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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 -------------------------- 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. ================================================================================- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (This page has been left blank intentionally.) 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 (This page has been left blank intentionally.) 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