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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON,Washington, D.C. 20549
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FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT OF
1934 For the Fiscal Year Ended December 29, 1995
[ ]27, 1996
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT
OF 1934 For the Transition Period from _________ to ---- ----
COMMISSION FILE NUMBER________
Commission File Number 0-8771
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EVANS & SUTHERLAND
COMPUTER CORPORATION
(Exact name of registrant as specified in its charter)
UTAHUtah 87-0278175
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
600 KOMAS DRIVE, SALT LAKE CITY, UTAHKomas Drive, Salt Lake City, Utah 84108
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (801) 588-1000
Securities Registered Pursuant to Section 12(b) of the Act:
"None"
Securities Registered Pursuant to Section 12(g) of the Act:
Title of Each Class
-----------------------------------------
Common Stock, $.20 par value
6% Convertible Debentures Due 2012
Preferred Stock Purchase Rights
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes __X__X No
______----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K ((S)(* 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of Registrant'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 stock held by
non-affiliates of the Registrant as of March 1, 1996February 28, 1997 was
approximately $116,809,000.$150,647,000.
The Registrant had issued and outstanding 8,738,9399,068,562 shares of its common
stock on March 1, 1996.February 28, 1997.
DOCUMENTS INCORPORATED BY REFERENCE
Those sections or portions of the Registrant's 19951996 Proxy Statement for
its Annual Meeting of Shareholders to be held on May 16, 199622, 1997 are incorporated
by reference into Part III hereof.
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FORM 10-K
PART I
ITEM 1. BUSINESS
GENERAL
Evans & Sutherland Computer Corporation (E&S or the Company) was
founded by Drs. David C. Evans and Ivan E. Sutherland and incorporated under the
laws of the State of Utah on May 10, 1968. E&S became a publicly-owned company
in 1978. The Company has its principal executive and operations facilities in
Salt Lake City, Utah.Utah, on a 36-acre campus in the University of Utah Research
Park. The Company also has offices in Boston, Massachusetts; Orlando, Florida;
Beijing, China; Horsham, England; Munich, Germany; and Tokyo, Japan.
A leader in computer graphics since 1968, E&S develops and
manufactures hardware and software for visual systems that produce vivid and
hardware design facilities in Austinhighly realistic 3D (three-dimensional) graphics and Dallas, Texas, Horsham, United Kingdom,synthetic environments. The
Company's product offerings include a full range of high-performance visual
systems for simulation, training, and Munich, Germany,virtual reality applications, as well as
graphic accelerator products for workstations and has sales and
service offices at various locations around the world.personal computers.
RECENT DEVELOPMENTS AND STRATEGIC ACTIVITIES
Evans & Sutherland designs, develops, manufactures, and markets high-
performance computer systems for various applications with demanding graphics
requirements. The Company is a leading supplier of visual systems for flight
training and simulation, is the supplier of high-performance graphics
accelerators to major workstation manufacturers, and is a leading supplier of
GL-based software development tools (a popular graphics language) used for
advanced 3D (three-dimensional) graphics applications on the industry's leading
workstation platforms. Evans & Sutherland's vision statement is to be a leader
in profitably providing systems to generate high-quality real-time synthetic
environments. These systems will include hardware, software, databases, and
integration.
STRATEGIC ACTIVITIES
E&S follows a three-point growth strategy, consisting
of growing existing businesses, developing new businesses internally, and
selectively acquiring businesses. DuringIn growing and developing existing and new
businesses, E&S launched two new business units, including Desktop Graphics and
Digital Studio, and announced several new products utilizing the past 12 months, EvansCompany's new
Universal 3D(TM) architecture. In the area of acquisitions, E&S acquired one
company and Sutherland acquiredestablished its Display Systems business unit. E&S also made
strategic minority investments in two businesses (Xionix, Inc. and Terabit Computer Specialty Company), invested in
another business (Strata, Inc.),software companies, and divested one product group (CDRS). The
Company expects to continue with this growth strategy.its
interests in another. A summary of theserecent developments and key strategic
activities that occurred in the past year are summarized below:below.
E&S completed the sale of its Design Software group (CDRS) to Parametric
Technology Corporation (PTC) on April 12, 1995 for a final net adjusted value of
$31,500,000. The decision to sell the group was based on a desire to focus on
the core businesses of the Company and to take advantage of an offer considered
to be high relative to the earnings which could be realized inside the Company.
The Company announced a strategic agreement with Digital Equipment
Corporation (DEC) on May 2, 1995 to develop high-end graphics accelerators for
the newest members of DEC's workstation family, the AlphaStation line. Digital
will sell and support the product worldwide. E&S now provides graphics hardware
and software solutions that are sold and supported by DEC, Hewlett-Packard, IBM,
and Sun Microsystems, as well as 3D graphics hardware and software products for
the personal computer.
E&S and Strata, Inc., a leading developer and marketer of quality software
tools, announced the formation of a strategic alliance on August 10, 1995, which
includes a non-consolidated equity investment in Strata by E&S plus a technology
cooperation agreement. The new relationship with Strata will aid E&S in the
delivery of high-performance software and hardware for modeling and rendering on
both PC and Macintosh machines, which will benefit the Company's customers in
simulation, game development, and multimedia applications.
Evans & Sutherland, Hughes Training, Inc., and Thomson Training &
Simulation Ltd. announced on September 14, 1995 the resolution of differences
among them and their parent companies and the dismissal of any and all legal
actions resulting from contractual disputes related to prior distribution
agreements. The settlement allows each company to proceed to supply their
products to the market, and it will make it possible for each party to work with
one or more of the other parties in continuing to serve the market.
On October 9, 1995, E&S announced the purchase of Xionix Simulation Inc. of
Dallas, Texas, a leading supplier of low-cost flight management system trainers
used for training flight crews in the operation of the complex systems found in
the computer-controlled cockpit. The acquisition further solidifies the
Company's expansion into the civil airline training systems market. Xionix
operates from its base near the Dallas/Fort Worth International Airport as a
separate business unit within E&S' existing commercial simulation market.
-3-
E&S announced a working agreement on October 19, 1995 with United Artists
Theatre Circuit Inc. to install the Company's Virtual Glider(TM) product in
United Artists Theatres' Starport entertainment centers. The Company's alliance
with United Artists Theatres complements both companies' strategies in terms of
developing real-time, interactive high-tech entertainment products. E&S has
installed Virtual Glider in the first two Starport Centres operated by United
Artists Theatres, located in Dallas, Texas and Indianapolis, Indiana.
The Company and Mitsubishi Electronics America, Inc., a leading
semiconductor supplier world-wide, announced on October 23, 1995 a technology
development partnership to produce professional 3D graphics products for the
personal computer market. The resulting products will be aimed at professionals
requiring high-end, workstation-class graphics at a lower price point, for
animation, entertainment, CAD, and visualization.
On March 20, 1996, E&S purchased Terabit Computer Specialty Company,
Inc., based in Salt Lake City.on March 20, 1996. Terabit supplies simulated cockpit instruments and
other airborne electronics displays used in training simulators for military and
commercial aircraft. Terabit will operate as aA new business unit withinwas created, the Company.Display Systems unit,
which incorporates the technologies and professional resources of E&S and
Terabit.
On August 16, 1996, the Company announced its selection by the U.S.
Air Force as the prime contractor on a key strategic program to provide visual
upgrade equipment used by the Air Mobility Command to train KC-135 and KC-10
pilots. The total value of the contract, which is the largest order in the
Company's history, could bring more than $70 million in revenues over the next
five years. Approximately $18.7 million of this order is recorded in the
Company's year-end backlog.
Evans & Sutherland announced on September 19, 1996 a stock repurchase
program by which up to 500,000 shares of its common stock may be acquired by the
Company in the open market or in negotiated transactions. Under the program,
repurchases may be made from time to time, depending on market conditions, share
price, and other factors. The Company believes this program represents efficient
management of its cash resources and an excellent way to provide additional
return to its shareholders. To date, the Company has not yet repurchased any of
such shares.
E&S announced formation of its Desktop Graphics business unit on
October 4, 1996. The new business unit will market products based on the
Company's REALimage(TM) technology to produce professional 3D graphics products
for the personal computer market. REALimage is part of a non-exclusive
partnership between Evans & Sutherland and Mitsubishi Electronics America, Inc.
(Mitsubishi). Mitsubishi sells chip sets that use the E&S REALimage design under
the name 3DPro. In addition, in March 1997, graphic accelerator boards utilizing
this technology were announced for delivery worldwide in the second quarter of
1997 by Diamond Multimedia Systems, Inc. and AccelGraphics, Inc.
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On December 3, 1996, the Company announced its Universal 3D
architecture for the industry's highest performance 3D visual systems.
Previously, sophisticated 3D graphics were only available on proprietary
UNIX-based systems. The new Universal 3D architecture now moves these
capabilities to high-volume platforms running the Windows NT operating system,
providing graphics professionals high performance with the cost advantage of
high-volume platform production. (See "New Product Strategy" for additional
information.)
Evans & Sutherland announced the formation of its Digital Studio
business unit on January 8, 1997. The new unit will provide 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 incorporate the Company's Universal 3D architecture. The premier
product is the recently introduced MindSet(TM) virtual set, a computer-generated
synthetic environment rendered in real time and digitally composited with live
camera views of on-screen personalities such as actors, newscasters, or
corporate trainers. Digital Studio products will enable producers to create
films, programs, and videos more quickly and less expensively than ever before.
BUSINESS UNITS AND STRATEGY
E&S is organized into six business units. Each business unit develops
and markets its products for a worldwide customer base. These business units can
be grouped into two areas: core businesses and new start-ups. The core
businesses are the simulation-related units in which E&S has an established
market presence with significant market share, and have historically been
profitable. The start-ups are in high growth markets where E&S has superior
technology which can be applied to new applications.
Core businesses:
. Government Simulation provides visual systems for flight and
ground training and related services to U.S. and international
armed forces, NASA, and aerospace companies.
. Commercial Simulation is the world's leading independent supplier
of visual systems for flight simulators for commercial airline
pilot training.
. Display Systems provides a complete suite of avionics displays for
cockpit and flight training.
New business start-ups:
. Desktop Graphics provides graphic accelerator technology for the
world's leading workstation manufacturers and NT-based personal
computers.
. Digital Studio provides virtual studio products and services for
digital content production in the television, film, video,
corporate training, and multimedia industries.
. Entertainment and Education is the world's leading supplier of
digital planetarium projection systems, and provides virtual
reality experiences for location-based entertainment centers,
including entertainment simulators.
NEW PRODUCT STRATEGY
Evans & Sutherland's new products are based on its Universal 3D
architecture. Building upon its 29 years of graphics expertise, E&S has created
a family of products that meets the needs of developers and users of highly
realistic synthetic environments. At the core is an open structure based on
Intel architecture, with front end computation controlled by the Windows NT
operating system. This product strategy easily scales with technology
improvements and supports widely available software.
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Industry standard technologies used in the Company's Universal 3D
architecture include:
1. Windows NT: The operating system for hosting modeling software and
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tools, as well as administrative and control functions
in the new E&S products.
2. Pentium Pro: The leading processor in most NT workstations is also
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used for geometry processing in the Company's new image
generators. Future generations of E&S products will track the
performance improvements of Intel processors, which are
increasing at the fastest rate in the industry.
3. OpenGL: Image database elements are rendered through the OpenGL
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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 or other graphics API's as
they become accepted for professional applications.
4. PCI: REALimage boards plug into standard PCI slots, and the
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new high-end E&S image generators use the PCI bus to communicate
between the workstation front-end and the image generator hardware.
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 currentproduct offerings
include: (1) visual system components and technology, such as ESIG(TM) 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 and heritage. The Company's new product offerings are based
on the Universal 3D architecture. 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 basic types: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. VisualImage generators which create the computer generated image and send
this image to a display device, such as a projector or CRT. Primary
E&S offerings include ESIG, Liberty(TM), Harmony(TM) (first shipments
in late 1997), and REALimage technology. REALimage is currently
manufactured and sold by Mitsubishi as part of a chip set.
2. Display systems which createconsist of a combination of projectors, display
screens, CRT screens, and specialized optics. These display computed imagessystems
are offered in a broad range of stored digital
modelsconfigurations, from onboard
instrument displays to domes offering 360(degree) field of various real-world environments that allow real-time interaction
withinview,
depending on the applications.
3. Databases of the synthetic environment which are offered as standard
options or as custom creations. Military databases that replicate specific geographicare commonly
customized and often cover large areas or imaginary worlds.
Operators interact withof terrain. E&S provides
database development as well as database tools, such as EaSIEST(TM)
and Integrator NT(TM). Integrator developed databases are a key
element of the environment by meansUniversal 3D architecture. These can be run on a full
range of an interface that has
typically been integrated in flight training simulators, weapons training
systems, simulators used for designing vehicles, digital planetariumimage generators, from REALimage powered desktop graphics
accelerators to high-end Harmony systems.
4. System integration, installation, and support services which are also
key elements of most all systems and virtual realitycomponents sold.
These components and subsystems are often integrated and sold as
complete systems for entertainment applications. These include
computer image generators, displaysolutions. For example, the DIGISTAR II(TM) and StarRider
systems modeling tools, and other software
products. Extensive use of custom VLSI design capability in-house improves
performance, reliability, and maintainabilityconsist of E&S products.
2. Graphics accelerators whichdeveloped image generators, databases of synthetic
worlds, and display systems. These are usedintegrated 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 component in high-performance,
interactive graphics display systemscomplete system solution for
workstations. These machines allow
users to make line drawings of the edges and vertices of models of 3D objects
and also to generate shaded images of such models stored in computer memory.
They are useful tools for computer-aided design, analysis, research, and
simulation. These products may be systems which run alongside workstations,
boards which plug into workstations, or integrated circuits (chips). They allow
users of DEC, HP, IBM, and Sun machines to achieve high-performance 3D graphics
similar to that available on other systems inplanetarium.
-5-
In the market.
3. Software Systems and development tools which are used with multi-platform
interactive graphics systems to produce leading-edge 3D graphics software and
hardware solutions to a broad customer base. Portable Graphics Inc. (PGI), a
wholly-owned subsidiary, develops and markets GL-related libraries and toolkits
for a variety of hardware platforms, which allow applications developed in the
IRIS GL and Open GL programming interfaces to run on all the industry's leading
workstation platforms.
4. Training Systems for flight management which are used within the commercial
aviationsimulation training market, for pilot training. Xionix Simulation Inc.,Evans & Sutherland's visual
systems create dynamic, high-quality, out-the-window scenes that represent the
view 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 wholly-
owned subsidiary, developsnumber of other components, including cockpits
or vehicle cabs and markets training devices which range from low-end
desktop trainers to more sophisticated free standing flight management systems
trainers.large hydraulic motion systems.
MARKETING
Evans & SutherlandSutherland's products are marketed worldwide by the Company
or its agents, including Rikei in Japan,agents. The Company's products and services are sold directly to
end-users by E&S as a prime contractor, through subcontractors or other prime
contractors, and prime contractors. The Companythrough system OEMs. E&S continues to develop and form both
domestic and international marketing alliances, which are proving to be an
effective method of reaching specific markets. In addition, the Company has OEM
agreements for its Visual Systemvisual system products with companies such as STN Atlas
Elektronik GmbH in Germany, and Mitsubishi Precision Co., Ltd. in Japan, OEM agreements for its Graphics
Accelerator products with Digital Equipment, Hewlett Packard, IBM, and Sun
Microsystems, and a
technology developmentnon-exclusive partnership with Mitsubishi Electronics. Sales,Electronics to manufacture and sell
REALimage based chip sets under the 3DPro brand name. In cases were E&S sells
through OEM suppliers, sales, marketing, and product support are offered by
thethose OEM suppliers. Software Systems (Portable Graphics Inc.) products are sold through
a direct sales force, through distributors, and through some of the same OEM
customers as the Graphics Accelerator products. Training Systems (Xionix Simulation, Inc.) products are
marketed and supported by the Company's sales and marketing staff.
-4-
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, national laboratories, museums, planetariums, science centers, and
location-based entertainment centers.
Customers accounting for more than 10% of the Company's net sales in
19951996 were the U.S. government, Thomson Training and Simulation, Ltd. (Thomson),
Hughes Training, Inc. (Hughes), and Rikei Corporation (Rikei). In 1995 and 1994,
Loral Corporation.Corporation (Loral) accounted for more than 10% of the Company's sales in
the respective years. Sales to the U.S. government and prime contractors under
government contracts were $25.8 million in 1996 (20% of total sales), $54.7
million in 1995 (48% of total sales), and $51.4 million in 1994 (45% of total sales), and $47.1 million
in 1993 (33% of total
sales). A portion of these sales are included in sales to Loral CorporationHughes and Loral.
Sales to Thomson Training Systems.were $15.8 million in 1996 (12% of total sales), $4.0 million
in 1995 (4% of total sales), and $7.6 million in 1994 (7% of total sales). Sales
to Hughes were $14.9 million in 1996 (11% of total sales), $11.0 million in 1995
(10% of total sales), and $6.3 million in 1994 (6% of total sales). Sales to
Rikei were $14.3 million in 1996 (11% of total sales), $8.8 million in 1995 (8%
of total sales), and $0.7 million in 1994 (less than 1% of total sales). Sales
to Loral accounted forwere $6.9 million in 1996 (5% of total sales), $34.3 million in 1995
(30% of total sales), and $25.7 million in 1994 (23% of total sales), and $8.2 million in 1993 (6% of total sales). In prior years, Thomson
accounted for more than 10%1996,
Loral was acquired by Lockheed Martin Information Systems, Inc. (Lockheed
Martin). See footnote 13 of the Company's sales. Sales through Thomson
accounted for $10.7 million"Notes to Consolidated Financial Statements" in 1995 (9%Part
II of total sales), $13.9 million in 1994
(12% of total sales), and $21.0 million in 1993 (15% of total sales).
COMPETITIONthis report.
COMPETITIVE CONDITIONS
Primary competitive factors for the Company's products are
performance, price, and price.product accessibility. Because competitors are
constantly striving to improve their products, E&S must assure that it continues
to offer products with the best performance at a competitive price. In 1996, the
Company gained market share in the government simulation market. Prime
contractors, including CAE Electronics, Ltd. (CAE), Lockheed Martin, and
Thomson, offer competing visual systems in the government simulation market. The
Company believes it is able to compete well in this environment and will
continue to be able to do so. In 1995,1996, the Company gained
market share in the Government Simulation market. CAE Electronics, Ltd.,
Lockheed Martin, Silicon Graphics, Inc., and Thomson are the major competitors
in this market. The Commercial Simulation business has been slow due to
depressed market conditions in the civil airlines industry. However, conditions
are improving and the Companyunit
was awarded several highly competitive orders in
1995.and gained market share against
CAE and Flight Safety areFlightSafety International, Inc., the principal competitors in thisthe
commercial simulation market. Graphics Systems,In both simulation markets, competition for
use with DEC, HP, IBM, and Sun workstations, sells into
the competitive market for high-performance engineering workstations. Sale of
these products depend on strong OEM partners. Stiff competitiongraphics computers also comes from Silicon Graphics, Inc.
The Desktop Graphics business unit competes against companies like
Intergraph, Inc. as a system OEM that use their own chip design, and products manufactured by3D Labs
that sells chip sets to board manufacturers. Digital Studio competitors consist
primarily of smaller start-up companies. This market is still in its infancy and
may experience significant change. Display Systems is also in a highly
fragmented market where consultive engineering is the workstation
manufacturers themselves.primary mechanism for
winning orders.
-6-
In the Education and Entertainment business, the Company's DIGISTAR
II(R)II digital planetarium product competes with traditional optical-mechanical
products. Competitors include Minolta Planetarium Co. Ltd., Goto Optical Mfg.
Co., Carl Zeiss Inc., and Spitz Inc. In entertainment systems, E&S is one of
many companies in a highly competitive and fragmented market.
BACKLOG
The Company's backlog was $76,822,000$127.4 million on December 27, 1996,
compared with $76.8 million on December 29, 1995, compared with
$67,133,000and $67.1 million on December
30, 1994, and $68,685,000 on December 31, 1993.1994. The predominant portion of the backlog as of December 29, 1995,27, 1996 is for
visual simulation products. It is anticipated that most of the 19951996 backlog will
be filled in 1996.1997.
INTERNATIONAL SALES
Sales known to be ultimately installed outside the U.S. are
considered international sales by the Company. Sales to foreign end-users were
$44,503,000$88.4 million or 39%68% of the Company's 1995 sales volume.1996 sales. To take full advantage of this
sales pattern, the Company operated a wholly-owned Foreign Sales Corporation
(FSC) subsidiary through fiscal year 1995,1996, the use of which resulted in tax
benefits in 19951996 amounting to approximately $344,000.$0.3 million. For additional
information, see footnote 13 of "Notes to Consolidated Financial Statements" in
Part II of this report.
DEPENDENCE ON SUPPLIERS
Most parts and assemblies used by E&S are readily available in the
open market; however, a limited number are available only from a single vendor.
In these instances the Company stocks a substantial inventory and attempts to
develop alternative components or sources where appropriate.
PATENTS
Evans & Sutherland owns a number of patents and is a licensee under
several others which were developed principally at the University of Utah.
Several patent applications are presently pending in the United States, Japan,
and several European countries. E&S is continuing the practice, begun in 1985,
of copyrighting chip masks designed by the Company and has instituted copyright
procedures for these masks in Japan. E&S does not rely on, and is not dependent
on, patent ownership for its competitive position. Were any or all patents held
to be invalid, management believes the Company would not suffer significant
damage. However, E&S actively pursues patents on its new technology.
-5-
RESEARCH & DEVELOPMENT
In 1995,1996, company-funded research and development decreased 30%increased 12% to
$19,406,000$21.8 million from $27,890,000.$19.4 million. As a percentage of sales, R&D decreased toresearch and
development remained constant at 17% in 1995 from 25%1996, the same as in 1994.1995. The Company
continues to fund almostsubstantially all R&Dresearch and development efforts internally.
It is anticipated that high levels of R&Dresearch and development will continue in
support of essential product developmentresearch and researchdevelopment efforts to ensure the
Company maintains technical excellence, leadership, and market competitiveness.
ENVIRONMENTAL STANDARDS
The Company believes its facilities and operations are within
standards fully acceptable to the Environmental Protection Agency and that all
facilities and procedures are in accordaccordance with environmental rules and
regulations, as well
asand federal, state, and local laws.
EMPLOYEES
As of March 1, 1996, the CompanyFebruary 28, 1997, Evans & Sutherland and its subsidiaries
employed 754784 persons. The Company believes its relations with its employees are
good.
-7-
SEASONALITY
The CompanyE&S believes there is no inherent seasonal pattern to its business.
However, sales volume fluctuates month-to-month or quarter-to-quarter due to relatively large
individual sales and the random nature of customer-established shipping dates.
Although the Company's volume has been skewed toward the fourth quarter, in the past few years, the
Company is workinghas worked diligently to smooth quarter-to-quarter revenues and expects
further success in achieving this goal.
ITEM 2. PROPERTIES
The Company'sEvans & Sutherland's principal executive, manufacturing, engineering,
and operations facilities are located in the University of Utah Research Park,
in Salt Lake City, Utah, where it owns six buildings oftotaling approximately
440,000 square feet. E&S occupies four buildings and leases out the remaining
two buildings. The buildings are located on land leased from the University of
Utah on 40-year land leases. Two buildings have options to renew the land leases
for an additional 40 years, and four have options to renew the land leases for
10 years. The Company also owns 46 acres of land in North Salt Lake. E&S has no
encumbrance on any of the real property. The Company and its subsidiaries hold
leases on several sales, service, and production facilities located throughout
the U. S., in Europe, and in Europe.Asia.
ITEM 3. LEGAL PROCEEDINGS
On September 14, 1995, Evans & Sutherland, Hughes Training, Inc., and
Thomson Training & Simulation Ltd. announced the resolution of differences among
them and their parent companies and the dismissal of any and all legal actions
resulting from contractual disputes related to prior distribution agreements.
E&S has had a long history of working with both Hughes and Thomson to jointly
provide high quality equipment and services to the pilot training market. The
settlement allows all three companies to proceed to supply their products to the
market, and will make it possible for each party to work with one or more of the
other parties in continuing to serve the market.
Except as noted above, neitherNeither the Company nor any of its subsidiaries is a party to any
material legal proceeding other thanproceeding. However, the Company is involved in ordinary routine
litigation incidental to its business.
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 1995.
-6-1996.
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EXECUTIVE OFFICERS OF THE REGISTRANT
The following sets forth certain information regarding the executive
officers of the Company as of March 29, 1996:27, 1997:
Name Age Position
- -------------------------- --- --------------------------------------------------------------------------------------------------------
Stewart Carrell 6263 Chairman of the Board of Directors
James R. Oyler 5051 President of the Company and Chief Executive Officer
John T. Lemley 5253 Vice President and Chief Financial Officer
Gary E. Meredith 6162 Senior Vice President and Corporate Secretary
Stuart J. Anderson 5657 Vice President and General Manager of Commercial Simulation
Gene R. Chidester 4748 Vice President of Manufacturing
Peter K. Doenges 4950 Director of Strategic Development
Leslie D. Horwood 45Technology
Bruce E. Erickson 52 Vice President and General Manager of Entertainment & EducationDigital Studio
Gordon B. Hurley 5152 Vice President of Shared Technology
Charles R. Maule 4546 Vice President and General Manager of Desktop Graphics
SystemsMark C. McBride 35 Vice President and Corporate Controller
Gregory J. Phipps 37 Vice President of Marketing
C. Grant Schultz 52 Corporate Controller53 Vice President and Treasurer
Ronald R. Sutherland 5758 Vice President and General Manager of Government Simulation
Allen H. Tanner 4243 Vice President and General Manager of Display Systems
- -----------------------
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 1213 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, a west coast based investment banking and venture capital firm.
Mr. Oyler was appointed President and Chief Executive Officer of the Company and
a member of the Board of Directors in December 1994. He is also a director of
Ikos Systems, Inc. Previously, Mr. Oyler served as President of AMG, Inc. from
mid-1990 through 1994 and as Senior Vice President of Harris Corporation from
1976 through 1990 and also served as consultant with
Booz, Allen & Hamilton.mid-1990. He has 1 year2 years of service with the Company.
Mr. Lemley joined the Company in November 1995 as Vice President and Chief
Financial Officer. Prior to coming to the Company, he was Senior Vice President
and Chief Financial Officer at Megahertz Corporation. Previously, Mr. Lemley was
with Medtronic, Inc., where he held several positions includingwas Corporate Controller and Acting Chief
Financial Officer. Prior to Medtronic, Mr. Lemley spent 17 years in a variety of
financial management positions with Hewlett Packard Company. He has less than 1 year of
service with the Company.
Mr. Meredith has been Senior Vice President and Secretary since 1995. He is also
the acting General Manager of the Entertainment and Education business unit
since 1996, and is a director of Blue Cross Blue Shield of Utah, Strata, Inc.,
and Tripos, Inc. Previously, Mr. Meredith served as Vice President and Chief
Financial Officer and Secretary and in other capacities with E&S. He has 1819
years of service with the Company.
Mr. Anderson has been Vice President and General Manager of Commercial
Simulation since 1994. Prior to joining the Company, he served as General
Manager of Business Development for Hughes Rediffusion Simulation Ltd. from 1992
to 1994, and numerous other positions with Rediffusion Simulation beginning in
1961. He has 1 year2 years of service with the Company.
-9-
Mr. Chidester has been Vice President of Manufacturing since 1994. He previously
served as Director of Graphics Workstation Manufacturing and has 78 years of
service with the Company.
Mr. Doenges has been Director of Strategic DevelopmentTechnology since 1994. He previously
served as Vice President, Strategic Technology, and Manager of New Business Development. He has 2223 years of service with
the Company.
-7-
Mr. Horwood has beenErickson was appointed Vice President and General Manager of Entertainment &
Education since 1994. Prior to joiningDigital Studio
on January 1, 1997. He previously served as Vice President of New Market
Development in the Company, he was ManagerGovernment Simulation business unit, Vice President of Marketingthe
Government Business Group, and Salesin other capacities with Hughes Training, Inc.E&S. He has 210 years of
service with the Company.
Mr. Hurley has been Vice President of Shared Technology since 1994. He
previously served as Vice President of Engineering in the Simulation Division.
Mr. Hurley has 1516 years of service with the Company.
Mr. Maule joined the Company in February 1996 as thehas been Vice President and General Manager of Desktop Graphics Systems.since
1996. Prior to joining the Company, Mr. Maulehe was Vice President of Marketing and
Strategy for Concurrent Computer Corporation. Previously, heMr. Maule served as
Director of Business Development for Lockheed Missiles & Space Company. He has 1
year of service with the Company.
Mr. MauleMcBride joined the Company in September 1996 as Vice President and Corporate
Controller. Prior to joining the Company, he was Senior Vice President and Chief
Financial Officer at HealthRider, Inc. Previously, Mr. McBride was employed by
Price Waterhouse LLP, independent accountants, in various capacities, ending
with Senior Manager. He is a Certified Public Accountant. Mr. McBride has less
than 1 year of service with the Company.
Mr. Phipps joined the Company in October 1996 as the Vice President of
Marketing. Prior to joining the Company, he was Regional Vice President of
Western Operations for Stream International, a software manufacturing division
of R.R. Donnelley, and Vice President of Marketing for the Global Software
Services division of R.R. Donnelley. Mr. Phipps has less than 1 year of service
with the Company.
Mr. Schultz has been ControllerVice President and Treasurer since 1979 and1996. He previously
served as Corporate Controller. He has 2021 years of service with the Company.
Mr. Sutherland has been Vice President and General Manager of Government
Simulation since 1994. He previously served as Executive Vice President of the
Government Sector, and Vice President of Simulation Products. Mr. Sutherland has
1415 years of service with the Company.
Mr. Tanner joined the Company in March 1996 as the Vice President and General
Manager of Display Systems. Prior to joining the Company, Mr. Tanner was
President of Terabit Computer Specialty Company, Inc. between 1979 and 1996.
Terabit was merged withacquired by E&S in March.March 1996. Mr. Tanner has less than 1 year of service with
the Company.
[THIS SPACE INTENTIONALLY LEFT BLANK]
-8--10-
FORM 10-K
PART II
ITEM 5. MARKET FORPRICE OF AND DIVIDENDS ON THE REGISTRANT'S
COMMON STOCKEQUITY AND RELATED SECURITY HOLDERSTOCKHOLDER MATTERS
PRICE RANGE OF COMMON STOCK
The Company's common stock trades on The NasdaqNASDAQ Stock Market under
the symbol "ESCC". The following table sets forth the range of the high and low
sales prices per share of the Company's common stock for the calendarfiscal quarters
indicated, as reported by Nasdaq.NASDAQ. Quotations represent actual transactions in
Nasdaq'sNASDAQ's quotation system but do not include retail markup, markdown, or
commission.
HIGH LOW
------- --------------- ----------
1996:
----
First Quarter 25 19
Second Quarter 29 21
Third Quarter 23 3/4 19 1/2
Fourth Quarter 26 1/4 20
1995:
---------
First Quarter 16 1/4 11 1/4
Second Quarter 17 3/4 13
Third Quarter 20 14 3/4
Fourth Quarter 25 1/4 16 1/2
1994:
-----
First Quarter 21 17 1/4
Second Quarter 19 1/2 13 1/4
Third Quarter 14 11 3/4
Fourth Quarter 14 3/4 11 1/4
APPROXIMATE NUMBER OF EQUITY SECURITY HOLDERS
On March 22, 1995,24, 1997, there were 933 holders883 shareholders of record of the
Company's common stock. Because many of such shares are held by brokers and
other institutions on behalf of shareholders, the Company is unable to estimate
the total number of shareholders represented by these record holders.
Title of Class
--------------
Common Stock, $0.20 Par Value
DIVIDENDS
Evans & Sutherland has never paid a cash dividend on its common
stock, retaining its earnings for the operation and expansion of its business.
The Company intends for the foreseeable future to continue the policy of
retaining its earnings to finance the development and growth of its business.
-9--11-
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
(Dollars in(In thousands, except per share amounts)
1996 1995 1994 1993 1992
1991------------ ----------- ----------- ----------- ----------- ----------------------- ------------ ------------
FOR THE YEAR
FOR THE YEAR
Net sales $ 113,194 $ 113,090 $ 142,253 $ 148,594 $ 144,890$130,564 $113,194 $113,090 $142,253 $148,594
Research and development 21,753 19,406 27,890 31,757 31,342
32,068Gain from sale of business unit - 23,506 - - -
Earnings (loss) before income taxes,
extraordinary gain, and cumulative
effect of change in accounting
principle 16,029 33,580 (11,384) 2,831 11,024
Earnings (loss) before
extraordinary gain and
cumulative effect of change
in accounting principle 10,352 20,484 -5,559(5,559) 1,826 6,849
9,452
Per share 1.12 2.37 -0.65(0.65) 0.22 0.78 1.07
Net earnings (loss) 10,352 20,811 -3,700(3,700) 4,093 7,558
10,704
Per share 1.12 2.41 -0.43(0.43) 0.50 0.86 1.21
Per share - fully diluted 1.11 2.31 - - - -
Weighted average number
of shares outstanding 8,638,665 8,519,990 8,256,331 8,780,051 8,863,0759,222 8,639 8,520 8,256 8,780
Return on equity 14.0% -2.8% 3.1% 5.7% 8.4%6.7 % 15.1 % (2.8)% 3.1 % 5.7 %
AT END OF THE YEAR
Current assets $ 161,004 $ 127,051 $ 161,188 $ 141,824 $ 154,320$159,213 $161,004 $127,051 $161,188 $141,824
Current liabilities 32,290 42,593 30,980 40,516 29,286
32,040
Current ratio 4.9 3.8 4.1 4.0 4.8
4.8
Working capital 126,923 118,411 96,071 120,672 112,538
122,280
Net fixed assets 42,671 40,855 44,823 48,247 53,531
56,307
Total assets 210,891 211,002 180,764 216,187 200,979
215,072
Long-term debt 18,015 18,015 20,375 37,066 37,067
45,715
Stockholders' equity 160,472 148,491 127,118 137,030 130,795 133,339
Stockholders' equity
per outstanding share 17.72 17.04 14.86 16.41 15.91 15.01
-10--12-
QUARTERLY FINANCIAL DATA (Unaudited)
(Dollars in(In thousands, except per share amounts)
1996
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 4,818
Earnings per common and common
equivalent share 0.08 0.16 0.35 0.52
1995
March 31 June 30 Sep. 29 Dec. 29
-------- ------- ------- -------------------- ------------- ------------ -----------
Net sales $19,286 $25,081 $33,662 $35,165
Gross profit 10,764 4,7036,703 16,417 18,54216,542
Operating expenses 14,146 11,971 11,172 13,536
Gain from sale of business unit - 20,188 - 3,318
Operating profit (loss) (3,382) 14,920 5,245 6,324
Other income, net 4,339 4,282 959 893
Earnings before income taxes and
extraordinary gain 957 19,202 6,204 7,217
Earnings before extraordinary gain 598 11,034 3,599 5,253
Extraordinary gain from repurchase of
convertible debentures, net of
income taxes - 200 111 16
Net earnings 598 11,234 3,710 5,269
Earnings per common and common equivalent
share before extraordinary gain 0.07 1.28 0.42 0.61
gain
Extraordinary gain - 0.02 0.01 -
Earnings per common and common
equivalent share 0.07 1.30 0.43 0.61
1994
April 1 July 1 Sep. 30 Dec. 30
------- ------- ------- -------
Net sales $26,860 $22,839 $21,934 $41,457
Gross profit 14,583 11,485 10,482 15,914
Loss before extraordinary gain -83 -1,578 -405 -3,493
Extraordinary gain from repurchase
of convertible debentures, net of
income taxes 91 369 1,270 129
Net earnings (loss) 8 -1,209 865 -3,364
Loss per share before extraordinary gain -0.01 -0.18 -0.05 -0.41
Extraordinary gain 0.01 0.04 0.15 0.02
Earnings (loss) per common and common
equivalent share 0.00 -0.14 0.10 -0.390.07 1.30 0.43 0.61
-11--13-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussions should be read in conjunction with the
Company's Consolidated Financial Statements contained herein under Item 8 of
this report.
ITEMS FROM THE CONSOLIDATED STATEMENTS OF OPERATION (AS A PERCENT OF SALES)(as a percent of sales)
Year-Ended Year-Ended Year-Ended
Dec. 27, Dec. 29, Dec. 30,
Dec. 31,1996 1995 1994
1993
---------- ---------- ------------------------- ---------------- -------------
Net sales 100.0% 100.0% 100.0%100.0 % 100.0 % 100.0 %
Cost of sales 50.5 55.5 53.6
46.2
------- -------- ------------------ ---------- ---------
Gross profit 49.5 44.5 46.4 53.8
Expenses:
Marketing, general and administrative 24.0 27.1 29.1 28.2
Research and development 16.7 17.2 24.7 22.3
Restructuring charge - - 7.2 5.6
Write-off of in-process R&Dacquired research and development - 0.6 -
-
------- -------- ------------------ ---------- ---------
Total expenses 40.7 44.9 61.0
56.1
------- -------- ------------------ ---------- ---------
Gain from Salesale of CDRSbusiness unit - 20.8 - -
Operating earnings (loss) 8.8 20.4 -14.6 -2.3(14.6)
Other income, net 3.5 9.3 4.5
4.3
------- -------- ------------------ ---------- ---------
Earnings (loss) before income taxes and extraordinary gain and cumulative effect
of change in accounting principle12.3 29.7 -10.1 2.0(10.1)
Income tax expense (benefit) 4.4 11.6 -5.2 0.7
------- -------- -------(5.2)
----------- ---------- ---------
Earnings (loss) before extraordinary gain and
cumulative effect of change in accounting
principle7.9 18.1 -4.9 1.3(4.9)
Extraordinary gain from repurchase of convertible
debentures, net of income taxes - 0.3 1.6
-
Cumulative effect at December 26, 1992 of
change in accounting for income taxes - - 1.6
------- -------- ------------------ ---------- ---------
Net earnings (loss) 18.4% -3.3% 2.9%
======= ======== =======7.9 % 18.4 % (3.3) %
=========== ========== =========
NET SALES WORLDWIDE AND BY MAJOR MARKET SECTORS (IN THOUSANDS)
WORLDWIDE
----------------------------------------------
1995 1994 1993
--------- ---------- ----------
United States $ 68,700 $ 75,200 $ 72,300
Europe (excluding
Great Britain) 16,800 18,500 34,800
Pacific Rim 13,900 7,000 9,400
Great Britain 11,600 9,200 17,900
All Other 2,200 3,200 7,800
--------- ---------- -----------
Total $ 113,200 $ 113,100 $ 142,200
========= ========== ===========
MAJOR MARKET SECTORS
----------------------------------------------
1995 1994 1993
--------- ---------- -----------
Government $ 85,700 $ 81,400 $ 86,200
Simulation
Graphics Systems 11,600 11,100 13,600
Commercial 9,100 4,200 15,500
Simulation
Education and 6,000 2,200 2,800
Entertainment
CDRS 800 8,200 6,100
Tripos, Inc. 0 6,000 18,000
--------- ---------- -----------
Total $ 113,200 $ 113,100 $ 142,200
========= ========== ===========
-12-
RESULTS OF OPERATIONS
OVERVIEW
The Company had aSUMMARY
Evans & Sutherland experienced another good year in 19951996. E&S
continues to see improved operating efficiencies from the previous years'
restructuring and rebuilding efforts. The Company's net sales increased 15% in
terms1996. Net earnings decreased 50%; however, after adjusting for the effect of revenue growththe
sale of CDRS and profit
growth from continuing operations. In 1995, E&S achievedother non-recurring items, net earnings increased 47%. Another
important indicator of $20.8the Company's progress was strong performance in winning
new orders. Bookings of over $181 million and ending backlog of $127 million has
placed E&S in a strong position for the future. These orders were also well
balanced between U.S. (46%) and international (54%) markets. Total backlog of
$127 million is at a record level. In addition, E&S acquired one company; made
strategic minority investments in two software companies; and divested its
interests in another. Corporate development activities continue to be an
important part of the Company's strategic growth plan. All of these
accomplishments represent real progress in strengthening Evans & Sutherland as a
leading provider of high quality visual systems.
SALES
In 1996, sales increased 15% ($130.6 million versus a net loss of $3.7$113.2 million in
1994,1995). The improvement was primarily due to increased market share and strong
international activity. International sales from ongoing
businesses were up nearly 14% (excluding CDRSincreased 99% ($88.4 million versus
$44.5 million in 1995) and Tripos)U.S. sales decreased 39% ($42.2 million compared to
$68.7 million in 1995). Early in 1995, E&S
completed its restructuring of operations that were begunBased on the previous year,
which included Company-wide reductions affecting every business groupyear-end backlog, the Company expects sales
in the Company. AsU.S. to increase in 1997. Strong growth in the international markets was
primarily due to a result, expenses as219% increase in sales in the Pacific Rim region ($44.3
million compared to $13.9 million in 1995), a percent of58% sales have been significantly
reduced (see table on the facing page, "Items from the Consolidated Statements
of Operations")increase in Europe,
excluding Great Britain ($26.6 million compared to $16.8 million in 1995), and productivity increased 31% as measured by revenue per
employeea
20% sales increase in Great Britain ($142 versus $108)13.9 million compared to $11.6 million in
1995).
In addition, several strategic transactions were
completed during the year, including divesting CDRS, and acquiring Xionix, Inc.
and Terabit Computer Specialty Company. The Company plans to continue these
corporate development activities.
NET SALES-14-
In 1995, net sales increased less than 1% ($113.2 million versus $113.1
million in 1994). International sales increased 17% ($44.5 million versus $37.9
million in 1994), which offset a 9% decrease in and U.S. sales decreased 9% ($68.7 million compared to $75.2
million in 1994). Strong growth in the international markets was led by a 99%
sales that nearly doubledincrease in the Pacific Rim region ($13.9 million compared to $7.0 million
in 1994) and a 26% sales increase in Great Britain ($11.6 million compared to
$9.2 million in 1994). Sales in other European and foreign locations showed a
slight decrease (see table on the facing page, "Net
Sales Worldwide and by Major Market Sectors").
In 1994, sales decreased 20% ($113.1 million versus $142.2 million in
1993). International sales decreased 46% ($37.9 million compared to $69.9
million in 1993), which more than offset a 4% increase in U.S. sales ($75.2
million compared to $72.3 million in 1993). Results were below expectations in
the international markets with significant reductions in each region served,
reflecting the unsettled political and business environment in 1994 fueled by
the end of the cold war, the worldwide recession, and low oil prices. At the
end of 1994, however, signs indicated that these international markets were
strengthening, which proved correct as reflected in the 1995 results.
Sales in the Government Simulation market segment increased 5% in 1995
($85.7 million versus $81.4 million in 1994), compared to a 6% decrease in 1994
($81.4 million versus $86.2 million in 1993). The improvement was led by
increased market share and strong international activity. With a solid backlog
of orders and excellent forward visibility, this business is expected to remain
strong and continue to show good performance.
Graphics Systems sales increased 5% in 1995 ($11.6 million versus $11.1
million in 1994) compared to an 18% decrease in 1994 ($11.1 million versus $13.6
million in 1993). The business has been stabilized and it is expected to
continue its rebuilding. Recent management changes are expected to have a
positive impact in the coming year. The Company expects significant
opportunities in the NT workstation market with graphics accelerator and
simulation products.
Sales in the Commercial Simulation market (civil aviation) more than
doubled from the prior year ($9.1 million versus $4.2 million in 1994), compared
to a 73% decrease in 1994 ($4.2 million versus $15.5 million in 1993). Sales in
1995 included $3.7 million in the settlement with Thomson. The Company was
awarded several highly competitive orders during the year, including a major
order from Airbus Industrie for current and future simulators. In addition to
the new relationship with Thomson, E&S continues to build a position as a
supplier of complete visual systems, which include the acquisitions of Xionix
and Terabit, further expanding both the Company's customer base and its range of
products.
Education and Entertainment sales nearly tripled from the prior year ($6.0
million versus $2.2 million in 1994), compared to a 21% decrease in 1994 ($2.2
million versus $2.8 million in 1993). Strong performance by the Company's new
DIGISTAR II planetarium system and other new entertainment orders both
contributed to the growth. Virtual Hang Gliders, a virtual reality hang-glider
ride, were installed in two Virtual Reality entertainment centers opened by
United Artists Theatres. Growth of such centers is expected, and other E&S
products are expected to be featured in these centers in the future.
CDRS sales in 1995 represent only three months of operations due to the
divestiture of CDRS that occurred on April 13, 1995. Tripos, Inc. sales for
1994 represent five months of operations due to the spin-off of Tripos that
occurred on June 1, 1994. CDRS and Tripos were included in Graphics Systems
prior to disposition, but are classified separately in the table on the facing
page for comparative purposes.
-13-
decrease.
COSTS AND EXPENSES
Cost of Sales, as a percent of sales, were 56%51%, 54%56%, and 46%54%,
respectively, in 1996, 1995, 1994, and 1993. The increases1994. In 1996, the decrease in the cost of
sales percentages were
anticipated. Increasedpercentage was due primarily to product mix and, 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. However,
increased competition with respectand contracts in which the Company is functioning as the
prime contractor are expected to reduce gross margins in 1997 and beyond. In
1995, the increase in cost of sales as a percentage of sales was due to
increased competition in nearly all of the Company's productsproduct lines, which added
pressure on prices and margins. Also, the Company-wide restructuring, which
included the elimination of the non-profitable product lines, whichprincipally the
Freedom series products, resulted in a $7.4 million write-down of inventory in
1995.
Total operating expenses were 26% lowerincreased 6% in 1996 ($53.1 million versus
$50.1 million in 1995, compared to 1994,excluding the write-off of acquired research and
14%
lowerdevelopment in 1994 compared to 1993 due to cost reductions resulting from
restructuring the Company. As1995), but decreased as a percent of sales (41% versus 44% in
1995). The trend of operating expenses increasing in total but being lower as a
percent of sales is expected to continue in 1997. In 1995, total operating
expenses decreased 18% ($50.1 million versus $60.8 million in 1994, excluding
the write-off of in-process R&Dacquired research and development in 1995 and the cost of
restructuring in 1994 and 1993, were 44%, 54%1994), and 51%also decreased as a percent of sales (44% versus 54%
in 1994).
Marketing, general, and administrative expenses increased 2% in 1996
($31.4 million versus $30.7 million in 1995), respectively, forbut decreased as a percent of
sales (24% versus 27% in 1995). The increase in these expenses 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 launched during the year. In 1995, 1994, and
1993.
Marketing, General, and Administrativethese expenses weredecreased 7%
lower($30.7 million versus $32.9 million in 1995
compared to 1994,1994), and also lowerdecreased as a percent of
sales (27% in 1995 versus 29% in 1994). In 1994, theseThe lower expenses in 1995 were 18% lower compareddue to 1993,the
Company-wide restructuring.
Research and development expenses increased 12% in 1996 ($21.8
million versus $19.4 million in 1995), but slightly higherdecreased as a percent of
sales.sales (16.7% versus 17.2% in 1995). The lowerincrease in these expenses in both1996 is
due primarily to increased activity related to the introduction of several new
products, and additional expenses related to the new business units created
during the year. In 1995, research and 1994 were
expecteddevelopment expenses decreased 30% ($19.4
million versus $27.9 million in 1994), and also decreased as a percent of sales
(17% versus 25% in 1994) due to the restructuring. Research and Development expenses were 30% lower in 1995 compared to 1994,
and 12% lower in 1994 compared to 1993 due to the restructuring. As a percent
of sales, R&D was significantly lower than 1994 (17% in 1995 versus 25% in
1994). Management intends to
continue to reduce R&D,research and development, as a percent of sales, over the
next few years. However, high levels of R&Dresearch and development will continue
in support of essential product development to ensure that the Company maintains
technical excellence and market competitiveness. The Company continues to fund
nearlysubstantially all R&Dresearch and development costs internally.
GAIN FROM SALE OF CDRS
The Company realized a one-time net gain of $23,506,000 from the sale of
CDRS to Parametric Technology Corporation on April 13, 1995. The final
transaction value net of expenses was $31,500,000.
OTHER INCOME, NET
Other income, net, decreased 57% in 1996 ($4.5 million versus $10.5
million in 1995) due primarily to a lower gain on sale of investment securities
($1.9 million versus $7.1 million in 1995) and a decrease in interest income
($3.9 million versus $4.8 million in 1995). In 1996, cash and marketable
securities balances were lower compared to 1995, primarily as the result of
proceeds received from the sale of CDRS in April 1995. In 1995, other income,
net, increased 104% ($10.5 million versus $5.1 million in 1995 from 1994, compared1994) due to a decrease
of 16% in 1994 from 1993. This resulted from an75%
increase in interest income of
75%($4.8 million versus $2.7 million in 1995 over 1994, compared to a decrease of 1% in 19941994) resulting
from 1993. In 1995,the higher cash balances were primarily the result ofreceived from the sale of CDRS. Interest
expense declined 22%CDRS, and 27% respectivelya 78% increase
from the sale of investment securities ($7.1 million versus $4.0 million in
1995 from 1994 and in 1994 from
1993 due to a lower balance of the Company's outstanding convertible debentures
during both 1995 and 1994. Sales of appreciated assets in 1995, 1994, and 1993
resulted in net realized gains of $7,126,000, $4,009,000 and $6,238,000
respectively. The underlying marketable securities comprising these sales were
399,500 shares, 295,000 shares, and 510,000 shares of VLSI common stock sold in
each of those years.1994).
-15-
EXTRAORDINARY GAIN
The CompanyEvans & Sutherland realized extraordinary gains of $327,000 and $1,859,000 in 1995 and 1994 respectively. The gains resulted from
repurchase by the Company of its 6% Subordinated Convertible Debentures at less than par. There
were no repurchaserepurchases of debentures by the Company in 1993.1996. The current outstanding face
amount of debentures outstanding is $18,015,000.$18.0 million.
INCOME TAXES
Provision (benefit) for income taxes was 39%35%, (51%)39%, and 36%(51%) of
pre-tax earnings (loss) for 1996, 1995, 1994, and 19931994 respectively. The Company
expects the income tax rate increaseto continue to decrease in 1994's tax benefit results primarily from the closing of the Company's wholly-
owned subsidiary in France. In 1993, the Company adopted FASB 109 Accounting
for Income Taxes as described in footnote 1 of "Notes to Consolidated Financial
Statements" in Part II of this report with the resulting tax effects shown as a
separate line item in the Consolidated Financial Statements of Operations.
-14-
1997.
LIQUIDITY AND CAPITAL RESOURCES
Funds to support the Company's operations come from net cash provided
by operating activities, sale of marketable securities held for investment, and
proceeds from employee stock purchase and option plans. The Company also has
cash equivalents and short-term marketable securities which can be used as
needed.
During 1995,1996, proceeds from employee stock purchases contributed $3.6
million and proceeds from the sale of CDRSinvestment securities provided $31,488,000, the sale
of VLSI marketable securities contributed $7,930,000, net cash from operating
activities provided $7,610,000, and employee stock purchases contributed
$2,295,000.$1.9
million. The major use of cash in 19951996 was forthe funding of operating activities
of $21.7 million (primarily an increase in working capital and payment of income
taxes related to the gain on the sale of CDRS), the purchase of capital
equipment for $5,846,000, the investment in Strata Inc. of $3,000,000,$10.5 million, and the repurchasepurchase of convertible debenturesinvestment securities of $1,831,000.$1.4
million. The net result was an
increasea decrease in cash and marketable securities of
$28.8 million to $91,741,000$63.0 million at the end of 19951996 from $51,810,000$91.7 million in 1994.1995. At
the end of 1995,1996, there were no material capital commitments. The Company
believes that through internal cash generation, plus the cash investmentsequivalents and
marketable securities identified above, it has sufficient resources to cover its
cash needs during fiscal year 1996.1997.
EFFECTS OF INFLATION
The effects of inflation were not considered material during 1995.1996.
FACTORS THAT MAY AFFECT FUTURE RESULTS
Evans & Sutherland's domestic and international businesses operate in
highly competitive markets. The business of the Company is subject to 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 dependent on its ability to
rapidly develop, manufacture, and market innovative products that meet customers
needs. Inherent in this process are 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 and uncertain, requiring
innovative designs and features that anticipate customer needs and technological
trends. The products, once developed, must be manufactured and distributed in
sufficient volumes at acceptable costs to meet demand. Furthermore, portions of
the manufacturing operations are dependent on the ability of suppliers to
deliver components and subassemblies in time to meet critical manufacturing and
distribution schedules. Constraints in these supply lines may adversely affect
E&S'sthe Company's operating results until alternate sourcing can be developed.
This annual report contains both historical facts and forward-looking
statements. Any forward-looking statements involve risks and uncertainties,
including but not limited to risk of product demand, market acceptance, economic
conditions, competitive products and pricing, difficulties in product
development, commercialization, and technology, and other risks detailed in this
filing. Although the Company believes it has the product offerings and resources
for continuing success, future revenue and margin trends cannot be reliably
predicted. Factors external to the Company can result in volatility of the
Company's common stock price. Because of the foregoing factors, recent trends
shouldare not be considerednecessarily reliable indicators of future stock prices or financial
performance.
-15--16-
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
*. Independent Auditors' Report
*. Consolidated Balance Sheets - December 29, 199527, 1996 and
December 30, 1994.
*29, 1995.
. Consolidated Statements of Operations - Years ended
December 27, 1996, December 29, 1995, and December 30, 1994, and December 31, 1993.
*1994.
. Consolidated Statements of Stockholders' Equity - Years ended
December 27, 1996, December 29, 1995, and December 30, 1994, and December 31, 1993.
*1994.
. Consolidated Statements of Cash Flows - Years ended December
27, 1996, December 29, 1995, and December 30, 1994, and December 31, 1993.
*1994.
. Notes to Consolidated Financial Statements - Years ended
December 27, 1996, December 29, 1995, and December 30, 1994, and December 31, 1993.1994.
The following constitutes a list of Financial Statement Schedules included in
Part IV of this report:
*. Schedule II - 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 Statements or notes thereto.
-16-[THIS SPACE INTENTIONALLY LEFT BLANK]
-17-
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 believes 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's business.
Evans & Sutherland's financial statements have been audited by KPMG
Peat Marwick LLP, independent public accountants. Management has made available
all the Company's 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 outside 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 Vice President and
Chief Executive Officer Chief Financial Officer
REPORT OF INDEPENDENT ACCOUNTANTS
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 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'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 generally accepted
auditing standards. 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 29, 199527, 1996
and December 30, 1994,29, 1995, and the results of their operations and their cash flows
for each of the years in the three-year period ended December 29, 1995,27, 1996, in
conformity with generally accepted accounting principles. 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.
As discussed in note 1 to the consolidated financial statements, the
Company changed its method of accounting for investments to adopt the provisions
of Statement of Financial Accounting Standards (SFAS) No. 115, Accounting for
Certain Investments in Debt and Equity Securities effective January 1, 1994 and
the Company changed its method of accounting for income taxes in 1993 to adopt
the provisions of SFAS No. 109, Accounting for Income Taxes.
KPMG Peat Marwick LLP
February 13, 19967, 1997
Salt Lake City, Utah
-17--18-
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 27, 1996 and December 29, 1995
and December 30, 1994
(Dollars in Thousands Except Share Amounts)thousands, except share amounts)
Assets 1996 1995
1994
- ---------------------------------------- ----------------
--------- ---------
Current assets:
Cash and cash equivalents $ 5,02316,521 $ 25,2135,023
Marketable securities (note 2) 46,454 86,718
26,597
Receivables:
Trade accounts,Accounts receivable, less allowance for doubtful receivables
25,625 20,724
of $563 in 1996 and $172 in 1995 and $144 in 1994
Income taxes - 1,633
Interest 1,201 1,142
Employees and other 295 150
--------- ---------
Total receivables34,842 27,121 23,649
Inventories (note 3) 20,202 18,981 23,033
Costs and estimated earnings in excess 15,052 20,573 of billings on
uncompleted contracts (note 4) 34,166 15,052
Deferred income taxes (note 9) 4,841 6,645 6,561
Prepaid expenses and deposits 2,187 1,464 1,425
--------- ---------
Total current assets 159,213 161,004 127,051
Property, plant and equipment at cost 106,147 107,625
(note 5) Less accumulated depreciation and 65,292 62,802
amortization
--------- ---------
Net property, plant, and equipment42,671 40,855 44,823
Investment securities (note 2) 7,057 7,437 7,277
Other assets at cost, less accumulated
amortization of $1,503 in 1995 and1,950 1,706 1,613
$1,157 in 1994
--------- ---------
$ 211,002210,891 $ 180,764211,002
========= =========
See accompanying notes to consolidated financial statements.
-18-
Liabilities and Stockholders' Equity
1995 1994
- ---------------------------------------- --------- ---------
------------------------------------
Current liabilities:
Notes payable to banks (note 6) $ 3,7735,334 $ 1,8173,773
Accounts payable 6,370 2,804 2,401
Accrued expenses (note 7) 13,933 14,849 15,556
Customer deposits 2,058 5,436 9,182
Income taxes payable (note 9) - 10,676 -
Billings in excess of costcosts and estimated earnings on
uncompleted contracts (note 4) 4,595 5,055 2,024
--------- ---------
Total current liabilities 32,290 42,593 30,980
Long-term debt (note 8) 18,015 20,37518,015
Deferred income taxes (note 9) 114 1,903 2,291
Stockholders' equity (notes 10 and 15):
Preferred stock, no par value. - -
Authorizedvalue; authorized 10,000,000 shares; no
shares issued and outstanding - -
Common stock, $.20 par value.
Authorizedvalue; authorized 30,000,000 shares; issued 1,743 1,710
and
outstanding 9,056,871 shares in 1996 and 8,715,320 shares in 1995 and 8,552,106 shares in 19941,811 1,743
Additional paid-in capital 8,639 5,112 2,850
Retained earnings 150,496 140,062 119,251
Net unrealized (loss) gain on marketable and investment securities (541) 1,694 2,847
securities
Cumulative translation adjustment 67 (120) 460
--------- ---------
Total stockholders' equity 160,472 148,491 127,118
Commitments and contingencies (notes 11 and 17)
--------- ---------
$ 211,002210,891 $ 180,764211,002
========= =========
See accompanying notes to consolidated financial statements.
-19-
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 27, 1996,
December 29, 1995, and December 30, 1994
and December 31, 1993
(In(Dollars in thousands, except per share amounts)
1996 1995 1994
1993
--------- --------- -------------------- ------------ ------------
Net sales (notes 12 and 13) $ 130,564 $ 113,194 $ 113,090
$ 142,253
Cost of sales 65,935 62,768 60,626
65,678
--------- --------- -------------------- ------------ ------------
Gross profit 64,629 50,426 52,464
76,575
--------- --------- -------------------- ------------ ------------
Expenses:
Marketing, general and administrative 31,357 30,714 32,874 40,154
Research and development 21,753 19,406 27,890 31,757
Restructuring charge (note 18) - - 8,212 7,900
Write-off of acquired research and development - 705 -
-
development --------- --------- -------------------- ------------ ------------
53,110 50,825 68,976 79,811
Gain from sale of CDRSbusiness unit (note 19) - 23,506 -
-
--------- --------- -------------------- ------------ ------------
Operating earnings (loss) 11,519 23,107 (16,512) (3,236)
Other income (expense):
Interest income 3,892 4,752 2,710
2,738
Interest expense (1,434) (1,477) (1,902) (2,613)
Gain on sale of marketable and investment securities (note 2) 1,868 7,126 4,009
6,238
(note 2)
MiscellaneousOther 184 72 311
(296)
--------- --------- -------------------- ------------ ------------
4,510 10,473 5,128
----------- ------------ ------------
Earnings (loss) before income taxes and extraordinary gain and cumulative effect of
change in accounting
principle16,029 33,580 (11,384) 2,831
Income tax expense (benefit) (note 9) 5,677 13,096 (5,825)
1,005
--------- --------- -------------------- ------------ ------------
Earnings (loss) before extraordinary gain and cumulative
effect of change in accounting
principle10,352 20,484 (5,559) 1,826
Extraordinary gain from repurchase of convertible debentures,
net of income taxes of $209 in 1995 and $1,115 in 1994 (note 8) - 327 1,859
-
Cumulative effect of change in - - 2,267
accounting for income taxes (note 1)
--------- --------- ---------=========== ============ ============
Net earnings (loss) $ 10,352 $ 20,811 $ (3,700)
$ 4,093
========= ========= ==================== ============ ============
Earnings (loss) per common and common equivalent share:
Before extraordinary gain and
cumulative effect of change in
accounting principle$ 1.12 $ 2.37 $ (.65) $ .22
Extraordinary gain from repurchase of convertible debentures - .04 .22
-
Cumulative effect of change in
accounting principle - - .28
--------- --------- -------------------- ------------ ------------
$ 1.12 $ 2.41 $ (.43)
$ .50
========= ========= ==================== ============ ============
Fully-diluted earnings (loss) per share:
Before extraordinary gain and
cumulative effect of change in
accounting principle$ 1.11 $ 2.28 $ - $ -
Extraordinary gain from repurchase of convertible debentures - .03 -
------------ ------------ ------------
$ 1.11 $ 2.31 $ -
$ -
========= ========= ==================== ============ ============
See accompanying notes to consolidated financial statements.
-20-
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended December 27, 1996, December 29, 1995, and December 30, 1994 and December 31, 1993
(Dollars in thousands)
1996 1995 1994
1993
---------- ---------- --------------------- ----------- ------------
Common stock:
Beginning of year $ 1,743 $ 1,710 $ 1,671 $ 1,644
Par value of shares issued for cash (181,734(195,571 shares in 1996,
181,734 shares in 1995, and 199,581 shares in 1994, and 155,4971994) 39 36 41
Par value of shares issued to acquire Terabit (149,215 shares in 1993) 36 41 311996) 30 - -
Par value of shares purchased and retired (19,410(3,235 shares in 1996, 18,520
shares in 1995, and 11,806 shares in 1994, and 22,240
shares in 1993)1994) (1) (3) (2)
(4)
--------- --------- -------------------- ----------- ------------
End of year 1,811 1,743 1,710
1,671
--------- --------- -------------------- ----------- ------------
Additional paid-in capital:
Beginning of year 5,112 2,850 11,899 9,841
Proceeds in excess of par value of shares issued for cash 2,746 2,504 3,273 2,385
Compensation expense on employee stock purchase plan 90 74 83 101
Tax benefit from issuance of common stock to employees 691 - 217 -
Retirement of treasury stock (51) (316) (243)
(428)Terabit acquisition 51 - -
Tripos spin off (note 19) - - (12,379)
-
--------- --------- -------------------- ----------- ------------
End of year 8,639 5,112 2,850
11,899
--------- --------- -------------------- ----------- ------------
Retained earnings:
Beginning of year 140,062 119,251 122,951
118,858Terabit acquisition 82 - -
Net earnings (loss) 10,352 20,811 (3,700)
4,093
--------- --------- -------------------- ----------- ------------
End of year 150,496 140,062 119,251
122,951
--------- --------- -------------------- ----------- ------------
Net unrealized (loss) gain on marketableinvestment securities:
Beginning of year 1,694 2,847 - -
Effect of change in accounting for investment securities - - 6,838
Fair value adjustment of marketable securities January 1, 1994
(note 1) - 6,838 -
Change in unrealized gain(2,235) (1,153) (3,991)
-
--------- --------- -------------------- ----------- ------------
End of year (541) 1,694 2,847
-
--------- --------- -------------------- ----------- ------------
Cumulative translation adjustment:
Beginning of year (120) 460 509
452
Translation adjustment 187 (580) (49)
57
--------- --------- -------------------- ----------- ------------
End of year 67 (120) 460
509
--------- --------- -------------------- ----------- ------------
Total stockholders' equity $ 160,472 $ 148,491 $ 127,118
$ 137,030
========= ========= ==================== =========== ============
See accompanying notes to consolidated financial statements.
-21-
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 27, 1996, December 29, 1995, and December 30, 1994
and December 31, 1993
(In(Dollars in thousands)
1996 1995 1994
1993
----------- --------------------- ---------- -----------
Cash flows from operating activities:
Net earnings (loss) $ 10,352 $ 20,811 $ (3,700) $ 4,093
Adjustments to reconcile net earnings (loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization of plant
and equipment 8,741 10,280 13,3449,120 9,950 10,704
Provision for losses on accounts receivable 335 158 99
Provision for write down of inventory (535) 7,988 4,316
114Provision for warranty expense 673 470 348
Gain on sale of marketable and investment securities (1,868) (7,126) (4,009)
Gain on repurchase of convertible debentures - (536) (2,974) -
Gain on sale of CDRSbusiness unit - (23,506) - -
Provision for warranty expense 470 348 1,121
Loss (gain) on disposal of fixed assets
and other assets (93) 69 101
Other amortization 1,209 424 1,094
Restructuring charge - - 8,212 7,900
Gain on sale of marketable securities (7,126) (4,009) (6,238)
Other, net 158 99 28769 (93) 69
Changes in operating assets and liabilities, net of effects of
purchase/sale of businesses:
ReceivablesAccounts receivable (7,406) (6,117) 7,426
17,197
Inventories (3,093) (7,695) (772) (13,278)
Costs and estimated earnings in excess of
billings on uncompleted contracts, net (19,036) 8,530 (8,789)
8,685Deferred income taxes 1,283 414 (1,541)
Prepaid expenses and deposits and
other assets(745) (423) (241) (175)
Accounts payable and accrued expenses 3,790 (3,912) (10,713)
(6,137)
Customer deposits (3,489) (3,472) 691 6,954
Income taxes payable (11,180) 12,169 (3,760)
(4,463)
Deferred income taxes 414 (1,541) (2,507)
----------- --------------------- ---------- -----------
Net cash (used in) provided by (used in)
operating activities (21,730) 7,610 (4,634)
28,092
----------- --------------------- ---------- -----------
Cash flows from investing activities:
Purchases of marketable securities and
short-term investments(57,354) (145,047) 32,627 (24,756)
Tripos spin off - (8,485) -
Proceeds from sale of CDRS 31,488 - -
Proceeds from sale of marketable securities and short-term investments 93,077 20,564 7,089
Investment in other long-term
investments97,262 85,147 16,062
Purchase of investment securities (1,447) (3,000) -
(2,000)Proceeds from sale of investment securities 1,886 7,930 4,502
Capital expenditures (10,521) (5,846) (6,417)
Tripos spin off - - (8,485)
Proceeds from sale of business unit - 31,488 -
Payment for acquisition, net of cash acquired - (93) (975)
-
Increase in capitalized software,
intangible and other assets (1,463) - (404) (1,159)
Capital expenditures (5,846) (6,417) (8,265)
Proceeds from disposal of fixed assets and other assets - - 61
182
---------- --------- ------------------- -----------
Net cash provided by (used in) investing activities 28,363 (29,421) 36,971
(28,909)
----------- --------------------- ---------- -----------
-22-
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Years ended December 27, 1996, December 29, 1995, and December 30, 1994
and December 31, 1993
(In(Dollars in thousands)
1996 1995 1994
1993
----------- --------------------- ---------- -----------
Cash flows from financing activities:
Payments for repurchase of convertible debentures $ - $ (1,831) $ (13,748) $ -
Principal payments on long-term debt - - (1)
Net borrowings (payments) under notes payable to banks 1,904 1,758 (1,142) 255
Net proceeds from issuance of common stock 3,594 2,295 4,607
2,084
--------- --------- ----------------- ---------- -----------
Net cash provided by (used in) financing activities 5,498 2,222 (10,283)
2,338
--------- --------- ----------------- ---------- -----------
Effect of foreign exchange rate changes on cash (633) (601) (91)
235
--------- --------- ----------------- ---------- -----------
Net change in cash and cash equivalents 11,498 (20,190) 21,963 1,756
Cash and cash equivalents at beginning of year 5,023 25,213 3,250
1,494
--------- --------- ----------------- ---------- -----------
Cash and cash equivalents at end of year $ 16,521 $ 5,023 $ 25,213
$ 3,250
========= ========= ================= ========== ===========
Supplemental Disclosures of Cash Flow Information
- -----------------------------------------------------------------------------------------
Cash paid during the year for:
Interest $ 1,385 $ 1,500 $ 2,225
$ 2,537
Income taxes 14,736 1,134 432 6,379
See accompanying notes to consolidated financial statements.
-23-
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 27, 1996, December 29, 1995, and December 30, 1994 and December 31, 1993
(Dollars in thousands, except share and per share amounts)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
(A) DESCRIPTION OF BUSINESSDescription of Business
-----------------------
Evans & Sutherland Computer Corporation (the(E&S or the Company) designs,
develops, manufactures,is in the
business of developing, marketing, and marketssupporting 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 component in high-performance, computerinteractive graphics
display systems for various applicationsworkstations; (c) software systems and development
tools which are used with demandingmulti-platform interactive graphics requirements. The
Company issystems to
produce 3D (three dimensional) graphics software and hardware solutions
to a supplier of visualbroad customer base; and (d) training systems for flight management
which are used within the commercial aviation training and
simulation, high-performance graphics accelerators to major
workstation manufacturers, and GL-based software development tools
usedmarket for advanced three-dimensional (3D) graphics applications on the
industry's leading workstation platforms. The Company's operations
consist of a single line of business.pilot
training.
The Company's fiscal year ends the last Friday in December. The fiscal
year ends for the years included in the accompanying consolidated
financial statements are the periods ended December 27, 1996, December
29, 1995, and December 30, 1994, and December 31, 1993.1994. Unless otherwise specified, all
references to a year are to the fiscal year endingended in the year stated.
(B) PRINCIPLES OF CONSOLIDATIONPrinciples of Consolidation
---------------------------
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation.
(C) REVENUE RECOGNITIONRevenue Recognition
-------------------
Net sales include revenue from system and software products, software
license rights, and service contracts. Product revenues are generally
recognized when the product is shipped and the Company has no additional
performance obligations.
Revenue from long-term contracts is recorded using the
percentage-of-
completionpercentage-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
provides 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.
Software license fees are 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.
(D) CASH-24-
EVANS & SUTHERLAND COMPUTER CORPORATION AND CASH EQUIVALENTSSUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Cash and Cash Equivalents
-------------------------
The Company considers all highly liquid financial instruments purchased
with an original maturity to the Company of three months or less to be
cash equivalents. Cash equivalents consist of debt securities of $-0- and $21,997$11,902
at December 29, 1995 and December 31,
1994, respectively.
(E) INVENTORIES27, 1996.
Inventories
-----------
Raw materials and supplies inventories are stated at the lower of
weighted average cost or market. Work-in-process and finished goods are
stated on the basis of accumulated manufacturing costs, but not in
excess of market (net realizable value).
(F) PROPERTY, PLANT, AND EQUIPMENTProperty, Plant, and Equipment
------------------------------
Property, plant, and equipment are stated at cost. Depreciation and
amortization are computed using the straight-line and double-declining
balance methods based on the estimated useful lives of the related
assets.
-24-
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(G) OTHER ASSETSOther Assets
------------
Other assets include deferred bond offering costs, goodwill and goodwill,certain
other intangible assets and are being amortized on the straight-line
basis over the bond term, and five
years, respectively.
(H) SOFTWARE DEVELOPMENT COSTSestimated useful lives of the respective assets.
Software Development Costs
--------------------------
Software development costs, if material, are capitalized from the date
technological feasibility is achieved if material; capitalization is discontinued
whenuntil the product is available for
general release to customers. Such deferrable costs have not been
material during the periods presented.
(I) MARKETABLE SECURITIES
---------------------Marketable and Investment Securities
------------------------------------
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 115, Accounting for Certain Investments in Debt and Equity
Securities (Statement 115) at January 1, 1994. Under Statement 115, the Company classifies its marketable debt and marketable 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' equity until realized. 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 gains and losses from the sale of securities are included in
results of operations and are determined on the specific-
identificationspecific-identification
basis.
(J) WARRANTY RESERVENonmarketable investment securities are recorded at the lower of cost or
net realizable value.
-25-
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Warranty Reserve
----------------
The Company provides 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.
(K) EARNINGS (LOSS) PER SHARE
-------------------------Stock-Based Compensation
------------------------
Effective January 1, 1996, the Company adopted the footnote disclosure
provisions of Statement of Financial Accounting Standards No. 123,
Accounting for Stock Based Compensation (SFAS 123). 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 Opinion No. 25, Accounting for Stock Issued to
Employees (APB 25). The Company has elected to continue to apply the
provisions of APB 25 and provide pro forma footnote disclosures required
by SFAS 123.
Earnings (Loss) Per Common and Common Equivalent Share
------------------------------------------------------
Earnings (loss) per common and common equivalent share areis computed based
on the weighted average number of common shares and, as appropriate,
dilutive common stock equivalents outstanding during the year totalingperiod. Stock
options are considered to be common stock equivalents. The number of
shares used to compute primary earnings (loss) per common and common
equivalent share were 9,222,301, 8,638,665, and 8,519,990 shares in
1996, 1995, and 8,256,3311994, respectively. The number of shares for 1995, 1994, and 1993, respectively.
Fully dilutedused to compute
fully-diluted earnings per share reflect additional dilution related to
stock options and warrants using the market price at the end of the
period when higher than the average price for the period. Fully-dilutedThe number of
shares used to compute fully-diluted earnings per share are based onwere 9,331,138
and 9,000,710 shares outstanding for 1995.
(L) INCOME TAXES
------------
Effective December 26, 1992, the Company adopted Statement of Financial
Accounting Standards No. 109, Accounting forin 1996 and 1995, respectively.
Income Taxes
and reported
the cumulative effect of the change in the method of accounting for
income taxes in the 1993 consolidated statement of operations. Under------------
The Company uses the asset and liability method of Statement 109,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. 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.
(M) FOREIGN CURRENCY TRANSLATION-26-
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Foreign Currency Translation
----------------------------
The local foreign currency is the functional currency for the Company's
foreign subsidiaries. Assets and liabilities of foreign operations are
translated to U.S. dollars at the current exchange rates as of the
applicable balance sheet date. Revenues and expenses are translated at
the average exchange rates prevailing during the period. Adjustments
resulting from translation are reported as a separate component of
stockholders' equity. -25-
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(M) FOREIGN CURRENCY TRANSLATION (CONTINUED)
----------------------------
Certain transactions of the foreign subsidiaries
are denominated in currencies other than the functional currency,
including transactions with the parent company. Transaction gains and
losses are included in miscellaneousother income (expense) for the period in which
the transaction occurs and amounted to net gains (losses) of $(53) in 1995, $266 in 1994,
and $(291) in 1993.
(N) ESTIMATESoccurs.
Estimates
---------
The preparation of the consolidated 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 and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
(O) RECLASSIFICATIONSConcentration of Credit Risk
----------------------------
Financial instruments that potentially subject the Company to
concentrations of credit risk are primarily cash, cash equivalents,
marketable securities, and accounts receivable. The Company's marketable
securities portfolio consists of investment-grade securities diversified
among security types, industries, and issuers. The Company's investments
are managed by recognized financial institutions that follow the
Company's investment policy. The Company's policy limits the amount of
credit exposure in any one issue, and the Company believes no
significant concentration of credit risk exists with respect to these
investments.
In the normal course of business, the Company provides unsecured credit
terms to its customers. Accordingly, the Company performs ongoing credit
evaluations of its customers and maintains allowances for possible
losses which, when realized, have been within the range of management's
expectations.
Reclassifications
-----------------
Certain reclassifications have been made in the 19941995 and 19931994
consolidated financial statements to conform with classifications
adopted in 1995.1996.
-27-
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(2) MARKETABLE AND INVESTMENT SECURITIES
---------------------------------------------------------
The amortized cost, gross unrealized holding gains, gross unrealized
holding losses, and fair value for securities by major security type and
class of security at 1996 and 1995, and 1994, wereare summarized as follows:
Gross Gross
unrealized unrealized
Amortized holding holding Fair
cost gains losses value
--------- ---------- ---------- ------------------- ----------
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
========== ========== ========== ==========
Year ended 1995:
U.S. government securities:
Maturing in one year or less $ 17,734 $ 35 $ - $ 17,769
Maturing between one and three years 28,932 210 - 29,142
State and municipal securities:
Maturing in one year or less 1,005 1 - 1,006
Maturing between one and three years 28,194 85 8 28,271
Corporate debt securities - Maturing between one and
three years 5,418 34 - 5,452
Mortgage-backed securities - maturing in one year or less 5,077 1 - 5,078
--------- ---------- ---------- ------------------- ----------
$ 86,360 $ 366 $ 8 $ 86,718
========= ========== ========== =========
Year ended 1994:
U.S. government securities:
Maturing in one year or less $ 20,595 $ - $ - $ 20,595
Maturing between one and three
years 6,002 - - 6,002
--------- ---------- ---------- ---------
$ 26,597 $ - $ - $ 26,597
========= ========== ========== =========
Proceeds from sales of securities during 1995 and 1994 were $85,147 and
$16,062, respectively. Gross realized gains for 1995 and 1994 were $154 and $3
and gross realized losses for the same periods were $291 and $8, respectively.
-26-
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(2) MARKETABLE SECURITIES (CONTINUED)
---------------------
Long-term investment securities are summarized as follows:
Gross Gross
unrealized unrealized
holding holding Market
Cost gains losses value
------- ---------- ---------- ----------------- ----------
Year ended 1996:
Marketable securities:
Iwerks Entertainment, Inc. $ 2,000 $ - $ 868 $ 1,132
========== ========== ========== ==========
Year ended 1995:
Marketable securities:
Iwerks Entertainment, Inc. $ 2,000 $ 345 $ 1,000 $ 1,345
Adobe Systems, Inc. 19 3,073 - 3,092
------- ------- ------- ----------------- ---------- ---------- ----------
$ 2,019 3,418 1,000 4,437
Non-marketable securities:
Strata, Inc. 3,000 - - 3,000
------- ------- ------- -------
$ 5,019 $ 3,418 $ 1,000 $ 7,437
======= ======= ======= =======
Year ended 1994:
Iwerks Entertainment, Inc. $ 2,000 - 1,000 1,000
VLSI Technology, Inc. 667 4,127 - 4,794
Adobe Systems, Inc. 18 1,465 - 1,483
------- ------- ------- -------
$ 2,685 $ 5,592 $ 1,000 $ 7,277
======= ======= ======= =======4,437
========== ========== ========== ==========
Proceeds from sales-28-
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(2) MARKETABLE AND INVESTMENT SECURITIES (continued)
------------------------------------
The Company has investments in nonmarketable securities of long-term securities duringthree
companies in 1996 and one company in 1995. These investments are
recorded at cost, adjusted for permanent impairment if necessary, and
total $5,925 and $3,000 at December 27, 1996 and December 29, 1995,
respectively.
On December 27, 1996, the Company contributed all of the issued and
1994 were $7,930outstanding capital stock of Portable Graphics, Inc., a wholly-owned
subsidiary and $4,502, respectively. Gross realized gains$350 cash in exchange for 19951,570,667 Class A Shares of
Total Graphics Solution N.V. (TGS) and 1994 were $7,263a warrant to purchase an
additional 832,355 Class A Shares (note 19). The total shares purchased
and $4,014available to purchase under the warrant represent 15 percent of the
total outstanding common shares at the time of the transaction. The
shares are not marketable. TGS develops and there were no gross realized lossesmarkets portable graphics
software tools which provide hardware independence for application
developers.
On June 25, 1996, the Company purchased 70,782 shares of Series B
Preferred Stock of Sense8 Corporation which is convertible to 70,782
common shares and represents less than 10 percent of the outstanding
common shares and common equivalent shares. The shares are not
marketable and are stated at cost. Sense8 Corporation designs and
markets software development tools for the same periods.creation of virtual reality
applications.
On August 10, 1995, the Company purchased 109,259 common shares of
Strata, Inc. (Strata) which represents less than 10%10 percent of the
outstanding common shares. The shares are not marketable and are stated
at cost. Strata is a developer of software tools for multimedia
producers.
(3) INVENTORIES
-----------
Inventories are summarized as follows:
1996 1995
1994
-------- ------------------- -----------
Raw materials and supplies $ 8,117 $ 7,404
$ 10,498
Work-in-process 11,211 8,983 12,471
Finished goods 874 2,594
64
-------- ------------------- -----------
$ 20,202 $ 18,981
$ 23,033
======== =================== ===========
Inventories totaling $10,767 were written off during 1995 of which $7,467 was
charged to cost of sales and $3,300 to the CDRS sale (note 19).
-27--29-
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(4) LONG-TERM CONTRACTS
-------------------
Comparative information with respect to uncompleted contracts are
summarized as follows:
1996 1995
1994
--------- -------------------- ----------
Accumulated costs and estimated $ 297,039 $ 262,503
earnings on
uncompleted contracts $ 160,069 $ 297,039
Less billings 130,498 287,042
243,954
--------- -------------------- ----------
$ 29,571 $ 9,997
$ 18,549
========= ==================== ==========
Costs and estimated earnings in excess of billings on
uncompleted contracts $ 15,05234,166 $ 20,57315,052
Billings in excess of costs and estimated earnings on
uncompleted contracts (4,595) (5,055)
(2,024)
--------- -------------------- ----------
$ 29,571 $ 9,997
$ 18,549
========= ==================== ==========
(5) PROPERTY, PLANT, AND EQUIPMENT
------------------------------
The cost and estimated useful lives of property, plant, and equipment
are summarized as follows:
Estimated
useful lives 1996 1995
1994
------------- ---------- ------------------------- ------------ ------------
Land - $ 1,436 $ 1,436
Buildings and improvements 40 years 35,970 35,366 35,055
Machinery and equipment 3 to 8 years 74,005 66,427 68,273
Office furniture and equipment 8 years 2,052 1,849 2,173
Construction-in-process - 1,895 1,069
688
--------- -------------------- -----------
115,358 106,147
Less accumulated depreciation and amortization 72,687 65,292
----------- -----------
$ 106,14742,671 $ 107,625
========= =========40,855
=========== ===========
All buildings and improvements owned by the Company 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 four leases for an additional
10 years. At the end of the lease term, including any extension, the
buildings and improvements revert to the lessor.
-30-
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(6) NOTES PAYABLE TO BANKS
----------------------
The following is a summary of notes payable to banks:
1996 1995
1994
-------- ----------------- ---------
Balance at end of year $ 3,7735,334 $ 1,8173,773
Weighted average interest rate at end of year 7.5% 7.9% 8.9%
Maximum balance outstanding during the year $ 6,1805,553 $ 3,2156,180
Average balance outstanding during the year $ 4,3904,833 $ 1,1954,390
Weighted average interest rate during the year 8.90% 9.77%7.6% 8.9%
-28-
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(6) NOTES PAYABLE TO BANKS (CONTINUED)
----------------------
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.
The Company has unsecured revolving line of creditline-of-credit agreements with
foreign banks totaling $7,466$7,626 at December 29, 1995,27, 1996, of which
approximately $3,693$2,476 was unused and available. The Company also has a
$5,000 unsecured line of credit with a U.S. bank for which $-0- and $350no amounts
were outstanding at December 31, 19951996 and 1994, respectively.1995.
(7) ACCRUED EXPENSES
----------------
Accrued expenses consist of the following:
1996 1995
1994
--------- ------------------ ----------
Pension plan obligation (note 14) $ 3,781 $ 2,153
$ 2,998
Unused vacation 2,195 2,310
Restructuring (note 18) - 5,037Compensation and benefits 5,671 5,897
Provision for CDRS expenses (note 19) - 2,414
-
Other 8,087 5,211
-------- --------4,481 4,385
---------- ----------
$ 13,933 $ 14,849
$ 15,556
======== ================== ==========
(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 adjustments in certain events. The debentures
are redeemable at the Company's option, in whole or in part, at
declining redemption premiums until March 1, 1997, and at par on and
after such date. The Company is required to provide a sinking fund
balance of five percent of the applicable principal amount of the
debentures annually beginning March 1, 1998. The debentures are
subordinated to all existing and future superior indebtedness.
During 1995 and 1994, the Company repurchased $2,360 and $16,691,
respectively, of convertible debentures on the open market. These
purchases resulted in extraordinary gains of approximately $536 and
$2,974 in 1995 and 1994, respectively. These extraordinary gains are
shown net of income taxes in the accompanying consolidated statements of
operations.
-29--31-
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(9) INCOME TAXES
------------
Components of income tax expense (benefit) attributable to income
(loss): from continuing operations:
Share and
stock
option
Current Deferred benefit Total
--------- --------- -------------------- --------------- ------------- ----------
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
===================== ============= ========== ======== ======== =========
1994:
Federal $ (4,505) $ (1,086) $ 188 $ (5,403)
State (636) (167) 29 (774)
Foreign 352 - - 352
--------------------- ------------- ---------- -------- -------- ---------
$ (4,789) $ (1,253) $ 217 $ (5,825)
===================== ============= ========== ======== ======== =========
1993:
Federal $ 962 $ (209) $ - $ 753
State 145 (32) - 113
Foreign 139 - - 139
--------- -------- -------- ---------
$ 1,246 $ (241) $ - $ 1,005
========= ========= ===== =========
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 1996 and 1994 and 35 percent for 1995 and 34
percent for 1994 and 1993, to earnings before income taxes as follows:a result of the
following:
1996 1995 1994
1993
-------- -------- -------------------- ----------- ---------
Tax at U.S. federal statutory rate $ 5,450 $ 11,753 $ (3,871) $ 963
Research and development and foreign tax credits - (124) (226)
(160)
Foreign taxes - 124 352 139
Losses (gains) of foreign subsidiaries (165) 217 (1,461) 1,577
Federal and state refunds from prior
tax years - - (1,275)
Earnings of foreign sales corporation (368) (344) (123) (343)
State taxes (net of federal income tax benefit) 496 1,075 (511)
96
Other, net 264 395 15
8------------ ----------- --------
-------- --------$ 5,677 $ 13,096 $ (5,825)
$ 1,005
======== ==================== =========== ========
-30--32-
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(9) INCOME TAXES (CONTINUED)(continued)
------------
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 29, 199527, 1996 and December 30, 1994,29, 1995, are presented below:
Domestic Foreign
-------------------- ----------------------------------------- ------------------------
1996 1995 19941996 1995
1994
--------- -------- ------ ------------------ ---------- ---------- ----------
Deferred tax assets:
Restructuring accrual $ 14 $ 1,889 $ - $ -
Warranty, vacation, and other accruals $ 1,839 $ 3,347 1,083$ - $ -
Inventory reserves and other inventory-related
temporary basis differences 2,067 2,381 2,527 - -
differences
Pension accrual 992 558 1,122 - -
Long-term contract related temporary differences 461 824 490 - -
Net operating loss carryforwards from
acquired subsidiary, expiring 479147 479 2,276 2,276
primarily in 2006
Other 330 188Unrealized loss on marketable equity securities 325 - - -
Other 324 344 - -
---------- ---------- ---------- --------- -------- ------- --------
Total gross deferred tax assets 6,155 7,933 7,778 2,276 2,276
Less valuation allowance 520189 520 2,276 2,276
---------- ---------- ---------- --------- -------- ------- --------
Total deferred tax assets 5,966 7,413 7,258 - -
---------- ---------- ---------- --------- -------- ------- --------
Deferred tax liabilities:
Plant and equipment, principally due to differences in
depreciation and capitalized interest (993) (1,549) (1,166) - -
Unrealized gain on marketable equity securities - (1,041) (1,746) - -
securities
Other (246) (81) (76) - -
---------- ---------- ---------- --------- -------- ------- --------
Total gross deferred tax liabilities (1,239) (2,671) (2,988) - -
---------- ---------- ---------- --------- -------- ------- --------
Net deferred tax asset $ 4,7424,727 $ 4,2704,742 $ - $ -
========== ========== ========== =========
======== ======= ========1996 1995
1994
--------- ------------------ ----------
Net long-termcurrent deferred tax asset $ 4,841 $ 6,645
6,561
Net long-termnoncurrent deferred tax liability (114) (1,903)
(2,291)
========= ========---------- ----------
Net deferred tax asset $ 4,727 $ 4,742
4,270
========= ================== ==========
-33-
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(9) INCOME TAXES (continued)
------------
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.
-31-(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 equal to the fair market value on the
date of grant. Options generally vest ratably over three 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 150,000 and 350,000 shares to be
granted under the plans during 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 27, 1996, 308,000 shares of common stock were
authorized and reserved for issuance, but were not granted. A summary of
activity follows (shares in thousands):
1996 1995 1994
--------------------------- ---------------------------- -------------------------------
Weighted- Weighted-
average average
Number of exercise Number of exercise Number of Exercise
shares price shares price shares price
----------- ------------- ---------- ------------ ----------- ---------------
Options outstanding at
beginning of year 842 $ 14.45 815 $ 13.22 895 $15.25 to 23.00
Options granted 724 21.32 291 16.93 1,173 12.22 to 19.94
------------ ----------- ------------
1,566 1,106 2,068
----------- ----------- -----------
Options exercised 169 13.44 139 13.71 173 15.60 to 18.00
Options canceled 88 18.20 125 13.00 1,080 13.60 to 23.00
----------- ----------- -----------
257 264 1,253
----------- ----------- -----------
Options outstanding
at end of year 1,309 $ 18.14 842 $ 14.45 815 $12.22 to 19.94
=========== =========== ===========
Options exercisable
at end of year 271 $ 14.67 312 $ 13.78 333 $12.22 to 19.94
=========== =========== ===========
Weighted-average
fair value of
options granted
during the year $ 7.15 $ 5.65
-34-
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(10) STOCK OPTION, PURCHASE, AND BONUS PLANS (continued)
---------------------------------------
Stock Option Plans - The Company has grantedfollowing table summarizes information about fixed stock options
to officers,
------------------
directors, and employees to acquire shares of the Company's common stock.
Substantially all options so granted provide for purchase prices equal to
the fair market value on the date of grant. During 1995, shareholders
authorized an additional 350,000 shares to be granted under the plans. In
addition, 180,000 authorized shares from the stock bonus plan were
transferred to the stock option plans and the stock bonus plan was
eliminated. A summary of activity follows:outstanding at December 27, 1996 (options in thousands):
Options outstanding Options exercisable
---------------------------------------------------------- -------------------------------------
Number Weighted-average
Range of shares
(in thousands)
--------------------- Exercise
1995 1994 1993out- remaining Weighted-average Number Weighted-average
exercise standing at contractual exercise exercisable at exercise
prices December 27, 1996 life price ------ ----- ------December 27, 1996 price
----------------- ----------------- ----------------- ---------------- ------------------ ---------------
Options outstanding at
beginning of year 815 895 1,093 $12.22 to $19.94
Options granted 291 1,173 31 $12.22 to $20.50
----- ----- -----
1,106 2,068 1,124
----- ----- -----
Options exercised 139 173 115 $13.65 to $18.00
Options canceled or expired 125 1,080 114 $12.22 to $23.00
----- ----- -----
264 1,253 229
----- ----- -----
Options outstanding at end of
year 842 815 895 $12.22 to $20.50
===== ===== =====
Options exercisable at end of
year
$ 12.22 - 12.25 312 333 754 $12.22 to $23.00
===== ===== =====7.99 $12.24 133 $12.23
13.22 - 15.25 151 8.40 14.96 46 14.94
15.39 - 20.50 169 7.00 19.00 92 18.06
20.75 - 20.88 411 9.12 20.87 - -
21.00 - 25.25 266 9.56 22.12 - -
================= -----------------
12.22 - 25.25 1,309 8.58 18.14 271 14.67
================= =================
UnderThe 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 termsCompany's net
earnings and earnings per share would have been changed to the following
pro forma amounts:
1996 1995
--------- -----------
Net earnings As reported $ 10,352 $ 20,811
Pro forma 8,570 20,319
Primary earnings per share As reported 1.12 2.41
Pro forma 0.96 2.35
Fully-diluted earnings per share As reported 1.11 2.31
Pro forma 0.92 2.26
Pro forma net earnings reflects only options granted in 1996 and 1995.
Therefore, the effect that calculating compensation cost for stock-based
compensation under SFAS 123 has on the pro forma net earnings as shown
above may not be representative of the stockeffects on reported net earnings
for future years.
The fair value of each option plans, 794,004 sharesgrant is estimated on the date of common stock
were authorizedthe
grant using the Black-Scholes option pricing model with the following
weighted average assumptions used for grants in 1996 and reserved for issuance, but were not granted at December
29, 1995.1995,
respectively: risk-free interest rates of 6.1 percent and 5.7 percent;
expected dividend yields of 0 percent; expected lives of 3.3 years; and
expected volatility of 49 percent.
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.
-35-
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(11) LEASE COMMITMENTS
-----------------LEASES
------
The Company leases certain of its buildings and related improvements to
third parties under noncancelable operating leases. Cost and accumulated
depreciation of the leased buildings and improvements at December 27,
1996 were $8,079 and $2,370, respectively. Rental income for all
operating leases for 1996, 1995 and 1994 were $770, $431 and $150,
respectively.
The Company occupies real property and uses certain equipment under
lease arrangements which are accounted for primarily as operating
leases. A
summaryRental expenses for all operating leases for 1996, 1995 and 1994
were $1,506, $1,770 and $1,897, respectively.
At December 27, 1996, the future minimum rental income and commitment
under operating leases that have initial or remaining noncancelable
lease terms in excess of lease expense under such arrangementsone year are as follows:
1995 1994 1993
----------- -----------Rental
Rental commit
income -ment
---------- ---------
Real propertyFiscal year(s):
1997 $ 873 $ 1,497
1998 783 1,164
1999 759 918
2000 751 776
2001 731 776
Thereafter 3,849 7,726
---------- ---------
$ 1,4337,746 $ 1,610
Equipment 606 464 539
---------- ---------- --------
Total lease expense $ 1,770 $ 1,897 $ 2,14912,857
========== ========== =================
(12) INDUSTRY SEGMENT AND FOREIGN OPERATIONS
---------------------------------------
The Company operates in a single industry segment, the visual simulation
and computer graphics marketplace. A summary of noncancelable long-term operating lease commitmentsoperations by geographic
area follows:
Real
property Equipment Total
---------- ------------ --------1996 1995 1994
----------- ----------- -----------
Fiscal year(s)Net sales:
U.S. operations $ 121,759 $ 110,004 $ 107,477
European operations 16,625 4,618 6,813
Eliminations (7,820) (1,428) (1,200)
----------- ----------- -----------
Total net sales $ 130,564 $ 113,194 $ 113,090
=========== =========== ===========
Operating earnings (loss):
1996U.S. operations $ 860 493 1,353
1997 844 445 1,289
1998 780 169 949
1999 682 125 807
2000 689 119 808
Thereafter 8,078 - 8,078
---------- ------------ --------9,943 $ 25,866 $ (14,490)
European operations 1,730 (2,953) (2,436)
Eliminations (154) 194 414
----------- ----------- -----------
Total commitmentsoperating earnings (loss) $ 11,93311,519 $ 1,35123,107 $ 13,284
========== ============ ========(16,512)
=========== =========== ===========
-32--36-
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(12) INDUSTRY SEGMENT AND FOREIGN OPERATIONS (continued)
---------------------------------------
A summary of operations by geographic area follows:
1996 1995 1994
1993
--------- --------- -------------------- ----------- -----------
Net sales:
U.S. operations $ 110,004 $ 107,477 $ 134,556
European operations 4,618 6,813 15,933
Eliminations (1,428) (1,200) (8,236)
--------- --------- ---------
Total net sales $ 113,194 $ 113,090 $ 142,253
========= ========= =========
Operating earnings (loss):
U.S. operations $ 25,866 $ (14,490) $ 550
European operations (2,953) (2,436) (3,984)
Eliminations 194 414 198
--------- --------- ---------
Total operating earnings (loss) $ 23,107 $ (16,512) $ (3,236)
========= ========= =========
Identifiable assets:
U.S. operations $ 120,466 $ 94,233 $ 104,773
$ 121,705
European operations 14,547 3,483 3,694
11,182
Eliminations (159) - (216)
(564)
--------- --------- -------------------- ----------- -----------
Total identifiable assets 134,854 97,716 108,251
132,323
Corporate assets 76,037 113,286 72,513
83,864
--------- --------- -------------------- ----------- -----------
Total assets $ 210,891 $ 211,002 $ 180,764
$ 216,187
========= ========= ==================== =========== ===========
Transfers between geographic areas are accounted for at market price and
intercompany profit is eliminated in consolidation. Operating earnings
(loss) are total sales less operating expenses. Identifiable assets are
those assets of the Company that are identified with the operations in
each geographic area. Corporate assets are principally cash, marketable
securities, and long-term investments.
(13) SALESALES TO FOREIGN AND MAJOR CUSTOMERS
-----------------------------------
A summary of sales------------------------------------
Sales to foreign and major customers are summarized as follows:
1996 1995 1994 1993
--------- --------- ---------
Sales to foreign end-users:
Europe (excluding Great Britain) $ 26,621 $ 16,801 $ 18,499
$ 34,792
Pacific Rim 44,262 13,888 6,988
9,446
Great Britain 13,913 11,612 9,250
17,904
Rest of worldOther 3,572 2,202 3,160
7,749
-------- -------- ----------------- --------- ---------
Total $ 88,368 $ 44,503 $ 37,897
$ 69,891
======== ======== ========
Major customers (10% or more of net
sales):========= ========= =========
Customers comprising 10 percent or greater of the Company's net sales
are summarized as follows:
1996 1995 1994
--------- --------- ---------
Thomson Training & Simulation Ltd. 12% 4% 7%
Hughes Training Incorporated 11% 10% 6%
Rikei Corporation 11% 8% 1%
Loral Corporation $ 34,333 $ 25,677 $ 8,192
Thomson/Hughes training 10,724 13,899 20,984
U.S. government (certain of which
are also included with sales set
forth above) 54,684 51,397 47,1435% 30% 23%
-33-The Company's products are sold to agencies of the United States
Government through prime contractors or subcontractors thereof. The
percentage of net sales to total sales attributed to the U.S. Government
either directly or through prime contractors or subcontractors for 1996,
1995 and 1994 was 20 percent, 48 percent, and 45 percent, respectively,
of which 6 percent, 34 percent, and 20 percent are also included as
sales to the customers above.
-37-
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(14) EMPLOYEE BENEFIT PLANS
----------------------
Pension Plan (Plan) - The Company has 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's funding policy is to contribute annually the
maximum amount that can be deducted for federal income tax purposes.
Supplemental Executive Retirement Plan (SERP) - Effective July 1, 1995,
---------------------------------------------
the Company introduced a non-qualified SERP which will be phased in over
three years. The SERP, which is unfunded, provides eligible executives
defined pension benefits, outside the Company's pension plan, based on
average earnings, years of service, and age at retirement.
Net annual Plan and SERP expense is summarized as follows:
1996 1995
------------------------------------------- ------------------------- 1994
Plan SERP 1994 1993Plan SERP Plan
---------- ---------- ---------- ---------- ---------
------ --------- -----------
Benefits for services rendered during the year $ 1,989 $ 265 $ 1,594 $ 91 $ 2,549
$ 2,236
the year
Interest on projected benefit obligation 1,776 98 1,763 44 1,979 1,781
Actual return on plan assets (3,546) - (4,978) - 427 (3,175)
Net amortization and deferral 875 86 2,419 36 (2,790)
1,222
-------- ------ -------- ----------------- ---------- ---------- ---------- ----------
$ 1,094 $ 449 $ 798 $ 171 $ 2,165
$ 2,064
======== ====== ======== ================= ========== ========== ========== ==========
The following assumptions were used in accounting for the pension planPlan and SERP
at the end of each year:
1996 1995 1994
1993
------ ------ ---------------- ---------- ----------
Discount rates used in determining benefit obligations 7.50% 7.00% 8.50% 7.25%
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 10.00
plan assets9.00
Since the SERP was established on July 1, 1995, the discount rate used in
determining the 1995 expense was 7.0 percent.-38-
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(14) EMPLOYEE BENEFIT PLANS (continued)
----------------------
The following summarizes the funded status and amounts recognized in the
Company's consolidated financial statements:
1996 1995
------------------------------------------------ ---------------------------- 1994
Plan SERP 1994
--------- ---------Plan SERP Plan
----------- ----------- ----------- ----------- ----------
Actuarial present value of benefit
obligations:
Vested benefits $ (15,033) $ - $ (16,183) $ - $ (11,231)
Nonvested benefits (610) (1,136) (732) (900) (735)
--------- -------- -------------------- ----------- ----------- ----------- -----------
Accumulated benefit obligation (15,643) (1,136) (16,915) (900) (11,966)
Effect of projected future
salary increases (10,135) (620) (12,548) (503) (8,801)
--------- -------- -------------------- ----------- ----------- ----------- -----------
Projected benefit obligation (25,778) (1,756) (29,463) (1,403) (20,767)
Plan assets at fair value 32,912 - 29,174 - 24,619
--------- -------- -------------------- ----------- ----------- ----------- -----------
Projected benefit obligation below (in
excess of) plan assets 7,134 (1,756) (289) (1,403) 3,852
Unrecognized net gain (9,116) - (1,657) 138 (6,858)
Unrecognized prior service cost (440) 1,136 (512) 1,094 (547)
Unrecognized net transition
obligation 397 - 476 - 555
--------- -------- -------------------- ----------- ----------- ----------- -----------
Accrued pension plan obligation (2,025) (620) (1,982) (171) (2,998)
Additional minimum liability - (1,136) - - -
----------- ----------- ----------- ----------- -----------
Total liability $ (2,025) $ (1,756) $ (1,982) $ (171) $ (2,998)
========= ======== ==================== =========== =========== =========== ===========
-34-
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(14) EMPLOYEE BENEFIT PLANS (CONTINUED)
----------------------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 has a deferred savings plan which
---------------------
qualifies under Section 401(k) of the Internal Revenue Code. The plan
covers all employees of the Company who have at least one year of
service and who are age 18 or older. The Company makes matching
contributions of 50 percent of each employee's contribution not to
exceed six percent of the employee's compensation. The Company's
contributions to this plan for 1996, 1995 and 1994 were $948, $836 and
1993 were $836, $1,064, and $1,025, respectively.
Life Insurance - In 1995, the Company purchased company-owned life
--------------
insurance policies insuring the lives of certain active employees. The
policies accumulate asset values to meet future liabilities including
the payment of employee benefits such as supplemental retirement. At
December 27, 1996 and December 29, 1995, the investment in the policies
included in other assets was $643 and $294, respectively, and net life insurance expense was $57.$91
and $57 for 1996 and 1995, respectively.
-39-
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(15) PREFERRED STOCK
---------------
The Company has both Class A and Class B Preferred Stock with 5,000,000
shares authorized for each class. The Company has reserved 300,000
shares 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 up of the Company, holders of the
preferred stock would be entitled to be paid, to the extent assets are
available for distribution, an amount of $100 per share plus any accrued
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
outstanding on November 30, 1988 and to all new shares issued after that
date; the warrants outstanding at December 29, 199527, 1996 and December 30, 199429,
1995 are equal to the shares outstanding of 8,715,320,9,056,871 and 8,552,106,8,715,320,
respectively. At December 29, 199527, 1996 and December 30, 1994,29, 1995, the warrants
were not exercisable and no shares of preferred stock have been issued.
(16) DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS
---------------------------------------------------------
The carrying amount of cash and cash equivalents, receivables, notes
payable to bank, accounts payable, and accrued expenses approximates
fair value because of their short maturity.
The fair value of the Company's long-term debt instruments ($16,21415,498 at
December 29, 1995)27, 1996) is based on quoted market prices.
(17) COMMITMENTS AND CONTINGENCIES
-----------------------------
In the normal course of business, the Company has various 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 believes the ultimate
disposition of these matters will not have a material adverse effect on
the Company's consolidated financial condition, liquidity, or results of
operations.
In September 1995, the Company reached 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 paid to the Company under this settlement
is classified as sales in the Company's consolidated statements of
operations.
-40-
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(18) RESTRUCTURING CHARGES
---------------------
In the fourth quarter of 1994, the Company incurred a restructuring
charge of $8,212. The restructuring was undertaken to remove the
Company's divisional structure, reengineer research and development,
consolidate manufacturing, finance, administration and field service
operations, and to modify product lines. This restructuring eliminated
approximately 200 jobs worldwide in the areas noted above or about
20 percent of the work force. Amounts expended in 1995 approximated the
December 30, 1994 accrual balance.
-35-
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(18) RESTRUCTURING CHARGES (CONTINUED)
---------------------
In the fourth quarter of 1993, the Company incurred a restructuring charge
of $7,900. The restructuring was undertaken to better serve the Company's
changing markets and to more appropriately focus its resources on
profitable opportunities. This restructuring eliminated approximately 170
jobs worldwide or about 13 percent of the work force. Amounts expended in
1994 approximated the December 31, 1993 accrual balance.
(19) 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 expires on the earlier of December 27, 2001
or the effective date of an underwritten public offering of the capital
stock of TGS. The cost of the warrant has been recorded in investment
securities in the consolidated financial statements.
On March 20, 1996, the Company acquired Terabit Computer Specialty
Company, Inc. (Terabit). Terabit, established in 1979, developed,
marketed and supported simulated cockpit instruments and other airborne
electronics displays used in training simulators for military and
commercial aircraft. To effect the acquisition, 149,215 shares of the
Company's common stock were issued in exchange for all of the
outstanding common stock of Terabit. The acquisition was accounted for
using the pooling of interests method. However, due to immateriality,
the Company's financial information has not been restated to include the
accounts and operations of Terabit prior to January 1, 1996.
On April 12, 1995, the Company sold its CDRS business unit to Parametric
Technology Corporation (PTC), a Massachusetts Corporation. The proceeds
from the sale net of direct expenses of $1,591 was approximately $31,488
resulting in a gain of $23,506 summarized as follows:
Proceeds $ 31,488
Assets and liabilities sold:
Accounts receivable $ (961)
Inventory (466)
Net property, plant, and equipment (1,228)
Liabilities 387 (2,268)
-------------------
Provision for expenses (2,414)
Write-off of inventory (3,300)
--------============
$ 23,506
====================
-41-
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(19) BUSINESSES SOLD, ACQUIRED, AND SPIN-OFF (continued)
---------------------------------------
On October 3, 1995 and on November 21, 1994, the Company acquired all of
the outstanding common stock of Xionix Simulation, Inc. (Xionix) and
Portable Graphics, Inc. (PGI) for $1,080 and $1,300, respectively.
Xionix manufactures low-cost flight-system trainers and PGI is involved
in software development. These business combinations were accounted for
under the purchase method of accounting. Accordingly, the purchase price
was allocated to assets and liabilities based on their estimated fair
values as of the date of acquisition. Operations of Xionix and PGI are
included in the accompanying consolidated financial statements from the
date of acquisition, and are not material in relation to the Company's
consolidated financial statements; pro forma financial information has
therefore not been presented. The Company allocated $705 of the Xionix
purchase price to in processin-process research and development which has no
alternative future use and this amount was written off during 1995.
Effective June 1, 1994 the Company's stockholders received a special
dividend in the form of a spin-off of Tripos, Inc. (Tripos), a
wholly-owned subsidiary of the Company at the time. Stockholders
received one share of Tripos common stock for every three shares of E&S
common stock held on May 25, 1994, the record date of the spin-off.
(20) ACCOUNTING STANDARDS ISSUED NOT YET ADOPTED
-------------------------------------------
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, Accounting for Stock Based
Compensation (FASB 123). The Company is required to adopt the provisions of
this statement for years beginning after December 15, 1995. This statement
encourages all entities to adopt a fair value based method of accounting
for employee stock options or similar equity instruments. However, it also
allows an entity to continue to measure compensation cost for those plans
using the intrinsic-value method of accounting prescribed by APB opinion
No. 25, Accounting for Stock Issued to Employees (APB 25). Entities
electing to remain with the accounting in APB 25 must make pro forma
disclosures of net income and earnings per share as if the fair value based
method of accounting defined in this statement had been applied. It is
currently anticipated that the Company will continue to account for
employee stock options or similar equity instruments in accordance with APB
25 and provide the disclosures required by FASB 123.
-36--42-
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
"None"
[THIS SPACE INTENTIONALLY LEFT BLANK]
-37--43-
FORM 10-K
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
Information regarding directors of the Company is incorporated by
reference from "Election of Directors" in the 19951996 Proxy Statement to be
delivered to shareholders in connection with the Annual Meeting of Shareholders
to be held on May 16, 1996.22, 1997.
Information required by item 405 of Regulation S-K is incorporated by
reference from "Compliance with Section 16(a) of the Securities Exchange Act of
1934" in the 1996 Proxy Statement to be delivered to shareholders in connection
with the Annual Meeting of Shareholders to be held on May 22, 1997.
Information concerning 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".
ITEM 11. EXECUTIVE COMPENSATION
Information regarding this item is incorporated by reference from
"Executive Compensation" in the 19951996 Proxy Statement to be delivered to
shareholders in connection with the Annual Meeting of Shareholders to be held on
May 16, 1996.22, 1997.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding this item is incorporated by reference from
"Security Ownership of Certain Beneficial Owners and Management" in the 19951996
Proxy Statement to be delivered to shareholders in connection with the Annual
Meeting of Shareholders to be held on May 16, 1996.22, 1997.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding this item is incorporated by reference from
"Executive Compensation - Summary Compensation Table", "Report of the
Compensation and Stock Options Committee of the Board of Directors", and
"Termination of Employment and Change of Control Arrangements", in the 19951996
Proxy Statement to be delivered to shareholders in connection with the Annual
Meeting of Shareholders to be held on May 16, 1996.
-38-22, 1997.
-44-
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 included in this report:
1. FINANCIAL STATEMENTSFinancial Statements - INCLUDED IN PARTIncluded in Part II, ITEMItem 8 OF THIS REPORT:of this report:
--------------------
Report of Management
Report of Independent Auditors
Consolidated Balance Sheets - December 27, 1996 and December 29,
1995.
Consolidated Statements of Operations - Years ended December 27,
1996, December 29, 1995, and December 30, 1994.
Consolidated Statements of Operations - Years ended December 29, 1995,
December 30, 1994, and December 31, 1993.
Consolidated Statements of Stockholders' Equity - Years ended
December 27, 1996, December 29, 1995, and December 30, 1994, and December 31, 1993.1994.
Consolidated Statements of Cash Flows - Years ended December 27,
1996, December 29, 1995, and December 30, 1994, and December 31, 1993.1994.
Notes to Consolidated Financial Statements - Years ended December 27,
1996, December 29, 1995, and December 30, 1994, and December 31, 1993.1994.
2. FINANCIAL STATEMENT SCHEDULESFinancial Statement Schedules - INCLUDED IN PARTincluded in Part IV OF THIS REPORT:of this report:
-----------------------------
Schedule II - 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 Statements or
notes thereto.
3. EXHIBITSExhibits
--------
3.1 Articles of Incorporation, as amended, filed as Exhibit 3.1
to the Company's Annual Report on Form 10-K for the fiscal
year ended December 25, 1987, and incorporated herein by
this reference.
Amendments to Articles of Incorporation filed as Exhibit
3.1.1 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 30, 1988, and incorporated
herein by this reference.
3.2 By-laws, as amended, filed as Exhibit 3.2 to the Company's
Annual Report on Form 10-K for the fiscal year ended
December 25, 1987, and incorporated herein by this
reference.
10.1 1985 Stock Option Plan, filed as Exhibit 1 to the Company's
Post-
effectivePost-effective Amendment No. 1 to Registration Statement on
Form S-8, SEC File No. 2-76027, and incorporated herein by
this reference.
-45-
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's Annual Report on Form 10-K
for the fiscal year ended December 29, 1989, and
incorporated herein by this reference.
10.3 The Company's 1981 Executive Stock Bonus Plan, filed as Exhibit 10.11
to the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1982, and incorporated herein by this reference.
-39-
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES,
AND REPORTS ON FORM 8-K (CONTINUED)
3. EXHIBITS (CONTINUED)
--------
10.4 The Company's 1991 Employee Stock Purchase Plan, filed as
Exhibit 4.1 to the Company's Registration Statement on Form
S-8, SEC File No. 33-39632, and incorporated herein by this
reference.
10.5 Transition Employment and Separation Agreement dated January 19,
1994, between the Company and Mr. Richard F. Leahy, filed as Exhibit
10.7 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 Terms of Employment Agreement dated June 23, 1994, between the
Company and Mr. Steven C. Eror, filed as Exhibit 10.8 to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 26, 1994, and incorporated herein by this reference.
10.710.4 Employment Agreement dated November 17, 1994, between the
Company and Mr. Gary E. Meredith, filed as Exhibit 10.9 to
the Company's Annual Report on Form 10-K for the fiscal
year ended December 26, 1994, and incorporated herein by
this reference.
10.810.5 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.
10.9 Release and Separation Agreement dated January 6,10.6 The Company's 1995 between the
Company and Mr. Robert A. Schumacker,Long-Term Incentive Equity Plan, filed
as Exhibit 10.11 to the Company's Annual Report on Form
10-K for the fiscal year ended December 26, 1994,29, 1995, and
incorporated herein by this reference.
10.10 Mutual Release and Separation Agreement dated January 27, 1995,
between the Company and Mr. Rodney S. Rougelot, filed as Exhibit
10.12 to the Company's Annual Report on Form 10-K for the fiscal
year ended December 26, 1994, and incorporated herein by this
reference.
10.11 The Company's 1995 Long-Term Incentive Equity Plan.
10.1210.7 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).
10.13 Settlement Agreement dated September 13,, filed as
Exhibit 10.12 to the Company's Annual Report on Form 10-K
for the fiscal year ended December 29, 1995, between the Company,
Thomson Training and
Simulation Limited, and Hughes Aircraft
Company.
10.14incorporated herein by this reference.
10.8 The Company's Executive Savings Plan.
10.15Plan, filed as Exhibit
10.14 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 29, 1995, and incorporated
herein by this reference.
10.9 The Company's Supplemental Executive Retirement Plan
(SERP)., filed as Exhibit 10.15 to the Company's Annual
Report on Form 10-K for the fiscal year ended December 29,
1995, and incorporated herein by this reference.
23.1 Consent of Independent Accountants.
24.1 Powers of Attorney for Messrs. Stewart Carrell, Henry N.
Christiansen, Peter O. Crisp, John T. Lemley, Gary E.
Meredith, James R. Oyler, Ivan E. Sutherland, and John E.
Warnock.
No reports on Form 8-K were filed during the fourth quarter
of the year ended December 29, 1995.27, 1996.
TRADEMARKS USED IN THIS FORM 10-K
DIGISTAR II, E&S, EaSIEST, ESIG, Evans & Sutherland, Harmony,
Integrator NT, Liberty, MindSet, REALimage, StarRider, and Virtual GliderUniversal 3D are
trademarks or registered trademarks of Evans & Sutherland Computer Corporation.
CDRS is a registered trademark of
Tripos, Inc. All other productsproduct, service, or services mentioned in this Form 10-Ktrade names or marks are identified by the trademarks or service marksproperties of their
respective companies or
organizations.
-40-owners.
-46-
Schedule II
-----------
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTSValuation and Qualifying Accounts
Years ended December 27, 1996, December 29, 1995, and December 30, 1994
and December 31, 1993
(In(Dollars in thousands)
Balance at Additions charged Receivables
beginning chargedof to cost and charged against Balance at end
Allowance for doubtful receivables of year and expenses allowance of year
- ---------------------------------- ----------- --------------- --------------- ------------------------------- ------------------- -------------------- ------------------
Year ended December 27, 1996 $ 172 $ 335 $ (56) $ 563
=========== =========== =========== ===========
Year ended December 29, 1995 $ 144 $ 158 $ 130 $ 172
=========== ============ ========== ==================== =========== ===========
Year ended December 30, 1994 $ 406 $ 99 $ 361 $ 144
=========== ============ ========== =========
Year ended December 31, 1993 $ 223 $ 287 $ 104 $ 406
=========== ============ ========== ==================== ===========
Balance at Additions Receivablescharged Costs incurred for
beginning chargedof to cost charged againstand product warranty Balance at end
Warranty reserve of year and expenses allowanceprovisions of year
- ---------------- ----------- --------------- --------------- ------------------------------- ------------------- -------------------- ------------------
Year ended December 27, 1996 $ 848 $ 673 $ 713 $ 808
============ =========== ============ ===========
Year ended December 29, 1995 $ 876 $ 470 $ 498 $ 848
============ =========== ============ ========== ====================
Year ended December 30, 1994 $ 1,600 $ 348 $ 1,072 $ 876
============ =========== ============ ========== =========
Year ended December 31, 1993 $ 1,539 $ 1,120 $ 1,059 $ 1,600
===========
============ ========== =========
Deferred tax asset valuation Balance at
- ---------------------------- beginning of Additions and Charges against Balance at Deferred tax asset valuationend
allowance year adjustments allowance of year
adjustments allowance end of year
- --------- ---------------- ----------- --------------- --------------- ---------------------------------- -------------------- -----------------
Year ended December 27, 1996 Domestic $ 520 $ - $ 331 $ 189
=========== =========== =========== ===========
Foreign $ 2,276 $ - $ - $ 2,276
=========== =========== =========== ===========
Year ended December 29, 1995 Domestic $ 520 $ - $ - $ 520
=========== ============ ========== ==================== =========== ===========
Foreign $ 2,276 $ - $ - $ 2,276
=========== ============ ========== ==================== =========== ===========
Year ended December 30, 1994 Domestic $ 560 $ (40) $ - $ 520
=========== ============ ========== ==================== =========== ===========
Foreign $ 1,802 $ 474 $ - $ 2,276
=========== ============ ========== =========
Year ended December 31, 1993 Domestic $ 560 $ - $ - $ 560
=========== ============ ========== =========
Foreign $ 1,802 $ - $ - $ 1,802
=========== ============ ========== ====================
-41--47-
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 28, 199627, 1997 By: /s/
JAMES R. OYLER
--------------------------------------------------------------------------
JAMES R. OYLER, PRESIDENT
Pursuant to the requirements of the Securities and Exchange Act of
1934, this report signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
/s/ STEWARD CARRELL * Chairman of the March 28, 1996
-------------------------
STEWART CARRELL Board of Directors
/s/ JAMES R. OYLER Director and President March 28, 1996
--------------------------
JAMES R. OYLER (Chief Executive Officer)
/s/ JOHN T. LEMLEY Vice President and Chief March 28, 1996
--------------------------
JOHN T. LEMLEY Financial Officer
(Principal Financial and
Accounting Officer)
/s/ HENRY N. CHRISTIANSEN * Director March 28, 1996
--------------------------
HENRY N. CHRISTIANSEN
/s/ PETER O. CRISP * Director March 28, 1996
--------------------------
PETER O. CRISP
/s/ IVAN E. SUTHERLAND * Director March 28, 1996
--------------------------
IVAN E. SUTHERLAND
/s/ JOHN E. WARNOCK * Director March 28, 1996
--------------------------
JOHN E. WARNOCK
By: /s/ GARY E. MEREDITH * March 28, 1996
--------------------------
/s/ * Chairman of the March 27, 1997
- ---------------------------------------------------- Board of Directors
STEWART CARRELL
/s/ Director and President March 27, 1997
- ---------------------------------------------------- (Chief Executive Officer)
JAMES R. OYLER
/s/ Vice President and Chief March 27, 1997
- ---------------------------------------------------- Financial Officer
JOHN T. LEMLEY (Principal Financial Officer)
/s/ Vice President and March 27, 1997
- ---------------------------------------------------- Corporate Controller
MARK C. MCBRIDE (Principal Accounting Officer)
/s/ * Director March 27, 1997
- ----------------------------------------------------
HENRY N. CHRISTIANSEN
/s/ * Director March 27, 1997
- ----------------------------------------------------
PETER O. CRISP
/s/ * Director March 27, 1997
- ----------------------------------------------------
IVAN E. SUTHERLAND
/s/ * Director March 27, 1997
- ----------------------------------------------------
JOHN E. WARNOCK
By: /s/ * March 27, 1997
-------------------------------------------------
GARY E. MEREDITH
Attorney-in-Fact
-42-
-48-