was appointed Corporate Secretary in March 1998. Prior to joining the
Company, he was Senior Vice President and Chief Financial Officer at
HealthRider, Inc. from September 1993 to September 1996. From August 1985 to
September 1993, he was employed by Price Waterhouse LLP, independent
accountants, in various capacities, ending with Senior Manager. Mr. McBride is a
Certified Public Accountant. He has one year of service with the Company.
Mr. Schultz has been Vice President and Treasurer since 1996. He previously
served as Corporate Controller. He has 22 years of service with the Company.
Mr. Sutherland has been Vice President and General Manager of Government
SimulationE&S since 1994. He previously servedHis first assignment with E&S, was as Executive Vice PresidentUK Product Manager for the
Commercial Simulation group, followed by an 18-month assignment as Program
Manager for the E&S subsidiary Xionix Simulation, in Dallas TX. Mr. Flitton then
moved to the E&S Salt Lake City Headquarters and held the positions of US
Regional Program Manager and then Products Director for the Government Sector, and Vice President ofCommercial Airline
group. His prior assignment was as the Product Manager for high-end IG systems
within the Simulation Products. He has 16 years of
service with the Company.
Mr. Tanner joined the CompanySystems Group in March 1996 as Vice President and General
Manager of Board Products. Prior to joining the Company, he was President of
Terabit Computer Specialty Company, Inc. between 1979 and 1996. Terabit was
acquired by E&S in March 1996. He has two years of service with the Company.
Mr. Walker joined the Company in July 1997 as Vice President and General Manager
of Digital Theater.Salt Lake City. Prior to joining E&S,
heMr. Flitton served seven yearsa full engineering apprenticeship with MCA
Universal Studios as Senior Project DirectorRediffusion Simulation
in the UK. Mr. Flitton was Principal Engineer and then Group Leader of the
Visual Engineering Group of Rediffusion. Mr. Flitton has a BEng Hons in
a varietyElecto/Mechanical Engineering from the University of other projectBrighton (UK) and technical management positions.an M.B.A.
from the University of Warwick (UK). He has less than one yearis also Member of service with
the Company.The Royal Aeronautical
Society (MRAeS).
18
FORM 10-K
PART II
ITEM 5. MARKET PRICE OF AND DIVIDENDS ON THEFOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
PRICE RANGE OF COMMON STOCK
The Company'sOur common stock trades on The NASDAQNasdaq Stock Market under the symbol "ESCC"."ESCC."
The following table sets forth the range of the high and low sales prices per
share of the Company'sour common stock for the fiscal quarters indicated, as reported by NASDAQ.The
Nasdaq Stock Market. Quotations represent actual transactions in NASDAQ'sNasdaq's
quotation system but do not include retail markup, markdown or commission.
HIGH LOW
1997:
First Quarter 28 3/8 22
Second Quarter 29 3/4 22
HIGH LOW
-------- --------
2001
First Quarter $ 8 $ 6 3/8
Second Quarter $8 11/16 $ 7 1/16
Third Quarter $ 8 5/16 $ 5 7/8
Fourth Quarter $ 7 3/16 $ 5 3/8
2000
First Quarter $ 13 1/2 $10 1/16
Second Quarter $ 11 3/8 $ 6 1/4
Third Quarter $ 7 1/4 $ 5 3/8
Fourth Quarter $ 7 3/4 $ 5 1/8
Third Quarter 33 1/2 26
Fourth Quarter 37 28 1/4
1996:
First Quarter 25 19
Second Quarter 29 21
Third Quarter 23 3/4 19 1/2
Fourth Quarter 26 1/4 20
APPROXIMATE NUMBER OF EQUITY SECURITY HOLDERS
On March 27, 1998,1, 2002, there were 833657 shareholders of record of the
Company'sour common stock.
Because many of such shares are held by brokers and other institutions hold many of our shares on behalf of
shareholders, the Company iswe are unable to estimate the total number of shareholders
represented by these record holders.
DIVIDENDS
Evans & Sutherland hasWe have never paid a cash dividend on itsour common stock, retaining itsour
earnings for the operation and expansion of itsour business. The
Company intendsWe intend for the
foreseeable future to continue the policy of retaining itsour earnings to finance
the development and growth of itsour business. The payment of dividends is
restricted under the terms of our credit facilities. See "Item 7--Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
19
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
(In thousands, except per share amounts)The following selected financial data for the five fiscal years ended
December 31, 2001 are derived from our Consolidated Financial Statements. The
selected financial data should be read in conjunction with our Consolidated
Financial Statements and related notes included elsewhere in this annual report.
See also "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
2001(1) 2000(2) 1999(3) 1998(4) 1997
1996 1995 1994 1993
--------- ---------- --------- ---------- ----------------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FOR THE YEAR
Sales $ 145,263 $ 166,980 $ 200,885 $ 191,766 $ 159,353
Net sales $159,353 $ 130,564 $113,194 $ 113,090 $ 142,253
Gross profit 75,214 64,629 50,426 52,464 76,575
Operating expenses 60,825 53,110 50,825 68,976 79,811
Gain from sale of business unit - - 23,506 - -
Operating earnings (loss) 14,389 11,519 23,107 (16,512) (3,236)
Earningsincome (loss) before
income
taxes, extraordinary gain,
and accounting change 6,838 16,029 33,580 (11,384) 2,831
Earnings (loss) before
extraordinary gain and
accounting changeaccretion of preferred stock (27,457) (69,570) (23,454) (15,983) 5,080
10,352 20,484 (5,559) 1,826
Net earnings (loss) 5,080 10,352 20,811 (3,700) 4,093
Diluted earningsincome (loss) per common
share:
Earnings (loss) before
extraordinary gain and
accounting changeBasic (2.70) (7.45) (2.49) (1.70) 0.56
Diluted (2.70) (7.45) (2.49) (1.70) 0.53
1.12 2.33 (0.65) 0.22
Net earnings (loss) 0.53 1.12 2.37 (0.43) 0.49
DilutedAverage weighted average number of
common shares outstanding
Basic 10,169 9,372 9,501 9,461 9,060
Diluted 10,169 9,372 9,501 9,461 9,502 9,222 8,785 8,520 8,287
AT END OF THE YEAR
Current assets $179,698 $159,213 $161,004 $127,051 $161,188
Current liabilities 50,741 32,290 42,593 30,980 40,516
Current ratio 3.5 4.9 3.8 4.1 4.0
Working capital 128,957 126,923 118,411 96,071 120,672
Net fixed assets 44,368 42,671 40,855 44,823 48,247
Total assets $ 177,353 $ 216,078 $ 258,464 $ 275,668 $ 234,390 210,891 211,002 180,764 216,187
Long-term debt, less current
portion 18,086 25,563 18,015 18,062 18,015
18,015 20,375 37,066Redeemable preferred stock -- 24,000 23,772 23,544 --
Stockholders' equity 64,659 67,634 137,194 165,083 165,634 160,472 148,491 127,118 137,030
Stockholders' equity
per outstanding share 18.27 17.72 17.04 14.86 16.41
- ------------------------
(1) During 2001, we incurred an impairment loss of $0.2 million and
restructuring charges of $2.8 million. See Notes 1 and 21 of the Notes to
Consolidated Financial Statements included in Part II of this annual report.
(2) During 2000, we recorded deferred tax expense of $20.6 million as a result
of our decision to fully reserve net deferred tax assets due to cumulative
net operating losses and the cancellation of a significant contract and the
related complaint filed by Lockheed Martin Corporation.
(3) During 1999, we incurred a write-off of inventories of $13.2 million, an
impairment loss of $9.7 million and a restructuring charge of $1.5 million.
See Notes 1 and 21 of the Notes to Consolidated Financial Statements
included in Part II of this annual report.
(4) During 1998, we incurred a $20.8 million charge to expense acquired
in-process technology in connection with the acquisitions of
AccelGraphics, Inc. and Silicon Reality, Inc.
20
QUARTERLY FINANCIAL DATA (Unaudited)(UNAUDITED)
(In thousands, except per share amounts)
1997 Quarter Ended
March 28 June 27 Sep. 26 Dec. 31
------------ ------------QUARTER ENDED
--------------------------------------------------
MARCH 30 JUNE 29 SEPT. 28(2) DEC. 31(3)
---------- ---------- ----------- ----------
Net sales2001
Sales $ 33,64239,632 $ 37,90748,097 $ 38,45129,601 $ 49,35327,933
Gross profit 15,128 17,424 19,284 23,378
Operating expenses 13,690 15,378 14,501 17,256
Operating13,215 11,973 1,793 2,459
Net loss before income taxes (6,048) (5,208) (17,987) (1,386)
Net income (loss) applicable to common stock (6,124) (5,132) (16,309) 108
Net income (loss) per common share(1):
Basic (0.64) (0.50) (1.57) 0.01
Diluted (0.64) (0.50) (1.57) 0.01
QUARTER ENDED
--------------------------------------------------
MARCH 31 JUNE 30(4) SEPT. 29(5) DEC. 31(6)
---------- ---------- ----------- ----------
2000
Sales $ 45,955 $ 25,589 $ 48,092 $ 47,344
Gross profit 1,438 2,046 4,783 6,122
Other16,113 (12,303) 14,804 10,834
Net income (expense), net 577 661 319 (9,108)
Earnings (loss) before income taxes 2,015 2,707 5,102 (2,986)(4,827) (31,598) 448 (14,570)
Net earningsincome (loss) 1,411 1,975 3,825 (2,131)
Diluted earningsapplicable to common stock (3,229) (52,253) 244 (14,560)
Net income (loss) per common share 0.15 0.21 0.40 (0.23)
1996 Quarter Ended
March 29 June 28 Sep. 27 Dec. 27
------------ ------------ ----------- ----------
Net sales $ 26,686 $ 30,907 $ 33,712 $ 39,259
Gross profit 12,494 14,715 16,764 20,656
Operating expenses 12,003 13,379 12,607 15,121
Operating profit 491 1,336 4,157 5,535
Other income, net 726 1,072 1,144 1,568
Earnings before income taxes 1,217 2,408 5,301 7,103
Net earnings 755 1,493 3,286 4,818share(1):
Basic (0.35) (5.58) 0.03 (1.55)
Diluted earnings per common share 0.08 0.16 0.35 0.52(0.35) (5.58) 0.03 (1.55)
- ------------------------
(1) Earnings per share are computed independently for each of the quarters
presented and therefore may not sum to the total for the year.
(2) During the third quarter of 2001, we recorded a restructuring charge of
$2.1 million and an income tax benefit of $2.0 million as a result of the
resolution of certain tax contingencies.
(3) During the fourth quarter of 2001, we recorded a $9 million gain on the sale
of certain patents. Also during this quarter, we recorded an impairment loss
of $0.2 million, a restructuring charge of $0.7 million and an income tax
benefit of $1.6 million as a result of the resolution of certain tax
contingencies.
(4) During the second quarter of 2000, we recorded a negative adjustment to
revenue of $10.9 million as a result of the cancellation of a significant
contract by Lockheed. Additionally, we recorded deferred tax expenses of
$20.6 million as a result of our decision to fully-reserve net deferred tax
assets due to cumulative net operating losses and the cancellation of a
significant contract and the related civil complaint filed by Lockheed.
(5) During the third quarter of 2000, we recorded a $6.7 million gain on the
sale of certain investment securities and a $1.9 million loss on available
for sale investment securities whose market value decline was determined to
be other than temporary.
(6) During the fourth quarter of 2000, we recorded a $5.9 million loss on
available for sale investment securities whose market value decline was
determined to be other than temporary.
21
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of sales and expenses during the reporting
period. Actual results could differ from those estimates. A summary of
significant accounting policies can be found in Note 1 to the consolidated
financial statements. We have identified the accounting policies which are
critical to our business and the understanding of our results of operation and
financial position.
REVENUE RECOGNITION
Revenue from long-term contracts which require significant production,
modification or customization is recorded using the percentage-of-completion
method, using the ratio of costs incurred to management's estimate of total
anticipated costs. Our estimates of total anticipated costs include assumptions,
such as estimated man-hours to complete, estimated materials costs, and
estimates of other direct and indirect costs. Actual results may vary
significantly from our estimates. If the actual costs are higher than
management's anticipated total costs, then an adjustment is required to reduce
the previously recognized revenue as the ratio of costs incurred to management's
estimate was overstated. If actual costs are lower than management's anticipated
total costs, then an adjustment is required to increase the previously
recognized revenue as the ratio of costs incurred to management's estimate was
understated.
COSTS AND ESTIMATED EARNINGS IN EXCESS OF BILLINGS ON UNCOMPLETED CONTRACTS AND
BILLINGS IN EXCESS OF COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
Billings on uncompleted long-term contracts may be greater than or less than
incurred costs and estimated earnings and are recorded as an asset or liability
on the balance sheets. As revenue recognized on these long-term contracts
includes estimates of management's anticipated total costs, the amounts in costs
and estimated earnings in excess of billings on uncompleted contracts and
billings in excess of costs and estimated earnings on uncompleted contracts also
include these estimates.
INVENTORIES
Inventory amounts include materials at standard costs. Inventory also
includes inventoried costs on programs and long-term contracts which includes
direct engineering and production costs and applicable overhead, not in excess
of estimated realizable value, which have not yet been recognized as cost of
sales. We periodically review inventories for excess and obsolete amounts as
well as for amounts which are in excess of estimated realizable value, and
provide a reserve that we consider sufficient to cover these items. Assumptions
on which we estimate this reserve include future sales, pricing of future
products and estimates of total anticipated costs to complete projects. Changes
in any of these assumptions would result in adjustments to our operating
results.
ACCRUED EXPENSES
Accrued expenses include amounts for liquidated damages and late delivery
penalties on contracts on which we are late in delivering our products. (See
Note 8 to the consolidated financial statements). We have included all amounts
which management believes we are liable as of December 31, 2001. These
liquidated damages are based, in part, on our estimate of when we will complete
certain projects. To the extent delivery dates are not consistent with our
estimates, these liquidated damage
22
accruals may require additional adjustments. We are currently a party to
contracts which include further possible liquidated damages and late delivery
penalties.
LEGAL PROCEEDINGS
Lockheed Martin Corporation served us with a complaint on March 23, 2000
alleging breach of contract and is seeking $8.5 million in compensatory damages
plus interest as well as consequential damages and attorneys' fees. We believe
that a loss with respect to the $8.5 million collected from Lockheed as asserted
in their legal proceedings is remote and that no amount can be currently
estimated. As additional information becomes available, we will assess the
appropriateness of the accounting and reflect adjustments as considered
necessary. Although management believes we will ultimately prevail in the
litigation, an unfavorable outcome of these matters would have a material
adverse effect on our financial condition and liquidity.
INCOME TAXES
As part of the process of preparing our consolidated financial statements we
are required to estimate our actual income taxes in each of the jurisdictions in
which we operate. This involves estimating our actual current tax exposure
together with assessing temporary differences resulting from differing
treatments of items, such as accrued liabilities, for tax and accounting
purposes. These differences result in deferred tax assets and liabilities, which
are included in our consolidated balance sheet. We must then assess the
likelihood that our deferred tax assets will be recovered from future taxable
income and, to the extent we believe that recovery is not likely, we must
establish a valuation allowance. To the extent we establish a valuation
allowance or increase or decrease this allowance in a period, we must include a
corresponding adjustment within the tax provision in the statement of
operations. Significant management judgment is required to determine our
provision for income taxes, our deferred tax assets and liabilities and any
valuation allowance recorded against our net deferred tax assets.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The preparation of our financial statements requires us to make estimates
and assumptions that affect the reported amount of assets at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. We specifically analyze accounts receivable and consider
historic experience, customer creditworthiness, facts and circumstances specific
to outstanding balances, current economic trends and changes in our payment
terms when evaluating the adequacy of the allowance for doubtful accounts.
Changes in any of these factors may result in material differences in the
expense recognized for bad debts.
CERTAIN DEFENSE CONTRACTS
A significant factor in our financial performance is six large, fixed price
defense contracts which use our Harmony image generator. These six contracts
represented a significant portion of our $27.5 million net loss for the year
2001. We entered into these contracts between two and four years ago. However,
these six contracts are now 90% complete and we expect to have these contracts
essentially completed by 2002 year end.
23
RESULTS OF OPERATIONS
The following discussions should be read in conjunction with the
Company'sour
Consolidated Financial Statements contained herein under Item 8 of this annual
report.
ITEMS FROM THE CONSOLIDATED STATEMENTS OF OPERATION (as a percent of sales)
Year-Ended Year-Ended Year-Ended
Dec.YEAR ENDED DECEMBER 31,
Dec. 27, Dec. 29,
1997 1996 1995
----------- ----------- -----------------------------------------------
2001 2000 1999
-------- -------- --------
Net sales 100.0 % 100.0 % 100.0 %Sales 100.0% 100.0% 100.0%
Cost of sales 52.8 50.5 55.5
------ ------- ------79.7 82.4 63.5
Write-off of inventories -- -- 6.6
-------- -------- --------
Gross profit 47.2 49.5 44.5
Expenses:
Marketing,20.3 17.6 29.9
-------- -------- --------
Operating expenses:
Selling, general and administrative 20.7 20.6 22.2 24.0 27.1
Research and development 16.0 16.7 17.2
Write-off19.8 26.5 22.1
REALimage transition costs 3.6 -- --
Restructuring charge 2.0 (0.5) 0.7
Impairment loss 0.2 -- 4.8
-------- -------- --------
Operating expenses 46.3 46.6 49.8
-------- -------- --------
(26.0) (29.0) (19.9)
Gain on sale of acquired research and development - - 0.6
------ ------- ------
Total expenses 38.2 40.7 44.9
------ ------- ------assets held for sale 6.2 -- --
Gain fromon sale of business unit - - 20.80.5 1.1 --
-------- -------- --------
Operating earnings 9.0 8.8 20.4loss (19.3) (27.9) (19.9)
Other income (expense), net (4.7) 3.5 9.3 (1.8) (2.4) 0.6
-------- ------- ------
Earnings before income taxes and extraordinary gain 4.3 12.3 29.7-------- --------
Pretax loss (21.1) (30.3) (19.3)
Income tax expense 1.1 4.4 11.6
------ ------- ------
Earnings before extraordinary gain 3.2 7.9 18.1
Extraordinary gain from repurchase(benefit) (2.2) 11.4 (7.6)
-------- -------- --------
Net loss (18.9) (41.7) (11.7)
Accretion of convertible
debentures, net of income taxes - - 0.3
------ ------- ------preferred stock -- 0.1 0.1
-------- -------- --------
Net earnings 3.2 loss applicable to common stock (18.9)% 7.9 (41.8)% 18.4 (11.8)%
====== ======= ============== ======== ========
RESULTS OF OPERATIONS
SUMMARY
Evans & Sutherland experienced another good year in 1997. Orders,
sales, and backlog all reached record levels. Net sales increased 22% and
operating earnings increased 25% over the prior year. Net earnings, however,
decreased 51% resulting from a write-down of investments in non-marketable
securities in accordance with Statement of Financial Accounting Standards No.
115.2001 VS. 2000
SALES
In 1997,2001, our total sales increased 22%decreased $21.7 million, or 13% ($159.4145.3 million in
2001 compared to $130.6$167.0 million in 1996)2000). Sales in the Simulation Group declined
$14.6 million, or 10% ($135.3 million in 2001 compared to $149.9 million in
2000). Sales in the REALimage Solutions Group declined $4.0 million, or 70%
($1.7 million in 2001 compared to $5.7 million in 2000). Sales in the
Applications Group declined $3.1 million, or 27% ($8.2 million in 2001 compared
to $11.3 million in 2000). The improvement was primarilyprimary reason for the decline in sales in the
Simulation Group is due to increased market share and strong
activitydelays in both domestic and international markets. U.S. sales increased 53%
($64.8 million comparedgovernment programs relating to $42.2 million in 1996), primarily due toour Harmony
image generator. In addition, the Simulation Group also experienced a 76%
increasedecline in
sales volumes to its commercial airline customers. These declines more than
offset increases in the U.S. government ($45.5 million compared to $25.8
million in 1996). International sales increased 7% ($94.6 million compared to
$88.4 million in 1996), resulting from strong sales growthvolumes of 46% in Europe
($59.2 million compared to $40.5 million in 1996), partially offset by a salesour simFUSION PC-based image generator
and support services. The decrease in the Pacific Rim regionREALimage Solutions Group declined as
this group was sold during the third quarter of 37%2001. Sales in the Applications
Group declined due to lower sales volumes of our planetarium and large-format
entertainment products.
GROSS PROFIT
Gross profit was essentially unchanged in 2001 from 2000 (both
$29.4 million). As a percent of sales, gross profit increased to 20.3% in 2001
from 17.6% in 2000. Gross profit in the Simulation Group improved due to higher
sales volumes and lower costs of sales for support services and lower
24
costs of sales on sales to commercial airline customers. These improvements in
the Simulation Group were offset by lower sales to government customers and
higher costs of sales on sales of simFUSION PC-based image generators. The lower
sales to government customers was due to delays and cost over-runs on programs
involving our Harmony image generator. Gross profit in the Applications Group
increased as cost of sales decreased on sales of planetarium systems and higher
sales of our RAPIDsite real-estate planning tool.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses decreased $4.3 million, or 13%
($27.830.1 million in 2001 compared to $34.4 million in 2000). As a percent of
sales, selling, general and administrative expenses increased to 20.7% in 2001
from 20.6% in 2000. These expenses decreased in the Simulation Group as the
result of lower headcount and lower incentive bonus expense. Selling, general
and administrative expenses decreased in the Application Group due to lower
headcount, lower commissions due to lower orders, lower advertising and lower
incentive bonus expense. The decrease in selling, general and administrative
expenses in 2001 is also partially due to all operating costs from April 1
through August 31, 2001 of $1.3 million associated with the REALimage Solutions
Group being recorded in the "REALimage transition costs" expense category.
Selling, general and administrative expenses were $31.4 million including the
$1.3 million of costs associated with the REALimage Solutions Group.
RESEARCH AND DEVELOPMENT
Research and development expenses decreased $15.5 million, or 35%
($28.8 million in 2001 compared to $44.3 million in 1996)2000). BasedAs a percent of
sales, research and development expenses declined to 19.8% in 2001 from 26.5% in
2000. Research and development expenses in the Simulation Group declined during
2001 as a result of lower labor and related expenses as the effort required on
currently booked orders,our Harmony, iNTegrator, Ensemble and PC-based simulation products has declined.
Research and development expenses in the Applications Group were essentially
unchanged. The decrease in research and development expenses in 2001 is also
partially due to all operating costs from April 1 through August 31, 2001
associated with the REALimage Solutions Group being recorded in the "REALimage
transition costs" expense category. Research and development expenses were
$32.7 million including these costs associated with the REALimage Solutions
Group. Due to the sale of the REALimage Solutions Group, the discontinuation of
the RAPIDsite business and the reduction of effort required to develop our
Harmony and iNTegrator products, management expects that the total research and
development spending necessary to continue the timely development of products
will be lower in 2002 than in 2001.
REALIMAGE TRANSITION COSTS
During the second quarter of 2001, we decided to sell the REALimage
Solutions Group. Accordingly, REALimage transition costs include all the
expenses associated with the REALimage Solutions Group that were incurred in the
second and third quarters of 2001. These costs totaled $5.3 million and were
3.6% of revenues for 2001. On August 31, 2001, we finalized an asset purchase
and intellectual property license agreement to sell the REALimage Solutions
Group to Real Vision, Inc. of Japan for a maximum value of $12.3 million which
is expected to close in April 2002. The consideration to E&S expects continued
worldwide revenue growthconsisted of
$4.0 million cash, a receivable for $2.3 million which was paid in
December 2001, and future royalties payable on a when and if earned basis of up
to a maximum of $6.0 million. The consideration to Real Vision, Inc. consists of
REALimage technology, other assets, and an obligation from E&S to provide
certain development support of the REALimage technology during a seven-month
transition period concluding in April 2002. During 2000, no comparable
transition costs were incurred.
25
RESTRUCTURING CHARGE
During 2001, we initiated a restructuring plan focused on reducing the
operating cost structure of E&S. As part of the plan, we recorded a charge of
$2.8 million relating to a reduction in force of approximately 92 employees. We
estimate that this restructuring plan will reduce expenses by $8.2 million per
year going forward. As of December 31, 2001, we had paid $1.9 million in
severance benefits. The majority of the remaining benefits will be paid out over
the next two quarters. We also recognized a restructuring charge of
$1.5 million in 1999 and reversed $0.8 million of that charge in 2000. The
charge in 1999 was based on the expected costs related to the termination of 28
employees. The reversal of a portion of these charges in 2000 was the result of
certain of these employees being transferred within E&S rather than being
terminated and, therefore, these termination costs were not incurred. In
addition, estimated severance and related charges were lower than expected for
the terminated employees.
IMPAIRMENT LOSS
We recognized an impairment loss of $0.2 million in 2001 and there was no
such charge in 2000. The 2001 charge was 0.2% of sales. The impairment loss
related to the write-off of goodwill, acquired in our acquisition of
AccelGraphics, Inc. and Silicon Reality, Inc. in the second quarter of 1998.
GAIN ON SALE OF ASSETS HELD FOR SALE
In 1996,the fourth quarter of 2001, we recognized a gain of $9.0 million on the
sale of certain of our key 3D-graphics patents. This gain on sale of assets held
for sale was 6.2% of sales increased 15% ($130.6in 2001 and there was no such transaction in 2000.
GAIN ON SALE OF BUSINESS UNIT
We recognized a gain on sale of business unit of $0.8 million in 2001 and
$1.9 million in 2000. As a percent of sales the gain was 0.5% in 2001 and 1.1%
in 2000. The 2001 gain was the result of our sale of our REALimage Solutions
Group to Real Vision, Inc. of Japan. The sale was for a maximum value of
$12 million, consisting of cash of $6.3 million plus future royalties, on a when
and if earned basis, up to $6 million, for REALimage technology, other assets,
and the performance of certain development support during a seven-month
transition period leading to closing the transaction in April 2002. The 2000
gain was the result of our sale of certain assets of our Application Group
relating to its digital studio business to RT-SET Real Time Synthesized
Entertainment Technology Ltd. ("RT-SET") and its subsidiary, RT-SET
America Inc., for $1.4 million in cash, common stock of RT-SET and the
assumption of certain liabilities.
OTHER INCOME (EXPENSE), NET
Other income (expense), net improved by $1.4 million (an expense of
$2.6 million in 2001 compared to $113.2an expense of $4.0 million in 1995)2000). The improvement over 1995loss
on write-down of investment securities improved $7.5 million ($0.3 million in
2001 compared to $7.8 million in 2000). The losses in both years are the result
of other-than-temporary declines in the values of certain marketable investment
securities of E&S. The gain on sale of investment securities declined
$6.0 million ($0.5 million in 2001 compared to $6.5 million in 2000). The larger
gain in 2000 was primarily due to increased market share
and strong international activity. International sales increased 99% ($88.4
millionthe sale of our investment in Silicon Light
Machines, Inc. to Cypress Semiconductor, Inc. ("Cypress") in which we received
Cypress stock. Interest income was essentially zero in 2001 compared to
$44.5$0.7 million in 1995)2000. Interest expense increased $0.3 million to $2.5 million in
2001 from $2.2 million in 2000. The increase in net income expense was due to
lower average cash balances and U.S.higher average borrowing balances in 2001
compared to 2000.
26
INCOME TAXES
E&S recorded an income tax benefit of $3.2 million in 2001 compared to an
expense of $19.0 million in 2000. Income tax benefit of $3.2 million for 2001 is
primarily attributable to adjustments to prior year tax provisions as the result
of the resolution of certain worldwide tax contingencies. Included in this
amount is $0.6 million for withholding taxes paid in Japan for taxes associated
with the REALimage transaction. During the second quarter of 2000, we increased
our deferred tax asset valuation allowance by $20.6 million. As a result of
cumulative net operating losses, and the cancellation of a significant contract
and the related civil complaint filed by Lockheed as discussed in Note 14 to the
consolidated financial statements, we fully reserved our net deferred tax assets
which previously existed at the end of the first quarter of 2000 and those
deferred tax assets recognized during the second quarter of 2000. These net
deferred tax assets relate to temporary differences, tax credit carry forwards
and net operating loss carry forwards. The valuation allowance was recorded in
accordance with SFAS 109, which requires that a valuation allowance be
established when there is significant uncertainty as to the realizability of the
deferred tax assets. We evaluate the realizability of our deferred tax assets on
a quarterly basis. If the deferred tax assets are realized in the future, or if
a portion or all of the valuation allowance is no longer deemed to be necessary,
the related tax benefits will reduce future income tax provisions.
2000 VS. 1999
SALES
In 2000, our total sales decreased 39%$33.9 million, or 17% ($42.2167.0 million in
2000 compared to $68.7$200.9 million in 1995)1999). Strong growthSales in the international
marketsSimulation Group
decreased $20.7 million, or 12% ($149.9 million in 2000 compared to
$170.6 million in 1999). Sales in REALimage Solutions Group decreased
$16.3 million, or 74% ($5.7 million in 2000 compared to $22.0 million in 1999).
Sales in the Applications Group increased $3.0 million, or 36% ($11.3 million in
2000 compared to $8.3 million in 1999). The decrease in sales in the Simulation
Group is due to the cancellation of the contract with Lockheed Martin
Corporation for the delivery of visual systems to the United Kingdom Ministry of
Defence ("UK MOD") for the Combined Arms Tactical Trainer program ("UK CATT")
and an adjustment to revenue on percent complete contracts where a review of the
estimated costs to complete the contracts resulted in a negative adjustment to
revenue of $10.9 million in the second quarter of 2000. The decrease was
primarilypartially offset by increased sales volume of visual systems to commercial
airline customers, increased sales volumes of our simFUSION workstation-based
product and increased sales related to customer service and support contracts.
The decrease in sales in the REALimage Solutions Group is due to a 219%decrease in
the number of units sold and decreased selling prices of existing products due
to increased competition and delays in the introduction of new products. The
increase in sales in the Pacific Rim regionApplications Group is due to an increase in sales
volume of large-format entertainment products and planetarium systems which is
partially offset by decreased sales of our digital video products due to the
sale of this business to RT-SET Real Time Synthesized Entertainment
Technology Ltd. and its subsidiary RT-SET America Inc. (together "RT-SET") in
the first quarter of 2000.
GROSS PROFIT
Gross profit decreased $30.7 million, or 51% ($44.329.4 million in 2000 compared
to $13.9$60.1 million in 1995) and a 43% sales increase in
Europe ($40.5 million compared to $28.4 million in 1995)1999).
COSTS AND EXPENSES
Cost of Sales, asAs a percent of sales, were 53%, 51%,gross profit decreased to
17.6% in 2000 from 29.9% in 1999. Gross profit in the Simulation Group in 2000
was negatively impacted by (i) the cancellation of the UK CATT contract due to
the loss of revenue and 56%,
respectively,the write-off of obsolete and excess inventory specific
to the UK CATT contract, (ii) adjustment for estimated actual costs at
completion of contract on percent-complete contracts of $16.7 million
($10.9 million as a reduction in 1997, 1996,sales as discussed previously, and
1995. In 1997, the$5.8 million as an increase in the cost of sales percentage wasrelating to contracts with total
estimated actual costs that
27
exceed the contract value) and (iii) higher costs on several contracts to
government customers which include the Harmony image generator. Gross profit in
the REALimage Solutions Group decreased due primarilyto lower revenue attributed to a
decrease in the number of units sold and decreased selling prices of existing
products due to increased competition and lower margin
contracts resulting from contracts in which the Company was functioning as the
prime contractor. As forecast last year, this trend is expected to continue to
reduce overall gross margins in 1998 and beyond. In 1996, the decreasedelays in the costintroduction of new
products. Gross profit in the Applications Group increased due to increased
revenue from sales percentageof large-format entertainment products and planetarium
systems which was due primarily to product mixpartially offset by decreased sales of our digital video
products.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses decreased $10.2 million, or 23%
($34.4 million in part, to the
Company-wide restructuring that occurred in 1994 and 1995 which eliminated
non-profitable product lines and included a write-down of inventory.
Total operating expenses increased 15% in 1997 ($60.8 million2000 compared to $53.1$44.6 million in 1996), but decreased as1999). As a percent of
sales, (38%selling, general and administrative expenses were 20.6% in 2000 compared
to 41%22.2% in 1996), continuing1999. The decrease in these expenses in the trend begunSimulation Group is due
primarily to lower marketing headcount, lower marketing consulting expenses and
lower marketing travel expenses. The decrease in 1996.these expenses in the REALimage
Solution Group is due to decreased sales volume resulting in decreased
commissions and other selling-related costs and decreased labor and associated
costs due to lower headcount as a result of the restructuring which took place
at the end of the third quarter of 1999. The trenddecrease in these expenses in the
Applications Group is due to the reduction of operatingemployees and related expenses increasingas
a result of the sale of certain assets of our digital video products business to
RT-SET.
RESEARCH AND DEVELOPMENT
Research and development expenses decreased $10.2 million, or 23%
($34.4 million in total but being lower as2000 compared to $44.6 million in 1999). As a percent of
sales, is expected
to continue in 1998. In 1996, total operating expenses increased 6% ($53.1
million compared to $50.1 million in 1995, excluding the write-off of acquired
research and development expenses were 20.6% in 1995), but decreased as a percent of sales (41%2000 compared to 44%22.2% in
1995).
Marketing, general, and administrative expenses increased 13% in 1997
($35.3 million compared to $31.4 million in 1996), but decreased as a percent of
sales (22% compared to 24% in 1996). In 1996, these expenses increased 2% ($31.4
million compared to $30.7 million in 1995), but decreased as a percent of sales
(24% compared to 27% in 1995). The increase in these expenses in both 1997 and
1996 is due primarily to increased marketing costs related to tradeshow activity
and additional marketing and administrative expenses related to the operation of
the new business units.1999. Research and development expenses in the Simulation Group increased 17% in 1997 ($25.5 million
compareddue to
$21.8 million in 1996), but decreased as a percentincreased efforts of sales (16.0%
compared to 16.7% in 1996). In 1996, researchthe continued development of our simFUSION
workstation-based product and other value-priced simulation products. Research
and development expenses increased
12%relating to the REALimage Solutions Group decreased due
to decreased headcount as a result of the group's restructuring at the end of
the third quarter of 1999.
AMORTIZATION OF GOODWILL AND OTHER INTANGIBLE ASSETS
Amortization of goodwill and other intangible assets decreased
$1.3 million, or 87% ($21.80.2 million in 2000 compared to $19.4$1.5 million in 1995), but slightly decreased as
a percent of sales (16.7% compared to 17.2% in 1995)1999).
The increasedecrease in these
expensesthis expense was due to the write-off of $9.3 million of
goodwill and other intangible assets during the third quarter of 1999 in both 1996the
REALimage Solutions Group.
IMPAIRMENT LOSS
We recognized an impairment loss of $9.7 million in 1999 and 1997 is due primarily to increased activity related to the
introductionwrite-down to fair value of several new products,goodwill, intangibles and additional expensesother long-lived assets
acquired in our acquisitions of AccelGraphic, Inc. and Silicon Reality, Inc. in
the second quarter of 1998. The impairment consisted of the write-off of
$4.9 million of goodwill, $4.4 million of intangible assets and $0.4 million of
property, plant and equipment. There was no such charge in 2000.
RESTRUCTURING CHARGE
We recognized a restructuring charge of $1.5 million in 1999 and reversed
$0.8 million of that charge in 2000. The charge in 1999 was based on the
expected costs related to the newtermination of 28 employees. The reversal of a
portion of these charges in 2000 was the result of certain of these employees
being transferred within E&S rather than being terminated and, therefore, these
termination costs were not incurred. In addition, estimated severance and
related charges were lower than expected for the terminated employees.
28
GAIN ON SALE OF BUSINESS UNIT
During 2000, we sold certain assets of our Applications Group relating to
its digital video business units. Management intends to continue to reduce research and development, as a percentrecognized $1.9 million of sales, overgain on the
next few years. However, high
levels of researchtransaction. See "Item 1--Business--Acquisitions and development will continueDispositions." There was no
such event in support of essential product
development to ensure that the Company maintains technical excellence and market
competitiveness. The Company continues to fund substantially all research and
development costs internally.1999.
OTHER INCOME (EXPENSE), NET
Other income (expense), net was $7.6a net expense of $4.0 million in 2000
compared to a net income of $1.1 million in 1999. Interest income declined
$1.1 million, or 61% ($0.7 million in 2000 compared to $1.8 million in 1999).
The decline in interest income is due to lower average balances of cash, cash
equivalents and short-term investments in 2000 compared to 1999 and due to
interest income received in 1999 on delayed income tax refunds. Interest expense
increased $0.9 million or 69% ($2.2 million in 1997 and
$4.52000 compared to $1.3 million of income in
1996. This change1999). The increase was due primarily to higher average borrowing balances and a write-downhigher
average rate of the Company's investmentsinterest paid on those borrowings in certain marketable and non-marketable securities of
$9.6 million during 1997. There were no gains from sales2000 compared to 1999. Loss
on write-down of investment securities increased $7.4 million, or 1,850%
($7.8 million in 19972000 compared to $0.4 million in 1999). The losses in both
years are the result of other-than-temporary declines in the values of certain
marketable investment securities of E&S. In 2000 we recognized $6.5 million gain
on the sale of investment securities. This gain was primarily due to the sale of
our investment in Silicon Light Machines, Inc. to Cypress in which we received
Cypress stock. There was no such event in 1999.
INCOME TAXES
Income tax expense (benefit) increased $34.4 million (expense of
$19.0 million in 2000 compared to a $1.9 million gain in 1996. In addition,
interest income decreased 17% ($3.2benefit of $15.4 million in 1997 compared1999). During
the second quarter of 2000, we increased our deferred tax asset valuation
allowance by $20.6 million. As a result of the net operating loss in the second
quarter of 2000, the cumulative net operating losses for 2000, 1999 and 1998,
and the cancellation of a significant contract and the related civil complaint
filed by Lockheed as discussed in Note 14 to $3.9the consolidated financial
statements, we fully reserved our net deferred tax assets which previously
existed at the end of the first quarter of 2000 and those deferred tax assets
recognized during the second quarter of 2000. These net deferred tax assets
relate to temporary differences, tax credit carry forwards and net operating
loss carry forwards. The valuation allowance was recorded in accordance with
SFAS 109, which requires that a valuation allowance be established when there is
significant uncertainty as to the realizability of the deferred tax assets. We
evaluate the realizability of our deferred tax assets on a quarterly basis. If
the deferred tax assets are realized in the future, or if a portion or all of
the valuation allowance is no longer deemed to be necessary, the related tax
benefits will reduce future income tax provisions.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2001, we had working capital of $54.5 million, in
1996). In 1996, other income, net, decreased 57% ($4.5including
cash, cash equivalents and restricted cash of $11.5 million, compared to $10.5working
capital of $75.1 million at December 31, 2000 including cash, cash equivalents,
short-term investments and restricted cash of $13.9 million. During 2001, we
used $28.2 million of cash in 1995)our operating activities, generated $12.4 million
of cash in our investing activities and generated $14.6 million of cash in our
financing activities.
Cash from our operating activities was provided by a $12.5 million decrease
in net costs and estimated earnings in excess of billings on uncompleted
contracts. The decrease in net costs and estimated earnings in excess of
billings on uncompleted contracts was due primarily to the achievement of billing
milestones during the year and the adjustment to revenue on percent complete
contracts due to the change in estimated actual costs to complete the contracts.
Cash used in our operating activities included a lower gain on$15.6 million decrease in
accounts payable and a $8.5 million decrease in accrued expenses.
29
Our investing activities included purchases of property, plant and equipment
of $6.6 million, proceeds from the sale of certain patents of $9.0 million,
proceeds from the sale of our REALimage Solutions Group of $6.3 million and
proceeds from sale of investment securities ($1.9of $3.8 million.
Our financing activities during the year included net borrowings of
$13.0 million, versus $7.1proceeds from issuances of common stock of $0.4 million, in 1995) and a
decrease in restricted cash of $1.2 million.
In December 2000, we entered into a secured credit facility (the "Foothill
Facility") with Foothill Capital Corporation ("Foothill"). The Foothill Facility
provides for borrowings and the issuance of letters of credit up to
$30.0 million. On February 22, 2002, E&S and Foothill amended the Foothill
Facility whereby Foothill waived all events of financial covenant default
through December 31, 2001 and revised E&S's 2002 financial covenants. The
Foothill Facility expires in December 2002. Borrowings under the Foothill
Facility bear interest income
($3.9at the Wells Fargo Bank National Association prevailing
prime rate plus 1.5% to 3.0%, depending on the amount outstanding. The Foothill
Facility provides Foothill with a first priority perfected security interest in
substantially all of our assets, including, but not limited to, all of our
intellectual property. Pursuant to the terms of the Foothill Facility, all cash
receipts of E&S must be deposited into a Foothill controlled account. The
Foothill Facility, among other things, (i) requires E&S to maintain certain
financial ratios and covenants, including a minimum tangible net worth that
adjusts each quarter, a minimum unbilled receivables to billed receivables
ratio, and a limitation of $12.0 million versusof aggregate capital expenditures in
any fiscal year; (ii) restricts our 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 our outstanding shares without
the prior consent of the lender. Due to Foothill's waiver on February 22, 2002
of E&S's noncompliance with financial covenants through December 31, 2001 and
the modification of the financial covenants, we are currently in compliance with
our financial covenants and ratios, although a continuation of recent negative
trends could impact future compliance with such covenants. Should the need
arise, we will negotiate with Foothill to modify and expand various financial
ratios and covenants, however no assurance can be given that such negotiations
will result in modifications that will allow us to continue to be in compliance
or otherwise be acceptable to us. E&S will need to replace the Foothill Facility
on or before December 14, 2002. In the event E&S is not able to obtain an
acceptable credit facility to replace the Foothill Facility on or before
December 14, 2002, E&S may be unable to meet its anticipated working capital
needs, routine capital expenditures, and current debt service obligations on a
short-term and long-term basis. As of December 31, 2001, we have $15.7 million
in outstanding borrowings and $6.0 million in outstanding letters of credit
under the Foothill Facility. Since the end of 2001, we have progressed against
the facility, and as of March 12, 2002 have $6.1 million in outstanding debt and
$4.8 million in 1995)outstanding letters of credit.
Evans & Sutherland Computer Limited, a wholly-owned subsidiary of Evans &
Sutherland Computer Corporation, has a $3.0 million overdraft facility (the
"Overdraft Facility") with Lloyds TSB Bank plc ("Lloyds"). Borrowings under the
Overdraft Facility bear interest at Lloyds' short-term offered rate plus 1.75%
per annum. As of December 31, 2001, there were $4.9 million in outstanding
borrowings. As of March 12, 2002, we had fully paid-off the outstanding balance.
The Overdraft Facility is subject to reduction or demand repayment for any
reason at any time at Lloyds' discretion and expires on November 30, 2002.
Evans & Sutherland Computer Limited executed a letter of negative pledge in
favor of Lloyds whereby it agreed not to sell or encumber its assets, except in
the ordinary course of business. Covenants contained in the Overdraft Facility
restrict dividend payments from Evans & Sutherland Computer Limited and require
maintenance of certain financial covenants. In 1996,addition, at December 31, 2001,
we have $0.9 million of cash on deposit with Lloyds in a restricted cash
collateral account to support certain obligations that the bank guarantees.
In July 2000, we formed a joint venture with Quadrant Group plc known as
Quest Flight Training Limited ("Quest"). Quest provides certain equipment,
software, training and marketable
securities balancesother goods and services to the Secretary of State for
Defence of the U.K. Ministry of Defence and other related governmental
30
entities with regard to an upgrade of the Ministry of Defence E3D Facility and
E3D Sentry Aircrew Training Services. In connection with the services of Quest
to the U.K. Ministry of Defence, we guaranteed various obligations of Quest.
Some of our guaranteed obligations are without any maximum amount. We believe
that the guarantees we isssued in connection with this project will not be
called upon for payment or performance; however, no assurance can be made that
we will not be obligated to satisfy the obligations of the guarantees.
As of December 31, 2001, we 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 our common stock at a conversion price of $42.10 or 428,000 shares of
our common stock, subject to adjustment. The 6% Debentures are redeemable at our
option, in whole or in part, at par.
On February 18, 1998, our Board of Directors authorized the repurchase of up
to 600,000 shares of our 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, our Board of Directors authorized
the repurchase of an additional 1,000,000 shares of our common stock. Between
February 18, 1998 and December 31, 1999, we repurchased 1,136,500 shares of our
common stock, leaving 463,500 shares available for repurchase as of March 12,
2002. We did not repurchase any shares of our stock during 2001. Stock may be
acquired on 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. The Foothill Facility requires that
we obtain prior consent from Foothill before we repurchase any shares.
We also maintain trade credit arrangements with certain of our suppliers.
The unavailability of a significant portion of, or the loss of, the various
borrowing facilities of E&S or trade credit from suppliers would have a material
adverse effect on our financial condition and operations.
In the event our various borrowing facilities were lower compared to 1995, primarily asbecome unavailable, we
were unable to make timely deliveries of products pursuant to the terms of
various agreements with third parties, or certain of our contracts were
adversely impacted for failure to meet delivery requirements, we may be unable
to meet our anticipated working capital needs, routine capital expenditures, and
current debt service obligations on a short-term and long-term basis.
We believe that the principal sources of liquidity for 2002 will be a result
of cash flows from operations and proceeds received fromon the sale of CDRScertain of our
buildings which, subsequent to December 31, 2001, have been designated by
management as assets to be disposed of. Positive cash flows from operations
during 2002 are largely expected as a result of the restructuring which has
taken place, the progress to date on our Harmony image generator fixed-price
contracts and other cost-cutting measures which will be implemented during 2002.
Circumstances that could materially affect liquidity in April 1995.
EXTRAORDINARY GAIN
Evans & Sutherland realized extraordinary gains2002 include, but are
not limited to, the following: (i) our ability to meet contractual milestones
related to the delivery and integration of our Harmony image generators,
(ii) our ability to successfully develop and produce new technologies and
products, (iii) our ability to meet our forecasted sales levels during 2002,
(iv) our ability to reduce costs and expenses, (v) our ability to maintain our
commercial simulation business in 1995 from repurchaselight of its 6% Subordinated Convertible Debentures at less than par. There were no
repurchasescurrent economic conditions and
(vi) our ability to favorably negotiate sale agreements related to certain of
debentures by the Company in 1997 or 1996. The current face
amount of debentures outstanding is $18.0 million.
INCOME TAXES
Provision for income taxes was 26%, 35%, and 39% of pre-tax earnings
for 1997, 1996, and 1995 respectively. In 1998, the Company expects the income
tax rate to approximate 1996 levels.
LIQUIDITY AND CAPITAL RESOURCES
Funds to support the Company's operations generally come from netour buildings.
Management believes that existing cash,
provided by operating activities, sale of marketable securities
available-for-sale, and proceeds from employee stock purchase and option plans.
The Company also has cash equivalents, borrowings
available under our various borrowing facilities, other asset-related cash
sources and short-term marketable securities whichexpected cash from future operations will be sufficient to meet our
anticipated working capital needs, routine capital expenditures and current debt
service obligations for the next twelve months. The Foothill Facility expires in
December 2002 and the Overdraft Facility expires on November 30, 2002. We
anticipate the need to replace these credit facilities; however, there can be used as needed.
During 1997, net cash from operating activities provided $14.3 million
and proceeds from employee stock purchases contributed $3.1 million. The major
uses of cash during the year included purchases of capital equipment for $10.8
million, payments for repurchases of common stock of $4.6 million, the purchase
of investment securities of $4.2 million, and net payments under notes payable
to banks of $3.8 million. The net result was a decreaseno
assurances that we will be successful in renegotiating our existing borrowing
facilities or obtaining additional debt or equity financing. Our cash and marketable
securities of $5.9 million to $57.1 million at December 31, 1997 from $63.0
million at December 27, 1996. At December 31, 1997, the Company has unsecured
revolving line of credit agreements with foreign banks totaling $11.1 million of
which approximately $10.3 million was unused and available. At the end of 1997,
there were no material capital commitments. The Company believes that through
internal cash generation, plus its cash
equivalents,
marketable securities31
subject to various restrictions previously set forth, are available for working
capital needs, capital expenditures, strategic investments, mergers and
available borrowings under its line of credit agreements, it has sufficient
resources to cover itsacquisitions, stock repurchases and other potential cash needs during fiscal year 1998.as they may
arise.
EFFECTS OF INFLATION
The effects of inflation were not considered material during fiscal years
1997, 1996,2001, 2000 and 1995,1999, and are not expected to be material for fiscal year 2002.
ACQUIRED IN-PROCESS TECHNOLOGY
In connection with the acquisitions of AGI and SRI, we 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, has had a material adverse impact on E&S's results of
operations. We recorded an impairment loss of $0.2 million relating to the
remaining balance of goodwill at the time of the sale of the REALimage Solutions
Group, in the third quarter of 2001. During the third quarter of 1999, we
recorded an impairment loss of $9.7 million consisting of a write-off of
$4.9 million of goodwill, $4.4 million of intangible assets and $0.4 million of
property, plant and equipment. Actual sales, operating profits and cash flows
attributable to acquired in-process technology have been significantly lower
than the original 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 E&S as a whole are subject to a variety of
factors which may not have been known or estimable at the date of such
acquisitions, and the estimates discussed below should not be considered our
current projections for operating results for the acquired businesses or E&S as
a whole. Following is a description of the acquired in-process technology and
the estimates made by E&S for each of the technologies.
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 product, which was completed and began shipping to customers in
late third quarter of 1998. THE YEAR 2000 ISSUE
BeginningThe 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 for this acquired in-process
technology was $6.1 million.
CAD-FOCUSED PROFESSIONAL GRAPHICS SUBSYSTEM (1200). This technology is a
graphics subsystem with lower costs compared to the mid-range technology,
resulting in 1996, Evans & Sutherland initiateda more cost-effective graphics solution for the reviewend-user. It
provides the cost sensitive user with adequate graphics performance, with
few features and assessmenta single texture configuration option. The technology is
used in the E&S Lightning 1200 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. This project was
completed five months later than originally projected. The assigned value
for this acquired in-process technology was $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
32
requirements. During the third quarter of 1999, we determined the technology
and graphics subsystem, as originally designed, would not be a viable
product in the workstation marketplace. The cost to complete this project
subsequent to the acquisition of AGI was $1.7 million. The project was
completed in the fourth quarter of 1999, approximately 9 months later than
planned. This project was funded by working capital. The assigned value for
this acquired in-process technology was $2.7 million.
ON-BOARD GEOMETRY ENGINE GRAPHICS SUBSYSTEM (ACCELGMX). 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 for this acquired in-process technology was $5.3 million.
The AccelGALAXY performed below sales estimates due to the delay in our
product introduction by E&S and a delayed design win at one major OEM. These
delays, in addition to increased competition, caused an erosion of approximately
50% of the projected average selling price for the AccelGALAXY and a loss of
projected unit sales. Subsequent to our acquisition of AGI, the developer of the
chip used on the AccelGMX also acquired a board company and entered the graphics
accelerator market in direct competition with the AccelGMX. Due to the advantage
of producing the chip, the competitor can produce a comparable product at a
lower cost; thus, the AccelGMX has performed below sales estimates and we no
longer expects to generate significant sales from this product. The E&S
Lightning 1200 performed below sales estimates due to the delay in our product
introduction. As a result of the delay in product introduction, most
OEMs selected a competing product. The expected sales volume and average selling
price of the E&S Lightning 1200 have been significantly reduced. At the time of
the sale of the REALimage Solutions Group in the third quarter of 2001, sales of
all its computerized hardwarethe group's products had decreased to nominal levels.
We periodically review the value assigned to the separate components of
goodwill, intangibles and internal-use software systemsother long-lived assets through comparison to
anticipated, undiscounted cash flows from the underlying assets to assess
recoverability. The assets are considered to be impaired when the expected
future undiscounted cash flows from these assets do not exceed the carrying
balances of the related assets. Based on the events described above and in
orderaccordance with SFAS 121 during the third quarter of 1999 we recorded an
impairment loss of $9.7 million related to ensure that such systems will function properlythe acquisition of AGI and SRI. The
impairment loss consisted of the write-off of $4.9 million of goodwill,
$4.4 million of intangible assets and $0.4 million of property, plant and
equipment. We recorded an impairment loss of $0.2 million relating to the
remaining value of goodwill at the time of the sale of the REALimage Solutions
Group in the third quarter of 2001.
OUTLOOK
2002 is expected to be a year 2000that returns E&S to a focus on its core
business. This encompasses visualization systems, components, spares, repairs,
and beyond. Duringtraining for the last two years,simulation marketplace. Our focus is a function of the Company's computerized informationsale
of the REALimage Solutions Group in 2001 and closing down the RAPIDsite business
in 2001. Implicit in these changes is a consolidation of the business base.
Revenues are expected to contract by 10% from the $145 million mark set in 2001.
However, a more focused management team coupled with core product offerings is
expected to revive our financial performance through higher margin business. New
2001 core business bookings, averaging greater than 40% gross margin, have
positioned our year-end backlog, of $104 million, to support this improvement.
Our main near-term challenge continues to be the completion of our initial
Harmony programs (referred to as the "Big 6 Programs"). We did make significant
progress on these programs during
33
2001. Our return to profitability, on a quarter-by-quarter basis, is dependent
in large part on the successful execution of these programs in the first half of
2002. Year-to-date 2002, milestones are being met, a majority of first unit
systems have been substantially replacedpassed testing, and several are believed to be Year 2000
compliant. It is possible, however, that softwarealready in training. Combined, the
Big 6 Programs are in excess of 90% complete. In looking towards the second half
of the year when these programs acquired from third
parties and incorporated into other applications utilized by the Company may not
be fully Year 2000 compliant. E&S intends to continue testing, replacing, or
enhancing its internal applications through the end of 1999 to ensure that risks
related to such software are minimized. Management does not believe that costs
associated with Year 2000 compliance efforts will have a material impact on the
Company's financial results or operations.
OUTLOOK
Looking forward, the Company expects good revenue and earnings growth
in 1998. The biggest challenge facing the Company is maintaining gross margin
levels, especially in the government business where continuing worldwide
pressure on defense budgets is severe and in contracts in which the Company
functions as the prime contractor. These pressures are expected to be partially
offset by continued profit improvement inessentially complete, we
believe that the Company's new businesses. New
product startup expensesfinancial posture will be much improved. Cash generation for
the second half of 2002 is expected to increase to a level of $5 million per
quarter from operations and profits are expected to be produced.
The foregoing contains "forward-looking statements" within the meaning of
that term in Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Exchange Act of 1934, as amended, including, among others,
those statements preceded by, followed by or including the words "estimates,"
"believes," "expects," "anticipates," "plans," "projects," and similar
expressions.
These forward-looking statements include, but are not limited to, the
following statements:
- the successful execution of the Big 6 programs by the end of 2002;
- we will generate $5 million of cash per quarter and will be profitable in
the second half of 2002;
- projections of sales and net income and issues that may affect sales or
net income;
- projections of capital expenditures;
- plans for future operations;
- financing needs or plans;
- plans relating to our products and services;
- Simulation Group will experience growth in its markets as simulation
training increases in value as an alternative to other training methods,
and as simulation training technology and cost-effectiveness improve;
- additional enhancements to iNTegrator will expand its functionality and
help secure E&S's dominant position in its main target markets, both
commercial and military simulation;
- E&S is able to compete effectively in the simulation market and will
continue to depress earningsbe able to do so in the foreseeable future;
- approximately two-third's of Simulation Group's 2001 backlog will be
converted to sales in 2002 and replaced with new orders;
- the Applications Group's new product will be launched in the first quarterhalf of
19982002;
- our properties are suitable for our immediate needs;
- total research and development spending will be lower in 2002 than in
2001;
- E&S will ultimately prevail in the litigation with Lockheed Martin
Corporation;
- E&S will not be liable for any further material liquidated damages and
late delivery penalties during 2002;
- existing cash, cash equivalents, borrowings available under E&S's various
borrowing facilities, other asset-related cash sources and expected cash
from future operations will be sufficient to meet E&S's anticipated
recovery as new products enter volume
production.
An important indicatorworking capital needs, routine capital expenditures and current debt
service obligations for the Company is its continued strong
performancenext twelve months;
- the guarantees of E&S issued in winning new orders. Record bookings in 1997connection with the services of over $186 million
resulted in a record year-end backlogour joint
venture entity, Quest Flight Training Ltd. to the UK Ministry of $155 million, most of whichDefence
or other parties will not be called upon for payment or performance;
- revenue is expected to be convertedcontract by 10% from 2001 to revenue in 1998.
The Company's investments in internal infrastructure is also beginning2002; and
34
- assumptions relating to produce results, contributingthe foregoing.
Forward-looking statements are inherently subject to an increase in productivity of 18% in 1997
as measured by revenue per employee. In addition, order fulfillment time was
reduced, resulting in improvements in on-time deliveries to customers. The
complete reengineering of supply-chain processes contributed to this
improvement, as well as to improved inventory turns and overall product quality.
Corporate development activities, including mergers, acquisitions, and strategic
investments, continue to be an important part of the Company's strategic growth
plan.
The foregoing contains forward-looking statements that involve risks and
uncertainties, including but not limitedsome of which cannot be predicted or quantified. Future events
and actual results could differ materially from those set forth in, contemplated
by, or underlying the forward-looking information. Our actual results could
differ materially from these forward-looking statements. In addition to quarterly fluctuations in
results, the timely availability and customer acceptance of new products, the
impact of competitive products and pricing, general market trends and
conditions, and
other risks detailed belowdescribed in the "Factors That May Affect Future Results". Actual results may vary materially from projected results. discussed
below, 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, product delays, commercialization and technology, and our ability
to maintain credit facilities to support our operations on favorable and
acceptable terms. In light of these risks and uncertainties, there can be no
assurance that the events contemplated by the forward-looking statements
contained in this annual report will, in fact, occur.
FACTORS THAT MAY AFFECT FUTURE RESULTS
Evans & Sutherland'sOur domestic and international businesses operate in highly competitive
markets that involve a number of risks, some of which are beyond the Company'sour control.
While E&S management iswe are optimistic about the
Company'sour long-term prospects, the following discussion
highlights some risks and uncertainties that should be considered in evaluating
itsour growth outlook.
Overview
The high-tech nature of the Company's business is subject to both
national and worldwide economic and political influences such as recession,
political instability, the economic strength of governments, and rapid changes
in technology. The Company's operating results are dependentOUR BUSINESS MAY SUFFER IF OUR COMPETITIVE STRATEGY IS NOT SUCCESSFUL
Our continued success depends on itsour ability to rapidly develop, manufacture, and market innovative productscompete in an industry that meet customers
needs. Inherent in this process is a number of risks that the Company must
manage in order to achieve favorable operating results. The process of
developing new high technology products is complex, expensive, and uncertain,
requiring innovative designs and features that anticipate customer needs,
competing solutions, and technological trends. The products, once developed,
must be manufactured and distributed in sufficient volumes and quality at
acceptable costs and competitive prices. Furthermore, portions of the
manufacturing operations are dependent on the ability of suppliers to deliver
high quality components and subassemblies in time to meet critical manufacturing
and distribution schedules. Constraints in these supply lines and insufficient
quality could adversely affect the Company's operating results until alternate
sourcing can be developed. In accordance with the provisions of the Private
Securities Litigation Reform Act of 1995, the cautionary statements set forth
below identify important factors that could cause actual results to differ
materially from those in the forward-looking statements contained in this
report.
Competitive Environment
The computer industry
is highly competitive, with rapid technological advances and constantly
improving price/products in both price and performance. As most market areas in which
E&S
operateswe operate continue to grow, the Company iswe are experiencing increased competition, and it expectswe
expect this trend to continue. In recent years, we have been forced to adapt to
domestic and worldwide political, economic, and technological developments that
have strongly affected these
markets, requiring adaptationour markets. Under our current competitive strategy, we
endeavor to remain competitive by market participants. Since 1994, E&S has
followed a three-point growth strategy, consisting of growing existing businesses, developing new
businesses internally, and selectively acquiring businesses. These strategies have broadened the Company's business portfolio,
creating opportunities for increasedbusinesses, increasing efficiency,
and market competitiveness,
improvedimproving access to new markets, and reduced exposure to airline industry and
defense budget reductions. In addition, E&S continues to undertake cost
reduction efforts throughout all business units while monitoring and adjusting
employment levels consistent with changing business requirements.
Evans & Sutherland'sreducing costs. Although our executive
management team and Board of Directors continue to review and monitor the Company'sour
strategic plans, we have no assurance that we will be able to continue to follow
our current strategy or that this strategy will be successful.
OUR STOCK PRICE MAY BE ADVERSELY IMPACTED IF OUR SALES OR EARNINGS FAIL TO MEET
EXPECTATIONS
Our stock price is subject to significant volatility and will likely be
adversely affected if sales or earnings in connection with
its three-point growth strategy. These plans include assessing business
combinationsany quarter fail to meet the
investment community's expectations. Our sales and joint ventures with companies engaged in similar or closely
related businesses, building market share in core businesses,earnings may fail to meet
expectations because they fluctuate and divesting less
well-positionedare difficult to predict. Our earnings
during 2001 and non-core businesses2000 fluctuated significantly from quarter to remain competitive.
Period to Period Fluctuations
The Company's operating results may fluctuate for a numberquarter. One of
reasons.
Delivery cycles and contract lengths are typically long for its core
simulation-related businesses, which make upthe reasons we experience such fluctuations is that the largest share of the Company's
revenuesour
sales and earnings. Well over half of each quarter's revenues resultearnings is from orders booked in previous quarters. Because the Company plans its operating
expenses, many ofour Simulation Group, which are relatively fixed in the short term, on expected
revenue, even a small revenue shortfall or shift may cause a period's results to
be below expectations. Such a revenue shortfall could arise from any number of
factors, including delays in the availability of products, delays from chip
suppliers, discontinuance of key components from suppliers, other supply
constraints, transit interruptions, overall economic conditions, or natural
disasters.typically has long
delivery cycles and contract lengths. The timing of customer acceptance of
certain large-scale commercial or government contracts may also have a significant effect onaffect the timing and
amount of sales that can be recognized; thus, causing our periodic operating
results. U.S.results to fluctuate. Our results may further fluctuate if United States and
international government defense budgets may require the
Company togovernments delay or even cancel production on large-scale
contracts due to lack of available funding.
35
GrossOur earnings may not meet either investor or internal expectations because
our budgeted operating expenses are relatively fixed in the short term and even
a small sales shortfall may cause a period's results to be below expectations.
Such a sales shortfall could arise from any number of factors, including:
- delays in the availability of products,
- delays from chip suppliers,
- discontinuance of key components from suppliers,
- other supply constraints,
- transit interruptions,
- overall economic conditions, and
- customer demand.
Another reason our earnings may not meet expectations is that our gross
margins are heavily influenced by mix considerations. These mix considerations
includinginclude the mix of lower-margin prime contracts versus sub-contracts, the mix of
new products and markets versus established products and markets, the mix of
high-end products versus low-end products, as well as the mix of configurations
within these product categories. Future margins may not duplicate historical
margins or growth rates.
The Company's stock price, like thatOUR SIGNIFICANT DEBT COULD ADVERSELY AFFECT OUR FINANCIAL RESOURCES AND PREVENT
US FROM SATISFYING OUR DEBT SERVICE OBLIGATIONS
We have a significant amount of other technology companies,indebtedness and may also incur additional
indebtedness in the future. We may not generate sufficient cash flow from
operations, or have future borrowings available to us, sufficient to pay our
debt. At December 31, 2001, total indebtedness was $38.9 million and our total
stockholders' equity was $64.7 million.
Our ability to make debt payments or refinance our indebtedness depends on
future performance, which, to a certain extent, is subject to general economic,
financial, competitive and other factors, some of which are beyond our control.
Based upon our current level of operations and anticipated growth, management
believes that available cash flow, together with available credit, will be
adequate to meet our financial needs. There can be no assurance, however, that
our business will generate sufficient cash flow from operations or that future
borrowings will be available in an amount sufficient to enable us to pay our
debts or to make necessary capital expenditures, or that any refinancing of debt
would be available on commercially reasonable terms or at all.
Our substantial indebtedness could have important consequences including,
but not limited to, the following:
- the ability to obtain additional financing for working capital, capital
expenditures, acquisitions, or other purposes may be impaired or
unavailable;
- a portion of cash flow will be used to pay interest expense, which will
reduce the funds that would otherwise be available for operations and
future business opportunities;
- a substantial decrease in net operating cash flows or an increase in
expenses could make it difficult for us to meet our debt service
requirements and force us to modify operations;
- we may be more highly leveraged than our competitors, which may place us
at a competitive disadvantage;
- our substantial indebtedness may make us more vulnerable to a downturn in
our business or in the economy generally; and
36
- some of our existing debt contains financial and restrictive covenants
that limit our ability to, among other things, borrow additional funds,
acquire and dispose of assets, and pay cash dividends.
A portion of our outstanding indebtedness bears interest at variable rates.
Any increase in interest rates will reduce funds available to us for our
operations and future business opportunities and will exacerbate the
consequences of our leveraged capital structure.
COVENANTS AND RESTRICTIONS IN OUR CREDIT DOCUMENTS LIMIT OUR ABILITY TO TAKE
CERTAIN ACTIONS
Our credit documents contain significant volatility. If revenuesfinancial and operating covenants
that limit the discretion of management with respect to certain business
matters. These covenants include, among others, restrictions on our ability to:
- declare dividends or earningsredeem or repurchase capital stock;
- incur certain additional debt;
- grant liens;
- make certain payments and investments;
- sell or otherwise dispose of assets; and
- consolidate with other entities.
We must also meet certain financial ratios and tests, including a minimum
tangible net worth that adjusts each quarter, an unbilled receivables to billed
receivables ratio, and a limitation of $12.0 million of aggregate capital
expenditures in any quarter failfiscal year. Failure to comply with the obligations
contained in the credit documents could result in an event of default, and
possibly the acceleration of the related debt and the acceleration of debt under
other instruments evidencing debt that may contain cross-acceleration or
cross-default provisions. On February 22, 2002, Foothill agreed to waive all
events of financial covenant default through December 31, 2001 and to revise our
2002 financial covenants. Therefore, we are currently in compliance with our
financial covenants, although a continuation of recent negative operating trends
could impact our future compliance with such covenants. Should the need arise,
we will negotiate with our lenders to modify and expand various financial
covenants, however, no assurance can be given that such negotiations will result
in modifications that will allow us to continue to be in compliance or otherwise
be acceptable to us.
DELAYS IN THE TIMELY DELIVERY OF OUR PRODUCTS MAY PREVENT US FROM INVOICING OUR
COSTS AND ESTIMATED EARNINGS IN EXCESS OF BILLINGS ON UNCOMPLETED CONTRACTS.
In accordance with accounting for long-term contracts, we record an asset
for our costs and estimated earnings that exceed the amount we are able to bill
our customers on uncompleted contracts. At December 31, 2001, $29.8 million of
our costs and estimated earnings that exceeded our billings on uncompleted
contracts related to four contracts with four different customers. We are not
able to bill these amounts unless we meet the investment community's expectations, there could be an immediate
impact on the Company's stock price. The stock price may also be affected by
broader market trends unrelatedcertain contractual milestones related
to the Company's performance.
Researchdelivery and Development
E&S commitsintegration of our Harmony image generators. Our failure to
achieve these contractual milestones by timely delivering and integrating our
Harmony image generators may significantly impact our ability to recover our
costs and estimated earnings that exceeded our billings on uncompleted
contracts, which could severely impact our cash flow.
37
FAILURE TO PROTECT OUR INTELLECTUAL PROPERTY COULD HARM OUR NAME RECOGNITION
EFFORTS AND ABILITY TO COMPETE EFFECTIVELY
Currently, we rely on a combination of patents, trademarks, copyrights and
common law safeguards including trade secret protection. To protect our
intellectual property rights in the future, we intend to continue to rely on a
combination of patents, trademarks, copyrights and common law safeguards,
including trade secret protection. We also rely on restrictions on use,
confidentiality and nondisclosure agreements and other contractual arrangements
with our employees, affiliates, customers, alliance partners and others. The
protective steps we have taken may be inadequate to deter misappropriation of
our intellectual property and proprietary information. A third party could
obtain our proprietary information or develop products or technology competitive
with ours. We may be unable to detect the unauthorized use of, or take
appropriate steps to enforce our intellectual property rights. Effective patent,
trademark, copyright and trade secret protection may not be available in every
country in which we offer or intend to offer our products and services to the
same extent as in the United States. Failure to adequately protect our
intellectual property could harm or even destroy our brands and impair our
ability to compete effectively. Further, enforcing our intellectual property
rights could result in the expenditure of significant financial and managerial
resources and may not prove successful.
OUR SIGNIFICANT INVESTMENT IN RESEARCH AND DEVELOPMENT MAY NOT BE REALIZED
We have no assurance that our significant investment in research and
development will generate future sales or benefits. We currently make and plan
to continue to make a significant investment in long-term research and development. Total
spending for research and development was $28.8 million or 19.8% of sales in
2001 as compared to $44.3 million or 26.5% of sales in 2000. Developing new
products and software is expensive and the
investment in product development often involves a long payback cycle.
While the
Company haswe have every reason to believe these investments will ultimately be rewarded with
revenue-generatingsales-generating products, customer acceptance ultimately dictates the success
of development and marketing efforts.
The Company plans to
continue significant investments in software research and development and
related product opportunities from which significant revenue is not anticipated
for a number of years. Management expects total spending for research and
development in 1998 to increase over spending in 1997 in absolute dollars, but
not to increase as a percentage of sales.
Product Development and Introduction
The Company'sWE MAY NOT CONTINUE TO BE SUCCESSFUL IF WE ARE UNABLE TO DEVELOP, PRODUCE AND
TRANSITION OUR PRODUCTS
Our continued success depends on itsour ability to develop, produce and
transition technologically complex and innovative products. Product transitions are a
recurring part of the Company's business. A number of risks are inherent in this
process. During fiscal 1998, for example, the Company is heavily committedproducts that meet customer
needs. We have no assurance that we will be able to meeting delivery schedules for its Harmonysuccessfully continue such
development, production and iNTegrator products. While E&S
has every expectation to meet these schedules, the Company has customer
contracts that include liquidated damages if delivery schedules are not met.transition.
The development of new technologytechnologies and products is increasingly complex and
uncertain,expensive, which among other risks, increases the risk of product introduction
delays. The introduction of a new product requires close collaboration and
continued technological advancement involving multiple hardware and software
design and manufacturing teams within the CompanyE&S as well as teams at outside suppliers
of key components, such as
chipsets.components. The failure of any one of these elements could cause the Company'sour new
products to fail to meet specifications or to miss the aggressive timetables
that we establish and the Company establishes.market demands.
As the variety and complexity of the Company'sour product families increase, the process
of planning and managing production, and inventory levels, and delivery schedules
also becomes increasingly complex. In addition, the extent to which a new
product gains rapid acceptance is strongly affected by the availability of key
applications optimized for the new systems. There is no assurance that acceptance of the Company'sand
demand for our new systemsproducts will not be affected by delays in this process.
Additionally, if we are unable to meet our delivery schedules, we may be subject
to the penalties, including liquidated damages that are included in some of our
customer contracts, and termination of our contracts.
Product life-cycles placetransitions are a premium on Evans & Sutherland'srecurring part of our business. Our short product
life cycles require our ability to successfully manage the timely transition
from current products to new products. The Company mayIn fact, it is not unusual for us to
announce a new products,product while the productits predecessor is still in the final stages of its
development. The Company'sOur transition results could be adversely affected by such factors
asas:
- development delays,
the38
- late release of products late to manufacturing,
- quality or yield problems experienced by production or suppliers,
- variations in product costs,
- excess inventories of older products and components, and
- delays in customer purchases of existing products in anticipation of the
introduction of new products.
IN THE EVENT WE SUFFER FURTHER PRODUCT DELAYS, WE MAY BE REQUIRED TO PAY CERTAIN
CUSTOMERS SUBSTANTIAL LIQUIDATED DAMAGES AND OTHER PENALTIES
The variety and complexity of our high technology product lines require us
to deal with suppliers and subcontractors supplying highly specialized parts,
operating highly sophisticated and narrow tolerance equipment in performing
highly technical calculations. The processes of planning and managing
production, inventory levels and delivery schedules are also highly complex and
specialized. Many of our products must be custom designed and excess inventoriesmanufactured,
which is not only complicated and expensive, but can also require a number of
oldermonths to accomplish. Slight errors in design, planning and managing production,
inventory levels, delivery schedules, or manufacturing can result in
unsatisfactory products that may not be correctable. If we are unable to meet
our delivery schedules, we may be subject to penalties, including liquidated
damages that are included in some of our customer contracts. During the fourth
quarter of 1999, we accrued $8.2 million for payments of liquidated damages and
components.
U.S. Government Contractspenalties due to product delays. As of December 31, 2000, we have paid
$6.0 million in connection with liquidated damages. During 2000, we accrued an
additional $0.9 million for late delivery penalties. During 2001 we accrued
$2.9 million to cover penalties, against which we paid $2.7 million. In 1997, 29%2001, we
also accrued $1.5 million to cover additional costs incurred by customers. There
is no assurance that we may not incur substantial liquidated damages in the
future in connection with further product delays.
WE MAY NOT MAINTAIN A SIGNIFICANT PORTION OF OUR SALES IF WE FAIL TO MAINTAIN
OUR UNITED STATES GOVERNMENT CONTRACTS
In 2001, 48% of the Company'sour sales were made to agencies of the U.S.United States government,
either directly or through prime contractors or subcontractors, for which there
is intense competition. Accordingly, we have no assurance that we will be able
to maintain a significant portion of the
Company'sour sales. These sales are subject to the
inherent risks related to government contracts, including uncertainty of
economic conditions, changes in government policies and requirements that may
reflect rapidly changing military and political developments, and the availabilityunavailability
of funds. These risks also include technological uncertainties and obsolescence,
and dependence on annual Congressional appropriation and allotment of funds. In
the past, some of the Company'sour programs have been delayed, curtailed, or terminated.
Although E&Swe cannot predict such uncertainties, in theour opinion of
management there are no
spending reductions or funding limitations pending that would impact Companyour
contracts.
Other characteristics of the industry aregovernment contract market that may affect our
operating results include the complexity of designs, the difficulty of
forecasting costs and schedules when bidding on developmental and highly
sophisticated technical work, and the rapidityspeed with which product lines become
obsolete due to technological advances and other factors characteristic of the
industry. Earningsmarket. Our earnings may vary materially on some contracts depending upon the
types of government long-term contracts undertaken, the costs incurred in their
performance, and the achievement of other performance objectives. DueFurthermore,
due to the intense competition for available U.S.United States government business,
maintaining or expanding government business increasingly requires E&Sus to commit
additional working capital for long-term programs and additional investments in
Company-fundedcompany-funded research and development.
As39
Our dependence on government contracts may lead to other perils as well
because as a U.S.United States government contractor or sub-contractor, Evans & Sutherland'sour
contracts and operations are subject to government oversight. The government may
investigate and make inquiries of the Company'sour business practices and conduct audits of
our contract performance and cost accounting. These investigations may lead to
claims against the Company.E&S. Under U.S.United States government procurement regulations and
practices, an indictment of a government contractor could result in that
contractor being fined and/or suspended for a period of time from eligibility
for bidding on, or for award of, new government contracts; a conviction could
result in debarment for a specified period of time.
Although
the outcomeOUR SALES MAY SUFFER IF WE LOSE CERTAIN SIGNIFICANT CUSTOMERS
We currently derive a significant portion of such investigations and inquiries cannot be predicted, in the
opinionour sales from a limited number
of management there are no claims, audits,non-U.S. government customers. The loss of any one or investigations pending
against E&S that are likely tomore of these customers
could have a material adverse effect on either the
Company'sour business, or its consolidated financial position orcondition and
results of operations. International Business
Evans & Sutherland'sWe were dependent on four of our non-U.S. government
customers for approximately 32% of our consolidated sales in 2001. We expect
that sales to a limited number of customers will continue to account for a
substantial portion of our sales in the foreseeable future. We have no assurance
that sales from this limited number of customers will continue to reach or
exceed historical levels in the future. We do not have supply contracts with any
of our significant customers.
OUR SALES WILL DECREASE IF WE FAIL TO MAINTAIN OUR INTERNATIONAL BUSINESS
Any reduction of our international business could significantly affect our
sales. Our international business accounted for 59%34% of our 2001 sales. We expect
that international sales will continue to be a significant portion of our
overall business in the foreseeable future.
Our international business experiences many of the Company's 1997 sales. Internationalsame risks our domestic
business involvesencounters as well as additional risks such as exposure to currency
fluctuations and changes in foreign economic and political environments, such as those currently affecting Asian markets. Internationalenvironments. Despite
our exposure to currency fluctuations, we are not engaged in any material
hedging activities to offset the risk of exchange rate fluctuations.
Our international transactions frequently involve increased financial and
legal risks arising from stringent contractual terms and conditions and widely
differing legal systems, customs, and moresstandards in foreign countries. In
addition, our international sales often include sales to various foreign
government armed forces, with many of the same inherent risks associated with
U.S.United States government sales identified above. E&S
expectspreviously.
FUTURE LOSSES COULD IMPAIR OUR ABILITY TO RAISE CAPITAL OR BORROW MONEY AND
CONSEQUENTLY AFFECT OUR STOCK PRICE
Although we recorded net sales of $145.3 million for the twelve months ended
December 31, 2001, we incurred a net loss of $27.5 million in 2001. We have
incurred net losses totaling $136.5 million over the past four years. We cannot
assure you that international saleswe will continuebe profitable in future periods. Losses in future
periods could impair our ability to beraise additional capital or borrow money as
needed, could decrease our stock price and could cause a significant portionviolation of the Company's overall businesscertain
covenants in the foreseeable future.
Commercial Airline Business
The Company'sour credit facilities.
IF OUR COMMERCIAL SIMULATION BUSINESS DECLINES, OUR SALES WILL DECREASE
We have no assurance that our commercial simulation (airline) business has strengthened
since its decision in 1994will
continue to pursue a new strategysucceed. Our commercial simulation business currently accounts for
approximately 15% to 20% of supplying complete
systems insteadour sales. This business is subject to many of just components. Characteristicsthe
risks related to the commercial simulation market that may
40
adversely affect our business. The following risks are characteristic of the
commercial simulation market includemarket:
- uncertainty of economic conditions,
- dependence upon the strength of the commercial airline industry,
- air pilot training requirements,
- competition,
- changes in technology, and
- timely performance by subcontractors on contracts in which E&S is the
prime contractor,contractor.
WE MAY MAKE ACQUISITIONS THAT ARE UNSUCCESSFUL OR STRAIN OR DIVERT OUR RESOURCES
FROM MORE PROFITABLE OPERATIONS
We intend to consider acquisitions, alliances, and transactions involving
other companies that could complement our existing business. However, we may not
be able to identify suitable acquisition parties, joint venture candidates, or
transaction counterparties. Also, even if we can identify suitable parties, we
may not be able to obtain the financing necessary to complete any such
transaction or consummate these transactions on terms that we find favorable.
We may not be able to successfully integrate any businesses that we acquire
into our existing operations. If we cannot successfully integrate acquisitions,
our operating expenses may increase. This increase would affect our net
earnings, which could adversely affect the value of our outstanding securities.
Moreover, these types of transactions may result in potentially dilutive
issuances of equity securities, the incurrence of additional debt, and
amortization of expenses related to goodwill and intangible assets, all of which
could adversely affect our profitability. These transactions involve numerous
other risks as well, including the diversion of management attention from other
business concerns, entry into markets in which we have had no or only limited
experience, and the potential loss of key employees of acquired companies.
Occurrence of any of these risks could have a material adverse effect on us.
OUR OPERATIONS COULD BE HURT BY TERRORIST ATTACKS AND OTHER ACTIVITIES THAT MAKE
AIR TRAVEL DIFFICULT OR REDUCE THE WILLINGNESS OF OUR COMMERCIAL AIRLINE
CUSTOMERS TO PURCHASE OUR SIMULATION PRODUCTS.
During 2001, $30.0 million, or 21% of our total revenue generated from our
Simulation Group, was derived from sales of our simulation products to
commercial airline companies and other third parties in the commercial airline
industry. The demand for our various commercial simulation products and services
is heavily dependant upon new orders from these commercial airline customers. In
the event terrorist attacks or other activities make air travel difficult or
reduce the demand or willingness of our customers to purchase our commercial
simulation products, our revenue may decline substantially. Since September 11,
2001, training requirements have increased to certify pilots, co-pilots and
flight engineers for different aircraft types and changing flight procedures. In
conjunction with this trend, the Simulation Group has been contacted by one of
our largest commercial customers to deliver two-times the average annual number
of systems. In addition to these additional systems, the contract provides for
an option to deliver further systems in 2002. However, at this time, we are
unable to predict the long-term impact of these events on either our industry as
a whole or on our operations and financial condition in particular.
OUR SHAREHOLDERS MAY NOT REALIZE CERTAIN OPPORTUNITIES BECAUSE OF THE
ANTI-TAKEOVER EFFECT OF STATE LAW
We may be subject to the Utah Control Shares Acquisition Act which provides
that any person who acquires 20% or more of the outstanding voting shares of a
publicly held Utah corporation will
41
not have voting rights with respect to the acquired shares unless a majority of
the disinterested shareholders of the corporation votes to grant such rights.
This could deprive shareholders of opportunities to realize takeover premiums
for their shares or other advantages that large accumulations of stock would
provide because anyone interested in acquiring E&S could only do so with the
cooperation of our board of directors.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The principal market risks to which we are exposed are changes in foreign
currency exchange rates and changes in technology.
New Businessesinterest rates. Our international sales,
which accounted for 34% of our total sales in 2001 are concentrated in the
United Kingdom, continental Europe and Asia. 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. We do
not enter into contracts for trading purposes and do not use leveraged
contracts. As E&S developsof December 31, 2001, we had no material sales or purchase
contracts in currencies other than U.S. dollars and grows its new businesses, there are certain
uncertaintieshad no foreign currency
sales or purchase contracts.
We reduce our exposure to changes in interest rates by maintaining a high
proportion of our debt in fixed-rate instruments. As of December 31, 2001, 47%
of our total debt was in fixed-rate instruments. Had we fully drawn on our
$30 million revolving line of credit with Foothill Capital Corporation and our
foreign line of credit, 39% of our total debt would be in fixed-rate
instruments.
The information below summarizes E&S's market risks associated with each business unit. These risks include:
(a) developing strong partner relationships with board manufacturers,debt
obligations as well as
intense competitive pressures forof December 31, 2001. Fair values have been determined by quoted
market prices. For debt obligations, the Desktop Graphics business; (b) acceptancetable below presents the principal cash
flows and related interest rates at year end by fiscal year of new technology and increasing market size and demand in a developing new
market for the Digital Theater business; (c) the technical feasibility and
uncertain market acceptance in a developing new market for the Digital Studio
business; and (d) changes in technology and intense competition for the Board
Products business. Risks also include technological uncertainties and
obsolescence, uncertaintymaturity. Bank
borrowings bear variable rates of economic conditions, commitment of working capital,
market acceptance, and other risks inherent in new businesses.
Private Finance Initiative
The Private Finance Initiative (PFI) is designed to increase the
involvement of the private sector in the provision of services which have
traditionally been provided by the public sector. PFI requires the private
sector to use its own capital to invest in assets which then are used to provide
a long term service such as simulation training to its public sector customer.
The number of programs being developed as PFIs is increasing worldwide. E&S is
currently involved in proposals to international military customers where it
would be an equity partner of the PFI prime contractor and program manager. PFI
programs, however, are subject to inherent risks, including the commitment of
working capital and fixed assets, long cycles in which to receive a return on
investment, and termination or default of contracts. These risks also include
technological uncertainties and obsolescence, uncertainty of economic
conditions, changes in U.S. and international government policies and
requirements that may reflect rapidly changing military and political
developments,interest and the availability6% Debentures bear a fixed
rate of funds.
Forward Looking Statements
This annual report contains both historical facts and forward-looking
statements. Any forward-looking statements involve risks and uncertainties,
including but not limited to riskinterest. The information below should be read in conjunction with
Note 10 of product demand, market acceptance, economic
conditions, competitive products and pricing, difficulties in product
development, commercialization, technology, and other risks detailed in this
filing. Although the Company believes it has the product offerings and resources
for continuing success, future revenue and margin trends cannot be reliably
predicted. Factors externalNotes to the Company can resultConsolidated Financial Statements in volatilityPart II 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.this
annual report.
THERE- FAIR
RATE 2002 2003 2004 2005 2006 AFTER TOTAL VALUE
-------- -------- -------- -------- -------- -------- -------- -------- --------
DEBT
Bank Borrowings 9.1% $ 20,830 -- $ 71 -- -- -- $ 20,901 $ 20,901
======== ======== ======== ======== ======== ======== ======== ========
6% Debentures 6.0% -- -- -- -- -- $ 18,015 $ 18,015 $ 6,756
-------- -------- -------- -------- -------- -------- -------- --------
Total debt $ 20,830 -- $ 71 -- -- $ 18,015 $ 38,916 $ 27,657
======== ======== ======== ======== ======== ======== ======== ========
42
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following constitutes a list of Financial Statements included in
Part II of this report:
- Report of Management
- Report of Independent Auditors' ReportAuditors
- Consolidated Balance Sheets -as of December 31, 19972001 and December 27,
1996.2000
- Consolidated Statements of Operations - Yearsfor each of the years in the
three-year period ended December 31, 1997,2001
- Consolidated Statements of Comprehensive Loss for each of the years in the
three-year period ended December 27, 1996, and December 29, 1995.31, 2001
- Consolidated Statements of Stockholders' Equity - Yearsfor each of the years in
the three-year period ended December 31, 1997, December 27, 1996, and December 29, 1995.2001
- Consolidated Statements of Cash Flows - Yearsfor each of the years in the
three-year period ended December 31, 1997, December 27, 1996, and December 29, 1995.2001
- Notes to Consolidated Financial Statements - Yearsfor each of the years in the
three-year period ended December 31, 1997, December 27, 1996, and December 29, 1995.2001
The following constitutesconsists of a list of Financial Statement Schedules included
in Part IV of this report:
- Schedule II - ValuationII--Valuation and Qualifying Accounts for each of the years in
the three-year period ended December 31, 2001
Schedules other than those listed above are omitted because of the absence
of conditions under which they are required or because the required information
is presented in the Financial Statements or notes thereto.
43
REPORT OF MANAGEMENT
Responsibility for the integrity and objectivity of the financial
information presented in this report rests with the management of Evans &
Sutherland. The accompanying financial statements have been prepared in
conformity with generally accepted accounting principles applied on a consistent
basis and, where necessary, include estimates based on management judgment.
Management also prepared other information in this report and is responsible for
its accuracy and consistency with the financial statements.
Evans & Sutherland has established and maintains an effective system of
internal accounting controls. The Company believesWe believe this system provides reasonable
assurance that transactions are executed in accordance with management
authorization in order to permit the financial statements to be prepared with
integrity and reliability and to safeguard, verify, and maintain accountability
of assets. In addition, Evans & Sutherland's business ethics policy requires
employees to maintain the highest level of ethical standards in the conduct of
the Company'sour business.
Evans & Sutherland's financial statements have been audited by KPMG Peat Marwick LLP,
independent public accountants. Management has made available all the Company'sof our
financial records and related data to allow KPMG Peat Marwick LLP to express an informed
professional opinion in their accompanying report.
The Audit Committee of the Board of Directors is composed of the
Chairman of the Board and all outsidethree
independent directors and meets regularly with the independent accountants, as
well as with Evans & Sutherland management, and
internal auditing, to review accounting, auditing,
internal accounting control and financial reporting matters.
James R. Oyler John T. Lemley
President and
James R. Oyler William M. Thomas
Vice President and Chief Financial
President and Chief Executive Officer Officer
Chief Financial Officer
REPORT OF INDEPENDENT ACCOUNTANTSAUDITORS
The Board of Directors and Stockholders
Evans & Sutherland Computer Corporation:
We have audited the consolidated financial statements of Evans & Sutherland
Computer Corporation and subsidiaries as listed in the accompanying index. In
connection with our audits of the consolidated financial statements, we have
also have audited the financial statement schedule as listed in the accompanying
index. These consolidated financial statements and financial statement schedule
are the responsibility of the Company'sEvans & Sutherland's management. Our responsibility is
to express an opinion on these consolidated financial statements and financial
statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted auditing
standards.in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Evans &
Sutherland Computer Corporation and subsidiaries as of December 31, 19972001 and
December 27, 1996,2000, and the results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 1997,2001, in conformity with
accounting principles generally accepted accounting principles.in the United States of America. Also
in our opinion, the related financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
KPMG Peat Marwick LLP
February 11, 1998
Salt Lake City, Utah
March 15, 2002
44
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1997 and December 27, 1996
(In thousands, except share amounts)CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Assets 1997 1996
------DECEMBER 31,
----------------------
2001 2000
-------- --------
Current assets:Assets:
Cash and cash equivalents $ 8,17610,651 $ 16,521
Marketable securities 48,928 46,45411,898
Restricted cash 870 2,024
Accounts receivable, less allowanceallowances for doubtful
receivables of $851$6,413 in 19972001 and $563$4,411 in 1996 36,066 34,8422000 30,516 34,572
Inventories (note 3) 26,885 20,20238,226 38,383
Costs and estimated earnings in excess of billings on
uncompleted contracts (note 4) 51,799 34,166
Deferred income taxes (note 9) 4,224 4,84147,761 68,464
Prepaid expenses and deposits 3,620 2,1874,817 5,326
-------- --------
Total current assets 179,698 159,213132,841 160,667
Property, plant and equipment, (note 5) 44,368 42,671
Investment securities (note 2) 5,000 7,057
Deferred income taxes (note 9) 3,802 -net 41,967 48,665
Investments 1,952 5,429
Goodwill and other intangible assets, net -- 374
Other assets 1,522 1,950593 943
-------- --------
$234,390 $210,891Total assets $177,353 $216,078
======== ========
Liabilities and Stockholders' Equity
------------------------------------stockholders' equity:
Current liabilities:
Notes payable to banks (note 6)portion of long-term debt $ 950154 $ 5,334344
Line of credit agreements 20,676 --
Accounts payable 14,353 6,37011,503 27,087
Accrued expenses (note 7) 18,061 13,93317,272 26,527
Customer deposits 6,574 2,058
Income taxes payable (note 9) 4,462 -3,650 3,908
Billings in excess of costs and estimated earnings on
uncompleted contracts (note 4) 6,341 4,59525,053 27,710
-------- --------
Total current liabilities 50,741 32,29078,308 85,576
-------- --------
Long-term debt (note 8) 18,015 18,015
Deferred income taxes (note 9) - 11418,086 25,563
Pension and retirement obligations 16,300 13,305
-------- --------
Total liabilities 112,694 124,444
Commitments and contingencies (notes 116, 9 and 17)13)
Redeemable preferred stock, class B-1, no par value;
authorized 1,500,000 shares; issued and outstanding zero
shares in 2001 and 901,408 shares in 2000 -- 24,000
-------- --------
Stockholders' equity (notes 10 and 15):equity:
Preferred stock, no par value; authorized 10,000,0008,500,000
shares; no shares issued and outstanding - --- --
Common stock, $.20 par value; authorized 30,000,000
shares; issued and outstanding 9,066,74310,739,753 shares in 19972001 and 9,056,8719,772,118
shares in 1996 1,813 1,8112000 2,148 1,954
Additional paid-in capital 8,025 8,63949,030 24,752
Common stock in treasury, at cost; 352,500 shares (4,709) (4,709)
Retained earnings 155,576 150,496
Net unrealized18,561 46,018
Accumulated other comprehensive loss on marketable and investment securities (68) (541)
Cumulative translation adjustment 288 67(371) (381)
-------- --------
Total stockholders' equity 165,634 160,47264,659 67,634
-------- --------
$234,390 $210,891Total liabilities and stockholders' equity $177,353 $216,078
======== ========
See accompanying notes to consolidated financial statements.45
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended December 31, 1997, December 27, 1996, and
December 29, 1995
(In thousands, except per share amounts)CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1997 1996 1995
---------- ---------- ----------YEAR ENDED DECEMBER 31,
------------------------------------
2001 2000 1999
-------- -------- --------
Net sales (notes 12 and 13) $ 159,353 $ 130,564 $ 113,194Sales $145,263 $166,980 $200,885
Cost of sales 84,139 65,935 62,768
---------- ---------- ----------115,823 137,532 127,556
Write-off of inventories -- -- 13,230
-------- -------- --------
Gross profit 75,214 64,629 50,426
---------- ---------- ----------29,440 29,448 60,099
-------- -------- --------
Expenses:
Marketing,Selling, general and administrative 35,333 31,357 30,71430,061 34,406 44,554
Research and development 25,492 21,753 19,406
Write-off28,844 44,264 44,358
REALimage transition costs 5,297 -- --
Restructuring charges 2,843 (761) 1,460
Impairment loss 220 -- 9,693
-------- -------- --------
Operating expenses 67,265 77,909 100,065
-------- -------- --------
(37,825) (48,461) (39,966)
Gain on sale of acquired research and development - - 705
---------- ---------- ----------
60,825 53,110 50,825assets held for sale 9,000 -- --
Gain fromon sale of business unit (note 18) - - 23,506
---------- ---------- ----------774 1,918 --
-------- -------- --------
Operating earnings 14,389 11,519 23,107loss (28,051) (46,543) (39,966)
Other income (expense):
Interest income 3,239 3,892 4,75231 659 1,849
Interest expense (1,300) (1,434) (1,477)(2,456) (2,195) (1,333)
Loss on write down of investment securities (9,575) - -(306) (7,786) (350)
Gain on sale of marketable and investment securities - 1,868 7,126538 6,472 --
Other 85 184 72
---------- ---------- ----------
(7,551) 4,510 10,473
---------- ---------- ----------
Earnings(385) (1,154) 933
-------- -------- --------
(2,578) (4,004) 1,099
-------- -------- --------
Loss before income taxes and extraordinary gain 6,838 16,029 33,580(30,629) (50,547) (38,867)
Income tax expense (note 9) 1,758 5,677 13,096
---------- ---------- ----------
Earnings before extraordinary gain 5,080 10,352 20,484
Extraordinary gain from repurchase(benefit) (3,172) 19,023 (15,413)
-------- -------- --------
Net loss (27,457) (69,570) (23,454)
Accretion of convertible debentures,
net of income taxes of $209 in 1995 (note 8) - - 327
---------- ---------- ----------redeemable preferred stock -- 228 228
-------- -------- --------
Net earnings $ 5,080 $ 10,352 $ 20,811
========== ========== ==========
Basic earningsloss applicable to common stock $(27,457) $(69,798) $(23,682)
======== ======== ========
Net loss per common share:
Before extraordinary gainBasic and Diluted $ .56(2.70) $ 1.16(7.45) $ 2.37
Extraordinary gain from repurchase of convertible debentures - - .04
---------- ---------- ----------
$ .56 $ 1.16 $ 2.41
========== ========== ==========
Diluted earnings per(2.49)
======== ======== ========
Basic and diluted weighted average common share:
Before extraordinary gain $ .53 $ 1.12 $ 2.33
Extraordinary gain from repurchase of convertible debentures - - .04
---------- ---------- ----------
$ .53 $ 1.12 $ 2.37
========== ========== ==========shares
outstanding 10,169 9,372 9,501
======== ======== ========
See accompanying notes to consolidated financial statements.46
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
Consolidated Statements of Stockholders'
Equity Years ended December 31, 1997, December 27, 1996,
and December 29, 1995
(In thousands, except share amounts)CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(IN THOUSANDS)
1997 1996 1995YEAR ENDED DECEMBER 31,
------------------------------------
2001 2000 1999
-------- -------- --------
Common stock:
Beginning of year $ 1,811 $ 1,743 $ 1,710
Par value of shares issuedNet loss $(27,457) $(69,570) $(23,454)
Other comprehensive income (loss):
Foreign currency translation adjustments 14 (419) (337)
Unrealized losses on securities (4) (27) (48)
Reclassification adjustment for cash (183,007 shareslosses included in 1997, 195,571 shares in 1996, and 181,734 shares in 1995) 37 39 36
Par value of shares issued to acquire Terabit (149,215
shares in 1996) - 30 -
Par value of shares purchased and retired (173,135 shares
in 1997, 3,235 shares in 1996, and 18,520 shares in 1995) (35) (1) (3)net
loss -- -- 275
-------- -------- --------
EndOther comprehensive income (loss) before income taxes 10 (446) (110)
Income tax expense related to items of year 1,813 1,811 1,743other
comprehensive income (loss) -- -- 70
-------- -------- --------
Additional paid-in capital:
BeginningOther comprehensive income (loss), net of year 8,639 5,112 2,850
Proceeds in excessincome taxes 10 (446) (180)
-------- -------- --------
Comprehensive loss $(27,447) $(70,016) $(23,634)
======== ======== ========
47
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER
----------------------- PAID-IN TREASURY RETAINED COMPREHENSIVE
SHARES AMOUNT CAPITAL STOCK EARNINGS INCOME (LOSS) TOTAL
---------- ---------- ---------- ---------- ---------- ---------------- ----------
Balance at December 31, 1998 9,598 $ 1,920 $ 23,420 $ -- $ 139,498 $ 245 $ 165,083
Issuance of par value of shares issuedcommon stock for cash 3,104 2,746 2,504142 28 1,361 -- -- -- 1,389
Repurchase of 413,500 common
shares (61) (12) (911) (4,709) -- -- (5,632)
Compensation expense on employee
stock purchase plan 102 90 74-- -- 117 -- -- -- 117
Tax benefit from issuance of
common stock to employees 770 691 -
Retirement-- -- 99 -- -- -- 99
Other comprehensive loss -- -- -- -- -- (180) (180)
Net loss -- -- -- -- (23,454) -- (23,454)
Accretion of treasuryredeemable preferred
stock (4,590) (51) (316)
Terabit acquisition - 51 -
-------- -------- --------
End-- -- -- -- (228) -- (228)
---------- ---------- ---------- ---------- ---------- ---------------- ----------
Balance at December 31, 1999 9,679 1,936 24,086 (4,709) 115,816 65 137,194
Issuance of year 8,025 8,639 5,112
-------- -------- --------
Retained earnings:
Beginningcommon stock for cash 93 18 562 -- -- -- 580
Compensation expense on employee
stock purchase plan -- -- 104 -- -- 104
Other comprehensive loss -- -- -- -- -- (446) (446)
Net loss -- -- -- -- (69,570) -- (69,570)
Accretion of year 150,496 140,062 119,251
Terabit acquisition - 82 -redeemable preferred
stock -- -- -- -- (228) -- (228)
---------- ---------- ---------- ---------- ---------- ---------------- ----------
Balance at December 31, 2000 9,772 1,954 24,752 (4,709) 46,018 (381) 67,634
Issuance of common stock for cash 67 14 392 -- -- -- 406
Compensation expense on employee
stock purchase plan -- -- 66 -- -- -- 66
Other comprehensive income -- -- -- -- -- 10 10
Net earnings 5,080 10,352 20,811
-------- -------- --------
Endloss -- -- -- -- (27,457) -- (27,457)
Conversion of year 155,576 150,496 140,062
-------- -------- --------
Net unrealized (loss) gain on investment securities:
Beginning of year (541) 1,694 2,847
Fair value adjustment of marketable securities 473 (2,235) (1,153)
-------- -------- --------
End of year (68) (541) 1,694
-------- -------- --------
Cumulative translation adjustment:
Beginning of year 67 (120) 460
Translation adjustment 221 187 (580)
-------- -------- --------
End of year 288 67 (120)
-------- -------- --------
Total stockholders' equity $165,634 $160,472 $148,491
======== ======== ========redeemable
preferred stock for common
stock 901 180 23,820 -- -- -- 24,000
---------- ---------- ---------- ---------- ---------- ---------------- ----------
Balance at December 31, 2001 10,740 $ 2,148 $ 49,030 $ (4,709) $ 18,561 $ (371) $ 64,659
========== ========== ========== ========== ========== ================ ==========
See accompanying notes to consolidated financial statements.48
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 1997, December 27, 1996, and
December 29, 1995
(In thousands)CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
1997 1996 1995
--------- --------- ---------YEAR ENDED DECEMBER 31,
---------------------------------------
2001 2000 1999
----------- ----------- -----------
Cash flows from operating activities:
Net earningsloss $ 5,080(27,457) $ 10,352(69,570) $ 20,811(23,454)
Adjustments to reconcile net earningsloss to net cash provided by
(used in) operating activities:
Write-off of inventories -- -- 13,230
Impairment loss 220 -- 9,693
Depreciation and amortization 10,041 9,120 9,95013,709 14,264 15,499
Gain on sale of a business unit (774) (1,918) --
Gain on sale of assets held for sale (9,000) -- --
Loss on disposal of property, plant and equipment 130 2,794 --
Provision for losses on accounts receivable 370 335 1582,358 3,829 558
Provision for write down of inventory 1,009 (535) 7,988obsolete and excess inventories 943 6,613 910
Provision for warranty expense 726 673 4702,197 1,189 958
Deferred income taxes (3,299) 1,283 414-- 20,341 (8,475)
Loss on write downwrite-down of investment securities 9,575 - -306 7,786 350
Gain on sale of marketable and investment securities - (1,868) (7,126)
Gain on repurchase of convertible debentures - - (536)
Gain on sale of business unit - - (23,506)(538) (6,472) --
Other, net 169 69 (93)18 852 732
Changes in assets and liabilities, net of effectseffect of
purchase/sale of businesses:business:
Accounts receivable (2,935) (7,406) (6,117)1,698 (9,977) 17,474
Inventories (8,641) (3,093) (7,695)(786) (5,992) (6,104)
Costs and estimated earnings in excess of billings on
uncompleted contracts, net (15,060) (19,036) 8,53012,520 27,296 (16,446)
Prepaid expenses and deposits (1,430) (745) (423)508 2,407 (565)
Accounts payable and accrued(15,584) 6,932 (5,041)
Accrued expenses 9,232 3,790 (3,912)(8,456) (1,720) 9,695
Customer deposits 4,496 (3,489) (3,472)
Income taxes 4,958 (11,180) 12,169
--------- --------- ---------(258) (812) 1,381
----------- ----------- -----------
Net cash provided by (used in) operating
activities 14,291 (21,730) 7,610
--------- --------- ---------(28,246) (2,158) 10,395
----------- ----------- -----------
Cash flows from investing activities:
Purchases of marketable securities (80,443) (57,354) (145,047)short-term investments -- (1,875) (14,700)
Proceeds from sale of marketable securities 77,858 97,262 85,147short-term investments -- 2,627 39,767
Purchase of investment securities (4,208) (1,447) (3,000)-- (500) (636)
Proceeds from sale of investment securities - 1,886 7,9303,780 1,428 --
Proceeds from sale of business unit 6,300 1,400 --
Proceeds from sale of assets held for sale 9,000 -- --
Investment in joint venture -- (754) --
Purchases of property, plant and equipment (10,804) (10,521) (5,846)
Increase in other assets - (1,463) -(6,646) (13,868) (14,530)
Proceeds from sale of business unit - - 31,488
Payment for acquisition, netproperty, plant and equipment 26 1,382 --
Proceeds from sale of cash acquired - - (93)
--------- --------- ---------certain manufacturing assets -- -- 6,010
Decrease (increase) in other assets (44) -- --
----------- ----------- -----------
Net cash provided by (used in) investing
activities (17,597) 28,363 (29,421)
--------- --------- ---------12,416 (10,160) 15,911
----------- ----------- -----------
Cash flows from financing activities:
Net borrowings (payments)Borrowings under notes payable to banks (3,827) 1,904 1,758
Net proceedsline of credit agreements and other
long-term debt 239,223 22,365 716
Payments under line of credit agreements and other
long-term debt (226,214) (16,919) (1,869)
Payments of debt issuance costs -- (1,296) --
Decrease (increase) in restricted cash 1,154 (2,024) --
Proceeds from issuance of common stock 3,141 3,594 2,295406 580 1,389
Proceeds from issuance of preferred stock -- -- --
Payments for repurchases of common stock (4,625) - -
Payments for repurchase of convertible debentures - - (1,831)
--------- --------- ----------- -- (5,478)
----------- ----------- -----------
Net cash provided by (used in) financing
activities (5,311) 5,498 2,222
--------- --------- ---------14,569 2,706 (5,242)
----------- ----------- -----------
Effect of foreign exchange rate changesrates on cash 272 (633) (601)
--------- --------- ---------and cash
equivalents 14 (600) (788)
----------- ----------- -----------
Net change in cash and cash equivalents (8,345) 11,498 (20,190)(1,247) (10,212) 20,276
Cash and cash equivalents at beginning of year 16,521 5,023 25,213
--------- --------- ---------11,898 22,110 1,834
----------- ----------- -----------
Cash and cash equivalents at end of year $ 8,17610,651 $ 16,52111,898 $ 5,023
========= ========= =========22,110
=========== =========== ===========
Supplemental Disclosures of Cash Flow Information
Cash paid (received) during the year for:
Interest $ 1,3512,426 $ 1,3851,539 $ 1,5001,321
Income taxes 1,915 14,736 1,134846 (5,887) (5,846)
Accretion of redeemable preferred stock -- 228 228
See accompanying notes to consolidated financial statements.49
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
DecemberNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, December 27, 1996, and December
29, 1995
(In thousands, except share and per share amounts)2001, DECEMBER 31, 2000 AND DECEMBER 31, 1999
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of BusinessDESCRIPTION OF BUSINESS
Evans & Sutherland Computer Corporation (E("Evans & Sutherland," "E&S," "we,"
"us" or the Company)"our") is in the
business of developing, marketing,an established high-technology company with outstanding
computer graphics technology and supporting visual simulation
computer systems. The Company's current products are of four basic types:
(a) visual systems which create and display computer images of stored
digital models of various real-world environments that allow real-time
interaction within databases that replicate specific geographic areas or
imaginary worlds; (b) graphics accelerators which are used as a componentworldwide presence in high-performance interactive3D
visual simulation. In addition, E&S is now applying this core technology into
higher-growth personal computer ("PC") products for both simulation and
workstations. Our core computer graphics display systems for
workstations; (c) software systems and development tools which aretechnology is used
with multi-platform interactive graphics systems to produce 3D (three
dimensional)high
performance image generators for simulation including PC-based visual system
products, to provide graphics software and hardware solutions to a broad customer
base; and (d) training systems for flight management which are used
within the commercial aviation training market for pilot training.
The Company changed its fiscal year end from the last Friday in December
to a calendar year end in 1997. The fiscal year ends for the years
included in the accompanying consolidated financial statements are the
periods ended December 31, 1997, December 27, 1996, and December 29,
1995. Unless otherwise specified, all references to a year areacceleration technology to the fiscal year ended inprofessional
digital content creation market, and to apply our core technologies to the
year stated.
Principlesexpanding market of ConsolidationPC-based applications and products.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the CompanyE&S and its
wholly-owned subsidiaries. All significant intercompanyinter-company accounts and transactions have been
eliminated in consolidation. Revenue Recognition
Net salesCertain reclassifications have been made in the
2000 and 1999 consolidated financial statements and notes to conform to the 2001
presentation.
LIQUIDITY
Management believes that existing cash, cash equivalents, borrowings
available under its various borrowing facilities, cash expected from the
anticipated sale of certain of E&S's buildings, other asset-related cash sources
and expected cash from future operations will be sufficient to meet our
anticipated working capital needs, routine capital expenditures and current debt
service obligations for the next twelve months. The Foothill Facility expires in
December 2002 and the Overdraft Facility expires on November 30, 2002 (see
Note 10). There can be no assurances that we will be successful in renegotiating
our existing borrowing facilities or obtaining additional debt or equity
financing. Our cash and cash equivalents, subject to various restrictions, are
available for working capital needs, capital expenditures, strategic
investments, mergers and acquisitions, stock repurchases and other potential
cash needs as they may arise.
During 2002, we expect to generate cash due to improved earnings, moving
unbilled receivables into receivables and cash, reducing inventory and the sale
of some of our real estate. Due to these expected developments, we expect our
liquidity position to improve and for Foothill to continue the facility.
In the event our various borrowing facilities were to become unavailable, we
were unable to timely deliver products pursuant to the terms of various
agreements with third parties, or certain of our contracts were adversely
impacted for failure to meet delivery requirements, we may be unable to meet our
anticipated working capital needs, routine capital expenditures, and current
debt service obligations on a short-term and long-term basis.
REVENUE RECOGNITION
Sales include revenue from system and software products, software license
rights and service contracts.
Product revenues are50
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
We have adopted the American Institute of Certified Public Accountants
("AICPA") Statement of Position ("SOP") 97-2, "Software Revenue Recognition", as
modified by SOP 98-9. SOP 97-2 generally requires revenue earned on software
arrangements involving multiple elements such as software products,
enhancements, post-contract customer support, installation and training to be
allocated to each element based on the relative fair values of the elements. The
fair value of an element must be based on evidence that is specific to the
vendor. The revenue allocated to software products is generally recognized upon
delivery of the products. The revenue allocated to post-contract customer
support is generally recognized over the support period.
We recognize revenues from product sales that do not require significant
production, modification, or customization when the following criteria are met:
we have signed a non-cancelable agreement; we have delivered the product; there
are no uncertainties surrounding product acceptance; the fees are fixed and
determinable; and collection is shipped and the Company has no additional
performance obligations.considered probable.
Revenue from long-term contracts which require significant production,
modification or customization is recordedrecognized in accordance with provisions of SOP
81-1 "Accounting for Performance of Construction-Type and Certain
Production-Type Contracts" using the
percentage-of-completion method, determined by the units-delivered
method, or when there is significant nonrecurring engineering, the ratio of costs incurred to management's
estimate of total anticipated costs. If estimated total costs on any contract
indicate a loss, the Company
provideswe provide currently for the total anticipated loss on the
contract. Billings on uncompleted long-term contracts may be greater than or
less than incurred costs and estimated earnings and are recorded as an asset or
liability in the accompanying consolidated balance sheets.
Revenue from software license rights is recognized when the product has
been delivered, provided that the Company has no additional performance
obligations. Revenues from service contracts are recognized ratably over
the related contract period.
EVANS & SUTHERLAND COMPUTER CORPORATIONCASH AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Cash and Cash Equivalents
The Company considersCASH EQUIVALENTS
We consider all highly liquid financial instruments purchased with an
original maturity to the CompanyE&S of three months90 days or less to be cash equivalents. Cash
equivalents consist ofinclude debt securities and money-market funds of $6,920$0 and
$11,902$3.8 million at December 31, 19972001 and December 27, 1996,2000, respectively.
Inventories
RawRESTRICTED CASH
We have restricted deposits pledged as collateral on overdraft protection,
letters of credit and certain other obligations all of which mature or expire
within one year.
INVENTORIES
Inventory amounts include materials at standard costs. Inventory also
includes inventoried costs on programs and supplies inventories are stated at the lower of
weighted average cost or market. Work-in-processlong-term contracts which includes
direct engineering and finished goods are
stated on the basis of accumulated manufacturingproduction costs butand applicable overhead, not in excess
of market (netestimated realizable value).
Property, Plant,value, which have not yet been recognized as cost of
sales. Spare parts and Equipmentgeneral stock materials are stated at cost not in excess
of realizable value. We periodically review inventories for excess and obsolete
amounts and provide a reserve that we consider sufficient to cover any excess
and obsolete inventories.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Depreciation and
amortization are computed using the straight-line and double-declining
balance methodsmethod based on the estimated
useful lives of the related assets.
OtherACCOUNTING FOR IMPAIRMENT OF LONG-LIVED ASSETS
We periodically review the value assigned to the separate components of
goodwill, intangibles and other long-lived assets through comparison to
anticipated, undiscounted cash flows from the underlying
51
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
assets to assess recoverability. The assets are considered to be impaired when
the expected future undiscounted cash flows from these assets do not exceed the
carrying balances of the related assets. The impairment loss of $9.7 million for
the year ended December 31, 1999, as determined in accordance with Statement of
Financial Accounting Standards No. 121 ("SFAS 121"), "Accounting for the
Impairment of Long-Lived Assets Otherand for Long-Lived Assets to be Disposed of",
relates to the write-down to fair value of goodwill, intangibles and other
long-lived assets include deferred bond offering costs,acquired in the acquisition of AccelGraphics, Inc. ("AGI") and
Silicon Reality, Inc. ("SRI"). Fair value was determined utilizing discounted
cash flow analyses and the replacement cost approach. The impairment loss
consisted of the write-off of $4.9 million of goodwill, $4.4 million of
intangible assets and certain$0.4 million of property, plant and equipment.
In addition to continued losses at AGI, the impairment loss was the result
of the following additional circumstances: (i) delays in production
introductions for the AccelGALAXY, E&S Lightning 1200 and the
multiple-controller graphics subsystems product line; (ii) the developer of the
chip used on the AccelGMX acquired a board company and entered the graphics
accelerator market in direct competition with the AccelGMX; and
(iii) introduction of lower-end products by competitors which can perform many
of the functions of the higher-end 3D graphics cards. Furthermore, we determined
that a manufacturer of a chip to be used in various new board products was
unable to manufacture a designed chip with agreed upon specifications.
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and other intangible assets at December 31, 2000 consisted
primarily of goodwill and areother intangible assets recorded in connection with
the acquisitions of AccelGraphics, Inc. and Silicon Reality, Inc. on June 26,
1998. The goodwill and other intangible assets were being amortized onusing the
straight-line basismethod over the estimated useful livesa period of the respectiveseven years for goodwill and six months to
seven years for other intangible assets. Software Development CostsAs of December 31, 2000 accumulated
amortization of goodwill and other intangible assets was $15.9 million.
SOFTWARE DEVELOPMENT COSTS
Software development costs, if material, are capitalized from the date
technological feasibility is achieved until the product is available for general
release to customers. Such deferrable costs have not been material during the
periods presented.
Marketable and Investment Securities
The Company classifies itsINVESTMENTS
We classify our marketable debt and equity securities as available-for-sale.
Available-for-sale securities are recorded at fair value. Unrealized holding
gains and losses, net of the related tax effect, are excluded from earnings and
are reported as a separate
component of stockholders' equityaccumulated other comprehensive income (loss)
until realized. Dividend income is recognized when earned. Realized gains and
losses from the sale of securities are included in results of operations and are
determined on the specific-identification basis. A decline in the market value
below cost that is deemed other than temporary is charged to results of
operations resulting in the establishment of a new cost basis for the security. Dividend income is recognized when earned. Realized
gainsboth
marketable and losses from the sale of securities are included in results of
operations and are determined on the specific-identification basis.
Nonmarketablenon-marketable investment securities.
Non-marketable investment securities are recorded at the lower of cost or
net realizablefair value. Warranty Reserve
The Company providesSome of the factors that are considered in determining the fair
value of these securities include analyses of each investee's financial
condition and operations, the status of its technology and strategies in place
to
52
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
achieve its objectives. Our 50% investment in a joint venture is stated at cost,
adjusted for equity in undistributed earnings since acquisition.
WARRANTY RESERVE
We provide a warranty reserve for estimated future costs of servicing
products under warranty agreements extending for periods from 90 days to one
year. Anticipated costs for product warranty are based upon estimates derived
from experience factors and are recorded at the time of sale or over the
contract period for long-term contracts.
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Stock-Based Compensation
Effective January 1, 1996, the CompanySTOCK-BASED COMPENSATION
We have adopted the footnote disclosure provisions of Statement of Financial
Accounting Standards (SFAS) No. 123 Accounting("SFAS 123"), "Accounting for Stock Based
Compensation.Compensation". SFAS 123 encourages entities to adopt a fair value based method
of accounting for stock options or similar equity instruments. However, it also
allows an entity to continue measuring compensation cost for stock based
compensation using the intrinsic-value method of accounting prescribed by
Accounting Principles Board (APB) Opinion No. 25 Accounting("APB 25"), "Accounting for Stock
Issued to Employees (APB
25)Employees". The Company hasWe have elected to continue to apply the provisions of APB
25 and provide pro forma footnote disclosures required by SFAS No. 123.
Income Taxes
The Company usesINCOME TAXES
We use the asset and liability method of accounting for income taxes. Under
the asset and liability method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases and operating loss and tax credit carryforwards.carry-forwards.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
Foreign Currency Translation
TheFOREIGN CURRENCY TRANSLATION
Prior to their disposition in 2000 (See Note 2) the local foreign currency
iswas the functional currency for our German subsidiaries. Our United Kingdom
subsidiary uses the Company's
foreign subsidiaries.U.S. dollar as its functional currency. Assets and
liabilities of foreignGerman operations arewere translated to U.S. dollars at the current
exchange rates as of the applicable balance sheet date. RevenuesSales and expenses arewere
translated at the average exchange rates prevailing during the period.
Adjustments resulting from translation arewere reported as a separate component of
stockholders' equity. Certain transactions of the foreignGerman subsidiaries arewere
denominated in currencies other than the functional currency, including
transactions with the parent company. Transaction gains and losses arewere included
in other income (expense) for the period in which the transaction occurs.
Earnings Per Common Share
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 128, Earnings per Share
(SFAS 128). SFAS 128 became effective for financial statements with
interim and annual periods ending after December 15, 1997. Accordingly,
the Company has adopted SFAS 128. SFAS 128 establishes a different method
of computing earnings per common share than was previously required under
the provisions of Accounting Principles Board Opinion No. 15. SFAS 128
requires the presentation of basic and diluted earnings per common share.
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 common 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. Prior periods have been restated
for presentation in accordance with SFAS 128.
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Earnings Per Common Share (continued)
In calculating earnings per common share, the earnings were the same for
both the basic and diluted calculation. A reconciliation between the basic
and diluted weighted average number of common shares for 1997, 1996, and
1995, is summarized as follows (in thousands):
1997 1996 1995
--------- --------- ---------
Basic weighted average number of common shares
outstanding during the year 9,060 8,944 8,639
Weighted average number of common stock options
outstanding during the year 442 278 146
========= ========= =========
Diluted weighted average number of common shares
outstanding during the year 9,502 9,222 8,785
========= ========= =========
Estimatesoccurred.
ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted accounting principlesin the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities, andthe disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenuessales and
expenses during the reporting period. Actual results could differ from those
estimates.
Concentration of Credit Risk53
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the CompanyE&S to concentrations of
credit risk are primarily cash, cash equivalents, marketable securities,short-term investments and
accounts receivable. The Company's marketable
securitiesOur short-term investment portfolio consists of
investment-grade securities diversified among security types, industries and
issuers. The Company'sOur investments are managed by recognized financial institutions that
follow the
Company'sour investment policy. The Company'sOur policy limits the amount of credit exposure in
any one issue, and the Companywe believes no significant concentration of credit risk
exists with respect to these investments.
In the normal course of business, the CompanyE&S provides unsecured credit terms to its
customers. Accordingly, the Company performswe perform ongoing credit evaluations of itsour customers
and maintainsmaintain allowances for possible losses which, when realized, have generally
been within the range of management's expectations.
Reclassifications
Certain reclassificationsIn accordance with accounting for long-term contracts, we record an asset
for costs and estimated earnings in excess of billings on uncompleted contracts.
At December 31, 2001, $29.8 million of the costs and estimated earnings in
excess of billings on uncompleted contracts pertain to four contracts with four
different customers. The billing of these amounts is contingent upon the
successful completion of contractual milestones related to the delivery and
integration of Harmony image generators. We expect to achieve most of the
remaining billing milestones during 2002. Our inability to achieve these
contractual milestones may significantly impact the realization of such amounts
and have been madea material adverse impact to the operating results and liquidity of
E&S.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting
for Derivative Instruments and Hedging Activities". SFAS 133, as amended by
SFAS 137 and SFAS 138, is effective for all fiscal years beginning after
June 15, 2000. SFAS 133 establishes new accounting and reporting standards for
companies to report information about derivative instruments, including certain
derivative instruments embedded in other contracts (collectively referred to as
derivatives), and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the 1996balance sheet and 1995
consolidatedmeasure
those instruments at fair value. For a derivative not designated as a hedging
instrument, changes in the fair value of the derivative are recognized in
earnings in the period of change. We adopted SFAS 133 as of January 1, 2001. The
impact of adopting SFAS 133 was not material to the financial statementsstatements.
In July 2001, the FASB issued SFAS No. 141, "Accounting for Business
Combinations" and No. 142, "Accounting for Goodwill and Other Intangible
Assetds". SFAS 141 is effective for E&S beginning July 1, 2001. The Statement
establishes accounting and reporting standards for business combinations and
prohibits the use of the pooling-of-interests method of accounting for those
transactions after June 30, 2001. SFAS 142 is effective for E&S beginning
January 1, 2002. The Statement establishes accounting and reporting standards
for goodwill and intangible assets. Beginning January 1, 2002, we do not have
any goodwill, therefore the impact of adopting SFAS 142 is not expected to conformbe
material to the financial statements.
In October 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations" and No. 144, "Accounting for the Impairment or Disposal
of Long-Lived Assets", that replaces SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of".
SFAS 143 is effective for E&S beginning July 1, 2002. The Statement addresses
financial accounting and reporting for obligations associated with classifications adopted
in 1997.the
retirement of tangible long-lived assets and the associated asset retirement
costs. The impact of adopting SFAS 143 is not expected to be material
54
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
to the financial statements. SFAS 144 establishes one accounting model for
long-lived assets to be disposed of by sale and addresses significant
implementation issues. SFAS No. 144 is effective for E&S beginning after
January 1, 2002. Management does not expect the adoption of this statement to
have a material impact on its financial statements.
(2) MARKETABLEACQUISITIONS AND INVESTMENT SECURITIESDISPOSITIONS
In the third quarter of 2001, E&S sold the REALimage group to Real
Vision, Inc., a Japanese company. The amortized cost, gross unrealized holding gains, gross unrealized
holding losses,sale was for a maximum value of
$12 million, consisting of cash of $6.3 million plus future royalties, on a when
and fair valueif earned basis, up to $6 million for securities by major security typeREALimage technology, other assets,
and classthe performance of security at 1997certain development support during a seven-month
transition period leading to closing the transaction in April 2002. Real Vision
has indicated it will continue the development of the technology, and 1996, are summarized as follows:
Gross Gross
unrealized unrealized
Amortized holding holding Fair
cost gains losses value
--------- ---------- ---------- --------
Year ended 1997:
U.S. government securities:
Maturing in one year or less $ 3,179 $ - $ 3 $ 3,176
Maturing between one and three years 1,509 7 - 1,516
State and municipal securities:
Maturing in one year or less 14,714 17 10 14,721
Maturing between one and three years 9,389 42 14 9,417
Corporate debt securities:
Maturing in one year or less 2,501 1 - 2,502
Maturing between one and three years 16,045 - 149 15,896
Marketable securities 1,700 - - 1,700
--------- ---------- ---------- --------
$ 49,037 $ 67 $ 176 $ 48,928
========= ========== ========== ========
Year ended 1996:
U.S. government securities:
Maturing in one year or less $ 2,081 $ 3 $ - $ 2,084
Maturing between one and three years 16,253 5 80 16,178
State and municipal securities:
Maturing in one year or less 2,005 10 - 2,015
Maturing between one and three years 16,058 47 1 16,104
Corporate debt securities - Maturing between one
and three years 4,004 - - 4,004
Marketable securities 6,051 18 - 6,069
--------- ---------- --------- --------
$ 46,452 $ 83 $ 81 $ 46,454
========= ========== ========== ========
Long-term investment securities are summarized as follows:
Gross Gross
unrealized unrealized
holding holding Market
Cost gains losses value
--------- ---------- ---------- --------
Year ended 1997:
Marketable securities:
Iwerks Entertainment, Inc. $ 500 $ - $ - $ 500
========= ========== ========== ========
Year ended 1996:
Marketable securities:
Iwerks Entertainment, Inc. $ 2,000 $ - $ 868 $ 1,132
========= ========== ========== ========
E&S is
maintaining a technical staff to support Real Vision in Salt Lake City during
the transition period. As part of the sale of the REALimage Group, E&S closed
its offices in Seattle, Washington, and San Jose, California and recorded an
impairment loss of $0.2 million related to the write-off of certain remaining
goodwill balances. E&S is recognizing the proceeds received on the sale of the
REALimage Group on a percent complete basis over the seven-month transition
period ending in April, 2002. The Company has investments in nonmarketable securitiesgain on sale of four companies
in 1997 and three companies in 1996. These investments are recorded at
cost, adjusted for declines in fair value that are considered other than
temporary, and total $4,500 and $5,925 atbusiness unit recognized
through December 31, 19972001 is calculated based on the ratio of costs incurred to
management's estimate of anticipated costs to be incurred during the transition
period and excludes $0.6 million of withholding taxes which have been recorded
as income tax expense on the accompanying statement of operations.
In the fourth quarter of 2001 we recognized $9.0 million on the sale of
certain of our key 3D-graphics patents, which were being held for sale, to
NVIDIA Corporation.
In December 27, 1996, respectively. Each2000, we completed the divestiture of our German subsidiary via
a management-led buyout and recorded a loss of $0.3 million. The former
subsidiary, which was called Evans & Sutherland Computer GmbH, now operates
under a new name. The divested company has no remaining connection with E&S. We
will continue to operate in Germany and throughout Europe under our own name,
providing marketing, sales, and support for our growing visual systems business
and traditional customer base.
On March 28, 2000, we sold certain assets of its Applications Group relating
to digital video products to RT-SET Real Time Synthesized Entertainment
Technology Ltd. and its subsidiary, RT-SET America Inc., for $1.4 million in
cash, common stock of RT-SET Real Time Synthesized Entertainment
Technology Ltd. valued at approximately $1.0 million, and the assumption of
certain liabilities. On June 15, 2000, we received additional common stock of
RT-SET Real Time Synthesized Entertainment Technology Ltd. valued at
$1.5 million as consideration for the successful development of a product
included in the purchased assets. We recognized a gain of $1.9 million on the
sale of these assets.
On June 3, 1999, we sold certain of our manufacturing capital assets and
inventory of $6.0 million to Sanmina-SCI as part of our efforts to outsource the
production of certain electronic products and assemblies. In addition, we
entered into an electronic manufacturing services agreement with Sanmina-SCI.
The electronic manufacturing services agreement commits E&S to purchase a
minimum of $22.0 million of electronic products and assemblies from Sanmina-SCI
each year until June 3, 2002. If we fail to meet these minimum purchase levels,
subject to adjustment, we may be required to pay 25% of the investments in nonmarketable
securities represent less than 20 percent ofdifference between
the outstanding voting
shares of$22.0 million and the respective companies.amount purchased.
55
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(3) INVENTORIES
Inventories are summarized as follows:
1997 1996
--------- ---------
Raw materials and supplies $ 13,674 $ 8,117
Work-in-process 10,040 11,211
Finished goods 3,171 874
--------- ---------
$ 26,885 $ 20,202consist of the following (in thousands):
DECEMBER 31,
------------------------
2001 2000
--------- ---------
Raw materials $ 22,437 $ 26,701
Work-in-process 10,047 9,219
Finished goods 5,742 2,463
--------- ---------
$ 38,226 $ 38,383
========= =========
(4) LONG-TERMCOSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
Comparative information with respect to uncompleted contracts areis summarized
as follows:
1997 1996
--------- ---------
Accumulated costs and estimated
earnings on uncompleted contracts $ 217,354 $ 160,069
Less billings 171,896 130,498
--------- ---------
$ 45,458 $ 29,571follows (in thousands):
DECEMBER 31,
------------------------
2001 2000
--------- ---------
Accumulated costs and estimated earnings on
uncompleted contracts $ 294,774 $ 252,012
Less total billings on uncompleted contracts (272,066) (211,258)
--------- ---------
$ 22,708 $ 40,754
========= =========
Costs and estimated earnings in excess of billings
on uncompleted contracts $ 47,761 $ 68,464
Billings in excess of costs and estimated earnings
on uncompleted contracts (25,053) (27,710)
--------- ---------
$ 22,708 $ 40,754
========= =========
Costs and estimated earnings in excess of
billings on uncompleted contracts $ 51,799 $ 34,166
Billings in excess of costs and estimated
earnings on uncompleted contracts (6,341) (4,595)
========= =========
$ 45,458 $ 29,571
========= =========
(5) PROPERTY, PLANT AND EQUIPMENT
The cost and estimated useful lives of property, plant and equipment are
summarized as follows:
Estimated
useful lives 1997 1996
------------ --------- ---------
Land - $ 1,436 $ 1,436
Buildings and improvements 40 years 38,152 35,970
Machinery and equipment 3 to 8 years 79,372 74,005
Office furniture and equipment 8 years 2,178 2,052
Construction-in-process - 2,030 1,895
--------- ---------
123,168 115,358
Less accumulated depreciation and
amortization (78,800) (72,687)
--------- ---------
$ 44,368 $ 42,671follows (dollars in thousands):
DECEMBER 31,
ESTIMATED ------------------------
USEFUL LIVES 2001 2000
------------ --------- ---------
Buildings and improvements 40 years $ 42,044 $ 41,343
Manufacturing machinery and equipment 3 to 8 years 75,865 80,212
Office furniture and equipment 8 years 5,546 6,308
Construction-in-process -- 2,329 2,779
--------- ---------
125,784 130,642
Less accumulated depreciation and
amortization (83,817) (81,977)
--------- ---------
$ 41,967 $ 48,665
========= =========
56
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
All buildings and improvements owned by the CompanyE&S are constructed on land leased
from an unrelated third party. Such leases extend for a term of 40 years from
1986, with options to extend two of the leases for an additional 40 years and
the remaining fourfive leases for an additional 10ten years. At the end of the lease
term, including any extension, the buildings and improvements revert to the
lessor.
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(6) NOTES PAYABLE TO BANKS
The following is a summary of notes payableWe have undertaken actions to banks:
1997 1996
-------- --------
Balance at end of year $ 950 $ 5,334
Weighted average interest rate at end of year 8.0% 7.5%
Maximum balance outstanding during the year $ 3,441 $ 5,553
Average balance outstanding during the year $ 1,845 $ 4,833
Weighted average interest rate during the year 7.6% 7.6%
The average balance outstanding and weighted average interest ratesell certain buildings that are computed based on the outstanding balances and interest rates at
month-end during each year.
The Company has unsecured revolving line of credit agreements with
foreign banks totaling $11,107 at December 31, 1997, of which
approximately $10,271 was unused and available. The Company also has a
$5,000 unsecured line for letters of credit with a U.S. bank. Letters of
credit totaling $4,691 were outstanding at December 31, 1997 and no
amounts were outstanding at December 31, 1996.
(7) ACCRUED EXPENSES
Accrued expenses consist of the following:
1997 1996
-------- --------
Pension plan obligation (note 14) $ 5,305 $ 3,781
Compensation and benefits 7,497 5,671
Other 5,259 4,481
-------- --------
$ 18,061 $ 13,933
======== ========
(8) LONG-TERM DEBT
Long-term debt is comprised of six percent convertible subordinated
debentures due in 2012. The six percent convertible subordinated
debentures are convertible at the bondholders option at any time prior to
maturity, subject to adjustment. The debentures are redeemable at the
Company's option, in wholenot, or
in part, at par. The debentures are
subordinated to all existing and future superior indebtedness.
During 1995, the Company repurchased $2,360 of convertible debentures on
the open market. These purchases resulted in an extraordinary gain of
approximately $536. This extraordinary gain is shown net of income taxes
in the accompanying consolidated statements of operations.
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(9) INCOME TAXES
Components of income tax expense (benefit) attributable to earnings
before income taxes and extraordinary gain:
Share
and
stock
option
Current Deferred benefit Total
--------- --------- ------- --------
1997:
Federal $ 5,327 $ (4,476) $ 663 $ 1,514
State 858 (721) 107 244
--------- --------- ------- --------
$ 6,185 $ (5,197) $ 770 $ 1,758
========= ========= ======= ========
1996:
Federal $ 3,130 $ 1,200 $ 595 $ 4,925
State 474 182 96 752
--------- -------- ------- --------
$ 3,604 $ 1,382 $ 691 $ 5,677
========= ======== ======= ========
1995:
Federal $ 11,085 $ 202 $ - $ 11,287
State 1,654 31 - 1,685
Foreign 124 - - 124
--------- ------- -------- --------
$ 12,863 $ 233 $ - $ 13,096
========= ========= ======== ========
The actual tax expense differs from the expected tax expense (benefit) as
computed by applying the U.S. federal statutory tax rate of 34 percent
for 1997 and 1996 and 35 percent for 1995 as a result of the following:
1997 1996 1995
-------- -------- --------
Tax at U.S. federal statutory rate $ 2,325 $ 5,450 $11,753
Losses (gains) of foreign subsidiaries (115) (165) 217
Earnings of foreign sales corporation (228) (368) (344)
State taxes (net of federal income tax benefit) 161 496 1,075
Research and development and foreign tax credits - - (124)
Foreign taxes - - 124
Other, net (385) 264 395
======== ======== ========
$ 1,758 $ 5,677 $13,096
======== ======== ========
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(9) INCOME TAXES (continued)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1997 and December 27, 1996, are presented below:
Domestic Foreign
------------------- -------------------
1997 1996 1997 1996
-------- -------- -------- -------
Deferred tax assets:
Warranty, vacation, and other accruals $ 1,740 $ 1,839 $ - $ -
Inventory reserves and other inventory-related
temporary basis differences 944 2,067 - -
Pension accrual 1,626 992 - -
Long-term contract related temporary differences 496 461 - -
Net operating loss carryforwards 111 147 721 2,276
Unrealized loss on marketable equity securities 41 325 - -
Write-down of investment securities 3,591 - - -
Other 342 324 - -
-------- -------- -------- -------
Total gross deferred tax assets 8,891 6,155 721 2,276
Less valuation allowance 153 189 721 2,276
-------- -------- -------- --------
Total deferred tax assets 8,738 5,966 - -
-------- -------- -------- -------
Deferred tax liabilities:
Plant and equipment, principally
due to differences in
depreciation and capitalized interest $ (652) (993) - -
Other (60) (246) - -
-------- -------- -------- -------
Total gross deferred tax liabilities (712) (1,239) - -
-------- -------- -------- -------
Net deferred tax asset $ 8,026 $ 4,727 $ - $ -
======== ======== ======== =======
1997 1996
-------- --------
Net current deferred tax asset $ 4,224 $ 4,841
Net non-current deferred tax asset (liability) 3,802 (114)
-------- --------
Net deferred tax asset $ 8,026 $ 4,727
======== ========
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(9) INCOME TAXES (continued)
Certain reclasses have been made during 1997 between beginning deferred
tax assets and liabilities and the current tax payable accounts. These
reclass entries were made to adjust the beginning deferred tax assets to
the tax return amounts.
Management believes the existing net deductible temporary differences
will reverse during the periods in which the Company generates net
taxable income. The Company has a strong taxable earnings history. A
valuation allowance is provided when it is more likely than not that some
portion of the deferred tax asset may not be realized. The Company has
established a valuation allowance primarily for net operating loss and
tax credit carryforwards from an acquired subsidiary and foreign
subsidiaries as a result of the uncertainty of realization. The Company's
beginning valuation allowance changed during 1997 for domestic and
foreign purposesused in operations by $36 and $1,555, respectively. The change in the
foreign valuation allowance is primarily attributable to adjusting the
gross asset to its expected value when it may be utilized.
(10) STOCK OPTION, PURCHASE, AND BONUS PLANS
Stock Option Plans - Under two fixed option plans, the Company grants
options to officers and employees to acquire shares of the Company's
common stock at a purchase price generally equal to the fair market value
on the date of grant. Options generally vest ratably over three to four
years and expire ten years from date of grant. The Company grants options
to its directors under its Director Plan. Option grants are limited to
10,000 shares per director in each fiscal year. Options generally vest
ratably over four years and expire ten years from the date of grant.
Shareholders authorized an additional 450,000, 150,000, and 350,000
shares to be granted under the plans during 1997, 1996, and 1995,
respectively. In addition, 180,000 authorized shares from the stock bonus
plan were transferred to the stock option plan during 1995 and the stock
bonus plan was eliminated. At December 31, 1997, options to purchase
268,000 shares of common stock were authorized and reserved for future
grant. A summary of activity follows (shares in thousands):
1997 1996 1995
--------------------- -------------------- ---------------------
Weighted- Weighted- Weighted-
Number average Number average Number average
of exercise of exercise of exercise
shares price shares price shares price
-------- ---------- -------- --------- -------- ---------
Options outstanding at beginning
of year 1,309 $ 18.14 842 $ 14.45 815 $ 13.22
Options granted 570 24.55 724 21.32 291 16.93
Options exercised (159) 16.21 (169) 13.44 (139) 13.71
Options canceled (80) 21.78 (88) 18.20 (125) 13.00
-------- -------- --------
Options outstanding at end of year 1,640 $ 20.38 1,309 $ 18.14 842 $ 14.45
======== ======== ========
Options exercisable at end of year 597 $ 16.40 271 $ 14.67 312 $ 13.78
======== ======== ========
Weighted-average fair value of
options granted during the year $ 8.81 $ 7.15 $ 5.65
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(10) STOCK OPTION, PURCHASE, AND BONUS PLANS (continued)
The following table summarizes information about fixed stock options
outstanding at December 31, 1997 (options in thousands):
Options outstanding Options exercisable
-------------------------------------------------- --------------------------------
Number Weighted-average
out- remaining Weighted-average Number Weighted-average
Range of standing at contractual exercise exercisable at exercise
exercise December 31, life price December 31, price
prices 1997 1997
-------------- --------------- -------------- -------------- --------------- --------------
$ 12.22 - 15.25 348 7.06 $12.96 297 $12.63
15.39 - 20.75 174 6.06 19.08 129 18.66
20.88 - 20.88 375 8.10 20.88 116 20.88
21.00 - 22.38 348 8.87 22.12 39 21.75
22.50 - 32.88 395 9.30 25.48 16 22.76
--------------- ---------------
12.22 - 32.88 1,640 8.12 20.38 597 16.40
=============== ===============
The Company accounts for these plans under APB 25, under which no
compensation cost has been recognized. Had compensation cost for these
plans been determined consistent with SFAS 123, the Company's net
earnings and earnings per common share would have been changed to the
following pro forma amounts (earnings per common share amounts have been
restated in 1996 and 1995 to reflect the Company's adoption of SFAS 128):
1997 1996 1995
------- ------ -------
Net earnings As reported $ 5,080 $ 10,352 $ 20,811
Pro forma 2,545 8,570 20,319
Basic earnings per common share As reported 0.56 1.16 2.41
Pro forma 0.28 0.96 2.35
Diluted earnings per common share As reported 0.53 1.12 2.37
Pro forma 0.27 0.93 2.31
Pro forma net earnings reflects only options grantedus. Accordingly, subsequent to December 29, 1994. Therefore, the effect that calculating compensation
cost for stock-based compensation under SFAS 123 has on the pro forma net
earnings31,
2001, we have designated these as shown above may notassets to be representative of the effects on
reported net earnings for future years.
The fair value of each option grant is estimated on the date of the grant
using the Black-Scholes option pricing model with the following weighted
average assumptions used for grants in 1997, 1996, and 1995,
respectively: risk-free interest rates of 5.7 percent, 6.1 percent, and
5.7 percent, expected average lives of 2.6 years for 1997 and 2.3 years
for both 1996 and 1995; and expected volatility of 47 percent for 1997
and 49 percent for both 1996 and 1995.
Stock Purchase Plan - The Company has an employee stock purchase plan
whereby qualified employees are allowed to purchase limited amounts of
the Company's common stock at 85 percent of the market value of the stock
at the time of the sale. A total of 500,000 shares are authorized under
the plan.
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(11)disposed of.
(6) LEASES
The Company leasesWe lease certain of itsour buildings and related improvements to third parties
under noncancelablenon-cancelable operating leases. Cost and accumulated depreciation of the
leased buildings and improvements at December 31, 19972001 were $8,133$8.9 million and
$2,616,$3.7 million, respectively. Rental income for all operating leases for 1997, 1996,2001,
2000 and 19951999 was $1,144, $770,$2.2 million, $1.8 million and $431,$1.6 million, respectively.
The Company occupiesWe occupy real property and usesuse certain equipment under lease arrangements
whichthat are accounted for primarily as operating leases. Rental expenses for all operating
leases for 1997, 1996,2001, 2000 and 19951999 were $1,718, $1,506,$4.0 million, $2.0 million and
$1,770,$2.1 million, respectively.
At December 31, 1997,2001, the future minimum rental income and commitmentlease payments
under operating leases that have initial or remaining noncancelable lease terms
in excess of one year are as follows:
Rental
Rental commit-
income ment
-------- ---------
Fiscal year(s)follows (in thousands):
1998 $ 915 $ 1,264
1999 755 1,151
2000 725 1,014
2001 682 867
2002 647 772
Thereafter 2,347 9,343
-------- ---------
$ 6,071 $ 14,411
======== =========
RENTAL RENTAL
INCOME COMMITMENT
----------- -----------
Year ending December 31,
2002 $ 1,393 $ 3,527
2003 1,265 2,912
2004 180 971
2005 -- 667
2006 -- 665
Thereafter -- 9,460
----------- -----------
$ 2,838 $ 18,202
=========== ===========
57
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (12) INDUSTRY SEGMENT AND FOREIGN OPERATIONS
The Company operates(CONTINUED)
(7) INVESTMENTS
We had the following investments in marketable equity securities, adjusted
for unrealized holding gains and losses and other-than-temporary declines in
fair value, nonmarketable equity securities, adjusted for other-than-temporary
declines in fair value and a single industry segment, the visual simulation
and computer graphics marketplace. A summary of operations by geographic
area follows:joint venture (in thousands):
1997 1996 1995DECEMBER 31,
------------------------
2001 2000
--------- --------- ----------
Net sales:
U.S. operationsMarketable securities:
Cypress Semiconductor, Inc. (Cypress) $ 138,910-- $ 121,759 $ 110,004
European operations 35,943 16,625 4,618
Eliminations (15,500) (7,820) (1,428)3,276
vi[z]rt (formerly RT-SET Real Time Synthesized
Entertainment Technology Ltd.) 57 358
Iwerks Entertainment, Inc. (Iwerks) 37 9
C3-D Digital Inc. (C3-D) 14 16
--------- ---------
108 3,659
--------- ---------
Nonmarketable securities:
Quantum Vision, Inc. (Quantum) 500 500
Total Graphics Solutions N.V. (TGS) 500 500
Other 16 16
--------- ---------
1,016 1,016
--------- ---------
Investment in joint venture:
Quest Flight Training Ltd. 828 754
--------- ---------
Total net salesinvestment securities $ 159,3531,952 $ 130,564 $ 113,194
========= ========= =========
Operating earnings (loss):
U.S. operations $ 7,433 $ 9,943 $ 25,866
European operations 7,702 1,730 (2,953)
Eliminations (746) (154) 194
--------- --------- ---------
Total operating earnings $ 14,389 $ 11,519 $ 23,107
========= ========= =========
Identifiable assets:
U.S. operations $ 138,888 $ 120,466 $ 94,233
European operations 23,741 14,547 3,483
Eliminations (877) (159) -
--------- --------- ---------
Total identifiable assets 161,752 134,854 97,716
Corporate assets 72,638 76,037 113,286
--------- --------- ---------
Total assets $ 234,390 $ 210,891 $ 211,002
=========5,429
========= =========
Transfers between geographic areasQuantum is a start-up company that owns patented technology to improve
cathode raytube (CRT) performance used in large projection systems. TGS develops
and markets portable graphics software tools, which provide hardware
independence for application developers. Each investment in non-marketable
investment securities was made either to enhance a current technology of E&S or
to complement our strategic direction.
We own, including total shares purchased or available to purchase under
warrants, less than 15% of the outstanding common stock and common stock
equivalents of Quantum and TGS. We have one of six seats on TGS's board of
directors. There are no inter-company transactions, technological dependencies,
related guarantees, obligations, contingencies, interchange of personnel, nor
ability to exercise significant influence on any of the companies in which we
have investments. Accordingly, we account for Quantum and TGS utilizing the cost
method.
We have a 50% interest in Quest Flight Training Ltd. (Quest), a joint
venture providing aircrew training services for the United Kingdom Ministry of
Defence under a 30 year contract. The investment is accounted for at market priceunder the
equity method. Equity in earnings of Quest of $74,000 in 2001 and intercompany profit$43,000 in
2000 is eliminatedrecorded in consolidation. Operating earnings
(loss)other income (expense). The financial position and operating
results of Quest are total sales less operating expenses. Identifiable assets are
those assetsimmaterial to our financial results. We guarantee a portion
of the Companyjoint venture's third-party borrowings. At December 31, 2001, Quest had
outstanding debt of $7.4 million. Management believes, based on current facts
and circumstances and the joint venture's financial position and operating
results, that are identified with the operations in
each geographic area. Corporate assets are principally cash, marketable
securities,likelihood of a payment pursuant to such guarantee is remote.
However, if we were required to make such a payment it would have a material
adverse impact on our operating results and long-term investments.
(13) SALES TO FOREIGN AND MAJOR CUSTOMERS
Sales to foreign customers are summarized as follows:
1997 1996 1995
-------- -------- --------
Sales to foreign end-users:
Europe (excluding Great Britain) $ 47,168 $ 26,621 $ 16,801
Pacific Rim 27,789 44,262 13,888
Great Britain 12,008 13,913 11,612
Other 7,677 3,572 2,202
-------- -------- --------
Total $ 94,642 $ 88,368 $ 44,503
======== ======== ========liquidity.
58
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (13) SALES TO FOREIGN AND MAJOR CUSTOMERS (continued)
Customers comprising 10 percent or greater(CONTINUED)
During 2000, we recognized a $6.7 million gain on the sale of our investment
in SLM to Cypress in which we received shares of Cypress stock which was offset
by a $0.2 million loss on the subsequent sale of certain Cypress shares. During
2001, we sold our remaining interest in Cypress for cash proceeds of
$3.8 million. During 2001, 2000 and 1999 we wrote down our investments in
marketable securities by $0.3 million, $7.8 million and $0.4 million
respectively due to other-than-temporary declines in market value. These amounts
are recorded in other income (expense), net in our consolidated statements of
operations.
(8) ACCRUED EXPENSES
Accrued expenses consist of the Company's net sales are
summarized as follows:following (in thousands):
DECEMBER 31,
------------------------
2001 2000
--------- ---------
Compensation and benefits $ 8,880 $ 11,277
Liquidated damages and late delivery penalties 1,500 3,091
Other 6,892 12,159
--------- ---------
$ 17,272 $ 26,527
========= =========
On October 16, 1997, 1996 1995
-------- -------- --------
Thomson Training & SimulationE&S and CAE Electronics Ltd. 12% 12% 4%
Hughes Training Incorporated 9% 11% 10%
Rikei Corporation 5% 11% 8%
Loral Corporation - 5% 30%
The Company's products are sold("CAE") entered into a
Sub-Contract (the "Sub-Contract") for E&S to agenciesdesign, develop and deliver the
visual system components and visual databases required for certain dynamic
mission simulators and tactical control centers, to be integrated with our
Harmony image generation equipment (the "Harmony VSC"). As of December 31, 1999,
the Harmony VSC had not been integrated with the dynamic mission simulators or
tactical control centers. Pursuant to the terms of the United States
Government through prime contractors or subcontractors thereof. The
percentageSub-Contract, the
integration was to be completed during 1999. Consequently, as of net salesDecember 31,
1999, in accordance with the liquidated damages provision of the Sub-Contract,
we incurred liquidated damages on this Sub-Contract totaling $6.0 million. E&S
and CAE agreed to total sales attributedan interim solution, which provides for the installation of
our ESIG 4530 image generators to integrate with the dynamic mission simulators
and tactical control centers until our Harmony VSC are able to support the
dynamic mission simulators and tactical control centers. As of December 31,
2000, integration of a Harmony VSC with a dynamic mission simulator has been
tested. A Harmony VSC is currently being installed and integrated with a dynamic
mission simulator at the training site. Upon successful completion of the
integration, the ESIG 4530 image generators currently installed at the training
site will be replaced with Harmony VSCs. We have agreed to pay CAE
(i) $0.5 million for reimbursement of certain expenses and costs incurred by CAE
relating to the U.S. Government
either directly or through prime contractors or subcontractors for 1997,
1996,integration and 1995 was 29 percent, 20 percent, and 48 percent, respectively,retrofit of which 22 percent, 30 percent, and 34 percent of those sales are also
included as salesthe ESIG 4530 to the customers above, respectively.
The outstanding accounts receivabledynamic mission
simulators and tactical control centers and (ii) $5.5 million as liquidated
damages resulting from agenciescertain delays of the United States
Government either directly or through prime contractors or subcontractors
was $9,478 or 26%Harmony VSC. As of gross receivables at December 31,
1997 and $9,091 or
26%2000, we have paid $6.0 million to CAE. As of gross receivables at December 27, 1996. The amount included in31, 2001 we have agreed
to pay $1.5 million of additional costs and estimated earnings in excess of billings on uncompleted
contracts from agenciesincurred by CAE for retrofit of the
simulators with the United States Government either
directly or through prime contractors or subcontractors was $21,371 or
41%Harmony Visual System (VSC). If further delays in the
integration of costs and estimated earnings in excess of billings on uncompleted
contracts at December 31, 1997 and $12,766 or 37% of costs and estimated
earnings in excess of billings on uncompleted contracts at December 27,
1996. The outstanding accounts receivable from another customer was
$5,464 or 15% of gross accounts receivable at December 31, 1997 and
$5,306 or 15% of gross accounts receivable at December 27, 1996.
(14)the Harmony VSC occur, we may be obligated to pay CAE additional
penalties.
59
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(9) EMPLOYEE BENEFIT PLANS
Pension Plan (Plan) - The Company has(the "Plan")--We have a defined benefit pension plan covering
substantially all employees who have attained age 21 with service in excess of
one year. Benefits at normal retirement age (65) are based upon the employee's
years of service and the employee's highest compensation for any consecutive
five of the last ten years of employment. The Company'sOur funding policy is to contribute
annually the
maximum amount that can be deducted for federal income tax purposes.amounts sufficient to satisfy regulatory funding standards, based upon
independent actuarial valuations.
Supplemental Executive Retirement Plan (SERP) - Effective July 1, 1995,
the Company introduced("SERP")--We have a non-qualified
SERP which will be phased in over
three years.SERP. The SERP, which is unfunded, provides eligible executives defined pension
benefits, outside the Company'sour pension plan, based on average earnings, years of service
and age at retirement.
Net annualThe following provides a reconciliation of benefit obligations, plan assets,
and funded assets of the Plan and SERP expense is summarized as follows:(in thousands):
1997 1996 1995
------------------ ------------------ ------------------
PlanPENSION PLAN SERP
Plan SERP Plan SERP
------- -------- ------- ------- ------- ------------------------------- ------------------------
2001 2000 2001 2000
--------- --------- --------- ---------
Benefits for services rendered during theChange in benefit obligation:
Beginning of year $ 2,02543,956 $ 32736,904 $ 1,9896,269 $ 2655,749
Service cost 2,891 2,460 746 815
Interest cost 3,127 2,759 447 410
Actuarial (gain) loss 200 3,722 (518) (521)
Benefits paid (1,075) (1,889) (200) (184)
Curtailment -- -- -- --
--------- --------- --------- ---------
End of year $ 1,59449,099 $ 91
Interest on projected benefit obligation 2,008 252 1,776 98 1,763 4443,956 $ 6,744 $ 6,269
========= ========= ========= =========
Change in plan assets:
Fair value at beginning of year $ 44,566 $ 43,721
Actual return on plan assets (4,848) - (3,546) - (4,978) -
Net amortization and deferral 1,707 221 875 86 2,419 36
------- -------- ------- ------- ------- -------(333) 2,086
Employer contributions -- 648
Benefits paid (1,075) (1,889)
--------- ---------
Fair value at end of year $ 89243,158 $ 80044,566
========= =========
Reconciliation of funded status:
Funded status $ 1,094(5,940) $ 449610 $ 798(5,706) $ 171
======= ======== ======= ======= ======= =======(6,269)
Unrecognized actuarial (gain) loss (4,300) (9,018) (1,241) 68
Unrecognized prior service cost 688 730 -- 495
Unrecognized transition obligation -- 79 -- --
Contribution -- -- 199 --
--------- --------- --------- ---------
Accrued benefit liability $ (9,552) $ (7,599) $ (6,748) $ (5,706)
========= ========= ========= =========
Assumptions (weighted average):
Discount rate 7.25% 7.8% 7.25% 7.3%
Expected return on plan assets 9.0% 9.0% N/A N/A
Compensation increase 4.5% 4.5% 4.5% 4.5%
60
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (14) EMPLOYEE BENEFIT PLANS (continued)
The(CONTINUED)
Net periodic pension and other postretirement benefit costs include the
following assumptions were used in accounting for the Plan and SERP
at the end of each year:components (in thousands):
1997 1996 1995
------- -------- --------
Discount rates used in determining benefit obligations 7.00% 7.50% 7.00%
Rates of increase in compensation levels 4.50 4.50 4.50
Expected long-term rate of return on plan assets 9.00 9.00 9.00
The following summarizes the funded status and amounts recognized in the
Company's consolidated financial statements:
1997 1996 1995
------------------- ------------------- --------------------
PlanPENSION PLAN SERP
Plan SERP Plan Plan------------------------------ ------------------------------
2001 2000 1999 2001 2000 1999
-------- -------- -------- -------- -------- --------
Actuarial present valueComponents of net periodic benefit
obligations:
Vested benefits $(21,321)cost:
Service cost $ (2,315) $(15,033)2,891 $ (1,176) $(16,183)2,460 $ -
Nonvested benefits (1,064) (73) (610) (580) (732) (900)3,252 $ 746 $ 815 $ 739
Interest cost 3,127 2,759 2,892 447 410 418
Expected return on assets (3,921) (3,907) (3,575) -- -- --
Amortization of actuarial (gain)
loss (264) (692) -- -- 1 53
Amortization of prior year service
cost 41 41 37 48 48 73
Amortization of transition 79 79 79 -- -- --
-------- -------- -------- -------- -------- --------
AccumulatedNet periodic benefit obligation (22,385) (2,388) (15,643) (1,756) (16,915) (900)
Effect of projected future
salary increases (13,827) (2,875) (10,135) (1,598) (12,548) (503)
-------- -------- -------- -------- -------- --------
Projected benefit obligation (36,212) (5,263) (25,778) (3,354) (29,463) (1,403)
Plan assets at fair value 36,767 - 32,912 - 29,174 -
-------- -------- -------- -------- -------- --------
Projected benefit obligation
below (in excess of) plan assets 555 (5,263) 7,134 (3,354) (289) (1,403)
Unrecognized net (gain) loss (3,954) 2,895 (9,116) 1,726 (1,657) 138
Unrecognized prior service cost 165 948 (440) 1,008 (512) 1,094
Unrecognized net transition
obligation 317 - 397 - 476 -
-------- -------- -------- -------- -------- --------
Accrued pension plan obligation (2,917) (1,420) (2,025) (620) (1,982) (171)
Additional minimum liability - (968) - (1,136) - -
-------- -------- -------- -------- -------- ---------
Total liability $(2,917) $ (2,388) $(2,025)1,953 $ (1,756) $(1,982)740 $ (171)2,685 $ 1,241 $ 1,274 $ 1,283
======== ======== ======== ======== ======== =================
The additional minimum liability is offset by an equal intangible asset
recorded in other assets in the consolidated financial statements.
Deferred Savings Plan - The Company hasPlan--We have a deferred savings plan whichthat qualifies under
Section 401(k) of the Internal Revenue Code. The plan covers all employees of
the CompanyE&S who have at least one year of service and who are age 18 or older. The Company makesWe make
matching contributions of 50 percent of each employee's contribution not to
exceed six percent of the employee's compensation. The Company'sOur contributions to this
plan for 1997, 1996,2001, 2000 and 19951999 were $957, $948$1.1 million, $1.0 million and $836,$1.1 million,
respectively.
Life Insurance - The Company purchasesInsurance--We purchase company-owned life insurance policies insuring
the lives of certain employees. The policies accumulate asset values to meet
future liabilities including the payment of employee benefits such as
supplemental retirement benefits. At December 31, 19972001 and December 27, 1996,2000, the investment
in the policies was $1,104$2.7 million and $643,$3.2 million, respectively, and net life
insurance expense was $135, $91,$0.1 million, $0.1 million and $57$0.2 million for 1997, 1996,2001,
2000, 1999, respectively.
(10) LONG-TERM DEBT
Included in long-term debt is approximately $18.0 million of 6% Convertible
Subordinated Debentures due in 2012 (the "6% Debentures"). The 6% Debentures are
unsecured and 1995, respectively.are convertible at each bondholder's option into shares of our
common stock at a conversion price of $42.10 or 428,000 shares of our common
stock subject to adjustment. The 6% Debentures are redeemable at our option, in
whole or in part, at par.
61
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (15) PREFERRED STOCK(CONTINUED)
The Companyfollowing is a summary of lines of credit (dollars in thousands):
2001 2000
--------- ---------
Balance at end of year $ 20,676 $ 7,345
Weighted average interest rate at end of year 9.1% 12.5%
Maximum balance outstanding during the year $ 25,530 $ 7,345
Average balance outstanding during the year $ 13,617 $ 1,612
Weighted average interest rate during the year 10.8% 9.6%
The average balance outstanding and weighted average interest rate are
computed based on the outstanding balances and interest rates at month-end
during each year.
In December 2000, we entered into a secured credit facility (the "Foothill
Facility") with Foothill Capital Corporation ("Foothill"). The Foothill Facility
provides for borrowings and the issuance of letters of credit up to
$30.0 million. On February 22, 2002, E&S and Foothill amended the Foothill
Facility whereby Foothill waived all events of financial covenant default
through December 31, 2001 and revised E&S's 2002 financial covenants. The
Foothill Facility expires in December 2002. Borrowings under the Foothill
Facility bear interest at the Wells Fargo Bank National Association prevailing
prime rate plus 1.5% to 3.0%, depending on the amount outstanding. In addition,
the Foothill Facility has both Class Aan unused line fee equal to 0.375% per annum times the
difference between $30.0 million and Class B Preferred Stock with 5,000,000
shares authorized for each class. The Company has reserved 300,000 sharesthe sum of the Class A Preferred Stock as Series A Junior Preferred Stock under a
shareholder rights plan. This preferred stock entitles holders to 100
votes per share and to receive the greater of $2.00 per share or 100
times the common dividend declared. Upon voluntary or involuntary
liquidation, dissolution, or winding upaverage undrawn portion of
the Company, holdersletters of credit and the average daily balance of all outstanding
borrowings, payable each quarter. The Foothill Facility provides Foothill with a
first priority perfected security interest in substantially all of our assets,
including, but not limited to, all of our intellectual property. Pursuant to the
terms of the preferred stock wouldFoothill Facility, all cash receipts of E&S must be entitleddeposited into
a Foothill controlled account.
The Foothill Facility, among other things, (i) requires E&S to maintain
certain financial ratios and covenants, including a minimum tangible net worth
that adjusts each quarter, a minimum unbilled receivables to billed receivables
ratio, and a limitation of $12.0 million of aggregate capital expenditures in
any fiscal year; (ii) restricts our 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 our outstanding shares without
the prior consent of the lender. Due to Foothill's waiver on February 22, 2002
of E&S's noncompliance with financial covenants through December 31, 2001 and
the modification of the financial covenants, we are currently in compliance with
its financial covenants and ratios, although a continuation of recent negative
trends could impact future compliance with such covenants. Should the need
arise, we will negotiate with Foothill to modify and expand various financial
ratios and covenants, however no assurance can be given that such negotiations
will result in modifications that will allow us to continue to be paid,in compliance
or otherwise be acceptable to E&S. E&S will need to replace the extent assets are
availableFoothill
Facility on or before December 14, 2002. In the event E&S is not able to obtain
an acceptable credit facility to replace the Foothill Facility on or before
December 14, 2002, E&S may be unable to meet its anticipated working capital
needs, routine capital expenditures, and current debt service obligations on a
short-term and long-term basis. As of December 31, 2001, we have $15.7 million
in outstanding borrowings and $6.0 million in outstanding letters of credit
under the Foothill Facility.
Evans & Sutherland Computer Limited, a wholly-owned subsidiary of Evans &
Sutherland Computer Corporation, has a $3.0 million overdraft facility (the
"Overdraft Facility") with Lloyds TSB Bank plc ("Lloyds"). Borrowings under the
Overdraft Facility bear interest at Lloyds' short-term offered rate plus 1.75%
per annum. As of December 31, 2001, there were $4.9 million in outstanding
62
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
borrowings. The Overdraft Facility is subject to reduction or demand repayment
for distribution, an amount of $100 per share plus any accruedreason at any time at Lloyds' discretion and unpaid dividends before payment is made to common stockholders.
In connection with this preferred stock, the Company issued one warrant
to each common stockholder that would be exercisable contingent upon
certain conditions and would allow the holder to purchase 1/100th of a
preferred share per warrant. The warrants attached to the shares
outstandingexpires on November 30,
19882002. Evans & Sutherland Computer Limited executed a letter of negative pledge
in favor of Lloyds whereby it agreed not to sell or encumber its assets, except
in the ordinary course of business. Covenants contained in the Overdraft
Facility restrict dividend payments from Evans & Sutherland Computer Limited and
to all new shares issued after that
date; the warrants outstandingrequire maintenance of certain financial covenants. In addition, at
December 31, 19972001, we have $0.9 million of cash on deposit with Lloyds in a
restricted cash collateral account to support certain obligations that the bank
guarantees.
(11) INCOME TAXES
Income tax benefit of $3.2 million for 2001 is primarily attributable to
adjustments to prior years tax provisions as a result of the resolution of
certain worldwide tax contingencies. Included in this amount is $0.6 million for
withholding taxes paid in Japan for taxes associated with the REALimage
transaction. Components of income tax expense (benefit) attributable to earnings
before income taxes for 2000 and December 27, 19961999 are equalas follows (in thousands):
SHARE AND
STOCK OPTION
CURRENT DEFERRED BENEFIT TOTAL
----------- ----------- ------------ -----------
Year ended December 31, 2000:
Federal $ (1,598) $ 17,750 $ -- $ 16,152
State (230) 2,591 -- 2,361
Foreign 510 -- -- 510
----------- ----------- ----------- -----------
$ (1,318) $ 20,341 $ -- $ 19,023
=========== =========== =========== ===========
Year ended December 31, 1999:
Federal $ (6,734) $ (6,816) $ 85 $ (13,465)
State (150) (2,056) 14 (2,192)
Foreign 244 -- -- 244
----------- ----------- ----------- -----------
$ (6,640) $ (8,872) $ 99 $ (15,413)
=========== =========== =========== ===========
The actual tax expense differs from the expected tax expense (benefit) as
computed by applying the U.S. federal statutory tax rate of 35 percent as a
result of the following (in thousands):
2001 2000 1999
--------- --------- ---------
Tax benefit at U.S. federal statutory rate $ (10,720) $ (17,692) $ (13,603)
Losses (gains) of foreign subsidiaries (320) -- --
Adjustment to prior year tax provisions (3,172) -- --
Earnings of foreign sales corporation -- -- (232)
State taxes (net of federal income tax benefit) -- 1,521 (1,425)
Research and development and foreign tax credits (681) (437) (925)
Change in federal valuation allowance 12,599 35,607 --
Other, net (878) 24 772
--------- --------- ---------
$ (3,172) $ 19,023 $ (15,413)
========= ========= =========
63
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of the sharesdeferred tax assets and deferred tax liabilities as of common stock outstanding of 9,066,743 and
9,056,871, respectively. At
December 31, 19972001 and 2000, are presented below (in thousands):
2001 2000
--------- ---------
Deferred tax assets:
Warranty, vacation, and other accruals $ 5,475 $ 4,481
Inventory reserves and other inventory-related
temporary basis differences 3,348 4,407
Pension accrual 6,387 5,204
Long-term contract related temporary differences 882 612
Net operating loss carryforwards 30,538 19,803
Unrealized loss on marketable equity securities -- --
Write-down of investment securities 2,191 2,350
Liquidated damages and late delivery penalties 1,034 134
Credit carryforwards 5,190 4,987
Other 343 332
--------- ---------
Total gross deferred tax assets 55,388 42,310
Less valuation allowance 54,094 40,866
--------- ---------
Total deferred tax assets 1,294 1,444
--------- ---------
Deferred tax liabilities:
Intangible assets -- (111)
Plant and equipment, principally due to
differences in depreciation (1,181) (1,108)
Other (113) (225)
--------- ---------
Total gross deferred tax liabilities (1,294) (1,444)
--------- ---------
Net deferred tax asset $ -- $ --
========= =========
Worldwide income before income taxes for the years ended December 27, 1996,31, 2001,
2000 and 1999, consisted of the warrants werefollowing (in thousands):
2001 2000 1999
--------- --------- ---------
United States $ (31,570) $ (51,395) $ (40,113)
Foreign 941 848 1,246
--------- --------- ---------
$ (30,629) $ (50,547) $ (38,867)
========= ========= =========
We have total federal net operating loss carryovers of $81.0 million, of
which $24.3 million expire in 2021, $45.4 million expire in 2020, and the
remainder expires between 2006 and 2019. We have various tax credit carryovers
of $5.2 million that expire between 2003 and 2021. We also have state net
operating loss carryovers that expire depending on the rules of the various
states to which the loss is allocated.
During the years ended December 31, 2001 and 2000, we increased the
valuation allowance on deferred tax assets by approximately $13.2 million and
$40.7 million, respectively. These amounts relate to an increase in the general
valuation allowance established under the provisions of Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes", which requires that
a valuation allowance be established when it is more likely than not exercisablethat the
net deferred tax assets will not be realized.
64
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
On March 9, 2002, President Bush signed into law the Jobs Creation and
no sharesWorker Assistance Act of preferred stock have been
issued.
(16)1992. Among other provisions, the Act provides for a
5-year carryback of losses generated in 2001 without the normal alternative
minimum tax limitation. We expect to be able to generate some additional federal
tax refunds due to this new law.
(12) DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash and cash equivalents, receivables, notes
payable to bank,line of
credit agreements, accounts payable, and accrued expenses approximates fair
value because of their short maturity. The fair value of the Company's
long-term debt instrumentsour 6% Debentures ($15,673 at6.8
and $7.9 million as of December 31, 19972001 and $15,498 at
December 27, 1996)2000, respectively) is based on
quoted market prices.
(17)(13) COMMITMENTS AND CONTINGENCIES
On November 27, 2000, we entered into a three year agreement with a third
party to provide E&S with certain copy service, mail service, software and
equipment through November 30, 2003. Minimum commitments under this agreement
totaled $640,000 at December 31, 2001.
On September 26, 2000, we entered into a purchase agreement with a third
party that commits E&S to purchase a minimum $4.5 million of licensed products
and support for design development software. The agreement is effective for a
period of three years with an option to renew the agreement for an additional
two-year term.
On June 3, 1999, we entered into an electronic manufacturing services
agreement with Sanmina Corporation (now Sanmina-SCI). The agreement commits us
to purchase a minimum of $22 million of electronic products and assemblies from
Sanmina-SCI each year until June 3, 2002. If we fail to meet these minimum
purchase levels, subject to adjustment, we may be required to pay 25 percent of
the difference between the $22 million and the amount purchased. We have fully
satisfied the requirements of this contract, which ends in June 2002. Various
alternatives, which include a renewed contract with Sanmina-SCI, are being
evaluated.
Certain of our contracts to deliver Harmony image generators contain
liquidated damage provisions for delays in delivery. We incurred $2.9 million,
$0.9 million and $8.2 million for such damages in 2001, 2000 and 1999,
respectively. If further delays in the delivery of the Harmony image generator
occur, we may incur additional liquidated damages.
(14) LEGAL PROCEEDINGS
LOCKHEED MARTIN CORPORATION V. EVANS & SUTHERLAND COMPUTER CORPORATION
(UNITED STATES (MIDDLE) DISTRICT COURT (FLORIDA), CASE NO. 6:00-CV-755-ORL-19C,
FILED ON MAY 23, 2000). On May 23, 2000, Lockheed Martin Corporation served E&S
with a civil complaint filed in the Circuit Court of the Ninth Judicial Circuit
in and for Orange County, Florida. Lockheed alleged in the complaint that we
breached a contract to provide certain visual systems for the Combined Arms
Tactical Trainer program for the United Kingdom Ministry of Defence. The
contract has an original value of $33.9 million. In the complaint, Lockheed
seeks compensatory damages of $8.5 million plus interest as well as
consequential damages and attorneys' fees. The $8.5 million being sought from
E&S by Lockheed was paid to us from May 1999 to March 2000 and was recognized as
revenue by us during 1999. On June 12, 2000, we filed its answer and
counterclaim. In the counterclaim, we allege as grounds for recovery against
Lockheed (1) breach of contract, (2) breach of implied covenant of good faith
and fair dealing, (3) unjust enrichment, (4) unfair competition,
(5) misappropriation of trade secrets, (6) intentional interference with
advantageous business relationship, (7) replevin, and (8) promissory
65
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
estoppel. In its counterclaim, we seek compensatory damages of not less than
$10.0 million and not more than $25.4 million.
On June 14, 2000, the case was removed to the Orlando Division of the United
States District Court for the District of Florida where it currently remains. On
July 7, 2000, Lockheed answered our counterclaim but also filed a motion for
dismissal of our counterclaims for unjust enrichment, unfair competition,
promissory estoppel, and incidental damages. On July 24, 2000, we filed our
opposition to Lockheed's motion to dismiss these certain counterclaims of E&S.
On October 20, 2000 the court denied Lockheed's motion to dismiss in its
entirety, without prejudice. On January 16, 2001, we filed a motion for partial
summary judgment, asking the court to dismiss all of Lockheed's breach of
contract claims. The court denied that motion on August 30, 2001, citing the
existence of material disputed facts. On September 6, 2001 the court granted
Lockheed's leave to amend its complaint, which was filed on September 17, 2001.
We filed a motion to dismiss these new claims on October 4, 2001, and Lockheed
has opposed it. The court currently has that motion under advisement.
Discovery in the matter is scheduled to conclude on September 30, 2002. A
trial date is currently set for March, 2003. We dispute Lockheed's allegations
in the complaint, is vigorously defending the action, and is vigorously
prosecuting its counterclaims. Although management believes E&S will ultimately
prevail in the litigation, an unfavorable outcome of these matters would have a
material adverse impact on our financial condition and operations.
In the normal course of business, the CompanyE&S has various other legal claims and
other contingent matters, including items raised by government contracting
officers and auditors. Although the final outcome of such matters cannot be
predicted, the Company believeswe believe the ultimate disposition of these matters will notwould have a
material adverse effect on the Company'sour consolidated financial condition, liquidity or
results of operations.
In September 1995,(15) STOCK OPTION AND STOCK PURCHASE PLANS
Stock Option Plans--We have stock incentive plans that provide for the Company reachedgrant
of options to officers and employees to acquire shares of our common stock at a
settlement agreement with
Thomson Training & Simulation (Thomson). Under the agreement, the Company
received $3,750 from lost revenues for breach of a working agreement by
Thomson. The settled agreement allows the Company and Thomson to pursue
opportunities in the civil pilot market on a nonexclusive basis. The
amount paidpurchase price generally equal to the Company under this settlement is classified as sales
in the Company's consolidated statements of operations.
(18) BUSINESSES SOLD, ACQUIRED, AND SPIN-OFF
On December 27, 1996, the Company contributed all of the issued and
outstanding capital stock of Portable Graphics, Inc., a wholly-owned
subsidiary, and paid $100 cash in exchange for 1,570,667 Class A Shares
of Total Graphics Solution N.V. (TGS) pursuant to Section 351(a) of the
Internal Revenue Code of 1986, whereby the Company immediately thereafter
had control of the TGS Class A Shares. Based upon an independent
valuation of TGS, the Company has recorded its investment in TGS at
$1,250. In addition, the Company paid TGS $250 in exchange for a warrant
to purchase an additional 832,355 Class A Shares at a price of $1.40 per
share. The warrant expiresfair market value on the earlier of December 27, 2001 or the
effective date of an underwritten public offeringgrant.
Options generally vest ratably over three years and expire ten years from date
of the capital stock of
TGS. The cost of the warrant has been recorded in investment securities
in the consolidated financial statements.grant. We grant options to our directors under our Director Plan. Option
grants are
66
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (18) BUSINESSES SOLD, ACQUIRED,(CONTINUED)
limited to 10,000 shares per director in each fiscal year. Options generally
vest ratably over four years and expire ten years from the date of grant. A
summary of activity follows (shares in thousands):
2001 2000 1999
-------------------------- -------------------------- --------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
NUMBER EXERCISE NUMBER EXERCISE NUMBER EXERCISE
OF SHARES PRICE OF SHARES PRICE OF SHARES PRICE
---------- ---------- ---------- ---------- ---------- ----------
Outstanding at
beginning of year 2,657 $ 12.63 2,087 $ 14.05 2,084 $ 13.80
Granted 267 7.35 865 9.18 472 14.25
Exercised (3) 5.17 (9) 1.03 (84) 7.72
Canceled (411) 11.76 (286) 13.30 (385) 14.32
---------- ---------- ----------
Outstanding at end of
year 2,510 12.22 2,657 12.63 2,087 14.05
========== ========== ==========
Exercisable at end of
year 1,803 1,480 14.12 1,219 14.16
========== ========== ==========
Weighted-average fair
value of options
granted during the
year 1.92 5.91 5.32
Shareholders authorized an additional 850,000 and 400,000 shares to be
granted under the plans during 2001 and 2000, respectively. As of December 31,
2001, options to purchase 1,303,000 shares of common stock were authorized and
reserved for future grant.
The following table summarizes information about fixed stock options
outstanding as of December 31, 2001 (options in thousands):
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------- ----------------------------
WEIGHTED-
NUMBER AVERAGE WEIGHTED- NUMBER WEIGHTED-
OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE
RANGE OF EXERCISE AS OF CONTRACTUAL EXERCISE AS OF EXERCISE
PRICES 12/31/01 LIFE PRICE 12/31/01 PRICE
----------------- ----------- ----------- ----------- ----------- -----------
$ 1.21 - $ 8.04 478 8.8 $ 6.75 86 $ 6.06
8.26 - 12.22 546 6.7 11.34 323 11.67
12.23 - 13.25 212 6.0 12.81 185 12.84
13.31 - 13.56 853 6.7 13.56 852 13.56
13.56 - 22.50 419 5.9 16.51 355 16.82
24.38 - 32.88 2 6.0 28.20 2 28.19
1.21 - 32.88 2,510 6.9 12.22 1,803 13.45
We account for these plans under APB 25, under which no compensation cost
has been recognized. Had compensation cost for these plans been determined
consistent with SFAS 123, our net
67
EVANS & SUTHERLAND COMPUTER CORPORATION AND SPIN-OFF (continued)
On March 20, 1996,SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
loss and loss per common share would have been changed to the Companyfollowing pro
forma amounts (in thousands, except per share data):
2001 2000 1999
----------- ----------- -----------
Net loss Pro forma $ (28,352) $ (71,923) $ (26,995)
Basic and diluted loss per common
share Pro forma (2.79) (7.67) (2.84)
The per share weighted-average fair value of stock options granted during
2001, 2000 and 1999 was $1.92, $5.91 and $5.32, respectively. The fair value of
each option grant is estimated on the date of the grant using the Black-Scholes
option-pricing model with the following weighted-average assumptions used for
grants during 2001, 2000 and 1999:
2001 2000 1999
--------- --------- ---------
Expected life (in years) 2.6 4.5 2.6
Risk-free interest rate 3.0% 6.1% 6.3%
Expected volatility 37% 79% 52%
Dividend yield -- -- --
Stock Purchase Plan--We have an employee stock purchase plan whereby
qualified employees are allowed to have up to 10% of their annual earnings
withheld to purchase our common stock at 85% of the market value of the stock at
the time of the sale. A total of 500,000 shares are authorized under the plan.
Shares totaling 63,000, 84,000 and 58,000 were purchased under this plan in
fiscal 2001, 2000 and 1999, and as of December 31, 2001, 50,000 shares were
available for future issuance under this plan.
(16) PREFERRED STOCK
PREFERRED STOCK--CLASS A
We have 5,000,000 authorized shares of Class A Preferred Stock. Prior to
1998, we had reserved 300,000 shares of Class A Preferred Stock as Series A
Junior Preferred Stock under a shareholder rights plan which expired in
November 1998. In November 1998, the Board of Directors declared a dividend of
one preferred stock purchase right ("Right") for each outstanding share of
common stock, par value $0.20 per share of E&S for shareholders of record on
November 19, 1998, and for all future issuances of common stock. The Rights are
not currently exercisable or transferable apart from the common stock and have
voting rights or rights to receive dividends. Each Right entitles the registered
holder to purchase from E&S one thousandth of a share of Preferred Stock at a
price per share of $60.00, subject to adjustment. The Rights will be exercisable
ten business days following a public announcement of a person or group of
affiliated persons acquiring beneficial ownership of 15% or more of our
outstanding common shares or following the announcement of a tender offer or
exchange offer upon the consummation of which would result in the beneficial
ownership by a person or group of affiliated persons of 15% or more of the
outstanding Company's stock. The Rights may be redeemed by E&S at a price of
$0.01 per Right before November 30, 2008.
68
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In the event that we are acquired Terabit Computer Specialty
Company, Inc. (Terabit). Terabit, established in 1979, developed,
marketed and supported simulated cockpit instruments anda merger or other airborne
electronics displays used in training simulators for military and
commercial aircraft. To effectbusiness combination
transaction, provision shall be made so that each holder of a Right, excluding
the acquisition, 149,215Rights beneficially owned by the acquiring persons, will have the right to
receive, upon exercise thereof at the then current exercise price, that number
of shares of common shares of the Company'ssurviving company which at the time of such
transaction will have a market value of two times the exercise price of the
Right. In the event that a person or group of affiliated persons acquires
beneficial ownership of 15% or more of our outstanding common shares, provision
shall be made so that each holder of a Right, excluding the Rights beneficially
owned by the acquiring persons, shall have the right to receive, upon exercise
thereof, a share of common stock were issuedat a purchase price equal to 50% of the then
current exercise price.
On June 7, 2000, E&S and American Stock Transfer & Trust Company amended the
Rights to allow the State of Wisconsin Investment Board to acquire beneficial
ownership up to 19.9% of our outstanding common shares without triggering the
exercisability of the Rights.
PREFERRED STOCK--CLASS B
We have 5,000,000 authorized shares of Class B Preferred Stock. On July 22,
1998, Intel Corporation ("Intel") purchased 901,408 shares of our preferred
stock plus a warrant to purchase an additional 378,462 shares of the preferred
stock at an exercise price of $33.28125 per share for approximately
$24.0 million. In March 2001, Intel converted the 901,408 shares of our
preferred stock into 901,408 shares of our common stock. In March 2001, Intel
and E&S amended the preferred stock and warrant purchase agreement to terminate
certain contractual rights of Intel, including registration rights, board and
committee observation rights, right of first refusal, right of participation,
right of maintenance, standstill agreement, and right to require E&S to
repurchase the preferred stock in exchangethe event of any transaction qualifying as a
specific corporate event.
(17) NET INCOME (LOSS) PER COMMON SHARE
Net income (loss) per common share is computed based on the weighted-average
number of common shares and, as appropriate, dilutive common stock equivalents
outstanding during the period. Stock options, warrants, and the 6% Debentures
are considered to be common stock equivalents.
Basic net income (loss) per common share is the amount of net income (loss)
for the period available to each share of common stock outstanding during the
reporting period. Diluted net income (loss) per share is the amount of net
income (loss) for the period available to each share of common stock outstanding
during the reporting period and to each share that would have been outstanding
assuming the issuance of common shares for all dilutive potential common shares
outstanding during the period.
In calculating net loss per common share, the net loss was the same for both
the basic and diluted calculation. The diluted weighted average number of common
shares outstanding during 2001, 2000 and 1999 excludes common stock issuable
pursuant to outstanding stock options, the 6% Debentures and the Class B-1
Preferred Stock because to do so would have had an anti-dilutive effect on loss
per common share. The total number of common shares excluded from diluted loss
per share related to the above was approximately 2.2 million, 2.8 million and
2.5 million in 2001, 2000 and 1999, respectively.
(18) SEGMENT AND RELATED INFORMATION
Our business units have been aggregated into three reportable segments:
Simulation, REALimage Solutions and Applications. These reportable segments
offer different products and services and are
69
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
managed and evaluated separately because each segment uses different
technologies and requires different marketing strategies. The Simulation segment
provides a broad line of visual systems for flight and ground simulators for
training purposes to government, aerospace and commercial airline customers. The
REALimage Solutions segment provides graphics acceleration technology to the
professional digital content creation market. The Applications segment provides
digital video applications for entertainment, educational and multimedia
industries. As discussed in Note 2, we sold the REALimage Solutions segment in
the third quarter of 2001.
The accounting policies of the outstanding
common stocksegments are the same as those described in
the summary of Terabit.significant accounting policies (Note 1). We evaluate 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. Our assets are not identifiable by segment.
REALIMAGE
SIMULATION SOLUTIONS APPLICATIONS TOTAL
------------ ------------ ------------ ------------
YEAR ENDED DECEMBER 31, 2001:
Sales $ 135,309 $ 1,714 $ 8,240 $ 145,263
Operating income (loss) (31,359) 4,132 (824) (28,051)
YEAR ENDED DECEMBER 31, 2000:
Sales $ 149,909 $ 5,736 $ 11,335 $ 166,980
Operating loss (43,106) (3,132) (305) (46,543)
YEAR ENDED DECEMBER 31, 1999:
Sales $ 170,578 $ 21,961 $ 8,346 $ 200,885
Operating loss (8,686) (26,685) (4,595) (39,966)
The acquisition was accounted2001 operating income amount for using the poolingREALimage Solutions segment
includes a $9.0 million gain on the sale of interests method. However, due to immateriality, the Company's
financial information has not been restated to include the accounts and
operationsassets held for sale, a
$0.8 million gain on sale of Terabit prior to January 1, 1996.
On April 12, 1995, the Company sold its CDRS business unit and an impairment loss of
$0.2 million. The restructuring charge of $2.8 million in 2001 affected all
segments. The operating loss amount for 2000 for the REALimage Solutions segment
included a credit of $0.8 million related to Parametric
Technology Corporation (PTC),the reversal of restructuring
charge accruals established in prior years.
The operating loss in 1999 for the Simulation segment includes a Massachusetts Corporation.write-off
of inventories of $12.1 million. The proceeds
fromoperating loss in 1999 for the sale netREALimage
Solutions segment includes an impairment loss of direct expenses$9.7 million, a restructuring
charge of $1,591 was approximately $31,488
resulting in$1.5 million and a gainwrite-off of $23,506 summarized as follows:
Proceeds $ 31,488
Assets and liabilities sold:
Accounts receivable $ (961)
Inventory (466)
Netinventories of $1.1 million.
70
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(19) GEOGRAPHIC INFORMATION
The following table presents sales by geographic location based on the
location of the use of the product or services. Sales within individual
countries greater than 10% of consolidated sales are shown separately (in
thousands):
2001 2000 1999
--------- --------- ---------
United States $ 95,734 $ 106,045 $ 114,190
United Kingdom 26,960 26,584 50,100
Europe (excluding United Kingdom) 10,479 21,723 27,777
Pacific Rim 9,069 8,162 8,324
Other 3,021 4,466 494
--------- --------- ---------
$ 145,263 $ 166,980 $ 200,885
========= ========= =========
The following table presents property, plant and equipment (1,228)
Liabilities 387 (2,268)
-----------
Provision for expenses (2,414)
Write-off of inventory (3,300)
-----------
$ 23,506
===========
On October 3, 1995,by geographic
location based on the Company acquired alllocation of the outstanding common
stock of Xionix Simulation, Inc. (Xionix) for $1,080. Xionix manufactures
low-cost flight-system trainers. This business combination wasassets (in thousands):
2001 2000
--------- ---------
United States $ 40,488 $ 47,777
Europe 1,479 888
--------- ---------
Total property, plant and equipment, net $ 41,967 $ 48,665
========= =========
(20) SIGNIFICANT CUSTOMERS
Sales to the U.S. government, either directly or indirectly through sales to
prime contractors or subcontractors, accounted for under$69.5 million or 48% of total
sales, $66.7 million or 40% of total sales, and $84.5 million or 42% of total
sales, in 2001, 2000 and 1999, respectively. Sales to the purchase methodUnited Kingdom
Ministry of accounting. Accordingly, the purchase
price was allocatedDefence ("UK MOD"), either directly or indirectly through sales to
assetsprime contractors or subcontractors, accounted for $13.6 million or 9% of total
sales, $22.3 million or 13% of total sales, and liabilities based on their estimated
fair values as$33.8 million or 17% of total
sales in 2001, 2000 and 1999, respectively.
In 2001, sales to Thales Training & Simulation ("Thales") were
$23.9 million or 16% of total sales, of which 57% related to UK MOD sales and
sales to The Boeing Company ("Boeing") were $15.1 million of 10% of total sales,
of which 100% related to U.S. government or UK MOD contracts.
In 2000, sales to Lockheed Martin Corporation ("Lockheed") were
$22.5 million or 14% of total sales, of which 100% related to U.S. government
and UK MOD contracts and sales to Thales Training & Simulation Ltd. were
$19.6 million or 12% of total sales, of which 58% related to UK MOD contracts.
In 1999, sales to Lockheed were $35.8 million or 18% of total sales, of which
100% related to U.S. government and UK MOD contracts, and sales to The Boeing
Company ("Boeing") were $25.4 million or 13% of total sales, of which 100%
related to U.S. government and UK MOD contracts.
Aggregated accounts receivable from agencies of the dateUnited States
government, either directly or indirectly through prime or subcontractors, was
$10.8 million or 29% of acquisition. Operationsgross accounts receivable at December 31, 2001 and
$9.3 million or 24% of Xionix are
includedgross accounts receivable at December 31, 2000.
Aggregated accounts receivable from the UK MOD, either directly or indirectly
through prime or subcontractors, was $5.4 million or 15% of gross accounts
receivable at December 31, 2001 and
71
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
$2.1 million or 5% of gross accounts receivable at December 31, 2000. Aggregated
accounts receivable from the Federal Department of Defense of the Federal
Republic of Germany, either directly or indirectly through prime or
subcontractors, was $3.3 million or 9% of gross accounts receivable at
December 31, 2001 and $10.6 million or 27% of gross accounts receivable at
December 31, 2000.
The amount of costs and estimated earnings in excess of billings on
uncompleted contracts from agencies of the United States government and the UK
MOD, either directly or indirectly through prime or subcontractors was
$9.8 million and $28.7 million, or 21% and 60% of total costs and estimated
earnings in excess of billings on uncompleted contracts, respectively, at
December 31, 2001. The amount of costs and estimated earnings in excess of
billings on uncompleted contracts from agencies of the United States government
and the UK MOD, either directly or indirectly through prime or subcontractors,
was $16.8 million and $20.5 million, or 25% and 30% of total costs and estimated
earnings in excess of billings on uncompleted contracts, respectively, at
December 31, 2000.
(21) RESTRUCTURING CHARGE
In the third quarter of 2001, we initiated a restructuring plan focused on
reducing the operating cost structure of E&S. As part of the plan, we recorded a
charge of $2.1 million relating to a reduction in force of approximately 80
employees. In the fourth quarter of 2001, we extended the restructuring plan
initiated in the accompanying consolidated financial statementsthird quarter. As part of the plan, we recorded a charge of
$0.7 million relating to a reduction in force of approximately 12 employees. As
of December 31, 2001, we had paid $1.9 million in severance benefits related to
these restructurings. The majority of the remaining benefits will be paid out
over the next two quarters. The charge was recorded in accordance with Emerging
Issues Task Force Issue 94-03 "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit (Including Certain Cost Incurred in
a Restructuring)" and Staff Accounting Bulletin No. 100, "Restructuring and
Impairment Charges".
In the third quarter of 1999, we initiated a restructuring plan focused on
reducing the operating cost structure of its REALimage Solutions Group. As part
of the plan, we recorded a charge of $1.5 million relating to 28 employee
terminations, including 17 employees in San Jose and 11 employees in Salt Lake
City.
During 2000, after all employee severance costs were incurred, we reversed
$0.8 million of the 1999 restructuring charge as a result of certain employees
being transferred within E&S rather than being terminated and estimated
severance and related charges being lower than expected for the terminated
employees.
(22) RELATED PARTY TRANSACTIONS
We had purchases of $0.4 million during 1999, from a supplier for which our
Chief Executive Officer serves as a director.
(23) REALIMAGE TRANSITION COSTS
Early in 2001, we announced our intention to spin out or sell its REALimage
Solutions Group. Therefore, we categorized all the costs and expenses associated
with the REALimage Solutions Group from the datebeginning of acquisition, and are not material in relation to2001 until the Company's
consolidated financial statements; pro forma financial information has
therefore not been presented. The Company allocated $705sale of
the Xionix
purchase price to in-process research and development which has no
alternative future use and this amount was written off during 1995.
(19) RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997,business in the FASB issued Statementthird quarter of Financial Accounting Standards
No. 130., Reporting Comprehensive Income and Statement of Financial
Accounting Standards No. 131, Disclosures about Segments of an Enterprise
and Related Information.2001 in the REALimage transition costs
expense category. These statements, which are effective for periods
beginning after December 15, 1997 expand or modify disclosures and,
accordingly, will have no impact on the Company's reported financial
position, results of operation, or cash flows.expenses totaled $5.3 million.
72
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
"None"
FORM 10-K
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANYREGISTRANT
Information regarding our directors of the Company is incorporated by reference from
"Election of Directors" in the Proxy Statement to be delivered to shareholders
in connection with the 19982002 Annual Meeting of Shareholders to be held on
May 21, 1998.16, 2002.
Information required by itemItem 405 of Regulation S-K is incorporated by
reference from "Compliance with Section 16(a) of the Securities Exchange Act of
1934" in the Proxy Statement to be delivered to shareholders in connection with
the 19982002 Annual Meeting of Shareholders to be held on May 21, 1998.16, 2002.
Information concerning our current executive officers of the Company is incorporated by
reference to the section in Part I hereof found under the caption "Executive
Officers of the Registrant".Registrant."
ITEM 11. EXECUTIVE COMPENSATION
Information regarding this item is incorporated by reference from "Executive
Compensation" in the Proxy Statement to be delivered to shareholders in
connection with the 19982002 Annual Meeting of Shareholders to be held on May 21,
1998.16,
2002.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
Information regarding this item is incorporated by reference from "Security
Ownership of Certain Beneficial Owners and Management" in the Proxy Statement to
be delivered to shareholders in connection with the 19982002 Annual Meeting of
Shareholders to be held on May 21, 1998.16, 2002.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding this item is incorporated by reference from "Executive
Compensation--Summary Compensation - Summary Compensation Table",Table," "Report of the Compensation and Stock
Options Committee of the Board of Directors",Directors," and "Termination of Employment and
Change of Control Arrangements",Arrangements," in the Proxy Statement to be delivered to
shareholders in connection with the 19982002 Annual Meeting of Shareholders to be
held on May 21, 1998.16, 2002.
73
FORM 10-K
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
The following constitutes a list of Financial Statements, Financial
Statement Schedules, and Exhibits required to be includedused in this report:
1. Financial Statements - IncludedStatements--Included in Part II, Item 8 of this report:
Report of Management
Report of Independent Auditors
Consolidated Balance Sheets -as of December 31, 19972001 and December 27, 1996.2000
Consolidated Statements of Operations - Yearsfor each of the years in the
three-year period ended December 31, 1997,2001
Consolidated Statements of Comprehensive Loss for each of the years in the
three-year period ended December 27, 1996, and December 29, 1995.31, 2001
Consolidated Statements of Stockholders' Equity - Yearsfor each of the years in the
three-year period ended December 31, 1997, December 27, 1996, and December 29, 1995.2001
Consolidated Statements of Cash Flows - Yearsfor each of the years in the
three-year period ended December 31, 1997,
December 27, 1996, and December 29, 1995.2001
Notes to Consolidated Financial Statements - Yearsfor each of the years in the
three-year period ended December 31, 1997, December 27, 1996, and December 29, 1995.2001
2. Financial Statement Schedules - includedSchedules--included in Part IV of this report:
Schedule II - ValuationII--Valuation and Qualifying Accounts
Schedules other than those listed above are omitted because of the absence
of conditions under which they are required or because the required
information is presented in the Financial Statementsfinancial statements or notes thereto.
3. Exhibits
2.1 Agreement and Plan of Merger, dated April 22, 1998, among Evans &
Sutherland Computer Corporation, E&S Merger Corp., and
AccelGraphics, Inc., filed as Annex I to Evans & Sutherland Computer
Corporation's Registration Statement on Form S-4, SEC File
No. 333-51041, and incorporated herein by this reference.
3.1 Articles of Incorporation, as amended, filed as Exhibit 3.1 to the Company'sEvans &
Sutherland Computer Corporation's Annual Report on Form 10-K, SEC File
No. 000-08771, for the fiscal year ended December 25, 1987, and
incorporated herein by this reference.
3.1.1 Amendments to Articles of Incorporation filed as Exhibit 3.1.1 to
the Company'sEvans & Sutherland Computer Corporation's Annual Report on Form 10-K,
SEC File No. 000-08771, for the fiscal year ended December 30, 1988,
and incorporated herein by this reference.
3.2 By-laws, as amended,3.1.2 Certificate of Designation, Preferences and Other Rights of the
Class B-1 Preferred Stock of Evans & Sutherland Computer Corporation,
filed as Exhibit 3.23.1 to the Company's
Annual Report onEvans & Sutherland Computer Corporation's
Form 10-K10-Q for the fiscal yearquarter ended DecemberSeptember 25, 1987,1998, and incorporated
herein by this reference.
74
3.2 Amended and Restated Bylaws of Evans & Sutherland Computer Corporation,
filed as Exhibit 3.2 to Evans & Sutherland Computer Corporation's
Form 10-K for the year ended December 31, 2000, and incorporated herein
by this reference.
3.3 Amendment No. 1 to the Amended and Restated Bylaws of Evans &
Sutherland Computer Corporation, filed as Exhibit 3.3 to Evans &
Sutherland Computer Corporation's Form 10-K for the year ended
December 31, 2000, and incorporated herein by this reference.
4.1 Form of Rights Agreement, dated as of November 19, 1998, between
Evans & Sutherland Computer Corporation and American Stock Transfer
Trust Company which includes as Exhibit A, the form of Certificate of
Designation for the Rights, as Exhibit B, the form of Rights
Certificate and as Exhibit C, a Summary of Rights, filed as Exhibit 1
to Evans & Sutherland Computer Corporation's Registration Statement on
Form 8-A filed December 8, 1998, and incorporated herein by this
reference.
4.2 First Amendment to Rights Agreement dated as of June 7, 2000 between
Evans & Sutherland Computer Corporation and American Stock Transfer &
Trust Company, filed as Exhibit 10.14 to Evans & Sutherland Computer
Corporation's Form 10-Q for the quarter ended June 30, 2000, and
incorporated herein by this reference.
* 10.1 1985 Stock Option Plan, as amended, filed as Exhibit 1 to the Company's
Post-effectiveEvans &
Sutherland Computer Corporation's Post-Effective Amendment No. 1 to
Registration Statement on Form S-8, SEC File No. 2-76027, and
incorporated herein by this reference.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES,
AND REPORTS ON FORM 8-K (Continued)
3. Exhibits (Continued)* 10.2 1989 Stock Option Plan for Non-employee Directors, filed as
Exhibit 10.5 to the Company'sEvans & Sutherland Computer Corporation's Annual Report
on Form 10-K, SEC File No. 000-08771, for the fiscal year ended
December 29, 1989, and incorporated herein by this reference.
* 10.3 The Company's 1991 Employee Stock Purchase Plan of Evans & Sutherland Computer
Corporation, as amended as of February 21, 2001, filed as Exhibitexhibit 4.1
to the Company'sEvans & Sutherland Computer Corporation's Post Effective Amendment
No. 1 to Registration Statement on Form S-8, SEC File No. 33-39632, and
incorporated herein by this reference.
* 10.4 Employment Agreement dated NovemberEvans & Sutherland Computer Corporation 1998 Stock Option Plan, as
amended as through May 17, 1994, between the
Company and Mr. Gary E. Meredith,2000, filed as Exhibit 10.9exhibit 4.1 to the
Company's Annual ReportEvans &
Sutherland Computer Corporation's Post Effective Amendment No. 1 to
Registration Statement on Form 10-K for the fiscal year ended
December 26, 1994,S-8, SEC File No. 333-58733, and
incorporated herein by this reference.
* 10.5 Employment Agreement dated November 29, 1994, between the
Company and Mr. James R. Oyler, filed as Exhibit 10.10 to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 26, 1994, and incorporated herein by this reference.
10.6 The Company'sEvans & Sutherland Computer Corporation's 1995 Long-Term Incentive
Equity Plan, filed as Exhibit 10.11 to the Company'sEvans & Sutherland Computer
Corporation's Annual Report on Form 10-K, SEC File No. 000-08771, for
the fiscal year ended December 29, 1995, and incorporated herein by
this reference.
10.7 Asset Purchase Agreement dated March 1, 1995, between the
Company and Parametric Technology Corporation as to E&S'
divestiture of its Design Software group (CDRS),* 10.6 Evans & Sutherland Computer Corporation's Executive Savings Plan, filed
as Exhibit 10.1210.14 to the Company'sEvans & Sutherland Computer Corporation's Annual
Report on Form 10-K, SEC File No. 000-08771, for the fiscal year ended
December 29, 1995, and incorporated herein by this reference.
* 10.7 Evans & Sutherland Computer Corporation's Supplemental Executive
Retirement Plan (SERP), filed as Exhibit 10.15 to Evans & Sutherland
Computer Corporation's Annual Report on Form 10-K, SEC File
No. 000-08771, for the fiscal year ended December 29, 1995, and
incorporated herein by this reference.
10.8 The Company's Executive Savings Plan,Business Loan Agreement by and between U.S. Bank National Association
and Evans & Sutherland Computer Corporation as of November 13, 1998,
filed as Exhibit 10.1410.8 to the Company'sEvans &
75
Sutherland Computer Corporation's Annual Report on Form 10-K for the
fiscal year ended December 29, 1995,31, 1998, and incorporated herein by this
reference.
10.9 The Company's Supplemental Executive Retirement Plan (SERP),Addendum to Business Loan Agreement by and between U.S. Bank National
Association and Evans & Sutherland Computer Corporation as of
February 5, 1999, filed as Exhibit 10.1510.9 to the Company'sEvans & Sutherland Computer
Corporation's Annual Report on Form 10-K for the fiscal year ended
December 29, 1995,31, 1998, and incorporated herein by reference.
10.11 Series B Preferred Stock and Warrant Purchase Agreement dated as of
July 20, 1998, between Evans & Sutherland Computer Corporation and
Intel Corporation, filed as Exhibit 4.2 to Evans & Sutherland Computer
Corporation's Form 10-Q for the quarter ended September 25, 1998, and
incorporated herein by this reference.
10.12 Warrant to Purchase Series B Preferred Stock dated as of July 22, 1998,
between Evans & Sutherland Computer Corporation and Intel Corporation,
filed as Exhibit 4.3 to Evans & Sutherland Computer Corporation's
Form 10-Q for the quarter ended September 25, 1998, and incorporated
herein by this reference.
10.13 Master Agreement for Electronic Manufacturing Services, dated as of
June 3, 1999, between Evans & Sutherland Computer Corporation and
Sanmina Corporation, filed as Exhibit 10.1 to Evans & Sutherland
Computer Corporation's Form 10-Q for the quarter ended July 2, 1999,
and incorporated herein by this reference.
10.14 Loan Agreement by and between Zions First National Bank, a national
banking association, and Evans & Sutherland Computer Corporation, dated
March 31, 2000, filed as Exhibit 10.1 to Evans & Sutherland Computer
Corporation's Form 10-Q for the quarter ended March 31, 2000 and
incorporated herein by this reference.
10.15 $15,000,000 Promissory Note in favor of Zions First National Bank, a
national banking association, dated March 31, 2000, filed as
Exhibit 10.2 to Evans & Sutherland Computer Corporation's Form 10-Q for
the quarter ended March 31, 2000, and incorporated herein by this
reference.
10.16 Trust Deed, Assignment of Rents, Security Agreement and Fixture Filing
executed by Evans & Sutherland Computer Corporation to Zions First
National Bank, a national banking association, in favor of Zions First
National Bank, a national banking association, dated March 31, 2000,
filed as Exhibit 10.3 to Evans & Sutherland Computer Corporation's
Form 10-Q for the quarter ended March 31, 2000, and incorporated herein
by this reference.
10.17 Assignment of tenant's Interest in Ground Lease for Security executed
by Evans & Sutherland Computer Corporation and Zions First National
Bank, a national banking association, dated March 31, 2000, filed as
Exhibit 10.4 to Evans & Sutherland Computer Corporation's Form 10-Q for
the quarter ended March 31, 2000, and incorporated herein by this
reference.
10.18 Assignment of Lease by Evans & Sutherland Computer Corporation and
Zions First National Bank, a national banking association, dated
March 31, 2000, filed as Exhibit 10.5 to Evans & Sutherland Computer
Corporation's Form 10-Q for the quarter ended March 31, 2000, and
incorporated herein by this reference.
10.19 Commercial Credit and Security Agreement, dated March 2, 1998, between
Evans & Sutherland Computer Corporation and First Security Bank, N.A.,
filed as Exhibit 10.6 to Evans & Sutherland Computer Corporation's
Form 10-Q for the quarter ended March 31, 2000, and incorporated herein
by this reference.
76
10.20 Modification Agreement dated February 22, 2000, between Evans &
Sutherland Computer Corporation and First Security Bank, N.A., filed as
Exhibit 10.7 to Evans & Sutherland Computer Corporation's Form 10-Q for
the quarter ended March 31, 2000, and incorporated herein by this
reference.
10.21 Letter of Credit and Reimbursement Agreement between Evans & Sutherland
Computer Corporation and Zions First National Bank, dated April 24,
2000, filed as Exhibit 10.1 to Evans & Sutherland Computer
Corporation's Form 10-Q for the quarter ended June 30, 2000, and
incorporated herein by this reference.
10.22 Supplemental Letter of Credit and Reimbursement Agreement between
Evans & Sutherland Computer Corporation and Zions First National Bank,
dated May 31, 2000, filed as Exhibit 10.2 to Evans & Sutherland
Computer Corporation's Form 10-Q for the quarter ended June 30, 2000,
and incorporated herein by this reference.
10.23 Managed Agency Account Assignment Agreement between Evans & Sutherland
Computer Corporation and Zions First National Bank, dated May 31, 2000,
filed as Exhibit 10.3 to Evans & Sutherland Computer Corporation's
Form 10-Q for the quarter ended June 30, 2000, and incorporated herein
by this reference.
10.24 Second Loan Modification Agreement made and entered into effective
June 30, 2000 by and among Evans & Sutherland Computer Corporation,
Evans & Sutherland Computer GmbH, Evans & Sutherland Computer Limited,
Evans & Sutherland Graphics Corporation and Zions First National Bank,
a national banking association, filed as Exhibit 10.4 to Evans &
Sutherland Computer Corporation's Form 10-Q for the quarter ended
June 30, 2000, and incorporated herein by this reference.
10.25 $15,000,000 Renewal and Substitute promissory Note in favor of Zions
First National Bank, a national banking association, dated June 30,
2000, filed as Exhibit 10.5 to Evans & Sutherland Computer
Corporation's Form 10-Q for the quarter ended June 30, 2000, and
incorporated herein by this reference.
* 10.26 Employment agreement between Evans & Sutherland Computer Corporation
and James R. Oyler, dated May 16, 2000, filed as Exhibit 10.6 to
Evans & Sutherland Computer Corporation's Form 10-Q for the quarter
ended June 30, 2000, and incorporated herein by this reference.
* 10.27 Employment agreement between Evans & Sutherland Computer Corporation
and Richard J. Gaynor, dated May 16, 2000, filed as Exhibit 10.7 to
Evans & Sutherland Computer Corporation's Form 10-Q for the quarter
ended June 30, 2000, and incorporated herein by this reference.
* 10.28 Employment agreement between Evans & Sutherland Computer Corporation
and David B. Figgins, dated May 16, 2000, filed as Exhibit 10.8 to
Evans & Sutherland Computer Corporation's Form 10-Q for the quarter
ended June 30, 2000, and incorporated herein by this reference.
* 10.29 Employment agreement between Evans & Sutherland Computer Corporation
and George K. Saul, dated May 16, 2000, filed as Exhibit 10.9 to
Evans & Sutherland Computer Corporation's Form 10-Q for the quarter
ended June 30, 2000, and incorporated herein by this reference.
* 10.30 Employment agreement between Evans & Sutherland Computer Corporation
and Robert H. Ard, dated May 16, 2000, filed as Exhibit 10.10 to
Evans & Sutherland Computer Corporation's Form 10-Q for the quarter
ended June 30, 2000, and incorporated herein by this reference.
77
* 10.31 Employment agreement between Evans & Sutherland Computer Corporation
and Thomas Atchison, dated July 25, 2000, filed as Exhibit 10.11 to
Evans & Sutherland Computer Corporation's Form 10-Q for the quarter
ended June 30, 2000, and incorporated herein by this reference.
10.32 Overdraft Facility dated June 15, 2000 between Evans & Sutherland
Computer Limited and Lloyds TSB Bank plc, filed as Exhibit 10.12 to
Evans & Sutherland Computer Corporation's Form 10-Q for the quarter
ended June 30, 2000, and incorporated herein by this reference.
* 10.33 Amendment to employment agreement between Evans & Sutherland Computer
Corporation and James R. Oyler, dated September 22, 2000, filed as
Exhibit 10.1 to Evans & Sutherland Computer Corporation's Form 10-Q for
the quarter ended September 29, 2000, and incorporated herein by this
reference.
* 10.34 Amendment to employment agreement between Evans & Sutherland Computer
Corporation and Richard J. Gaynor, dated September 22, 2000, filed as
Exhibit 10.2 to Evans & Sutherland Computer Corporation's Form 10-Q for
the quarter ended September 29, 2000, and incorporated herein by this
reference.
* 10.35 Amendment to employment agreement between Evans & Sutherland Computer
Corporation and David B. Figgins, dated September 22, 2000, filed as
Exhibit 10.3 to Evans & Sutherland Computer Corporation's Form 10-Q for
the quarter ended September 29, 2000, and incorporated herein by this
reference.
* 10.36 Amendment to employment agreement between Evans & Sutherland Computer
Corporation and George K. Saul, dated September 22, 2000, filed as
Exhibit 10.4 to Evans & Sutherland Computer Corporation's Form 10-Q for
the quarter ended September 29, 2000, and incorporated herein by this
reference.
* 10.37 Amendment to employment agreement between Evans & Sutherland Computer
Corporation and Robert H. Ard, dated September 22, 2000, filed as
Exhibit 10.5 to Evans & Sutherland Computer Corporation's Form 10-Q for
the quarter ended September 29, 2000, and incorporated herein by this
reference.
* 10.38 Amendment to employment agreement between Evans & Sutherland Computer
Corporation and Thomas Atchison, dated September 22, 2000, filed as
Exhibit 10.6 to Evans & Sutherland Computer Corporation's Form 10-Q for
the quarter ended September 29, 2000, and incorporated herein by this
reference.
* 10.39 Employment agreement between Evans & Sutherland Computer Corporation
and Nicholas J. Iuanow, dated September 22, 2000, filed as
Exhibit 10.7 to Evans & Sutherland Computer Corporation's Form 10-Q for
the quarter ended September 29, 2000, and incorporated herein by this
reference.
* 10.40 Employment agreement between Evans & Sutherland Computer Corporation
and William M. Thomas, dated December 22, 2000, filed as Exhibit 10.40
to Evans & Sutherland Computer Corporation's Form 10-K for the year
ended December 31, 2000, and incorporated herein by this reference
herein.
10.41 Loan and Security Agreement by and between Evans & Sutherland Computer
Corporation and Foothill Capital Corporation, dated December 14, 2000,
filed as Exhibit 10.41 to Evans & Sutherland Computer Corporation's
Annual Report on Form 10-K for the fiscal year ended December 31, 2001,
and incorporated herein by this reference.
10.42 Leasehold Deed of Trust, Assignment of Rents, Security Agreement and
Fixture filing between Evans & Sutherland Computer Corporation, Chicago
Title Company, Foothill
78
Capital Corporation, dated December 14, 2001, filed as Exhibit 10.42 to
Evans & Sutherland Computer Corporation's Form 10-K for the year ended
December 31, 2000, and incorporated herein by this reference herein.
10.43 Leasehold Deed of Trust, Assignment of Rents, Security Agreement and
Fixture filing between Evans & Sutherland Computer Corporation, Chicago
Title Company, Foothill Capital Corporation, dated December 14, 2001,
filed as Exhibit 10.43 to Evans & Sutherland Computer Corporation's
Form 10-K for the year ended December 31, 2000, and incorporated herein
by this reference herein.
10.44 Leasehold Deed of Trust, Assignment of Rents, Security Agreement and
Fixture filing between Evans & Sutherland Computer Corporation, Chicago
Title Company, Foothill Capital Corporation, dated December 14, 2001,
filed as Exhibit 10.44 to Evans & Sutherland Computer Corporation's
Form 10-K for the year ended December 31, 2000, and incorporated herein
by this reference.
10.45 Absolute Assignment of Sub-Leases and Rent by Evans & Sutherland
Computer Corporation, dated December 14, 2001, filed as Exhibit 10.45
to Evans & Sutherland Computer Corporation's Form 10-K for the year
ended December 31, 2000, and incorporated herein by this reference.
10.46 Absolute Assignment of Sub-Leases and Rent by Evans & Sutherland
Computer Corporation, dated December 14, 2001, filed as Exhibit 10.46
to Evans & Sutherland Computer Corporation's Form 10-K for the year
ended December 31, 2000, and incorporated herein by this reference.
10.47 Absolute Assignment of Sub-Leases and Rent by Evans & Sutherland
Computer Corporation, dated December 14, 2001, filed as Exhibit 10.47
to Evans & Sutherland Computer Corporation's Form 10-K for the year
ended December 31, 2000, and incorporated herein by this reference.
10.48 Pledge and Security Agreement between Evans & Sutherland Computer
Corporation and Foothill Capital Corporation, dated December 14, 2001,
filed as Exhibit 10.48 to Evans & Sutherland Computer Corporation's
Form 10-K for the year ended December 31, 2000, and incorporated herein
by this reference.
10.49 Intellectual Property Security Agreement between Evans & Sutherland
Computer Corporation and Foothill Capital Corporation, dated
December 14, 2001, filed as Exhibit 10.49 to Evans & Sutherland
Computer Corporation's Form 10-K for the year ended December 31, 2000,
and incorporated herein by this reference.
10.50 Amendment No. 1 to Series B Preferred Stock and Warrant Purchase
Agreement between Evans & Sutherland Computer Corporation and Intel
Corporation, dated effective as of March 1, 2001, filed as
Exhibit 10.50 to Evans & Sutherland Computer Corporation's Form 10-K
for the year ended December 31, 2000, and incorporated herein by this
reference.
10.51 Asset Purchase and Intellectual Property License Agreement between Real
Vision Inc. and Evans & Sutherland Computer Corporation, dated
August 31, 2001, filed as Exhibit 10.1 to Evans & Sutherland Computer
Corporation's Form 10-Q for the quarter ended September 28, 2001, and
incorporated herein by reference.
10.52 Initial License Agreement between Real Vision Inc. and Evans &
Sutherland Computer Corporation, dated August 31, 2001, filed as
Exhibit 10.2 to Evans & Sutherland Computer Corporation's Form 10-Q for
the quarter ended September 28, 2001, and incorporated herein by
reference.
79
10.53 Foothill Covenant waiver for the third quarter 2001, filed as
Exhibit 10.3 to Evans & Sutherland Computer Corporation's Form 10-Q for
the quarter ended September 28, 2001, and incorporated herein by
reference.
10.54 Master Sales Agreement between Evans & Sutherland Computer Corporation
and ATI Technologies Inc., dated August 27, 2001, filed as
Exhibit 10.4 to Evans & Sutherland Computer Corporation's Form 10-Q for
the quarter ended September 28, 2001, and incorporated herein by
reference.
10.55 Software License Agreement between Evans & Sutherland Computer
Corporation and ATI Technologies Inc., dated August 27, 2001, filed as
Exhibit 10.5 to Evans & Sutherland Computer Corporation's Form 10-Q for
the quarter ended September 28, 2001, and incorporated herein by
reference.
10.56 Amendment Number One to Loan and Security Agreement and Waiver by and
between Foothill Capital Corporation and Evans & Sutherland Computer
Corporation, dated February 22, 2002, filed herein.
10.57 Patent Purchase and License Agreement between Nvidia
International Inc., Evans & Sutherland Computer Corporation, and
Evans & Sutherland Graphics Corporation, dated October 15, 2001, filed
herein.
10.58 Patent Cross License Agreement between Nvidia Corporation and Evans &
Sutherland Computer Corporation, dated October 15, 2001, filed herein.
Certain information in this exhibit will be omitted and filed
separately with the Securities and Exchange Commission pursuant to a
confidential treatment request under Rule 24b-2 of the Securities and
Exchange Act of 1934, as amended.
21.1 Subsidiaries of Registrant, filed herein.
23.1 Consent of Independent Accountants.Auditors, filed herein.
24.1 Powers of Attorney for Messrs. Stewart Carrell, Gerald
Casilli, Henry N. Christiansen, Peter O. Crisp, John T.
Lemley, Gary E. Meredith, James R. Oyler, William M. Thomas,
Gerald S. Casilli, Wolf-Dieter Hass and Ivan E. Sutherland, and John E. Warnock.
27 Financial Data Schedule (filedfiled
herein.
- ------------------------
* Management contract for Compensatory plan or arrangement required to be
filed as partan exhibit pursuant to Item 14(c) of electronic filing
only).
No reports on Form 8-K were filed during the fourth quarter of the
year ended December 31, 1997.10-K.
TRADEMARKS USED IN THIS FORM 10-K
AccelGALAXY, AccelGMX, Digistar, E&S, E&S Lightning 1200, EaSIEST, Ensemble,
ESIG, FuseBox, Harmony, iNTegrator, Liberty,
Melody, MindSet, Real Image Technology,INTegrator, RAPIDsite, REALimage, Rhythm,simFUSION, StarRider, Symphony
and Universal 3D ArchitectureVanguard 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.
80
ScheduleSCHEDULE II
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
Valuation and Qualifying Accounts
Years ended DecemberVALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1997, December 27, 1996, and December 29, 1995
(Dollars in thousands)2001, 2000 AND 1999
(IN THOUSANDS)
Allowance for doubtful receivables
- ----------------------------------
Receivables
Additions charged
Balance at charged to (recovered) Balance
beginning of cost and against at end
year expenses allowance of year
-------------- -------------- ------------- ----------DEDUCTIONS
BALANCE AT ADDITIONS CHARGED
BEGINNING CHARGED TO (RECOVERED) BALANCE
OF COST AND AGAINST AT END OF
YEAR EXPENSES ALLOWANCE YEAR
----------- ----------- ----------- -----------
Year endedAllowance for doubtful receivables
December 31, 19972001 $ 5634,411 $ 3702,358 $ 82356 $ 851
============== ============== ============= ==========
Year ended December 27, 1996 $ 172 $ 335 $ (56) $ 563
============== ============== ============= ==========
Year ended December 29, 1995 $ 144 $ 158 $ 130 $ 172
============== ============== ============= ==========
Deferred tax asset valuation allowance
- --------------------------------------
Balance at Charges Balance
beginning of Additions and against at end
year adjustments allowance of year
-------------- -------------- ------------- ----------
Year ended6,413
December 31, 1997 Domestic2000 1,322 3,829 740 4,411
December 31, 1999 1,616 558 852 1,322
Inventory Reserves
December 31, 2001 $ 1899,894 $ -943 $ 363,652 $ 153
============== ============== ============= ==========
Foreign7,185
December 31, 2000 6,047 6,613 2,766 9,894
December 31, 1999 6,963 910 1,826 6,047
Warranty Reserves
December 31, 2001 $ 2,2761,447 $ -2,197 $ 1,5551,678 $ 721
============== ============== ============= ==========
Year ended1,966
December 27, 1996 Domestic $ 520 $ - $ 331 $ 189
============== ============== ============= ==========
Foreign $ 2,276 $ - $ - $ 2,276
============== ============== ============= ==========
Year ended31, 2000 1,376 1,189 1,118 1,447
December 29, 1995 Domestic $ 520 $ - $ - $ 520
============== ============== ============= ==========
Foreign $ 2,276 $ - $ - $ 2,276
============== ============== ============= ==========31, 1999 1,436 958 1,018 1,376
81
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
EVANS & SUTHERLAND COMPUTER CORPORATION
March 31, 1998 By: /S/
-------------------------
EVANS & SUTHERLAND COMPUTER CORPORATION
March 29, 2002 By: /s/ JAMES R. OYLER
-----------------------------------------
JAMES R. OYLER, PRESIDENT
Pursuant to the requirements of the Securities and Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
/S/ * Chairman of the March 31, 1998
- ----------------------
STEWART CARRELL Board of Directors
/S/ Director and President March 31, 1998
- ----------------------
JAMES R. OYLER (Chief Executive Officer)
/S/ Vice President and Chief March 31, 1998
- ----------------------
JOHN T. LEMLEY Financial Officer
(Principal Financial Officer)
/S/ Vice President and March 31, 1998
- ----------------------
MARK C. MCBRIDE Corporate Controller
(Principal Accounting Officer)
/S/ * Director March 31, 1998
- ----------------------
GERALD S. CASILLI
/S/ * Director March 31, 1998
- ----------------------
PETER O. CRISP
/S/ * Director March 31, 1998
- ----------------------
HENRY N. CHRISTIANSEN
/S/ * Director March 31, 1998
- ----------------------
Director, Chief Executive
/s/ JAMES R. OYLER Officer and President
------------------------------------------- (Principal Executive March 29, 2002
JAMES R. OYLER Officer)
Vice President, Chief
/s/ WILLIAM M. THOMAS Financial Officer, Treasurer
------------------------------------------- and Corporate Secretary March 29, 2002
WILLIAM M. THOMAS (Principal Financial and
Accounting Officer)
*
------------------------------------------- Director March 29, 2002
GERALD S. CASILLI
*
------------------------------------------- Director March 29, 2002
WOLF-DIETER HASS
*
------------------------------------------- Director March 29, 2002
IVAN E. SUTHERLAND
/S/ * Director March 31, 1998
- ----------------------
JOHN E. WARNOCK
By: /S/ * March 31, 1998
-------------------
JOHN T. LEMLEY
Attorney-in-Fact
*By: /s/ WILLIAM M. THOMAS
--------------------------------------
WILLIAM M. THOMAS March 29, 2002
*Attorney-in-Fact
82