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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 ](MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year ended December
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
[ ]2001
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission file number
FOR THE TRANSITION PERIOD FROM ________________ TO ________________
COMMISSION FILE NUMBER 0-8771
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EVANS & SUTHERLAND
COMPUTER CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
Utah 87-0278175
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
600 Komas Drive, Salt Lake City, Utah
UTAH 87-0278175
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
600 KOMAS DRIVE, SALT LAKE CITY, UTAH 84108
(Address of Principal Executive (Zip Code)
Offices)
(Zip Code)
Registrant's telephone number, including area code: (801) 588-1000
Securities registered pursuant to Section 12(b) of the Act:
"None""NONE"
Securities registered pursuant to Section 12(g) of the Act:
Title of Class
------------------------------------------------------------
Common Stock,TITLE OF CLASS
COMMON STOCK, $.20 par valuePAR VALUE
6% Convertible Debentures DueCONVERTIBLE DEBENTURES DUE 2012
Preferred Stock Purchase RightsPREFERRED STOCK PURCHASE RIGHTS
------------------------------
Indicate by check mark whether the 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 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. [ ]/ /
The aggregate market value of the voting and non-voting Common Stock held by
non-affiliates of the registrant as of March 2, 20011, 2002 was approximately
$23,640,000,$33,242,000, based on the closing market price of the Common Stock on such date,
as reported by The Nasdaq Stock Market.
The number of shares of the registrant's Common Stock outstanding at
March 2, 20011, 2002 was 9,434,537.10,398,314.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 20012002 Annual Meeting of Shareholders
to be held on May 24, 200116, 2002 are incorporated by reference into Part III hereof.
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2
EVANS & SUTHERLAND COMPUTER CORPORATION
FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 20002001
PART I
PART I
Item 1. Business...............................................................................5Business 5
Item 2. Properties............................................................................13Properties 15
Item 3. Legal Proceedings.....................................................................13Proceedings 15
Item 4. Submission of Matters to a Vote of Security Holders...................................14Holders 17
PART II
Item 5. Market For Registrant's Common Equity and Related
Stockholder Matters..........................................................16Matters 19
Item 6. Selected Consolidated Financial Data..................................................17Data 20
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................................................19Operations 22
Item 7A. Quantitative and Qualitative Disclosures About Market Risk............................34Risk 42
Item 8. Financial Statements and Supplementary Data...........................................35Data 43
Report of Management................................................................36Management 44
Report of Independent Accountants...................................................36Auditors 44
Consolidated Balance Sheets.........................................................37Sheets 45
Consolidated Statements of Operations...............................................38Operations 46
Consolidated Statements of Comprehensive Loss.......................................39Loss 47
Consolidated Statements of Stockholders' Equity.....................................40Equity 48
Consolidated Statements of Cash Flows...............................................41Flows 49
Notes to Consolidated Financial Statements..........................................42Statements 50
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure...............................................65Disclosure 73
PART III
Item 10. Directors and Executive Officers of the Registrant...................................65Registrant 73
Item 11. Executive Compensation...............................................................65Compensation 73
Item 12. Security Ownership of Certain Beneficial Owners and
Management.......................65Management and Related Stockholder Matters 73
Item 13. Certain Relationships and Related Transactions.......................................65Transactions 73
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K.....................668-K 74
Signatures .....................................................................................7382
3
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4
FORM 10-K
PART I
ITEM 1. BUSINESS
GENERAL
Evans & Sutherland Computer Corporation ("Evans & Sutherland," "E&S(R),&S," "we,"
"us," or the "Company""our") was incorporated in the State of Utah on May 10, 1968. The Company is anAn
established high-technology company, with outstanding
computer graphics technology andE&S is a worldwide presenceleader in high-performance 3Dproviding
visual system solutions for simulation. E&S visual systems are used in military
and commercial training simulators, planetariums and interactive domed theaters,
as well as engineering and other applications. E&S is unique among visual
simulation companies in that it offers a complete range of solutions from low
cost, PC-based products to the most advanced systems in the world. All E&S
products are backed by unrivaled customer service and support, ensuring
customers low life-cycle cost and the best value in visual simulation.
In addition,E&S's principal offices are located at 600 Komas Drive, Salt Lake City, Utah
84108, and its telephone number is (801) 588-1000. E&S's home page on the
Internet is www.es.com. You can learn more about E&S appliesby reviewing SEC filings on
the E&S web site. The SEC also maintains a web site at www.sec.gov that contains
reports, proxy statements and other information regarding SEC registrants,
including E&S. E&S makes its core technologyweb site content available for information purposes
only. It should not be relied upon for investment purposes, nor is it
incorporated by reference into higher-growth personal computer (PC) products for both simulation and
workstations.this Form 10-K.
During 2000, the Company's2001, our core computer graphics technology was shared among three
business groups:
(1) Simulation Group, which produces a full range of image generators,
software, databases, and display systems for simulation markets;military and commercial
simulation;
(2) REALimage(R)REALimage Solutions Group, which providedprovides graphics acceleration
products totechnology for PC-based simulation, the professional digital content
creation (DCC) market, and now focuses on integrating video processing with graphics processing
in products that will support content creationtechnology for animation,
broadcasting, and netcasting graphic applications; and
(3) Applications Group, which applies the Company'sleverages our core technologies and applies
them to other growth markets.
Unlessmarkets, such as digital theaters and visualization
software for real estate development applications.
RESTRUCTURING
Early in 2001, we announced our intention to spin out or sell our REALimage
Solutions Group. In the context otherwise requires, as used herein,third quarter of 2001, E&S sold the term
"Company" refersREALimage Group to
Evans & Sutherland Computer CorporationReal Vision, Inc., a Japanese company that has been a partner with E&S in the
development of technology for professional video applications. The sale was for
a maximum value of $12 million, consisting of cash of $6.3 million plus future
royalties, on a when and its
subsidiaries. The Company's headquarters are located at 600 Komas Drive,if earned basis, of up to $6 million for REALimage
technology, other assets, and the performance of certain development support
during a seven-month transition period leading to closing the transaction in
April 2002. Real Vision has indicated it will continue the development of the
technology, and E&S is maintaining a technical staff to support Real Vision in
Salt Lake City Utah 84108, and its telephone number is (801) 588-1000. The Company's
web page onduring the worldwide web is http://www.es.com.
RECENT DEVELOPMENTS
On July 22, 1998, Intel Corporation ("Intel") purchased 901,408
sharestransition period. Shortly after the sale of the
Company's preferred stock plus a warrant to purchase an additional
378,462 sharesREALimage Group, E&S closed its offices in Seattle, Washington, and San Jose,
California.
Throughout 2001, we had been actively seeking sale or spin-off opportunities
for our RAPIDsite-TM- visualization solutions business which is part of the
preferred stock at an exercise priceApplications Group. The general economic downturn made it difficult to sell this
business. In December, we decided to discontinue the RAPIDsite business and
incorporate its technology into the core simulation business.
In the third quarter of $33.28125 per
share for approximately $24.0 million. In March 2001, Intel convertedwe initiated a restructuring plan focused on
reducing the 901,408 sharesoperating cost structure of E&S. As part of the Company's preferred stock into 901,408 sharesplan, we recorded a
charge of $2.1 million relating to a reduction
5
in force of approximately 80 employees. In the fourth quarter of 2001, we
extended the restructuring plan initiated in the third quarter. As part of the
Company's common stock.plan, we recorded a charge of $0.7 million relating to a reduction in force of
approximately 12 employees. We estimate that this restructuring plan will reduce
expenses by $8.2 million per year going forward. As of December 31, 2001, we had
paid $1.9 million in severance benefits. The majority of the remaining benefits
will be paid out over the next two quarters. The charge was recorded in
accordance with Emerging Issues Task Force Issue 94-03 "Liability Recognition
for Certain Employee Termination Benefits and Other Costs to Exit (Including
Certain Cost Incurred in a Restructuring)" and Staff Accounting Bulletin
No. 100, "Restructuring and Impairment Charges".
In March 2001, Intelthe third quarter of 1999, E&S initiated a restructuring plan focused on
reducing the operating cost structure of its REALimage Solutions Group. As part
of the plan, E&S recorded a charge of $1.5 million relating to 28 employee
terminations, including 17 employees in San Jose and 11 employees in Salt Lake
City. The charge was recorded in accordance with Emerging Issues Task Force
Issue 94-03, "Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit (Including Certain Costs Incurred in a Restructuring)."
During 2000, after all employee severance costs were incurred, E&S reversed
$0.8 million of the Company amended the
preferred stock and warrant purchase agreement to terminate certain contractual
rights of Intel, including registration rights, board and committee observation
rights, right of first refusal, right of participation, right of maintenance,
standstill agreement, and right to require the Company to repurchase the
preferred stock in the event of any transaction qualifyingrestructuring charge as a specific
corporate event.result of certain employees being
transferred within E&S rather than being terminated and estimated severance and
related charges being lower than expected for the terminated employees.
FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS
This annual report, including all documents incorporated herein by
reference, includes certain "forward-looking statements" within the meaning of
that term in Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Exchange Act of 1934, as amended, including, among others,
those statements preceded by, followed by or including the words "estimates,"
"believes," "expects," "anticipates," "plans," "projects," and similar
expressions.
These forward-looking statements include, projectionsbut are not limited to, the
following statements:
- the successful execution of growththe Big 6 programs by the end of 2002;
- we will generate $5 million of cash per quarter and will be profitable in
the military and commercial airline training simulator market; pilot training
utilizing Harmony will commence at four additional training sites during 2001;
the usesecond half of digital video to create, edit, and distribute rich visual content is
a market ready for growth;2002;
- projections of sales and net income and issues that may affect sales or
net income;
- projections of capital expenditures;
- plans for future operations;
- financing needs or plans;
- plans relating to the Company'sour products and services;
- Simulation Group will experience growth in its markets as simulation
training increases in value as an alternative to other training methods,
and as simulation training technology and cost-effectiveness improve;
- additional enhancements to iNTegrator will expand its functionality and
help secure E&S's dominant position in its main target markets, both
commercial and military simulation;
- E&S is able to compete effectively in the simulation market and will
continue to be able to do so in the foreseeable future;
- approximately two-third's of Simulation Group's 2001 backlog will be
converted to sales in 2002 and replaced with new orders;
6
- the Applications Group's new product will be launched in the first half of
2002;
- our properties are suitable for our immediate needs;
- total research and development spending will be lower in 2002 than in
2001;
- E&S will ultimately prevail in the litigation with Lockheed Martin
Corporation;
- E&S will not be liable for any further material liquidated damages and
late delivery penalties during 2002;
- existing cash, cash equivalents, borrowings available under E&S's various
borrowing facilities, other asset-related cash sources and expected cash
from future operations will be sufficient to meet E&S's anticipated
working capital needs, routine capital expenditures and current debt
service obligations for the next twelve months;
- the guarantees of E&S issued in connection with the services of our joint
venture entity, Quest Flight Training Ltd., to the UK Ministry of Defence
or other parties will not be called upon for payment or performance;
- revenue is expected to contract by 10% from 2001 to 2002; and
- assumptions relating to the foregoing.
Forward-looking statements are inherently subject to risks and
uncertainties, some of which cannot be predicted or quantified. Future events
and actual results could differ materially from
5
those set forth in, contemplated
by, or underlying the forward-looking information. Our actual results could
differ materially from these forward-looking statements. In addition to the
other risks described in the "Factors That May Affect Future Results" discussion
under Item 7 - Management's7--Management's Discussion and Analysis of Financial Condition and
Results of Operations in Part
IIon page 35 of this annual report, important factors to
consider in evaluating such forward-looking statements include risk of product
demand, market acceptance, economic conditions, competitive products and
pricing, difficulties in product development, product delays, commercialization
and failuretechnology, and E&S's ability to meet certain milestones or delivery
requirements.maintain credit facilities to support its
operations on favorable and acceptable terms. In light of these risks and
uncertainties, there can be no assurance that the events contemplated by the
forward-looking statements contained in this annual report will, in fact, occur.
REPORTABLE SEGMENTS
The Company'sDuring 2001, our business units have beenwere aggregated into the following three
reportable segments: the Simulation Group, the REALimage Solutions Group, and
the Applications Group. The three groups benefit from shared core graphics
technology, and each group's new products are based on open Intel and Microsoft
hardware and software standards. Each reportable segment markets its products to
a worldwide customer base. As described above under the heading "Restructuring",
we sold the REALimage Solutions Group and discontinued the RAPIDsite business in
the Applications Group. Financial information by reportable segment for each of
the three years ended December 31, 20002001 is included in note 19Note 18 of the Notes to
Consolidated Financial Statements included in Part II of this annual report.
Simulation Group
- ----------------SIMULATION GROUP
E&S is an industry leader in providing visual systems to both government and
commercial simulation customerscustomers. The Simulation Group provides more than 30% of
the worldwide market for government and military applications and commercial
airline training simulators worldwide.simulators. The Companygroup anticipates growth in these marketplacesmarkets as
simulation training is usedincreases in place ofvalue as an alternative to other training
methods, and as simulation training technology and cost-effectiveness improve.
7
Throughout 2000, the Company2001, we continued development of its
Integrator(R)our
iNTegrator-Registered Trademark- software product, which provides the real-time
control and modeling tools for the Symphony(TM)Symphony-TM- family of hardware platforms.
Performance optimizations and new functionality have continuously been added
with each new software release to meet existing contract requirements and to
increase the product performance. The Company plans further improvements to IntegratorWhile the majority of iNTegrator development
is complete, some additional enhancements are planned in 2001,2002, which management
believes will expand its functionality and help secure the Company's
favorableour dominant position in
itsour main target markets, both commercial and military.
In addition to continued development of IntegratoriNTegrator software, during 2000we completed
the Company made enhancements of itsmajor development efforts on our most advanced image generator product,
Harmony(R).
During the fourth quarterHarmony-Registered Trademark-. All major Harmony programs are now in training or
in final stages of 2000, the first Harmony system began
training pilots at the United Kingdom's Defence Helicopter Flying School at RAF
Shawbury. The Company expects that pilot training utilizing Harmony will
commence at four additional training sites during 2001.
Productscompletion and acceptance.
PRODUCTS & MarketsMARKETS
The Simulation Group provides a broadcomplete line of visual systems for flight
and ground training and related services to the United States and international
armed forces, NASA, commercial airlines, and aerospace companies. E&S remains an
industry leader in visual systems sales to variousmany U.S. government agencies and
more than 20 foreign governments for training military vehicle operators. The
Simulation Group is also a leading independent supplier of visual systems for
commercial airline flight simulators. This group provides over 30% of the visual
systems installed in full-flight training simulators for commercial airlines,
training centers, simulator manufacturers, and aircraft manufacturers.
The group's visual systems create dynamic, high-quality, interactive, out-the-window
scenes that realistically simulate the viewwhat vehicle operators see when
performing tasks under actual
operating conditions. The visual systems are an integral part of full mission
simulators, which incorporate a number of other components, including cockpits
or vehicle cabs and large hydraulic motion systems.
6
Generally, the Simulation Group's visual systems products consist of the following six
major components.components listed below. These components are available as subsystems, but
are typically sold together as a complete visual-systemvisual system solution delivered to an
end user or prime contractor.
(1) Image generators (IGs) create computer-generated real-time images and
send these images to display devices, such as projectors or computer
monitors. The group's primary IG offerings include the Symphony family of
products from Harmony on the high end to OpenGL(R),OpenGL, PC-based simFUSIONsimFUSION-TM-
at the low end, and its legacy ESIG(R)ESIG-Registered Trademark- products, which
continue to experienceshow strong sales. E&S offers a complete, high-to-low family
of IGs that can use the same software and databases. Harmony is the Company'sour
flagship for highest performance, Ensemble(TM)Ensemble-TM- is the first PC-based true
image generator offering deterministic performance and
simulation-specific functionality, and simFUSION(TM)simFUSION is the first OpenGL
PC-based image generation systemhardware platform targeted at low-cost applications. E&S is the
only visual system provider offering a complete line of compatible and
scalable products for real-time simulation and visualization.
(2) Display systems consist of projectors, display screens, computer
monitors, and specialized optics. These display systems are offered in a
broad range of configurations, from onboard instrument displays to domes
offering a 360-degree field of view, depending on the applications.
(3) Databases ofdepicting synthetic environments are offered as options or as
custom creations.solutions. The group provides database development as well as
database development tools such as IntegratoriNTegrator and
EaSIEST(R).EaSIEST-Registered Trademark-. Databases developed using IntegratoriNTegrator are a
key element of the Symphony product family. These can be run on a full
range of image generators
from the PC-based simFUSION to the high-end Harmony systems.generators.
(4) Simulation of sensor imagery such as radar, infrared, and night vision
goggles (NVG) is often provided with the visual systems for
high-performance fixed and rotary wing aircraft. E&S develops and
manufactures a variety of hardware and software products to achieve
realistic
8
sensor simulation, including the Vanguard(TM)Vanguard-Registered Trademark- radar
image generator, infrared post processors,postprocessors, and customized systems for
either simulated or stimulated NVG solutions.
(5) System integration and installation services are offered in support of
the total simulator system. The Company hasWe have the capability to act as the main
prime contractor for large commercial and military contracts requiring
total systems integration.
(6) A full range of customer support services is offered to prime
contractors, system integrators, and military or commercial end users.
The Company's Encore program is an innovative new approachService and Support product offerings include customized support
packages, called Encore(SM), that provide complete maintenance, spares,
and round-the-clock technical support; SimTech Training, which provides
training to customer
servicethe customers' simulation technicians and support. Encore combines the latest advancements in
manufacturingengineers; and
interactive communications technology to offerComputer-Based Training.
E&S customersalso develops complete simulation solutions for specific training
applications. In 2001, we announced two new products, the Mission Command
Trainer, or MCT-TM-, and the Air Traffic Control Trainer, or ATCT-TM-. The MCT
is a comprehensive, flexible,low-cost tactics simulator that provides realistic command training,
mission planning, and cost-effective customer
servicemission rehearsal in a virtual environment against an
intelligent virtual enemy, all in the safety and support program. Encore combines web-based technologysecurity of a classroom.
Developed in a partnership with new physical distribution locations to deliver timely support as
efficiently as possible. Encore customers have immediate access to
service information through customized, secure, private web sites
providing product newsMicroNav, Ltd., one of the world's leading
producers of air traffic control training software, the ATCT is a complete,
advanced 3D tower simulator for licensing, refresher training, and announcements, documentation, and online
spares and repairs tracking. In addition, each customer has a
single-point E&S contact who can be reached through the web site to
ensure continuity throughout the procurement, installation, operation,
and maintenance processes.conversion
training.
The Simulation Group's products are marketed worldwide by the
CompanyE&S and qualified
distributors. Products and services are sold directly to end users by E&S as a
prime contractor, through simulator prime contractors with E&S acting as a
subcontractor, and through system OEMs. E&S continues to form both domestic and
international alliances with aerospace and simulation companies that dominate
their respective market segments. Such strategic alliances have proved to be an
effective method for accessing specific markets. In addition, the Company haswe have OEM and
value added resellerValue Added Reseller agreements with a
number ofseveral major distributors in Europe and
Asia.
7
Competitive ConditionsCOMPETITIVE CONDITIONS
Primary competitive factors for the Simulation Group's products are
performance, price, service, and product availability. Because competitors are
constantly striving to improve their products, the group must ensure that it
continues to offer products with superiorthe best performance at a competitive price.
Prime contractors, including Lockheed Martin, Flight Safety International (FSI),
Thales Training & Simulation Ltd., and CAE Electronics, Ltd. (CAE), offer
competing visual systems in the simulation market. The Company believes it isWe believe we are able to
compete effectively in this environment and will continue to be able to do so in
the foreseeable future. In 2000,2001, the group was awarded several highly
competitive orders against FSI and CAE, the principal competitors in the
commercial simulation market. In the military simulation market, the group
competes primarily with Silicon Graphics, Inc. and CAE. In the low-cost,
PC-based market, the Company'sour simFUSION product competes against companies producingthat focus on
PC simulation using graphics accelerator cards, such as Quantum 3D.
BacklogIn February 2001, a team of industry leaders led by Evans & Sutherland was
selected by the U.S. Army Simulation, Training, and Instrumentation Command
(STRICOM) to receive an Indefinite Delivery/Indefinite Quantity (ID/IQ)
contract. Under the terms of the contract, the E&S team is prequalified to bid
as a prime contractor on STRICOM contracts valued at up to $4 billion over the
next eight years.
A team comprised of E&S and others is one of 17 prime contractor teams
selected by STRICOM for the Virtual Domain, one of four business domains that
include Constructive, Live, and Test-Instrumentation. Core members of the E&S
team include Cubic Applications, Inc., CACI, J.F. Taylor, Inc., Raydon, and MTI.
The team also includes 13 subcontractors with extensive backgrounds in military
simulation.
9
E&S is also a member of two contractor teams selected by STRICOM last fall
for the Constructive Domain. These key contract awards position Evans &
Sutherland to provide its state-of-the-art visual systems support, including
image generation, display systems, and database development, for future STRICOM
programs.
BACKLOG
The Simulation Group's backlog was $104.2 million on December 31, 2001,
compared with $134.6 million on December 31, 2000 compared with $149.1 million on December 31, 1999.2000. It is anticipated that
mostapproximately two-thirds of the 20002001 backlog will be converted to sales in 2001 and replaced with
new orders.
Business Subject to Government Contract Renegotiation2002.
BUSINESS SUBJECT TO GOVERNMENT CONTRACT RENEGOTIATION
A significant portion of the Simulation Group's business is dependent on
contracts and subcontracts associated with government business. In
the normal courseThe U.S.
Government, and other governments, may terminate any of this business, theour government may renegotiate profits or
terminate contracts
or subcontracts. Management does not believe that such
renegotiations or terminations are likely. However, if such renegotiations or
terminationsand, in general, subcontracts, at their convenience as well as for default based
on performance. If any of the Company'sour government contracts were to occur, such eventsbe terminated for
convenience, we generally would be entitled to receive payment for work
completed and allowable termination or cancellation costs.
Upon termination for convenience of a fixed-price type contract, we normally
are entitled, to the extent of available funding, to receive the purchase price
for delivered items, reimbursement for allowable costs for work-in-progress and
an allowance for profit on the contract or adjustment for loss if completion of
performance would have resulted in a material adverse effectloss. Upon termination for convenience of a
cost reimbursement contract, we normally are entitled, to the extent of
available funding, to reimbursement of allowable costs plus a portion of the
fee. The amount of the fee recovered, if any, is related to the portion of the
work accomplished prior to termination and is determined by negotiation.
U.S. government contracts also are conditioned upon the continuing
availability of Congressional appropriations. Long-term government contracts and
related orders are subject to cancellation if appropriations for subsequent
performance periods become unavailable. Congress usually appropriates funds on a
fiscal-year basis even though contract performance may extend over many years.
Consequently, at the Company's consolidated financial condition,
liquidity, or resultsoutset of operations.a program, the contract is usually partially
funded, and Congress annually determines if additional funds are to be
appropriated to the contract.
REALIMAGE SOLUTIONS GROUP
The REALimage Solutions Group - -------------------------
The goalwas sold to Japan-based Real Vision, Inc., in
September 2001. As part of Real Vision, the REALimage Solutions Groupgroup is continuing to integratedevelop the
"Studio-on-a-Chip" technology, which brings together real-time graphics and
video in a unique and effective way to support all aspects of visual content
creation for broadcasting and netcasting applications. The Company believes that the usesale was for a
maximum value of digital video$12 million, consisting of cash of $6.3 million plus future
royalties, on a when and if earned basis, up to create, edit, and distribute
rich visual content is a market ready$6 million for growth. The film industry's adoption
of high-definition (HD), the FCC's recent reinforcement of its mandated
implementation of HD broadcasting standards by 2006,REALimage
technology, other assets, and the emerging streaming
video phenomena over networks, all causeperformance of certain development support
during a seven-month transition period leading to closing the Companytransaction in
April 2002. Real Vision has indicated it will continue the development of the
technology, and E&S is maintaining a technical staff to anticipate thatsupport Real Vision in
Salt Lake City during the demand for professional video production equipment will growtransition period. Shortly after the sale of the
REALimage Group, E&S closed its offices in the future.
Similarly, the rate of spending on network infrastructureSeattle, Washington, and San Jose,
California.
PRODUCTS & MARKETS
Prior to distribute
video-centric services over wired and wireless networks is also expected to
grow.
The new REALimage chipset will be focused on providing lower-cost
microelectronics-based content creation, editing, and delivery systems. The
Company intends for REALimage to become a leading supplier of advanced video
processors used to enable a new wave of markets and applications that depend on
the creation and delivery of high-quality video content.
The Company is currently evaluating various business arrangements of
its REALimage Solutions Group in order to enhance the value of this business
segment, including, but not limited to, transferring the assets of2002, the REALimage Solutions Group to a wholly-owned subsidiarydeveloped and seeking outside investment to
assist with the development of the REALimage Solutions Group's products.
Products & Markets
The REALimage Solutions Group develops and sellssold graphics
chips and graphics subsystems for professional PC workstations. Early in 2000,
the group's strategic focus changed from development and manufacture of graphics
accelerator cards for professional digital content creation customers to
development of the next generation REALimage chip, the REALimageRI 5000. This product,chip,
referred to
10
as "studio-on-a-chip""Studio-on-a-Chip", brings together both graphics and video processing
technology on a single chip for digital video content creation and
post-production. This product represents the first of a new class of innovative
semiconductor processors and software that will enable a completely new
generation of advanced video processing systems.
8
Development work on the REALimage 5000 products is in progress but
further engineering and design is required. The Company has established
agreements with several OEMs for REALimage 5000 "design-ins" for their next
product releases.
REALimage Solutions Group markets directly to OEM customers, working
to ensure that "studio-on-a- chip" products are an integral part of key products
developed for professional video creation, editing, and media server
applications. Typical sales cycles can require from 7 to 15 months to obtain a
design-in, secure an initial order, and begin revenue-producing shipments.
However, once designed into an OEM's system, multi-year follow-on orders are
likely. The first target market is vertical video system OEMs.
The REALimage Solutions Group also benefits from the advanced
technology developed in the Company's Simulation Group, and then flows this
technology back to the simulation business for use in PC-based visual systems,
such as Ensemble and simFUSION.
The group also began to establish a new application and market for REALimage
technology in 2000 when REALimage chips were selected by Honeywell for use in
cockpit navigation systems for military aircraft and business jets.
The
Company is pursuing additional opportunities for REALimage in cockpit displays.
Competitive Conditions
The group's future success will depend on completionCOMPETITIVE CONDITIONS
Due to the sale of the REALimage Solutions Group to Real Vision, Inc. of
Japan, we do not compete in this industry or market any longer.
BACKLOG
Because of the shift in strategic focus, the in-process development of the
new RI 5000 chipset, and achieving design-ins and partnerships with board
manufacturers. The computer industry is highly competitive and is known for
rapid technological advances. These advances result in frequent new product
introductions, short product life cycles and increased new product capabilities,
typically representing significant price/performance improvements. The principal
competitive factors are product features, price, performance, product quality
and reliability, customer support and product availability. The principal
competitors for the newsale of REALimage, chipset are expectedthe group has no backlog as of
December 31, 2001, compared to be Pinnacle Systems
and Matrox Graphics.
Backlog
The REALimage Solutions Group's backlog was $0.7 million onas of December 31, 2000 compared with $0.2 million on December 31, 1999. The group expects that
the 2000 backlog will be converted to sales in 2001.
Applications Group
- ------------------2000.
APPLICATIONS GROUP
The Applications Group is composed of synergistic businesses that use E&S
core technology in growth markets. The group's products are applications that
leverage theE&S's technology of the Company's Simulation and REALimage Solutions
groups and apply them to other growth markets. ProductsAfter these
applications have been developed and produced, our strategy is to spin them off
or sell them to companies involved in complementary businesses.
PRODUCTS & MarketsMARKETS
The Applications Group's digital theater products include hardware,
software, and content for both the entertainment and educational marketplaces.
Digital theater focuses on immersive all-dome theater applications combining
colorful, digitally produced imagery, full-spectrum audio, and audience-participationaudience-
participation capability. The group provides turnkey solutions incorporating
visual systems and sub-systemssubsystems from the Simulation and REALimage
Solutions groups.Group. E&S integrates these
systems with projection equipment, audio components, and audience-participation
systems from other suppliers. Products include Digistar(R),Digistar-Registered Trademark-
II, a calligraphic star projection system designed to compete with analog star
projectors in planetariums, and StarRider(R)StarRider-Registered Trademark-, a full-color,
domed theater experience available in interactive or video playback formats. The
groupApplications Group is a leading supplier of digital display systems in the
planetarium marketplace. In addition to projection and theater systems, the
groupApplications Group develops and markets show content for planetariums and domed
theaters.
9
In 2000,2001, the Applications Group achieved several important milestones. The
Applications Group launched its second interactive show called Crack the Cosmic
Code. The show debuted at the StarRider theater at Exploration Place in Wichita,
Kansas. The Applications Group continued its development of its new product,
which will be launched in the first half of 2002, as well as several new domed
theater shows, which are available to theaters around the world for licensing.
In 2001, the Applications Group continued to expand the market for E&S
RAPIDsite(TM).RAPIDsite-TM-. E&S RAPIDsite is a photo-realisticphotorealistic visualization tool designed for
use by real-estate developers, consulting engineers, architects, and municipal
planners involved with all types of land development projects. RAPIDsite
features fast 3D-model construction, accelerated graphics rendering performance
and easy-to-use interactive exploration of a proposed development on a Windows
NT computer with an Open GLOpenGL graphics accelerator.
During 2000,Throughout 2001, we had been actively seeking sale or spin-off opportunities
for our RAPIDsite-TM- visualization solutions business which is part of the
Applications Group. The general economic
11
downturn made it difficult to sell this business. In December, we decided to
discontinue the RAPIDsite product line was expanded to allow customers to purchase a variety of
software-only packages, bundled hardware and software, or complete solutions
that include the visualization, computer hardware and software, multimedia
presentation to be used by customers for marketing, and tailored web pages. The
Company is currently evaluating various business arrangements of its E&S
RAPIDsite business in order to enhance the value of this business, including,
but not limited to, transferring the assets of this business to a wholly-owned
subsidiary and seeking outside investment to assist with the development of the
E&S RAPIDsite products.
The Applications Group sells its products directly to end-users
using E&S salespeople, OEM representatives and distributors.
Competitive Conditionsbusiness.
COMPETITIVE CONDITIONS
Primary competitive factors for the Applications Group's products are
functionality, performance, price, and access to customers and distribution
channels. The Company'sOur digital theater products compete with traditional
optical-mechanical products and digital display systems offered by Minolta
Planetarium Co. Ltd., GoTo Optical Mfg. Co., Carl Zeiss Inc., Spitz, Inc. and,
Trimension, Inc. The competitors for E&S RAPIDsite are MultiGen-Paradigm, a
division of Computer Associates and Discreet, a division of Autodesk,Sky-Skan, Inc.
BacklogBACKLOG
The Applications Group's backlog was $2.7 million December 31, 2001,
compared with $7.4 million on December 31, 2000, compared with $7.2 million on December 31, 1999.2000. It is anticipated that most of
the 20002001 backlog will be converted to sales in 2001.2002.
SIGNIFICANT CUSTOMERS
Worldwide customers using E&S products include U.S. and international armed
forces, NASA, aerospace companies, most major airlines, PC
manufacturers, film and video studios, laboratories, museums,
planetariums, and science centers.
Sales to the U.S. government, either directly or indirectly through sales to
prime contractors or subcontractors, accounted for $69.5 million or 48% of total
sales, $66.7 million or 40% of total sales, and $84.5 million or 42% of total
sales in 2001, 2000, and $70.8 million or 37% of
total sales in 2000, 1999, and 1998, respectively. Sales to the United Kingdom
Ministry of Defence ("UK MOD"),Defense, either directly or indirectly through sales to prime
contractors or subcontractors, accounted for $13.6 million or 9% of total sales,
$22.3 million or 13% of total
sales,and $33.8 million or 17% of total sales in 2001, 2000 and
$32.11999, respectively.
In 2001, sales to Thales Training & Simulation Ltd. totaled $23.9 million or
17%16.4% of total sales in 2000, 1999of which 57% related to U.S. government and 1998, respectively.United Kingdom
Ministry of Defence contracts and sales to The Boeing Company totaled
$15.1 million or 10% of total sales of which 100% related to U.S. government and
United Kingdom Ministry of Defence contracts.
In 2000, sales to Lockheed Martin Corporation ("Lockheed") were $22.5 million or 14% of
total sales, of which 100% related to U.S. government and UK MODUnited Kingdom
Ministry of Defence contracts and sales to Thales Training & Simulation Ltd.
were $19.6 million or 12% of total sales, of which 58% related to UK MODUnited Kingdom
Ministry of Defence contracts.
In 1999, sales to Lockheed Martin Corporation were $35.8 million or 18% of
total sales, of which 100% related to U.S. government and UK MODUnited Kingdom
Ministry of Defence contracts and sales to The Boeing Company
("Boeing") were
$25.4 million or 13% of total sales, of which 100% related to U.S. government
and UK MOD contracts. In 1998, sales to Boeing were
approximately $28.1 million or 15%United Kingdom Ministry of total sales, of which approximately 98%
related to U.S. government and UK MOD contracts and sales to Lockheed were
approximately $22.0 million or 11% of total sales, of which approximately 91%
related to U.S. governmentDefence contracts.
All of the Company'sour sales to significant customers are within the Simulation Group.
10
DEPENDENCE ON SUPPLIERS
Most of the Company'sour current parts and assemblies are readily available through
multiple sources in the open market; however, a limited number are available
only from a single source. In these cases, the Company stockswe stock a substantial inventory, or
obtainsobtain the agreement of the vendor to maintain adequate stock for future
demands, and/or attemptsattempt to develop alternative components or sources where
appropriate.
On June 3, 1999, the Companywe entered into an electronic manufacturing services
agreement with Sanmina Corporation.Corporation (now Sanmina-SCI). The agreement commits the Companyus
to purchase a minimum of $22.0$22 million of electronic products and assemblies from
Sanmina CorporationSanmina-SCI each year until June 3, 2002. If the Company
failswe fail to meet these minimum
purchase levels, subject to adjustment, the Companywe may be required to pay 25 percent of
the
12
difference between the $22.0$22 million and the amount purchased. Management expects thatWe have fully
satisfied the Company will satisfyrequirements of this minimum purchase commitment.contract, which ends in June 2002. Various
alternatives, which include a renewed contract with Sanmina-SCI, are being
evaluated.
SEASONALITY
E&S believes there is no inherent seasonal pattern to any of its business segments.business. Sales
volume fluctuates quarter-to-quarter due to relatively large and nonrecurring
individual sales and customer-established shipping dates.
INTELLECTUAL PROPERTY
E&S owns a number of patents and trademarks and is a licensee under several
others. In the U.S., the Company holds and internationally, we hold active patents that cover many
aspects of the Company'sour graphics technology. Several patent applications are presently
pending in the U.S., Japan, and several European countries. E&S
copyrights chip masks designed by the Companycountries, and has instituted copyright
procedures for these masksother patent
applications are in Japan. E&S does not rely on, and is not dependent
on, patent and/or trademarks ownership to maintain its competitive position. In
the event any or all patents are held to be invalid, management believes the
Company would not suffer significant long-term damage. However,preparation. E&S actively pursues patents on its new
technology. E&S routinely copyrights software, documentation, and chip masks
designed by us and institutes copyright registration for such software,
documentation, and masks when appropriate.
RESEARCH & DEVELOPMENT
E&S considers the timely development and introduction of new products to be
essential to maintaining its competitive position and capitalizing on market
opportunities. The Company'sOur research and development expenses were $28.8 million,
$44.3 million, and $44.4 million in 2001, 2000, and $31.8 million in 2000, 1999, and
1998, respectively. As a
percentage of sales, research and development expenses were 20%, 27%, and 22% in
2001, 2000, and 17% in 2000, 1999, and 1998, respectively. The Company
continuesWe continue to fund substantially all
research and development efforts internally. It is anticipated that high levels
of research and development will be needed to continue to ensure that the Company maintainswe
maintain technical excellence, leadership, and market competitiveness. However,
due to the Company believessale of the REALimage Solutions Group, the discontinuation of the
RAPIDsite business and the reduction of effort required to develop our Harmony
and iNTegrator products, management expects that the total research and
development expenses as a percentagespending necessary to continue the timely development of salesproducts
will declinebe lower in 2002 than in 2001.
INTERNATIONAL SALES
Sales of products known to be ultimately installed outside the United States
are considered international sales by the CompanyE&S and were $49.5 million,
$60.9 million, and $86.7 million in 2001, 2000, and $84.9 million in 2000, 1999, and 1998, respectively.
International sales represented 34%, 36%, 43% and 44%43% of total sales in 2001, 2000,
1999
and 1998,1999, respectively. For additional information, see note 20Note 19 of Notes to
Consolidated Financial Statements included in Part II of this annual report.
EMPLOYEES
As of March 2, 2001,1, 2002, Evans & Sutherland and its subsidiaries employed a
total of 724 persons compared to 847 persons. The Company believes itsemployees as of March 2, 2001. We believe
our relations with itsour employees are good. None of the Company'sour employees areis subject to
collective bargaining agreements.
11
ENVIRONMENTAL STANDARDS
The Company believes itsWe believe our facilities and operations are within standards fully
acceptable to the Environmental Protection Agency and that all facilities and
procedures are in accordance with environmental rules and regulations, and
international, federal, state, and local laws.
13
STRATEGIC RELATIONSHIPRELATIONSHIPS
In October 2001, we announced an agreement with NVIDIA-Registered Trademark-
Corporation. As part of this agreement, NVIDIA Corporation acquired certain key
3D-graphics patents from E&S and the companies agreed to a broad cross-license
of technologies.
This agreement with NVIDIA allows E&S to leverage its general graphics
technology into high volume markets, while adding new capabilities including
NVIDIA's programmable Shader technology to E&S's base of unique technology and
patents for the simulation industry.
During the fourth quarter of 2001, E&S entered into a multiyear agreement
with graphics technology leader ATI Technologies Inc., under which ATI will
provide graphics accelerator chips for our next-generation PC-based visual
systems. ATI chips will replace REALimage chips in E&S's next-generation
Ensemble and simFUSION image generators.
On July 22, 1998, Intel purchased 901,408 shares of the Company'sE&S's preferred stock
plus a warrant to purchase an additional 378,462 shares of the preferred stock
at an exercise price of $33.28125 per share for approximately $24.0 million. In
March 2001, Intel converted the 901,408 shares of the
Company'sE&S's preferred stock into
901,408 shares of the Company'sE&S's common stock. In March 2001, Intel and the CompanyE&S amended the
preferred stock and warrant purchase agreement to terminate certain contractual
rights of Intel, including registration rights, board and committee observation
rights, right of first refusal, right of participation, right of maintenance,
standstill agreement, and right to require the CompanyE&S to repurchase the preferred stock
in the event of any transaction qualifying as a specific corporate event. The CompanyE&S
also entered into an agreement to accelerate development of high-end graphics
and video subsystems for Intel-based workstations in July 1998.
ACQUISITIONS AND DISPOSITIONS
Early in 2001, we announced our intention to spin out or sell our REALimage
Solutions Group. In the third quarter of 2001, E&S sold the REALimage Solutions
Group to Real Vision, Inc., a Japanese company that has been a partner with E&S
in the development of technology for professional video applications. The sale
was for a maximum value of $12 million, consisting of cash of $6.3 million plus
future royalties, on a when and if earned basis, up to $6 million for REALimage
technology, other assets, and the performance of certain development support
during a seven-month transition period leading to closing the transaction in
April 2002. Real Vision has indicated it will continue the development of the
technology, and E&S is maintaining a technical staff to support Real Vision in
Salt Lake City during the transition period. As part of the sale of the
REALimage Group, E&S closed its offices in Seattle, Washington, and San Jose,
California.
In December 2000, the Companywe completed the divestiture of itsour German subsidiary via
a management-led buyout and recorded a loss of $0.3 million. The former
subsidiary, which was called Evans & Sutherland Computer GmbH, now operates
under a new name. The divested company has no remaining connection with E&S. The CompanyWe
will continue to operate in Germany and throughout Europe under itsour own name,
providing marketing, sales, and support for the Company'sour growing visual systems business
and traditional customer base.
On March 28, 2000, the Companywe sold certain assets of its
Applicationsour Application Group relating
to digital video products to RT-SET Real Time Synthesized Entertainment
Technology Ltd. and its subsidiary, RT-SET America Inc., for $1.4 million in
cash, common stock of RT-SET Real Time Synthesized Entertainment
Technology Ltd. valued at approximately $1.0 million, and the assumption of
certain liabilities. On June 15, 2000, the Companywe received additional common stock of
RT-SET Real Time Synthesized entertainmentEntertainment Technology Ltd. valued at
$1.5 million related to the successful development of a product included in the
purchased assets.
14
On June 3, 1999, the Companywe sold certain of itsour manufacturing capital assets and
inventory forof $6.0 million to Sanmina Corporation (now Sanmina-SCI) as part of
the Company'sour efforts to outsource the production of certain electronic products and
assemblies. In addition, the Companywe entered into an electronic manufacturing services
agreement with Sanmina Corporation.Sanmina-SCI. The electronic manufacturing services agreement
commits the Companyus to purchase a minimum of $22.0 million of electronic products and
assemblies from Sanmina CorporationSanmina-SCI each year until June 3, 2002. If the Company failswe fail to meet
these minimum purchase levels, subject to adjustment, the Companywe may be required to pay
25% of the difference between the $22.0 million and the amount purchased. We
have fully satisfied the requirements of this contract, which ends in
June 2002. Various alternatives, which include a renewed contract with
Sanmina-SCI, are being evaluated.
On June 26, 1998, the Company,E&S, through its wholly-owned subsidiary, Evans &
Sutherland Graphics Corporation ("ESGC"), acquired all of the outstanding stock
of AccelGraphics, Inc. ("AGI") to expand the Company'sE&S's workstation graphics development,
integration and distribution within the workstation graphics marketplace. To
acquire AGI, the CompanyE&S paid approximately $23.7 million in cash and 1,109,303 shares
of the Company'sE&S's common stock, which was valued at $25.7 million. In addition, the CompanyE&S
converted all outstanding AGI options into options to purchase approximately
351,000 shares of common stock of the CompanyE&S with a fair value of $3.4 million and
incurred transaction costs of approximately $1.1 million.
To further expand the Company'sE&S's presence within the workstation graphics
marketplace, on June 26, 1998, the CompanyE&S acquired the assets and assumed certain
liabilities of Silicon Reality, Inc. ("SRI"), a designer and developer of 3D
graphics hardware and software products for the PC workstation marketplace. The CompanyE&S
paid approximately $1.2 million and incurred transaction costs of approximately
$250,000.
12
ITEM 2. PROPERTIES
Evans & Sutherland's principal executive, engineering, manufacturing and
operations facilities for each of its business segments are located in the
University of Utah Research Park, in Salt Lake City, Utah, where it owns seven
buildings totaling approximately 450,000 square feet. E&S occupies fivefour
buildings and leases one of the remaining three buildings to other businesses.
The remaining two buildings are vacant. We plan to other businesses, whichsell the three buildings we
do not occupy. The buildings are located on land leased from the University of
Utah on 40-year(the "U of U Property") with an initial term of 40-years or longer. Five of
the buildings have land leases that expire in 2026 (the "U of U Property"). Two2030, with a ten-year renewal
option. The remaining two buildings located on the U of U
Property have options to renew the land leases for an additional 40 years,that expire in 2012 and
five have options to renew the land leases for 10 years.2014 respectively, with 40-year renewal options. All of the Company'sour interests in the U
of U Property are subject to a lien by Foothill Capital Corporation to secure
repayment of the borrowing facility as set forth in the Liquidity and Capital
Resources section of the Management's Discussion and Analysis of Financial
Condition and Results of Operations. The CompanyE&S and its subsidiaries hold leases on
several sales, operations, service and production facilities located throughout
the United States, Europe and Asia, none of which is material to the Company'sour
manufacturing, engineering or operating facilities. E&S believes that these
properties are suitable for its immediate needs and it does not currently plan
to expand its facilities or relocate.
ITEM 3. LEGAL PROCEEDINGS
LOCKHEED MARTIN CORPORATION V. EVANS & SUTHERLAND COMPUTER CORPORATION
(UNITED STATES (MIDDLE) DISTRICT COURT (FLORIDA), CASE NO. 6:00-CV-755-ORL-19C,
FILED ON MAY 23, 2000). On May 23, 2000, Lockheed Martin Corporation (the "Plaintiff")
served the CompanyE&S
with a civil complaint filed in the Circuit Court of the Ninth Judicial Circuit
in and for Orange County, Florida. The PlaintiffLockheed alleged in the complaint that the Companywe
breached a contract to provide certain visual systems for the Combined Arms
Tactical Trainer program for the United Kingdom Ministry of Defence. The
contract has an original value of $33.9 million. In the complaint, the PlaintiffLockheed
seeks compensatory damages of $8.5 million plus interest as well as
consequential damages and attorneys' fees. The $8.5 million being sought from
the CompanyE&S by the PlaintiffLockheed was paid to the Companyus from May 1999 to March 2000 and was recognized as
revenue by the Companyus during 1999. On June 12, 2000, the Companywe filed itsour answer and
counterclaim. In the counterclaim, the Company allegeswe allege as grounds for
15
recovery against the PlaintiffLockheed (1) breach of contract, (2) breach of implied covenant
of good faith and fair dealing, (3) unjust enrichment, (4) unfair competition,
(5) misappropriation of trade secrets, (6) intentional interference with
advantageous business relationship, (7) replevin, and (8) promissory estoppel.
In itsour counterclaim, the Company seekswe seek compensatory damages of not less than
$10.0 million and not more than $25.4 million.
On June 14, 2000, the case was removed to the Orlando Division of the United
States District Court for the District of Florida where it currently remains. On
July 7, 2000, the PlaintiffLockheed answered the Company'sour counterclaim but also filed a motion for
dismissal of the Company'sour counterclaims for unjust enrichment, unfair competition,
promissory estoppel, and incidental damages. On July 24, 2000, the Companywe filed itsour
opposition to the Plaintiff'sLockheed's motion to dismiss these certain counterclaims of the Company.our counterclaims. On October 20,
2000 the court denied the Plaintiff'sLockheed's motion to dismiss in its entirety, without
prejudice. On January 16, 2001, the Companywe filed a motion for partial summary judgement,judgment,
asking the court to dismiss all of the Plaintiff'sLockheed's breach of contract claims. The
court denied that motion on August 30, 2001, citing the existence of material
disputed facts. On September 6, 2001 the court granted Lockheed's leave to amend
its complaint, which was filed on September 17, 2001. We filed a motion to
dismiss these new claims on October 4, 2001, and Lockheed has indicatedopposed it. The
court currently has that it will take the motion under advisement.
Discovery in the matter is scheduled to conclude on September 30, 2002. A
trial date is currently set for September 2002. Management
disputes the Plaintiff'sMarch, 2003. We dispute Lockheed's allegations
in the complaint, isare vigorously defending the action, and isare vigorously
prosecuting itsour counterclaims. Although management believes the CompanyE&S will ultimately
prevail in the litigation, an unfavorable outcome of these matters would have a
material adverse impact on the Company'sour financial condition and operations.
In the normal course of business, the CompanyE&S has various other legal claims and
other contingent matters, including items raised by government contracting
officers and auditors. Although the final outcome of such matters cannot be
predicted, the Company believeswe believe the ultimate disposition of these matters will notwould have a
material adverse effect on the Company'sour consolidated financial condition, liquidity or
results of operations.
1316
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 2000.2001.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following sets forth certain information regarding the executive
officers of the CompanyE&S as of March 30, 2001:
Name Age Position
- ------------------- ------- ------------------------------------------------
Stewart Carrell 67 Chairman of the Board of Directors
James R. Oyler 55 President and Chief Executive Officer
Robert H. Ard 47 Vice President - Applications Group
David B. Figgins 52 Vice President1, 2002:
NAME AGE POSITION
- ---- -------- ------------------------------------------
James R. Oyler 55 President and Chief Executive Officer
David B. Figgins 53 Vice President and General Manager,
Product Marketing
L. Eugene Frazier 56 Vice President and General Manager,
Strategic Visualization
William M. Thomas 47 Vice President, Chief Financial Officer,
Treasurer and Corporate Secretary
E. Thomas Atchison 53 Vice President, Manufacturing, Service,
and Support
Nicholas Gibbs 43 Vice President and General Manager,
Simulation Systems
Richard Flitton 39 Vice President and General Manager,
Commercial Simulation
Group
Nicholas J. Iuanow 41 Vice President, Corporate Development
and Treasurer
George K. Saul 50 Vice President - REALimage Solutions Group
William M. Thomas 47 Vice President, Chief Financial Officer
and Corporate Secretary
- -------------------
Mr. Carrell was elected Chairman of the Board of Directors of the Company in
March 1991. He has been a member of the Board for 17 years. He also serves as
the Chairman of Seattle Silicon Corporation, and he is a director of Tripos,
Inc. From mid-1984 until October 1993, Mr. Carrell was Chairman and Chief
Executive Officer of Diasonics, Inc., a medical imaging company. From November
1983 until early 1987, Mr. Carrell was also a General Partner in Hambrecht &
Quist LLC, an investment banking and venture capital firm.
Mr. Oyler was appointed President and Chief Executive Officer of the CompanyE&S and a
member of the Board of Directors in December 1994. He is also a director of Ikos
Systems, Inc. Previously,Before joining Evans & Sutherland, Mr. Oyler served as President
of AMG, Inc. from mid-1990 throughuntil December 1994, and asa Senior Vice President offor
Harris Corporation from 1976 through mid-1990. He has sixseven years of service
with the
Company.E&S.
Mr. ArdFiggins was appointed Vice President, of the Applications GroupProduct Marketing, in
May 1999.January 2002. He joined the Company in June 1998 as Vice President and General Manager.
Previously, he was President of Model Technology, Inc. where he was employed
from July 1996 to May 1998. From June 1989 to July 1996, Mr. Ard was employed by
Mentor Graphics CorporationE&S as Vice President and General Manager, PC
Simulation, in April of various
divisions. He has two years of service with the Company.
Mr. Figgins1998, and was appointed Vice President of the Simulation
Group in January 1999. He joined the Company in April 1998 asIn June 2001, he was appointed Vice President of PC Simulation in
theand
Operating Officer, Simulation Group. Previously, he wasBefore joining E&S, Mr. Figgins served as
Vice President of Business Development and Marketing for Raytheon Training,
where he was employed from May 1986 to April 1998. Mr. Figgins has over
25 years experience in the simulation and training industry and has held
increasingly responsible technical, marketing and management positions in small,
medium and large organizations with senior executive positions in the last
decade. Mr. Figgins is a graduate of Royal Air Force Halton and holds a M.S in
Management from Purdue University. He has twofour years of service with the Company.E&S.
Mr. Iuanow joined the Company in August 2000 as Vice President, Corporate
Development and Treasurer. Prior to joining the Company, he was Vice President
and Treasurer at Cordant Technologies Inc. where he was employed from September
1989 to June 2000. Previously, he held various financial management positions at
Morton Thiokol. He has less than one year of service with the Company.
14
Mr. SaulFrazier was appointed Vice President, of the REALimage Solutions GroupStrategic Visualization, in
December 1999.January 2002. He joined the CompanyE&S in September 1997 as Vice President, Programs. In
June of 1998, andMr. Frazier was appointed Vice President, Programs and Shared
Technology. In April of Administration in October 1998. From January 1997 to June 1998,1999, he was appointed Vice President and Chief Executive Officer of Silicon Reality, Inc., a graphics
technology start-up company E&S acquired in June 1998. Previously,General
Manager, Systems. Mr. Saul wasFrazier served as Vice President and General Manager of
Hitachi Semiconductor America whereSimulation Systems until June of 2001, when he was employed from
January 1991appointed Vice President and
Operating Officer for Simulation. Prior to January 1997. He alsohis assignment at E&S, he was
Director, Technology Development and Advanced Programs at Lockheed Martin
Tactical Defense Systems. Before working with Lockheed Martin, he held
various management positions at
Fairchild Semiconductor Corporation and National Semiconductorincreasingly responsible assignments in Simulation for LORAL Corporation. He has
twofour years of service with the Company.E&S.
Mr. Thomas was appointed Vice President and Chief Financial Officer in
December 2000 and Corporate Secretary in MarchFebruary 2001. He became Treasurer in
January 2002. He joined the CompanyE&S in
17
August 2000 as Vice President, Finance, offor the Simulation Group. PriorFrom May 1998
to joining the
Company, heAugust 2000, Mr. Thomas was Executive Vice President and Chief Financial
Officer for Edge Technologies, Inc. During the three year period from May 1998 to August 2000. From February 1995 to May
1998, Mr. Thomas was Chief Financial Officer for Stanley Aviation Corporation.
Previously, he was a Director of Finance for a Hughes Aircraft Company
where hesubsidiary, Financial Executive and Strategic Planner for a Large Scale
Information Technology Business Unit, and Senior Business Manager and Assistant
Controller for multiple divisions of Hughes. Mr. Thomas was employed by Hughes
from March 1982 to February 1995. He has less than one year of service with E&S.
Mr. Atchison was appointed Vice President, Manufacturing, Service, and
Support, in October 2001. He joined E&S in 1998, when E&S acquired Silicon
Reality, Inc. in June 1998, and served as Director, Materials, until July of
1999, when he was appointed Vice President, Manufacturing. At Silicon Reality,
Mr. Atchison was Vice President, Operations, Chief Operating Officer, and Chief
Financial Officer from October 1997 to June 1998. Prior to Silicon Reality, he
was Vice President, Investor Relations and Business Development for Alphatec,
and managed production control for National Semiconductor/ Fairchild. He has
three years of service with E&S.
Mr. Gibbs is the Company.Vice President and General Manager of the Simulation
Systems Business Unit. Prior to this role, he served as General Manager of the
Service and Support Division. He has also held management positions in Supply
Chain Management and Quality Assurance. Mr. Gibbs received a B.S. in Mathematics
from the University of Utah. Mr. Gibbs has been with E&S for over 15 years.
Mr. Flitton was appointed Vice President and General Manager for the
Commercial Simulation division of Evans & Sutherland in January 2002.
Mr. Flitton has been in the simulation industry since 1979, and has been with
E&S since 1994. His first assignment with E&S, was as UK Product Manager for the
Commercial Simulation group, followed by an 18-month assignment as Program
Manager for the E&S subsidiary Xionix Simulation, in Dallas TX. Mr. Flitton then
moved to the E&S Salt Lake City Headquarters and held the positions of US
Regional Program Manager and then Products Director for the Commercial Airline
group. His prior assignment was as the Product Manager for high-end IG systems
within the Simulation Systems Group in Salt Lake City. Prior to joining E&S,
Mr. Flitton served a full engineering apprenticeship with Rediffusion Simulation
in the UK. Mr. Flitton was Principal Engineer and then Group Leader of the
Visual Engineering Group of Rediffusion. Mr. Flitton has a BEng Hons in
Electo/Mechanical Engineering from the University of Brighton (UK) and an M.B.A.
from the University of Warwick (UK). He is also Member of The Royal Aeronautical
Society (MRAeS).
18
FORM 10-K
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
PRICE RANGE OF COMMON STOCK
The Company'sOur common stock trades on The Nasdaq 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'sour common stock for the fiscal quarters indicated, as reported by The
Nasdaq Stock Market. Quotations represent actual transactions in Nasdaq's
quotation system but do not include retail markup, markdown or commission.
HIGH LOW
-------------------- --------------------
2000
----
First Quarter $ 13 1/2 $ 10
HIGH LOW
-------- --------
2001
First Quarter $ 8 $ 6 3/8
Second Quarter $8 11/16 $ 7 1/16
Third Quarter $ 8 5/16 $ 5 7/8
Fourth Quarter $ 7 3/16 $ 5 3/8
2000
First Quarter $ 13 1/2 $10 1/16
Second Quarter $ 11 3/8 $ 6 1/4
Third Quarter $ 7 1/4 $ 5 3/8
Fourth Quarter $ 7 3/4 $ 5 1/8
1999
----
First Quarter $ 18 3/16 $ 12
Second Quarter $ 19 $ 12 3/8
Third Quarter $ 15 $ 12 1/16
Fourth Quarter $ 14 1/8 $ 10 7/16
APPROXIMATE NUMBER OF EQUITY SECURITY HOLDERS
On March 2, 2001,1, 2002, there were 701657 shareholders of record of the
Company'sour common stock.
Because brokers and other institutions hold many of the
Company'sour shares on behalf of
shareholders, the Company iswe are unable to estimate the total number of shareholders
represented by these record holders.
DIVIDENDS
Evans & Sutherland hasWe have never paid a cash dividend on itsour common stock, retaining itsour
earnings for the operation and expansion of itsour business. The Company intendsWe intend for the
foreseeable future to continue the policy of retaining itsour earnings to finance
the development and growth of itsour business. The payment of dividends is
restricted under the terms of the Company'sour credit facilities. See "Item 7 - Management's7--Management's
Discussion and Analysis of Financial Condition and Results of
Operations - LiquidityOperations--Liquidity and Capital Resources."
1619
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected financial data for the five fiscal years ended
December 31, 20002001 are derived from the Company'sour Consolidated Financial Statements. The
selected financial data should be read in conjunction with the Company'sour Consolidated
Financial Statements and related notes included elsewhere in this annual report.
See also "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
(In thousands, except per share amounts)
2000 1999(1) 1998(2)2001(1) 2000(2) 1999(3) 1998(4) 1997
1996
--------- --------- --------- --------- ---------
FOR THE YEAR---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FOR THE YEAR
Sales ...............................$ 145,263 $ 166,980 $ 200,885 $ 191,766 $ 159,353
$ 130,564
Net income (loss) before
accretion of preferred stock .....................(27,457) (69,570) (23,454) (15,983) 5,080 10,352
Net income (loss) per common
share:
Basic .........................(2.70) (7.45) (2.49) (1.70) 0.56
1.16
Diluted .......................(2.70) (7.45) (2.49) (1.70) 0.53 1.12
Average weighted number of
common shares outstanding
Basic .........................10,169 9,372 9,501 9,461 9,060
8,944
Diluted .......................10,169 9,372 9,501 9,461 9,502 9,222
AT END OF YEAR
Total assets ........................$ 177,353 $ 216,078 $ 258,464 $ 275,668 $ 234,390
$ 210,891
Long-term debt, less current
portion 18,086 25,563 18,015 18,062 18,015
18,015
Redeemable preferred stock ..........-- 24,000 23,772 23,544 --
--
Stockholders' equity ................64,659 67,634 137,194 165,083 165,634 160,472
- ----------------------------------
(1) During 2001, we incurred an impairment loss of $0.2 million and
restructuring charges of $2.8 million. See Notes 1 and 21 of the Notes to
Consolidated Financial Statements included in Part II of this annual report.
(2) During 2000, we recorded deferred tax expense of $20.6 million as a result
of our decision to fully reserve net deferred tax assets due to cumulative
net operating losses and the cancellation of a significant contract and the
related complaint filed by Lockheed Martin Corporation.
(3) During 1999, the Companywe incurred a write-off of inventories of $13.2 million, an
impairment loss of $9.7 million and a restructuring charge of $1.5 million.
See notesNotes 1 4 and 2221 of the Notes to Consolidated Financial Statements
included in Part II of this annual report.
(2)(4) During 1998, the Companywe incurred a $20.8 million charge to expense acquired
in-process technology in connection with the acquisitions of
AccelGraphics, Inc. and Silicon Reality, Inc.
See note 2 of the
Notes to Consolidated Financial Statements included in Part II of
this annual report.
1720
QUARTERLY FINANCIAL DATA (Unaudited)(UNAUDITED)
(In thousands, except per share amounts)
Quarter Ended
-------------------------------------------
March 31 JuneQUARTER ENDED
--------------------------------------------------
MARCH 30 Sept.JUNE 29 Dec. 31
-------- ------- -------- -------
2000SEPT. 28(2) DEC. 31(3)
---------- ---------- ----------- ----------
2001
Sales ......................................$ 39,632 $ 48,097 $ 29,601 $ 27,933
Gross profit 13,215 11,973 1,793 2,459
Net loss before income taxes (6,048) (5,208) (17,987) (1,386)
Net income (loss) applicable to common stock (6,124) (5,132) (16,309) 108
Net income (loss) per common share(1):
Basic (0.64) (0.50) (1.57) 0.01
Diluted (0.64) (0.50) (1.57) 0.01
QUARTER ENDED
--------------------------------------------------
MARCH 31 JUNE 30(4) SEPT. 29(5) DEC. 31(6)
---------- ---------- ----------- ----------
2000
Sales $ 45,955 $ 25,589 $ 48,092 $ 47,344
Gross profit ............................... 16,113 (12,303) 14,804 10,834
Net income (loss) before income taxes ...... (4,827) (31,598) 448 (14,570)
Net income (loss) applicable to common stock (3,229) (52,253) 244 (14,560)
Net income (loss) per common share(2)share(1):
Basic ................................... (0.35) (5.58) 0.03 (1.55)
Diluted ................................. (0.35) (5.58) 0.03 (1.55)
Quarter Ended
-------------------------------------------
April 2 July 2 Oct. 1(1) Dec. 31
------- ------ --------- -------
1999
Sales ...................................... $ 49,746 $ 44,023 $ 48,704 $ 58,412
Gross profit ............................... 22,378 17,603 7,477 12,641
Net income (loss) before income taxes ...... 379 (4,980) (28,020) (6,246)
Net income (loss) applicable to common stock 204 (3,493) (18,033) (2,360)
Net income (loss) per common share(2):
Basic ................................... 0.02 (0.36) (1.91) (0.25)
Diluted ................................. 0.02 (0.36) (1.91) (0.25)
- ----------------------------------
(1) During the third quarter of 1999, the Company incurred a write-off
of inventories of $13.2 million, an impairment loss of $9.7 million
and a restructuring charge of $1.5 million. See notes 1, 4 and 22 of
the Notes to Consolidated Financial Statements included in Part II
of this annual report.
(2) Earnings per share are computed independently for each of the quarters
presented and therefore may not sum to the total for the year.
18(2) During the third quarter of 2001, we recorded a restructuring charge of
$2.1 million and an income tax benefit of $2.0 million as a result of the
resolution of certain tax contingencies.
(3) During the fourth quarter of 2001, we recorded a $9 million gain on the sale
of certain patents. Also during this quarter, we recorded an impairment loss
of $0.2 million, a restructuring charge of $0.7 million and an income tax
benefit of $1.6 million as a result of the resolution of certain tax
contingencies.
(4) During the second quarter of 2000, we recorded a negative adjustment to
revenue of $10.9 million as a result of the cancellation of a significant
contract by Lockheed. Additionally, we recorded deferred tax expenses of
$20.6 million as a result of our decision to fully-reserve net deferred tax
assets due to cumulative net operating losses and the cancellation of a
significant contract and the related civil complaint filed by Lockheed.
(5) During the third quarter of 2000, we recorded a $6.7 million gain on the
sale of certain investment securities and a $1.9 million loss on available
for sale investment securities whose market value decline was determined to
be other than temporary.
(6) During the fourth quarter of 2000, we recorded a $5.9 million loss on
available for sale investment securities whose market value decline was
determined to be other than temporary.
21
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of sales and expenses during the reporting
period. Actual results could differ from those estimates. A summary of
significant accounting policies can be found in Note 1 to the consolidated
financial statements. We have identified the accounting policies which are
critical to our business and the understanding of our results of operation and
financial position.
REVENUE RECOGNITION
Revenue from long-term contracts which require significant production,
modification or customization is recorded using the percentage-of-completion
method, using the ratio of costs incurred to management's estimate of total
anticipated costs. Our estimates of total anticipated costs include assumptions,
such as estimated man-hours to complete, estimated materials costs, and
estimates of other direct and indirect costs. Actual results may vary
significantly from our estimates. If the actual costs are higher than
management's anticipated total costs, then an adjustment is required to reduce
the previously recognized revenue as the ratio of costs incurred to management's
estimate was overstated. If actual costs are lower than management's anticipated
total costs, then an adjustment is required to increase the previously
recognized revenue as the ratio of costs incurred to management's estimate was
understated.
COSTS AND ESTIMATED EARNINGS IN EXCESS OF BILLINGS ON UNCOMPLETED CONTRACTS AND
BILLINGS IN EXCESS OF COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
Billings on uncompleted long-term contracts may be greater than or less than
incurred costs and estimated earnings and are recorded as an asset or liability
on the balance sheets. As revenue recognized on these long-term contracts
includes estimates of management's anticipated total costs, the amounts in costs
and estimated earnings in excess of billings on uncompleted contracts and
billings in excess of costs and estimated earnings on uncompleted contracts also
include these estimates.
INVENTORIES
Inventory amounts include materials at standard costs. Inventory also
includes inventoried costs on programs and long-term contracts which includes
direct engineering and production costs and applicable overhead, not in excess
of estimated realizable value, which have not yet been recognized as cost of
sales. We periodically review inventories for excess and obsolete amounts as
well as for amounts which are in excess of estimated realizable value, and
provide a reserve that we consider sufficient to cover these items. Assumptions
on which we estimate this reserve include future sales, pricing of future
products and estimates of total anticipated costs to complete projects. Changes
in any of these assumptions would result in adjustments to our operating
results.
ACCRUED EXPENSES
Accrued expenses include amounts for liquidated damages and late delivery
penalties on contracts on which we are late in delivering our products. (See
Note 8 to the consolidated financial statements). We have included all amounts
which management believes we are liable as of December 31, 2001. These
liquidated damages are based, in part, on our estimate of when we will complete
certain projects. To the extent delivery dates are not consistent with our
estimates, these liquidated damage
22
accruals may require additional adjustments. We are currently a party to
contracts which include further possible liquidated damages and late delivery
penalties.
LEGAL PROCEEDINGS
Lockheed Martin Corporation served us with a complaint on March 23, 2000
alleging breach of contract and is seeking $8.5 million in compensatory damages
plus interest as well as consequential damages and attorneys' fees. We believe
that a loss with respect to the $8.5 million collected from Lockheed as asserted
in their legal proceedings is remote and that no amount can be currently
estimated. As additional information becomes available, we will assess the
appropriateness of the accounting and reflect adjustments as considered
necessary. Although management believes we will ultimately prevail in the
litigation, an unfavorable outcome of these matters would have a material
adverse effect on our financial condition and liquidity.
INCOME TAXES
As part of the process of preparing our consolidated financial statements we
are required to estimate our actual income taxes in each of the jurisdictions in
which we operate. This involves estimating our actual current tax exposure
together with assessing temporary differences resulting from differing
treatments of items, such as accrued liabilities, for tax and accounting
purposes. These differences result in deferred tax assets and liabilities, which
are included in our consolidated balance sheet. We must then assess the
likelihood that our deferred tax assets will be recovered from future taxable
income and, to the extent we believe that recovery is not likely, we must
establish a valuation allowance. To the extent we establish a valuation
allowance or increase or decrease this allowance in a period, we must include a
corresponding adjustment within the tax provision in the statement of
operations. Significant management judgment is required to determine our
provision for income taxes, our deferred tax assets and liabilities and any
valuation allowance recorded against our net deferred tax assets.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The preparation of our financial statements requires us to make estimates
and assumptions that affect the reported amount of assets at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. We specifically analyze accounts receivable and consider
historic experience, customer creditworthiness, facts and circumstances specific
to outstanding balances, current economic trends and changes in our payment
terms when evaluating the adequacy of the allowance for doubtful accounts.
Changes in any of these factors may result in material differences in the
expense recognized for bad debts.
CERTAIN DEFENSE CONTRACTS
A significant factor in our financial performance is six large, fixed price
defense contracts which use our Harmony image generator. These six contracts
represented a significant portion of our $27.5 million net loss for the year
2001. We entered into these contracts between two and four years ago. However,
these six contracts are now 90% complete and we expect to have these contracts
essentially completed by 2002 year end.
23
RESULTS OF OPERATIONS
The following discussions should be read in conjunction with the
Company'sour
Consolidated Financial Statements contained herein under Item 8 of this annual
report.
Year ended DecemberYEAR ENDED DECEMBER 31,
--------------------------------------
2001 2000 1999
1998
---------- ---------- ------------------ -------- --------
Sales ................................................... 100.0% 100.0% 100.0%
Cost of sales ...........................................79.7 82.4 63.5 57.5
Write-off of inventories ................................ --- -- 6.6
-
---------- ---------- ------------------ -------- --------
Gross profit .......................................20.3 17.6 29.9
42.5
---------- ---------- ------------------ -------- --------
Operating expenses:
Selling, general and administrative ................ 20.5 21.4 20.920.7 20.6 22.2
Research and development ...........................19.8 26.5 22.1
16.6
Amortization of goodwill and other intangible assets 0.1 0.8 2.5REALimage transition costs 3.6 -- --
Restructuring charge 2.0 (0.5) 0.7
Impairment loss .................................... -0.2 -- 4.8
-
Restructuring charge ............................... (0.5) 0.7 -
Write-off of acquired in-process technology ........ - - 10.8
---------- ---------- ------------------ -------- --------
Operating expenses .................................46.3 46.6 49.8
50.8
---------- ---------- ------------------ -------- --------
(26.0) (29.0) (19.9)
(8.3)Gain on sale of assets held for sale 6.2 -- --
Gain on sale of business unit ...........................0.5 1.1 - -
---------- ---------- ------------
-------- -------- --------
Operating loss .....................................(19.3) (27.9) (19.9) (8.3)
Other income (expense) ..................................(1.8) (2.4) 0.6
1.1
---------- ---------- ------------------ -------- --------
Pretax loss ........................................(21.1) (30.3) (19.3) (7.2)
Income tax expense (benefit) ............................(2.2) 11.4 (7.6)
1.1
---------- ---------- ------------------ -------- --------
Net loss ...........................................(18.9) (41.7) (11.7) (8.3)
Accretion of preferred stock ............................-- 0.1 0.1
0.1
---------- ---------- ------------------ -------- --------
Net loss applicable to common stock .....................(18.9)% (41.8)% (11.8)%
(8.4)%
========== ========== ================== ======== ========
RESULTS2001 VS. 2000
SALES
In 2001, our total sales decreased $21.7 million, or 13% ($145.3 million in
2001 compared to $167.0 million in 2000). Sales in the Simulation Group declined
$14.6 million, or 10% ($135.3 million in 2001 compared to $149.9 million in
2000). Sales in the REALimage Solutions Group declined $4.0 million, or 70%
($1.7 million in 2001 compared to $5.7 million in 2000). Sales in the
Applications Group declined $3.1 million, or 27% ($8.2 million in 2001 compared
to $11.3 million in 2000). The primary reason for the decline in sales in the
Simulation Group is due to delays in government programs relating to our Harmony
image generator. In addition, the Simulation Group also experienced a decline in
sales volumes to its commercial airline customers. These declines more than
offset increases in the sales volumes of our simFUSION PC-based image generator
and support services. The decrease in the REALimage Solutions Group declined as
this group was sold during the third quarter of 2001. Sales in the Applications
Group declined due to lower sales volumes of our planetarium and large-format
entertainment products.
GROSS PROFIT
Gross profit was essentially unchanged in 2001 from 2000 (both
$29.4 million). As a percent of sales, gross profit increased to 20.3% in 2001
from 17.6% in 2000. Gross profit in the Simulation Group improved due to higher
sales volumes and lower costs of sales for support services and lower
24
costs of sales on sales to commercial airline customers. These improvements in
the Simulation Group were offset by lower sales to government customers and
higher costs of sales on sales of simFUSION PC-based image generators. The lower
sales to government customers was due to delays and cost over-runs on programs
involving our Harmony image generator. Gross profit in the Applications Group
increased as cost of sales decreased on sales of planetarium systems and higher
sales of our RAPIDsite real-estate planning tool.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses decreased $4.3 million, or 13%
($30.1 million in 2001 compared to $34.4 million in 2000). As a percent of
sales, selling, general and administrative expenses increased to 20.7% in 2001
from 20.6% in 2000. These expenses decreased in the Simulation Group as the
result of lower headcount and lower incentive bonus expense. Selling, general
and administrative expenses decreased in the Application Group due to lower
headcount, lower commissions due to lower orders, lower advertising and lower
incentive bonus expense. The decrease in selling, general and administrative
expenses in 2001 is also partially due to all operating costs from April 1
through August 31, 2001 of $1.3 million associated with the REALimage Solutions
Group being recorded in the "REALimage transition costs" expense category.
Selling, general and administrative expenses were $31.4 million including the
$1.3 million of costs associated with the REALimage Solutions Group.
RESEARCH AND DEVELOPMENT
Research and development expenses decreased $15.5 million, or 35%
($28.8 million in 2001 compared to $44.3 million in 2000). As a percent of
sales, research and development expenses declined to 19.8% in 2001 from 26.5% in
2000. Research and development expenses in the Simulation Group declined during
2001 as a result of lower labor and related expenses as the effort required on
our Harmony, iNTegrator, Ensemble and PC-based simulation products has declined.
Research and development expenses in the Applications Group were essentially
unchanged. The decrease in research and development expenses in 2001 is also
partially due to all operating costs from April 1 through August 31, 2001
associated with the REALimage Solutions Group being recorded in the "REALimage
transition costs" expense category. Research and development expenses were
$32.7 million including these costs associated with the REALimage Solutions
Group. Due to the sale of the REALimage Solutions Group, the discontinuation of
the RAPIDsite business and the reduction of effort required to develop our
Harmony and iNTegrator products, management expects that the total research and
development spending necessary to continue the timely development of products
will be lower in 2002 than in 2001.
REALIMAGE TRANSITION COSTS
During the second quarter of 2001, we decided to sell the REALimage
Solutions Group. Accordingly, REALimage transition costs include all the
expenses associated with the REALimage Solutions Group that were incurred in the
second and third quarters of 2001. These costs totaled $5.3 million and were
3.6% of revenues for 2001. On August 31, 2001, we finalized an asset purchase
and intellectual property license agreement to sell the REALimage Solutions
Group to Real Vision, Inc. of Japan for a maximum value of $12.3 million which
is expected to close in April 2002. The consideration to E&S consisted of
$4.0 million cash, a receivable for $2.3 million which was paid in
December 2001, and future royalties payable on a when and if earned basis of up
to a maximum of $6.0 million. The consideration to Real Vision, Inc. consists of
REALimage technology, other assets, and an obligation from E&S to provide
certain development support of the REALimage technology during a seven-month
transition period concluding in April 2002. During 2000, no comparable
transition costs were incurred.
25
RESTRUCTURING CHARGE
During 2001, we initiated a restructuring plan focused on reducing the
operating cost structure of E&S. As part of the plan, we recorded a charge of
$2.8 million relating to a reduction in force of approximately 92 employees. We
estimate that this restructuring plan will reduce expenses by $8.2 million per
year going forward. As of December 31, 2001, we had paid $1.9 million in
severance benefits. The majority of the remaining benefits will be paid out over
the next two quarters. We also recognized a restructuring charge of
$1.5 million in 1999 and reversed $0.8 million of that charge in 2000. The
charge in 1999 was based on the expected costs related to the termination of 28
employees. The reversal of a portion of these charges in 2000 was the result of
certain of these employees being transferred within E&S rather than being
terminated and, therefore, these termination costs were not incurred. In
addition, estimated severance and related charges were lower than expected for
the terminated employees.
IMPAIRMENT LOSS
We recognized an impairment loss of $0.2 million in 2001 and there was no
such charge in 2000. The 2001 charge was 0.2% of sales. The impairment loss
related to the write-off of goodwill, acquired in our acquisition of
AccelGraphics, Inc. and Silicon Reality, Inc. in the second quarter of 1998.
GAIN ON SALE OF OPERATIONSASSETS HELD FOR SALE
In the fourth quarter of 2001, we recognized a gain of $9.0 million on the
sale of certain of our key 3D-graphics patents. This gain on sale of assets held
for sale was 6.2% of sales in 2001 and there was no such transaction in 2000.
GAIN ON SALE OF BUSINESS UNIT
We recognized a gain on sale of business unit of $0.8 million in 2001 and
$1.9 million in 2000. As a percent of sales the gain was 0.5% in 2001 and 1.1%
in 2000. The 2001 gain was the result of our sale of our REALimage Solutions
Group to Real Vision, Inc. of Japan. The sale was for a maximum value of
$12 million, consisting of cash of $6.3 million plus future royalties, on a when
and if earned basis, up to $6 million, for REALimage technology, other assets,
and the performance of certain development support during a seven-month
transition period leading to closing the transaction in April 2002. The 2000
vs.gain was the result of our sale of certain assets of our Application Group
relating to its digital studio business to RT-SET Real Time Synthesized
Entertainment Technology Ltd. ("RT-SET") and its subsidiary, RT-SET
America Inc., for $1.4 million in cash, common stock of RT-SET and the
assumption of certain liabilities.
OTHER INCOME (EXPENSE), NET
Other income (expense), net improved by $1.4 million (an expense of
$2.6 million in 2001 compared to an expense of $4.0 million in 2000). The loss
on write-down of investment securities improved $7.5 million ($0.3 million in
2001 compared to $7.8 million in 2000). The losses in both years are the result
of other-than-temporary declines in the values of certain marketable investment
securities of E&S. The gain on sale of investment securities declined
$6.0 million ($0.5 million in 2001 compared to $6.5 million in 2000). The larger
gain in 2000 was primarily due to the sale of our investment in Silicon Light
Machines, Inc. to Cypress Semiconductor, Inc. ("Cypress") in which we received
Cypress stock. Interest income was essentially zero in 2001 compared to
$0.7 million in 2000. Interest expense increased $0.3 million to $2.5 million in
2001 from $2.2 million in 2000. The increase in net income expense was due to
lower average cash balances and higher average borrowing balances in 2001
compared to 2000.
26
INCOME TAXES
E&S recorded an income tax benefit of $3.2 million in 2001 compared to an
expense of $19.0 million in 2000. Income tax benefit of $3.2 million for 2001 is
primarily attributable to adjustments to prior year tax provisions as the result
of the resolution of certain worldwide tax contingencies. Included in this
amount is $0.6 million for withholding taxes paid in Japan for taxes associated
with the REALimage transaction. During the second quarter of 2000, we increased
our deferred tax asset valuation allowance by $20.6 million. As a result of
cumulative net operating losses, and the cancellation of a significant contract
and the related civil complaint filed by Lockheed as discussed in Note 14 to the
consolidated financial statements, we fully reserved our net deferred tax assets
which previously existed at the end of the first quarter of 2000 and those
deferred tax assets recognized during the second quarter of 2000. These net
deferred tax assets relate to temporary differences, tax credit carry forwards
and net operating loss carry forwards. The valuation allowance was recorded in
accordance with SFAS 109, which requires that a valuation allowance be
established when there is significant uncertainty as to the realizability of the
deferred tax assets. We evaluate the realizability of our deferred tax assets on
a quarterly basis. If the deferred tax assets are realized in the future, or if
a portion or all of the valuation allowance is no longer deemed to be necessary,
the related tax benefits will reduce future income tax provisions.
2000 VS. 1999
- -------------
SalesSALES
In 2000, the Company'sour total sales decreased $33.9 million, or 17% ($167.0 million in
2000 compared to $200.9 million in 1999). Sales in the Simulation Group
decreased $20.7 million, or 12% ($149.9 million in 2000 compared to
$170.6 million in 1999). Sales in REALimage Solutions Group decreased
$16.3 million, or 74% ($5.7 million in 2000 compared to $22.0 million in 1999).
Sales in the Applications Group increased $3.0 million, or 36% ($11.3 million in
2000 compared to $8.3 million in 1999). The decrease in sales in the Simulation
Group is due to the cancellation of the contract with Lockheed Martin
Corporation ("Lockheed") for the delivery of visual systems to the United Kingdom Ministry of
Defence ("UK MOD") for the Combined Arms Tactical Trainer program ("UK CATT")
and an adjustment to revenue on percent complete contracts where a review of the
estimated costs to complete the contracts resulted in a negative adjustment to
revenue of $10.9 million in the second quarter of 2000. The decrease was
partially offset by increased sales volume of visual systems to commercial
airline customers, increased sales volumevolumes of the Company'sour simFUSION workstation-based
product and increased sales related to customer service and support contracts.
The decrease in sales in the REALimage Solutions Group is due to a decrease in
the number of units sold and decreased selling prices of existing products due
to increased competition and delays in the introduction of new products. The
increase in sales in the Applications Group is due to an 19
increase in sales
volume of large-format entertainment products and planetarium systems which is
partially offset by decreased sales of the Company'sour digital video products due to the
sale of this business to RT-SET Real Time Synthesized Entertainment
Technology Ltd. and its subsidiary RT-SET America Inc. (together "RT-SET") in
the first quarter of 2000.
Gross ProfitGROSS PROFIT
Gross profit decreased $30.7 million, or 51% ($29.4 million in 2000 compared
to $60.1 million in 1999). As a percent of sales, gross profit decreased to
17.6% in 2000 from 29.9% in 1999. Gross profit in the Simulation Group in 2000
was negatively impacted by (i) the cancellation of the UK CATT contract due to
the loss of revenue and the write-off of obsolete and excess inventory specific
to the UK CATT contract, (ii) adjustment for estimated actual costs at
completion of contract on percent-complete contracts of $16.7 million
($10.9 million as a reduction in sales as discussed previously, and
$5.8 million as an increase in cost of sales relating to contracts with total
estimated actual costs that
27
exceed the contract value) and (iii) higher costs on several contracts to
government customers which include the Harmony image generator. Gross profit in
the REALimage Solutions Group decreased due to lower revenue attributed to a
decrease in the number of units sold and decreased selling prices of existing
products due to increased competition and delays in the introduction of new
products. Gross profit in the Applications Group increased due to increased
revenue from sales of large-format entertainment products and planetarium
systems which was partially offset by decreased sales of the
Company'sour digital video
products.
Selling, General and AdministrativeSELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses decreased $8.8$10.2 million, or 20%23%
($34.234.4 million in 2000 compared to $43.0$44.6 million in 1999). As a percent of
sales, selling, general and administrative expenses were 20.5%20.6% in 2000 compared
to 21.4%22.2% in 1999. The decrease in these expenses in the Simulation Group is due
primarily to lower marketing headcount, lower marketing consulting expenses and
lower marketing travel expenses. The decrease in these expenses in the REALimage
Solution Group is due to decreased sales volume resulting in decreased
commissions and other selling-related costs and decreased labor and associated
costs due to lower headcount as a result of the restructuring which took place
at the end of the third quarter of 1999. The decrease in these expenses in the
Applications Group is due to the reduction of employees and related expenses as
a result of the sale of certain assets of the Company'sour digital video products business to
RT-SET.
Research and DevelopmentRESEARCH AND DEVELOPMENT
Research and development expenses decreased $0.1$10.2 million, or 23%
($44.334.4 million in 2000 compared to $44.4$44.6 million in 1999). As a percent of
sales, research and development expenses were 26.5%20.6% in 2000 compared to 22.1%22.2% in
1999. Research and development expenses in the Simulation Group increased due to
increased efforts of the continued development of the Company'sour simFUSION
workstation-based product and other value-priced simulation products. Research
and development expenses relating to the REALimage Solutions Group decreased due
to decreased headcount as a result of the group's restructuring at the end of
the third quarter of 1999.
Amortization of Goodwill and Other Intangible AssetsAMORTIZATION OF GOODWILL AND OTHER INTANGIBLE ASSETS
Amortization of goodwill and other intangible assets decreased
$1.3 million, or 87% ($0.2 million in 2000 compared to $1.5 million in 1999).
The decrease in this expense was due to the write-off of $9.3 million of
goodwill and other intangible assets during the third quarter of 1999 in the
REALimage Solutions Group.
Impairment Loss
The CompanyIMPAIRMENT LOSS
We recognized an impairment loss of $9.7 million in 1999
and there was no such charge in 2000. The impairment loss was determined in
accordance with Statement of Financial Accounting Standards No. 121 ("SFAS
121"), Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of, and related to the
write-down to fair value of goodwill, intangibles and other long-lived assets
acquired in the Company'sour acquisitions of AccelGraphic, Inc. and Silicon Reality, Inc. in
the second quarter of 1998. The impairment consisted of the write-off of
$4.9 million of goodwill, $4.4 million of intangible assets and $0.4 million of
property, plant and equipment. 20
Restructuring Charge
The CompanyThere was no such charge in 2000.
RESTRUCTURING CHARGE
We recognized a restructuring charge of $1.5 million in 1999 and reversed
$0.8 million of that charge in 2000. The charge in 1999 was based on the
expected costs related to the termination of 28 employees. The reversal of a
portion of these charges in 2000 was the result of certain of these employees
being transferred within the CompanyE&S rather than being terminated and, therefore, these
termination costs were not incurred. In addition, estimated severance and
related charges were lower than expected for the terminated employees.
Gain on Sale of Business Unit28
GAIN ON SALE OF BUSINESS UNIT
During 2000, the Companywe sold certain assets of itsour Applications Group relating to
its digital video business and recognized $1.9 million of gain on the
transaction. See "Item 1 - Business - Acquisitions1--Business--Acquisitions and Dispositions." There was no
such event in 1999.
Other Income (Expense)OTHER INCOME (EXPENSE), NetNET
Other income (expense), net was a net expense of $4.0 million in 2000
compared to a net income of $1.1 million in 1999. Interest income declined
$1.1 million, or 61% ($0.7 million in 2000 compared to $1.8 million in 1999).
The decline in interest income is due to lower average balances of cash, cash
equivalents and short-term investments in 2000 compared to 1999 and due to
interest income received in 1999 on delayed income tax refunds. Interest expense
increased $0.9 million or 69% ($2.2 million in 2000 compared to $1.3 million in
1999). The increase was due to higher average borrowing balances and a higher
average rate of interest paid on those borrowings in 2000 compared to 1999. Loss
on write-down of investment securities increased $7.4 million, or 1,850%
($7.8 million in 2000 compared to $0.4 million in 1999). The losses in both
years are the result of other-than-temporary declines in the values of certain
marketable investment securities of the Company.E&S. In 2000 the Companywe recognized $6.5 million gain
on the sale of investment securities. This gain was primarily due to the sale of
the Company'sour investment in Silicon Light Machines, Inc. to Cypress Semiconductor, Inc. ("Cypress") in which the Companywe received
Cypress stock. There was no such event in 1999.
Income TaxesINCOME TAXES
Income tax expense (benefit) increased $34.4 million (expense of
$19.0 million in 2000 compared to a benefit of $15.4 million in 1999). During
the second quarter of 2000, the Companywe increased itsour deferred tax asset valuation
allowance by $20.6 million. As a result of the net operating loss in the second
quarter of 2000, the cumulative net operating losses for 2000, 1999 and 1998,
and the cancellation of a significant contract and the related civil complaint
filed by Lockheed as discussed in Note 1514 to the consolidated financial
statements, the Companywe fully reserved itsour net deferred tax assets which previously
existed at the end of the first quarter of 2000 and those deferred tax assets
recognized during the second quarter of 2000. These net deferred tax assets
relate to temporary differences, tax credit carry forwards and net operating
loss carry forwards. The valuation allowance was recorded in accordance with
SFAS 109, which requires that a valuation allowance be established when there is
significant uncertainty as to the realizability of the deferred tax assets. The Company evaluatesWe
evaluate the realizability of itsour deferred tax assets on a quarterly basis. If
the deferred tax assets are realized in the future, or if a portion or all of
the valuation allowance is no longer deemed to be necessary, the related tax
benefits will reduce future income tax provisions.
1999 vs. 1998
- -------------
Sales
In 1999, the Company's total sales increased $9.1 million, or 5%
($200.9 million in 1999 compared to $191.8 million in 1998). Sales in the
Simulation Group increased $3.6 million, or 2% ($170.6 million in 1999 compared
to $167.0 million in 1998). The increase in sales in the Simulation Group is
primarily due to increased sales volumes due to stronger demand by U.S. and
European government customers that offset a decline in sales to commercial
airline customers. Sales in the REALimage Solutions Group increased $4.5
million, or 26% ($22.0 million in 1999 compared to $17.5 million in 1998). The
increase in sales in the REALimage Solutions Group is primarily due to the
21
effect of having a full year of sales in 1999 relating to the acquisition of
AccelGraphics, Inc. which was purchased at the end of the second quarter of
1998. See "Item 1 Business - Acquisitions and Dispositions." Sales in the
Applications Group increased $1.0 million, or 14% ($8.3 million in 1999 compared
to $7.3 million in 1998). The increase in sales in the Applications Group is
primarily due to increased sales volumes of planetarium systems and large-format
entertainment products.
Write-off of Inventories
During the third quarter of 1999, the Company performed significant
testing of the software relating to its Harmony image generator product that had
been delayed. As a result of the testing, the Company determined that certain of
the inventories previously purchased for the Harmony image generator had become
technologically obsolete and did not properly function with the updated
software. In connection with this assessment, the Company recorded a charge of
$12.1 million to write-off obsolete, excess and overvalued inventories. In
addition, during the third quarter of 1999, the Company wrote-off $1.1 million
of REALimage Solutions Group inventories related to end-of-life or abandoned
product lines.
Gross Profit
Gross profit decreased $21.3 million, or 26% ($60.1 million in 1999
compared to $81.4 million in 1998). As a percent of sales, gross margin
decreased to 29.9% in 1999 from 42.5% in 1998. The decrease in gross profit was
impacted by the write-off of $13.2 million of obsolete, excess and overvalued
inventories. Gross profit was also affected by technical issues causing product
delays, which caused some contract milestones to be missed in the Company's
international simulation business. The Company accrued $8.2 million against cost
of sales in 1999 for liquidated damages and late delivery penalties as a result
of these product delays. Excluding the impact of these two charges, gross
margins were 40.6% in 1999, as compared to 42.5% in 1998. The decrease in gross
margin was due to higher than expected costs on certain contracts to government
customers which include the Harmony and Ensemble image generators. In addition,
gross margin in the REALimage Solutions Group decreased in 1999 as it has
changed its business model from one based on royalty income to one based on
sales of graphic subsystems which has product costs consistent with a
manufacturing operation. Gross profit in the REALimage Solutions Group also
decreased due to a decrease in the number of units sold and decreased selling
prices of existing products and the delay in introduction of new products.
Selling, General and Administrative
Selling, general and administrative expenses increased $2.9 million,
or 7% ($43.0 million in 1999 compared to $40.1 million in 1998) and increased as
a percent of sales to 21.4% in 1999 from 20.9% in 1998. The increase in these
expenses was due to the impact of having a full year of costs associated with
ESGC (formerly AccelGraphics, Inc.) in 1999 compared to a half year in 1998, and
higher costs due to increased headcount related to the Company's recruiting
efforts, new business development and launch of E&S RAPIDsite.
Research and Development
Research and development expenses increased $12.6 million, or 40%
($44.4 million in 1999 compared to $31.8 million in 1998) and increased as a
percent of sales to 22.1% in 1999 from 16.6% in 1998. The increase in these
costs was due to increased development efforts of the Company's Integrator
software. This software provides the real-time control and modeling tools for
the Symphony product family, which includes Harmony, Ensemble and simFUSION. In
addition, the increase in these expenses was due to the impact of having a full
year of ESGC costs in 1999 compared to a half year in 1998.
Amortization of Goodwill and Other Intangible Assets
Amortization of goodwill and other intangible assets declined $3.3
million, or 68% ($1.5 million in 1999 compared to $4.8 million in 1998). The
decrease in these expenses was due to the write-off of $9.3 million of goodwill
and other intangible assets during the third quarter of 1999. The goodwill is
being amortized using the straight-line method over an estimated useful life of
seven years. The other intangible assets are being amortized using the
straight-line method over estimated useful lives ranging from six months to
seven years.
22
Impairment Loss
In the third quarter of 1999, the Company recorded an impairment
loss of $9.7 million, as determined in accordance with SFAS 121, relating to the
write-down to fair value of goodwill, intangibles and other long-lived assets
acquired in the acquisitions of AGI and SRI. The impairment loss consisted of
the write-off of $4.9 million of goodwill, $4.4 million of intangible assets and
$0.4 million of property, plant and equipment. No such loss was incurred in
1998.
In addition to continued losses at AGI, the impairment loss was the
result of the following additional circumstances: (i) delays in product
introductions for the AccelGALAXY(TM), E&S Lightning 1200(TM) and the
multiple-controller graphics subsystems product line; (ii) the developer of the
chip used on the AccelGMX(TM) acquired a board company and entered the graphics
accelerator market in direct competition with the AccelGMX; and (iii)
introduction of lower-end products by competitors which can perform many of the
functions of the higher-end 3D graphics cards. Furthermore, the Company
determined that a manufacturer of a chip to be used in various new board
products was unable to manufacture a designed chip with agreed upon
specifications.
Restructuring Charge
In the third quarter of 1999, the Company initiated a restructuring
plan focused on reducing the operating cost structure of its REALimage Solutions
Group. As part of the plan, the Company recorded a charge of $1.5 million
relating to 28 employee terminations. No such charge was incurred in 1998.
Acquired In-Process Technology
In the second quarter of 1998, the Company recognized $20.8 million
of expense to write-off acquired in-process technology related to the
acquisitions of AGI and SRI. No such expense was recognized in 1999.
Other Income (Expense), Net
Other income (expense), net decreased $1.0 million, or 48% ($1.1
million in 1999 compared to $2.1 million in 1998). Interest income was $1.9
million and $2.7 million in 1999 and 1998, respectively. The decrease in
interest income is primarily due to the decrease in the average cash and cash
equivalents and short-term investment balances in 1999 as compared to 1998.
During 1998, the Company recognized a gain of $2.5 million as a result of the
sale of its investment in Sense8 Corporation. The Company recognized a loss due
to the write-down of its investment securities of $0.4 million and $1.1 million
in 1999 and 1998, respectively. The write-downs were necessary as management
believed that the decline in market value of these investments below cost were
other than temporary. Other was $0.9 million income in 1999 and $0.6 million
expense in 1998. Increase in other income is due to foreign currency transaction
gains and other miscellaneous items in 1999 compared to foreign currency
transaction losses in 1998 and other miscellaneous items.
Income Taxes
The effective tax rate was 39.7% of pre-tax loss in 1999 and was
30.7% of pre-tax income excluding the write-off of acquired in-process
technology in 1998. The change in the effective tax rate is due to the Company
incurring a pre-tax loss in 1999 and the benefit of research and other tax
credits. The Company expects the effective income tax rate in 2000 to
approximate the rate in 1998.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2000, the Company2001, we had working capital of $61.8$54.5 million, including
cash, cash equivalents and short-term investmentsrestricted cash of $13.9$11.5 million, compared to working
capital of $116.9$75.1 million at December 31, 19992000 including cash, cash equivalents,
and short-term investments and restricted cash of $22.9$13.9 million. During 2000, the Company2001, we
used $2.2$28.2 million of cash in itsour operating activities, used $10.2generated $12.4 million
of cash in itsour investing activities and generated $2.7$14.6 million of cash in itsour
financing activities.
23
Cash from our operating activities of the Company was provided by a $27.3$12.5 million decrease
in net costs and estimated earnings in excess of billings on uncompleted
contracts and a $6.9 million increase in accounts payable.contracts. The decrease in net costs and estimated earnings in excess of
billings on uncompleted contracts was due to the achievement of billing
milestones during the year and the adjustment to revenue on percent complete
contracts due to the change in estimated actual costs to complete the contracts.
Cash used in the
Company'sour operating activities included a net loss adjusted for non-cash
expenses and income for the year of $20.3$15.6 million a $10.0 million increasedecrease in
accounts receivablepayable and a $6.0$8.5 million increasedecrease in inventory.
The Company'saccrued expenses.
29
Our investing activities included purchases of property, plant and equipment
of $13.9 million, proceeds from sales of property, plant and
equipment of $1.4$6.6 million, proceeds from the sale of certain assetspatents of its
digital video business$9.0 million,
proceeds from the sale of $1.4our REALimage Solutions Group of $6.3 million and
proceeds from sale of investment securities of $1.4$3.8 million.
The Company'sOur financing activities during the year included net borrowings of
$5.4$13.0 million, proceeds from issuances of common stock of $0.6$0.4 million, increaseand a
decrease in restricted cash of $2.0 million and payments of debt
issuance costs of $1.3$1.2 million.
On March 31, 2000, the Company entered into a secured credit
facility (the "Zions Facility") with Zions First National Bank. The Zions
Facility provided for borrowings of up to $15.0 million, which included a $7.0
million sublimit for the issuance of letters of credit.
In December 2000, the
Companywe entered into a secured credit facility (the "Foothill
Facility") with Foothill Capital Corporation ("Foothill"). In connection with the Foothill
Facility, additional borrowings under the Zions Facility were terminated in
December 2000 and outstanding letters of credit were secured through the
issuance of a letter of credit from Wells Fargo Bank, National Association, the
parent of Foothill. The Foothill Facility
provides for borrowings and the issuance of letters of credit up to
$30.0 million. On February 22, 2002, E&S and Foothill amended the Foothill
Facility whereby Foothill waived all events of financial covenant default
through December 31, 2001 and revised E&S's 2002 financial covenants. The
Foothill Facility expires in December 2002. Borrowings under the Foothill
Facility bear interest at the Wells Fargo Bank National Association prevailing
prime rate plus 1.5% to 3.0%, depending on the amount outstanding. The Foothill
Facility provides Foothill with a first priority perfected security interest in
substantially all of the
Company'sour assets, including, but not limited to, all of the Company'sour
intellectual property. Pursuant to the terms of the Foothill Facility, all cash
receipts of the CompanyE&S must be deposited into a Foothill controlled account. The
Foothill Facility, among other things, (i) requires the CompanyE&S to maintain certain
financial ratios and covenants, including a minimum tangible net worth that
adjusts each quarter, a minimum unbilled receivables to billed receivables
ratio, and a limitation of $12.0 million of aggregate capital expenditures in
any fiscal year; (ii) restricts the Company'sour ability to incur debt or liens; sell,
assign, pledge or lease assets; merge with another company; and (iii) restricts
the payment of dividends and repurchase of any of the
Company'sour outstanding shares without
the prior consent of the lender. The
Company isDue to Foothill's waiver on February 22, 2002
of E&S's noncompliance with financial covenants through December 31, 2001 and
the modification of the financial covenants, we are currently in compliance with
itsour financial covenants and ratios, although a continuation of recent negative
trends could impact future compliance with such covenants. Should the need
arise, the Companywe will negotiate with Foothill to modify and expand various financial
ratios and covenants, however no assurance can be given that such negotiations
will result in modifications that will allow the Companyus to continue to be in compliance
or otherwise be acceptable to us. E&S will need to replace the Company.Foothill Facility
on or before December 14, 2002. In the event E&S is not able to obtain an
acceptable credit facility to replace the Foothill Facility on or before
December 14, 2002, E&S may be unable to meet its anticipated working capital
needs, routine capital expenditures, and current debt service obligations on a
short-term and long-term basis. As of December 31, 2000, the Company has $7.32001, we have $15.7 million
in outstanding borrowings and $15.2$6.0 million in outstanding letters of credit
under the Foothill Facility. Since the end of 2001, we have progressed against
the facility, and as of March 12, 2002 have $6.1 million in outstanding debt and
$4.8 million in outstanding letters of credit.
Evans & Sutherland Computer Limited, a wholly-owned subsidiary of Evans &
Sutherland Computer Corporation, has a $5.0$3.0 million overdraft facility (the
"Overdraft Facility") with Lloyds TSB Bank plc ("Lloyds"). Borrowings under the
Overdraft Facility bear interest at Lloyds' short-term offered rate plus 1.75%
per annum. As of December 31, 2000,2001, there were no borrowings under$4.9 million in outstanding
borrowings. As of March 12, 2002, we had fully paid-off the Overdraft Facility.outstanding balance.
The Overdraft Facility is subject to reduction or demand repayment for any
reason at any time at Lloyds' discretion and expires on November 30, 2001.2002.
Evans & Sutherland Computer Limited executed a letter of negative pledge in
favor of Lloyds whereby it agreed not to sell or encumber its assets, except in
the ordinary course of business. Covenants contained in the Overdraft Facility
restrict dividend payments from Evans & Sutherland Computer Limited and require
maintenance of certain financial covenants. In addition, at December 31, 2000, the Company has $1.52001,
we have $0.9 million of cash on deposit with Lloyds in a restricted cash
collateral account to support certain obligations that the bank guarantees.
At December 31,In July 2000, we formed a joint venture with Quadrant Group plc known as
Quest Flight Training Limited ("Quest"). Quest provides certain equipment,
software, training and other goods and services to the Company has unsecured lettersSecretary of credit
totaling approximately $1.1 million outstandingState for
Defence of the U.K. Ministry of Defence and other related governmental
30
entities with U.S. Bank, N.A.regard to an upgrade of the Ministry of Defence E3D Facility and
E3D Sentry Aircrew Training Services. In connection with the services of Quest
to the U.K. Ministry of Defence, we guaranteed various obligations of Quest.
Some of our guaranteed obligations are without any maximum amount. We believe
that expire
between March 2001 and June 2001.
24
the guarantees we isssued in connection with this project will not be
called upon for payment or performance; however, no assurance can be made that
we will not be obligated to satisfy the obligations of the guarantees.
As of December 31, 2000, the Company2001, we had approximately $18.0 million of 6%
Convertible Subordinated Debentures due in 2012 (the "6% Debentures"). The 6%
Debentures are unsecured and are convertible at each bondholder's option into
shares of the Company'sour common stock at a conversion price of $42.10 or 428,000 shares of
the Company'sour common stock, subject to adjustment. The 6% Debentures are redeemable at the Company'sour
option, in whole or in part, at par.
On February 18, 1998, the Company'sour Board of Directors authorized the repurchase of up
to 600,000 shares of the Company'sour common stock, including the 327,000 shares still
available from the repurchase authorization approved by the Board of Directors
on November 11, 1996. On September 8, 1998, the Company'sour Board of Directors authorized
the repurchase of an additional 1,000,000 shares of the Company'sour common stock. Subsequent toBetween
February 18, 1998 throughand December 31, 1999, the Companywe repurchased 1,136,500 shares of itsour
common stock, leaving 463,500 shares available for repurchase as of March 2, 2001. The Company12,
2002. We did not repurchase any shares of the Company's commonour stock in 2000.during 2001. Stock may be
acquired inon the open market or through negotiated transactions. Under the
program, repurchases may be made from time to time, depending on market
conditions, share price and other factors. The CompanyFoothill Facility requires that
we obtain prior consent from Foothill before we repurchase any shares.
We also maintainsmaintain trade credit arrangements with certain of itsour suppliers.
The unavailability of a significant portion of, or the loss of, the various
borrowing facilities of the CompanyE&S or trade credit from suppliers would have a material
adverse effect on the Company'sour financial condition and operations.
In the event the Company'sour various borrowing facilities were to become unavailable, the Companywe
were unable to make timely deliverdeliveries of products pursuant to the terms of
various agreements with third parties, or certain of the
Company'sour contracts were
adversely impacted for failure to meet delivery requirements, the Companywe may be unable
to meet itsour anticipated working capital needs, routine capital expenditures, and
current debt service obligations on a short-term and long-term basis.
We believe that the principal sources of liquidity for 2002 will be a result
of cash flows from operations and proceeds on the sale of certain of our
buildings which, subsequent to December 31, 2001, have been designated by
management as assets to be disposed of. Positive cash flows from operations
during 2002 are largely expected as a result of the restructuring which has
taken place, the progress to date on our Harmony image generator fixed-price
contracts and other cost-cutting measures which will be implemented during 2002.
Circumstances that could materially affect liquidity in 2002 include, but are
not limited to, the following: (i) our ability to meet contractual milestones
related to the delivery and integration of our Harmony image generators,
(ii) our ability to successfully develop and produce new technologies and
products, (iii) our ability to meet our forecasted sales levels during 2002,
(iv) our ability to reduce costs and expenses, (v) our ability to maintain our
commercial simulation business in light of current economic conditions and
(vi) our ability to favorably negotiate sale agreements related to certain of
our buildings.
Management believes that existing cash, cash equivalents, borrowings
available under itsour various borrowing facilities, other asset-related cash
sources and expected cash from future operations will be sufficient to meet the
Company'sour
anticipated working capital needs, routine capital expenditures and current debt
service obligations for the next twelve months. The Foothill Facility expires in
December 2002 and the Overdraft Facility expires on November 30, 2001. There2002. We
anticipate the need to replace these credit facilities; however, there can be no
assurances that the Companywe will be successful in renegotiating itsour existing borrowing
facilities or obtaining additional debt or equity financing. The Company'sOur cash and cash
equivalents,
31
subject to various restrictions previously set forth, are available for working
capital needs, capital expenditures, strategic investments, mergers and
acquisitions, stock repurchases and other potential cash needs as they may
arise.
EFFECTS OF INFLATION
The effects of inflation were not considered material during fiscal years
2001, 2000 and 1999, and are not expected to be material for fiscal year 2002.
ACQUIRED IN-PROCESS TECHNOLOGY
In connection with the acquisitions of AGI and SRI, the Companywe made allocations of
the purchase price to various acquired in-process technology projects. These
amounts were expensed as non-recurring charges in the quarter ended June 26,
1998 because the acquired in-process technology had not yet reached
technological feasibility and had no future alternative uses.
Failure to complete the development of these projects in their entirety, or
in a timely manner, has had a material adverse impact on the
Company'sE&S's results of
operations. We recorded an impairment loss of $0.2 million relating to the
remaining balance of goodwill at the time of the sale of the REALimage Solutions
Group, in the third quarter of 2001. During the third quarter of 1999, the Companywe
recorded an impairment loss of $9.7 million consisting of a write-off of
$4.9 million of goodwill, $4.4 million of intangible assets and $0.4 million of
property, plant and equipment. Actual sales, operating profits and cash flows
attributable to acquired in-process technology have been significantly lower
than the original projections used to value such technology in connection with
each of the respective acquisitions. On-going operations and financial results
for the acquired technology and the CompanyE&S as a whole are subject to a variety of
factors which may not have been known or estimable at the date of such
acquisitions, and the estimates discussed below should not be considered the
Company'sour
current projections for operating results for the acquired businesses or the CompanyE&S as
a whole. Following is a description of the acquired in-process technology and
the estimates made by the CompanyE&S for each of the technologies.
25
Mid-range Professional Graphics SubsystemMID-RANGE PROFESSIONAL GRAPHICS SUBSYSTEM (2100). This technology is a
graphics subsystem with built in VGA core and integral DMA engines. This
technology provides superior graphics performance over previous
technologies, and includes features such as stereo and dual monitor support
and various texture memory configurations. The technology is used in the
AccelGALAXY product, which was completed and began shipping to customers in
late third quarter of 1998. The cost to complete this project subsequent to
the acquisition of AGI was $0.3 million, $0.1 million over the budgeted
amount and was funded by working capital. The project was also completed a
month later than scheduled. The assigned value for this acquired in-process
technology was $6.1 million.
CAD-focused Professional Graphics SubsystemCAD-FOCUSED PROFESSIONAL GRAPHICS SUBSYSTEM (1200). This technology is a
graphics subsystem with lower costs compared to the mid-range technology,
resulting in a more cost-effective graphics solution for the end-user. It
provides the cost sensitive user with adequate graphics performance, with
few features and a single texture configuration option. The technology is
used in the E&S Lightning 1200 product, which was completed in March 1999
and began shipping to customers in April 1999. The cost to complete this
project subsequent to the acquisition of AGI was $0.5 million, $0.2 million
over the budgeted amount and was funded by working capital. This project was
completed five months later than originally projected. The assigned value
for this acquired in-process technology was $6.2 million.
Multiple-Controller Graphics SubsystemsMULTIPLE-CONTROLLER GRAPHICS SUBSYSTEMS (2200). This technology is a
high-end graphics subsystem involving the parallel use of two or four
controllers. This technology is aimed at super users in the graphics area
who need significant increases in performance and features to accomplish
their tasks and are willing to pay the increased price necessary to support
those
32
requirements. During the third quarter of 1999, the Companywe determined the technology
and graphics subsystem, as originally designed, would not be a viable
product in the workstation marketplace. The cost to complete this project
subsequent to the acquisition of AGI was $1.7 million. The project was
completed in the fourth quarter of 1999, approximately 9 months later than
planned. This project was funded by working capital. The assigned value for
this acquired in-process technology was $2.7 million.
On-board Geometry Engine Graphics Subsystem (AccelGMX)ON-BOARD GEOMETRY ENGINE GRAPHICS SUBSYSTEM (ACCELGMX). This technology is
a mid-range graphics subsystem with a geometry engine on board. This
technology is aimed at the performance intensive graphics end-user. It has
fewer features than the mid-range professional technology, but faster
geometry performance compared to the mid-range professional technology on
Pentium II processors. This technology was completed in the third quarter of
1998 and the AccelGMX product that uses this technology began shipping to
customers at that time. The cost to complete this project subsequent to the
acquisition of AGI was $0.1 million and was funded by working capital. The
assigned value for this acquired in-process technology was $5.3 million.
The AccelGALAXY performed below sales estimates due to the delay in our
product introduction by the CompanyE&S and a delayed design win at one major OEM. These
delays, in addition to increased competition, caused an erosion of approximately
50% of the projected average selling price for the AccelGALAXY and a loss of
projected unit sales. Subsequent to the Company'sour acquisition of AGI, the developer of the
chip used on the AccelGMX also acquired a board company and entered the graphics
accelerator market in direct competition with the AccelGMX. Due to the advantage
of producing the chip, the competitor can produce a comparable product at a
lower cost; thus, the AccelGMX has performed below sales estimates and the Companywe no
longer expects to generate significant sales from this product. The E&S
Lightning 1200 performed below sales estimates due to the delay in our product
introduction by the Company.introduction. As a result of the delay in product introduction, most
OEMs selected a competing product. The expected sales volume and average selling
price of the E&S Lightning 1200 have been significantly reduced. 26
The CompanyAt the time of
the sale of the REALimage Solutions Group in the third quarter of 2001, sales of
all the group's products had decreased to nominal levels.
We periodically reviewsreview the value assigned to the separate components of
goodwill, intangibles and other long-lived assets through comparison to
anticipated, undiscounted cash flows from the underlying assets to assess
recoverability. The assets are considered to be impaired when the expected
future undiscounted cash flows from these assets do not exceed the carrying
balances of the related assets. Based on the events described above and in
accordance with SFAS 121 during the third quarter of 1999 the Companywe recorded an
impairment loss of $9.7 million related to the acquisition of AGI and SRI. The
impairment loss consisted of the write-off of $4.9 million of goodwill,
$4.4 million of intangible assets and $0.4 million of property, plant and
equipment. EFFECTS OF INFLATION
The effectsWe recorded an impairment loss of inflation were not considered material during fiscal
years 2000, 1999 and 1998, and are not$0.2 million relating to the
remaining value of goodwill at the time of the sale of the REALimage Solutions
Group in the third quarter of 2001.
OUTLOOK
2002 is expected to be materiala year that returns E&S to a focus on its core
business. This encompasses visualization systems, components, spares, repairs,
and training for fiscal year
2001.
OUTLOOK
Looking forward, the Company expects sales to increase in 2001. The
increase in expected salessimulation marketplace. Our focus is due primarily to higher anticipated sales ina function of the Simulation and Application Groups offset by lower anticipated sales insale
of the REALimage Solutions Group. SalesGroup in 2001 and closing down the Simulation GroupRAPIDsite business
in 2001. Implicit in these changes is a consolidation of the business base.
Revenues are expected to increasecontract by 10% from the $145 million mark set in 2001.
However, a more focused management team coupled with core product offerings is
expected to revive our financial performance through higher margin business. New
2001 as comparedcore business bookings, averaging greater than 40% gross margin, have
positioned our year-end backlog, of $104 million, to 2000 as orders and backlog continuesupport this improvement.
Our main near-term challenge continues to grow in
those businesses. As of December 31, 2000 the Company's orders backlog was
$142.7 million.
We believe the Company's main challenge isbe the completion of our initial
Harmony programs (referred to as the Company's"Big 6 Programs"). We did make significant
contracts. The Company is in the process of completing
certain contracts, which include the Harmony image generator. Certain ofprogress on these contracts wereprograms during
33
2001. Our return to be completed and integrated during 1999 and 2000.
Consequently, as of December 31, 2000, in accordance with original contractual
provisions, the Company incurred liquidated damages and late delivery penalties
totaling $9.1 million. The Company paid $6.0 million of this amount in 2000. The
Company is investing considerable resources in capital equipment, human
resources and other research and development expenses to develop Harmony-related
products. The near-term success of the Companyprofitability, on a quarter-by-quarter basis, is dependent
in large part on the successful execution of these programs.
The Company is currently evaluating various business arrangementsprograms in the first half of
its REALimage Solutions Group2002. Year-to-date 2002, milestones are being met, a majority of first unit
systems have passed testing, and its E&S RAPIDsite businessseveral are already in order to enhancetraining. Combined, the
valueBig 6 Programs are in excess of these businesses, including, but not limited to, transferring90% complete. In looking towards the assets of each of these businesses to wholly-owned subsidiaries and seeking
outside investment to assist with the developmentsecond half
of the productsyear when these programs are expected to be essentially complete, we
believe that the financial posture will be much improved. Cash generation for
the second half of these
businesses.2002 is expected to increase to a level of $5 million per
quarter from operations and profits are expected to be produced.
The foregoing contains "forward-looking statements" within the meaning of
that term in Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Exchange Act of 1934, as amended, including, among others,
those statements preceded by, followed by or including the words "estimates,"
"believes," "expects," "anticipates," "plans," "projects," and similar
expressions.
These forward-looking statements include, but are not limited to, the
following statements:
- the successful execution of the Big 6 programs by the end of 2002;
- we will generate $5 million of cash per quarter and will be profitable in
the second half of 2002;
- projections of sales and net income and issues that may affect sales or
net income;
- projections of capital expenditures;
- plans for future operations;
- financing needs or plans;
- plans relating to the Company'sour products and services;
plans- Simulation Group will experience growth in its markets as simulation
training increases in value as an alternative to enter intoother training methods,
and as simulation training technology and cost-effectiveness improve;
- additional enhancements to iNTegrator will expand its functionality and
help secure E&S's dominant position in its main target markets, both
commercial and military simulation;
- E&S is able to compete effectively in the simulation market and will
continue to be able to do so in the foreseeable future;
- approximately two-third's of Simulation Group's 2001 backlog will be
converted to sales in 2002 and replaced with new orders;
- the Applications Group's new product will be launched in the first half of
2002;
- our properties are suitable for our immediate needs;
- total research and development spending will be lower in 2002 than in
2001;
- E&S will ultimately prevail in the litigation with Lockheed Martin
Corporation;
- E&S will not be liable for any further material liquidated damages and
late delivery penalties during 2002;
- existing cash, cash equivalents, borrowings available under E&S's various
arrangementsborrowing facilities, other asset-related cash sources and expected cash
from future operations will be sufficient to enhancemeet E&S's anticipated
working capital needs, routine capital expenditures and current debt
service obligations for the valuenext twelve months;
- the guarantees of REALimage Solutions GroupE&S issued in connection with the services of our joint
venture entity, Quest Flight Training Ltd. to the UK Ministry of Defence
or other parties will not be called upon for payment or performance;
- revenue is expected to contract by 10% from 2001 to 2002; and
the
E&S RAPIDsite business and34
- assumptions relating to the foregoing.
Forward-looking statements are inherently subject to risks and
uncertainties, some of which cannot be predicted or quantified. Future events
and actual results could differ materially from those set forth in, contemplated
by, or underlying the forward-looking information. Our actual results could
differ materially from these forward-looking statements. In addition to the
other risks described below in the "Factors That May Affect Future Results,"Results" discussed
below, important factors to consider in evaluating such forward-looking
statements include risk of product demand, market acceptance, economic
conditions, competitive products and pricing, difficulties in product
development, product delays, commercialization and technology.technology, and our ability
to maintain credit facilities to support our operations on favorable and
acceptable terms. In light of these risks and uncertainties, there can be no
assurance that the events contemplated by the forward-looking statements
contained in this annual report will, in fact, occur.
27
FACTORS THAT MAY AFFECT FUTURE RESULTS
Evans & Sutherland'sOur domestic and international businesses operate in highly competitive
markets that involve a number of risks, some of which are beyond our control.
While we are optimistic about our long-term prospects, the following discussion
highlights some risks and uncertainties that should be considered in evaluating
our growth outlook.
E&S's Business May Suffer if Our Competitive Strategy is Not SuccessfulOUR BUSINESS MAY SUFFER IF OUR COMPETITIVE STRATEGY IS NOT SUCCESSFUL
Our continued success depends on our ability to compete in an industry that
is highly competitive, with rapid technological advances and constantly
improving products in both price and performance. As most market areas in which
we operate continue to grow, we are experiencing increased competition, and we
expect this trend to continue. In recent years, we have been forced to adapt to
domestic and worldwide political, economic, and technological developments that
have strongly affected our markets. Under our current competitive strategy, we
endeavor to remain competitive by growing existing businesses, developing new
businesses internally, selectively acquiring businesses, increasing efficiency,
improving access to new markets, and reducing costs. Although our executive
management team and Board of Directors continue to review and monitor our
strategic plans, we have no assurance that we will be able to continue to follow
our current strategy or that this strategy will be successful.
E&S's Stock Price May be Adversely Impacted if Our Sales or Earnings
Fail to Meet ExpectationsOUR STOCK PRICE MAY BE ADVERSELY IMPACTED IF OUR SALES OR EARNINGS FAIL TO MEET
EXPECTATIONS
Our stock price is subject to significant volatility and will likely be
adversely affected if sales or earnings in any quarter fail to meet the
investment community's expectations. Our sales and earnings may fail to meet
expectations because they fluctuate and are difficult to predict. Our earnings
during 19992001 and 2000 fluctuated significantly from quarter to quarter. One of
the reasons we experience such fluctuations is that the largest share of our
sales and earnings is from our Simulation Group, which typically has long
delivery cycles and contract lengths. The timing of customer acceptance of
certain large-scale commercial or government contracts may affect the timing and
amount of sales that can be recognized; thus, causing our periodic operating
results to fluctuate. Our results may further fluctuate if United States and
international governments delay or even cancel production on large-scale
contracts due to lack of available funding.
35
Our earnings may not meet either investor or internal expectations because
our budgeted operating expenses are relatively fixed in the short term and even
a small sales shortfall may cause a period's results to be below expectations.
Such a sales shortfall could arise from any number of factors, including:
o- delays in the availability of products,
o- delays from chip suppliers,
o- discontinuance of key components from suppliers,
o- other supply constraints,
o- transit interruptions,
o- overall economic conditions, and
o- customer demand.
Another reason our earnings may not meet expectations is that our gross
margins are heavily influenced by mix considerations. These mix considerations
include the mix of lower-margin prime contracts versus sub-contracts, the mix of
new products and markets versus established products and markets, the mix of
high-end products versus low-end products, as well as the mix of configurations
within these product categories. Future margins may not duplicate historical
margins or growth rates.
28
Our Significant Debt Could Adversely Affect Our Financial Resources and Prevent
Us from Satisfying Our Debt Service ObligationsOUR SIGNIFICANT DEBT COULD ADVERSELY AFFECT OUR FINANCIAL RESOURCES AND PREVENT
US FROM SATISFYING OUR DEBT SERVICE OBLIGATIONS
We have a significant amount of indebtedness and may also incur additional
indebtedness in the future. We may not generate sufficient cash flow from
operations, or have future borrowings available to us, sufficient to pay our
debt. At December 31, 2000,2001, total indebtedness was $25.9$38.9 million and our total
stockholders' equity was $67.6$64.7 million.
Our ability to make debt payments or refinance our indebtedness depends on
future performance, which, to a certain extent, is subject to general economic,
financial, competitive and other factors, some of which are beyond our control.
Based upon our current level of operations and anticipated growth, management
believes that available cash flow, together with available credit, will be
adequate to meet our financial needs. There can be no assurance, however, that
our business will generate sufficient cash flow from operations or that future
borrowings will be available in an amount sufficient to enable us to pay our
debts or to make necessary capital expenditures, or that any refinancing of debt
would be available on commercially reasonable terms or at all.
Our substantial indebtedness could have important consequences including,
but not limited to, the following:
(i)- the ability to obtain additional financing for working capital, capital
expenditures, acquisitions, or other purposes may be impaired or
unavailable;
(ii)- a portion of cash flow will be used to pay interest expense, which will
reduce the funds that would otherwise be available for operations and
future business opportunities;
(iii)- a substantial decrease in net operating cash flows or an increase in
expenses could make it difficult for us to meet our debt service
requirements and force us to modify operations;
(iv)- we may be more highly leveraged than our competitors, which may place us
at a competitive disadvantage;
(v)- our substantial indebtedness may make us more vulnerable to a downturn in
our business or in the economy generally; and
(vi)36
- some of our existing debt contains financial and restrictive covenants
that limit our ability to, among other things, borrow additional funds,
acquire and dispose of assets, and pay cash dividends.
A portion of our outstanding indebtedness bears interest at variable rates.
Any increase in interest rates will reduce funds available to us for our
operations and future business opportunities and will exacerbate the
consequences of our leveraged capital structure.
Covenants and Restrictions in Our Credit Documents Limit Our Ability
to Take Certain ActionsCOVENANTS AND RESTRICTIONS IN OUR CREDIT DOCUMENTS LIMIT OUR ABILITY TO TAKE
CERTAIN ACTIONS
Our credit documents contain significant financial and operating covenants
that limit the discretion of management with respect to certain business
matters. These covenants include, among others, restrictions on our ability to:
o- declare dividends or redeem or repurchase capital stock;
o- incur certain additional debt;
o- grant liens;
o- make certain payments and investments;
o- sell or otherwise dispose of assets; and
o- consolidate with other entities.
We must also meet certain financial ratios and tests, including a minimum
tangible net worth that adjusts each quarter, an unbilled receivables to billed
receivables ratio, and a limitation of $12.0 million of aggregate capital
expenditures in any fiscal year. Failure to comply with the obligations
contained in the credit documents could result in an event of default, and
possibly the acceleration of the related debt and the acceleration of debt under
other instruments evidencing debt that may contain cross-acceleration or
cross-default provisions. WeOn February 22, 2002, Foothill agreed to waive all
events of financial covenant default through December 31, 2001 and to revise our
2002 financial covenants. Therefore, we are currently in compliance with our
financial covenants, although a continuation of recent negative operating trends
could impact our future compliance with such covenants. Should the need arise,
we will negotiate with our lenders to modify and expand various financial
covenants, however, no assurance can be given that such negotiations will result
in modifications that will allow us to continue to be in compliance or otherwise
be acceptable to us.
29
Delays in the Timely Delivery of Our Products May Prevent Us From Invoicing Our
Costs and Estimated Earnings in Excess of Billings on Uncompleted Contracts.DELAYS IN THE TIMELY DELIVERY OF OUR PRODUCTS MAY PREVENT US FROM INVOICING OUR
COSTS AND ESTIMATED EARNINGS IN EXCESS OF BILLINGS ON UNCOMPLETED CONTRACTS.
In accordance with accounting for long-term contracts, we record an asset
for our costs and estimated earnings that exceed the amount we are able to bill
our customers on uncompleted contracts. At December 31, 2000, $46.02001, $29.8 million of
our costs and estimated earnings that exceeded our billings on uncompleted
contracts related to fivefour contracts with fivefour different customers. We are not
able to bill these amounts unless we meet certain contractual milestones related
to the delivery and integration of our Harmony image generators. Our failure to
achieve these contractual milestones by timely delivering and integrating our
Harmony image generators may significantly impact our ability to recover our
costs and estimated earnings that exceeded our billings on uncompleted
contracts, which could severely impact our cash flow.
Failure to Protect Our Intellectual Property Could Harm Our Name
Recognition Efforts and Ability to Compete Effectively37
FAILURE TO PROTECT OUR INTELLECTUAL PROPERTY COULD HARM OUR NAME RECOGNITION
EFFORTS AND ABILITY TO COMPETE EFFECTIVELY
Currently, we rely on a combination of patents, trademarks, copyrights and
common law safeguards including trade secret protection. To protect our
intellectual property rights in the future, we intend to continue to rely on a
combination of patents, trademarks, copyrights and common law safeguards,
including trade secret protection. We also rely on restrictions on use,
confidentiality and nondisclosure agreements and other contractual arrangements
with our employees, affiliates, customers, alliance partners and others. The
protective steps we have taken may be inadequate to deter misappropriation of
our intellectual property and proprietary information. A third party could
obtain our proprietary information or develop products or technology competitive
with ours. We may be unable to detect the unauthorized use of, or take
appropriate steps to enforce our intellectual property rights. Effective patent,
trademark, copyright and trade secret protection may not be available in every
country in which we offer or intend to offer our products and services to the
same extent as in the United States. Failure to adequately protect our
intellectual property could harm or even destroy our brands and impair our
ability to compete effectively. Further, enforcing our intellectual property
rights could result in the expenditure of significant financial and managerial
resources and may not prove successful.
We Could Incur Substantial Costs Defending Our Intellectual Property from
Claims of Infringement
The industry is characterized by frequent litigation regarding
copyright, patent and other intellectual property rights. We may be subject to
future litigation based on claims that our products infringe the intellectual
property rights of others or that our own intellectual property rights are
invalid. Claims of infringement could require us to reengineer or rename our
products or seek to obtain licenses from third parties in order to continue
offering our products. Licensing or royalty agreements, if required, may not be
available on terms acceptable to us or at all. Even if successfully defended,
claims of infringement could also result in significant expense to us and the
diversion of our management and technical resources.
E&S's Significant Investment in Research and Development May Not be RealizedOUR SIGNIFICANT INVESTMENT IN RESEARCH AND DEVELOPMENT MAY NOT BE REALIZED
We have no assurance that our significant investment in research and
development will generate future sales or benefits. We currently make and plan
to continue to make a significant investment in research and development. Total
spending for research and development was $28.8 million or 19.8% of sales in
2001 as compared to $44.3 million or 27%26.5% of sales in 2000
as compared to $44.4 million or 22% of sales in 1999. This investment is
necessary for us to be able to compete in the graphics simulation industry.2000. Developing new
products and software is expensive and often involves a long payback cycle.
While we have every reason to believe these investments will be rewarded with
sales-generating products, customer acceptance ultimately dictates the success
of development and marketing efforts.
E&S May Not Continue to be Successful if We Are Unable to Develop,
Produce and Transition Our ProductsWE MAY NOT CONTINUE TO BE SUCCESSFUL IF WE ARE UNABLE TO DEVELOP, PRODUCE AND
TRANSITION OUR PRODUCTS
Our continued success depends on our ability to develop, produce and
transition technologically complex and innovative products that meet customer
needs. We have no assurance that we will be able to successfully continue such
development, production and transition.
30
The development of new technologies and products is increasingly complex and
expensive, which among other risks, increases the risk of product introduction
delays. The introduction of a new product requires close collaboration and
continued technological advancement involving multiple hardware and software
design and manufacturing teams within E&S as well as teams at outside suppliers
of key components. The failure of any one of these elements could cause our new
products to fail to meet specifications or to miss the aggressive timetables
that we establish and the market demands.
As the variety and complexity of our product families increase, the process
of planning and managing production, inventory levels, and delivery schedules
also becomes increasingly complex. There is no assurance that acceptance of and
demand for our new products will not be affected by delays in this process.
Additionally, if we are unable to meet our delivery schedules, we may be subject
to the penalties, including liquidated damages that are included in some of our
customer contracts, and termination of our contracts.
Product transitions are a recurring part of our business. Our short product
life cycles require our ability to successfully manage the timely transition
from current products to new products. In fact, it is not unusual for us to
announce a new product while its predecessor is still in the final stages of its
development. Our transition results could be adversely affected by such factors
as:
o- development delays,
o38
- late release of products to manufacturing,
o- quality or yield problems experienced by production or suppliers,
o- variations in product costs,
o- excess inventories of older products and components, and
o- delays in customer purchases of existing products in anticipation of the
introduction of new products.
In the Event E&S Suffers Further Product Delays, E&S May Be Required to Pay
Certain Customers Substantial Liquidated DamagesIN THE EVENT WE SUFFER FURTHER PRODUCT DELAYS, WE MAY BE REQUIRED TO PAY CERTAIN
CUSTOMERS SUBSTANTIAL LIQUIDATED DAMAGES AND OTHER PENALTIES
The variety and complexity of our high technology product lines require us
to deal with suppliers and subcontractors supplying highly specialized parts,
operating highly sophisticated and narrow tolerance equipment in performing
highly technical calculations. The processes of planning and managing
production, inventory levels and delivery schedules are also highly complex and
specialized. Many of our products must be custom designed and manufactured,
which is not only complicated and expensive, but can also require a number of
months to accomplish. Slight errors in design, planning and managing production,
inventory levels, delivery schedules, or manufacturing can result in
unsatisfactory products that may not be correctable. If we are unable to meet
our delivery schedules, we may be subject to penalties, including liquidated
damages that are included in some of our customer contracts. During the fourth
quarter of 1999, we accrued $8.2 million for payments of liquidated damages and
penalties due to product delays. As of December 31, 2000, we have paid
$6.0 million in connection with liquidated damages. During 2000, we accrued an
additional $0.9 million for late delivery penalties. During 2001 we accrued
$2.9 million to cover penalties, that is expectedagainst which we paid $2.7 million. In 2001, we
also accrued $1.5 million to be
settled in 2001.cover additional costs incurred by customers. There
is no assurance that we may not incur substantial liquidated damages in the
future in connection with further product delays.
E&S May Not Maintain a Significant Portion of Our Sales if We Fail to Maintain
Our United States Government ContractsWE MAY NOT MAINTAIN A SIGNIFICANT PORTION OF OUR SALES IF WE FAIL TO MAINTAIN
OUR UNITED STATES GOVERNMENT CONTRACTS
In 2000, 40%2001, 48% of our sales were to agencies of the United States government,
either directly or through prime contractors or subcontractors, for which there
is intense competition. Accordingly, we have no assurance that we will be able
to maintain a significant portion of our sales. These sales are subject to the
inherent risks related to government contracts, including uncertainty of
economic conditions, changes in government policies and requirements that may
reflect rapidly changing military and political developments, and unavailability
of funds. These risks also include technological uncertainties and obsolescence,
and dependence on annual Congressional appropriation and allotment of funds. In
the past, some of our programs have been delayed, curtailed, or terminated.
Although we cannot predict such uncertainties, in our opinion there are no
spending reductions or funding limitations pending that would impact our
contracts.
31
Other characteristics of the government contract market that may affect our
operating results include the complexity of designs, the difficulty of
forecasting costs and schedules when bidding on developmental and highly
sophisticated technical work, and the speed with which product lines become
obsolete due to technological advances and other factors characteristic of the
market. Our earnings may vary materially on some contracts depending upon the
types of government long-term contracts undertaken, the costs incurred in their
performance, and the achievement of other performance objectives. Furthermore,
due to the intense competition for available United States government business,
maintaining or expanding government business increasingly requires us to commit
additional working capital for long-term programs and additional investments in
company-funded research and development.
39
Our dependence on government contracts may lead to other perils as well
because as a United States government contractor or sub-contractor, our
contracts and operations are subject to government oversight. The government may
investigate and make inquiries of our business practices and conduct audits of
our contract performance and cost accounting. These investigations may lead to
claims against E&S. Under United States government procurement regulations and
practices, an indictment of a government contractor could result in that
contractor being fined and/or suspended for a period of time from eligibility
for bidding on, or for award of, new government contracts; a conviction could
result in debarment for a specified period of time.
E&S's Sales May Suffer if We Lose Certain Significant CustomersOUR SALES MAY SUFFER IF WE LOSE CERTAIN SIGNIFICANT CUSTOMERS
We currently derive a significant portion of our sales from a limited number
of non-U.S. government customers. The loss of any one or more of these customers
could have a material adverse effect on our business, financial condition and
results of operations. We were dependent on four of our non-U.S. government
customers for approximately 23% of our consolidated sales and three
of our non-U.S. government customers for approximately 24%32% of our consolidated sales in 2000 and 1999, respectively.2001. We expect
that sales to a limited number of customers will continue to account for a
substantial portion of our sales in the foreseeable future. We have no assurance
that sales from this limited number of customers will continue to reach or
exceed historical levels in the future. We do not have supply contracts with any
of our significant customers.
E&S's Sales Will Decrease if We Fail to Maintain Our International BusinessOUR SALES WILL DECREASE IF WE FAIL TO MAINTAIN OUR INTERNATIONAL BUSINESS
Any reduction of our international business could significantly affect our
sales. Our international business accounted for 36%34% of our 20002001 sales. We expect
that international sales will continue to be a significant portion of our
overall business in the foreseeable future.
Our international business experiences many of the same risks our domestic
business encounters as well as additional risks such as exposure to currency
fluctuations and changes in foreign economic and political environments. Despite
our exposure to currency fluctuations, we are not engaged in any material
hedging activities to offset the risk of exchange rate fluctuations.
The ongoing economic crisis affecting the Asian markets is an
example of a change in a foreign economic environment that could affect our
international business. Any similar economic downturns may also decrease the
number of orders we receive and our receivable collections.
Our international transactions frequently involve increased financial and
legal risks arising from stringent contractual terms and conditions and widely
differing legal systems, customs, and standards in foreign countries. In
addition, our international sales often include sales to various foreign
government armed forces, with many of the same inherent risks associated with
United States government sales identified previously.
Future Losses Could Impair Our Ability to Raise Capital or Borrow Money and
Consequently Affect Our Stock PriceFUTURE LOSSES COULD IMPAIR OUR ABILITY TO RAISE CAPITAL OR BORROW MONEY AND
CONSEQUENTLY AFFECT OUR STOCK PRICE
Although we recorded net sales of $167.0$145.3 million for the twelve months ended
December 31, 2000,2001, we incurred a net loss of $69.6$27.5 million in 2000.2001. We have
incurred net losses totaling $109.0$136.5 million over the past threefour years. We cannot
assure you that we will be profitable in future periods. Losses in future
periods could impair our ability to raise additional capital or borrow money as
needed, could decrease our stock price and could cause a violation of certain
covenants in our credit facility.
32
If E&S's Commercial Simulation Business Fails, E&S's Sales will Decreasefacilities.
IF OUR COMMERCIAL SIMULATION BUSINESS DECLINES, OUR SALES WILL DECREASE
We have no assurance that our commercial simulation (airline) business will
continue to succeed. Our commercial simulation business currently accounts for
approximately 15% to 20% of our sales. This business is subject to many of the
risks related to the commercial simulation market that may
40
adversely affect our business. The following risks are characteristic of the
commercial simulation market:
o- uncertainty of economic conditions,
o- dependence upon the strength of the commercial airline industry,
o- air pilot training requirements,
o- competition,
o- changes in technology, and
o- timely performance by subcontractors on contracts in which E&S is the
prime contractor.
We May Make Acquisitions that are Unsuccessful or Strain or Divert Our
Resources from More Profitable OperationsWE MAY MAKE ACQUISITIONS THAT ARE UNSUCCESSFUL OR STRAIN OR DIVERT OUR RESOURCES
FROM MORE PROFITABLE OPERATIONS
We intend to consider acquisitions, alliances, and transactions involving
other companies that could complement our existing business. However, we may not
be able to identify suitable acquisition parties, joint venture candidates, or
transaction counterparties. Also, even if we can identify suitable parties, we
may not be able to obtain the financing necessary to complete any such
transaction or consummate these transactions on terms that we find favorable.
We may not be able to successfully integrate any businesses that we acquire
into our existing operations. If we cannot successfully integrate acquisitions,
our operating expenses may increase. This increase would affect our net
earnings, which could adversely affect the value of our outstanding securities.
Moreover, these types of transactions may result in potentially dilutive
issuances of equity securities, the incurrence of additional debt, and
amortization of expenses related to goodwill and intangible assets, all of which
could adversely affect our profitability. These transactions involve numerous
other risks as well, including the diversion of management attention from other
business concerns, entry into markets in which we have had no or only limited
experience, and the potential loss of key employees of acquired companies.
Occurrence of any of these risks could have a material adverse effect on us.
Our Contemplated Business Arrangements to Enhance the ValueOUR OPERATIONS COULD BE HURT BY TERRORIST ATTACKS AND OTHER ACTIVITIES THAT MAKE
AIR TRAVEL DIFFICULT OR REDUCE THE WILLINGNESS OF OUR COMMERCIAL AIRLINE
CUSTOMERS TO PURCHASE OUR SIMULATION PRODUCTS.
During 2001, $30.0 million, or 21% of our REALimage
Solutionstotal revenue generated from our
Simulation Group, was derived from sales of our simulation products to
commercial airline companies and RAPIDsite Business May not be Successful.
Weother third parties in the commercial airline
industry. The demand for our various commercial simulation products and services
is heavily dependant upon new orders from these commercial airline customers. In
the event terrorist attacks or other activities make air travel difficult or
reduce the demand or willingness of our customers to purchase our commercial
simulation products, our revenue may decline substantially. Since September 11,
2001, training requirements have increased to certify pilots, co-pilots and
flight engineers for different aircraft types and changing flight procedures. In
conjunction with this trend, the Simulation Group has been contacted by one of
our largest commercial customers to deliver two-times the average annual number
of systems. In addition to these additional systems, the contract provides for
an option to deliver further systems in 2002. However, at this time, we are
considering various business arrangements relatingunable to our
REALimage Solutions Group and our RAPIDsite business in order to enhancepredict the valuelong-term impact of these businesses, including, but not limited to, transferring the
assets of each of these two businesses to wholly-owned subsidiariesevents on either our industry as
a whole or on our operations and seeking
outside investment to assist with the development of the products of these
businesses. However, we may not be able to identify suitable parties, joint
venture candidates, or transaction counterparties. Also, even if we can identify
suitable parties, we may not be able to obtain the financing necessary to
complete any such transaction or consummate these transactions on terms that we
find favorable. These transactions involve numerous other risks as well,
including the diversion of management attention from other business concerns and
entry into marketsfinancial condition in which we have had only limited experience. Occurrence of
any of these risks could have a material adverse effect on us.
E&S's Shareholders May Not Realize Certain Opportunities Because of the
Anti-Takeover Effect of State Lawparticular.
OUR SHAREHOLDERS MAY NOT REALIZE CERTAIN OPPORTUNITIES BECAUSE OF THE
ANTI-TAKEOVER EFFECT OF STATE LAW
We may be subject to the Utah Control Shares Acquisition Act which provides
that any person who acquires 20% or more of the outstanding voting shares of a
publicly held Utah corporation will
41
not have voting rights with respect to the acquired shares unless a majority of
the disinterested shareholders of the corporation votes to grant such rights.
This could deprive shareholders of opportunities to realize takeover premiums
for their shares or other advantages that large accumulations of stock would
provide because anyone interested in acquiring E&S could only do so with the
cooperation of our board of directors.
33
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The principal market risks to which the Company iswe are exposed are changes in foreign
currency exchange rates and changes in interest rates. The
Company'sOur international sales,
which accounted for 36%34% of the Company'sour total sales in 20002001 are concentrated in the
United Kingdom, continental Europe and Asia. Foreign currency purchase and sale
contracts are entered into for periods consistent with related underlying
exposures and do not constitute positions independent of those exposures. The Company doesWe do
not enter into contracts for trading purposes and doesdo not use leveraged
contracts. As of December 31, 2000,
the Company2001, we had no material sales or purchase
contracts in currencies other than U.S. dollars and had no foreign currency
sales or purchase contracts.
The Company reduces itsWe reduce our exposure to changes in interest rates by maintaining a high
proportion of itsour debt in fixed-rate instruments. As of December 31, 2000, 71%2001, 47%
of the Company'sour total debt was in fixed-rate instruments. Had the Companywe fully drawn on itsour
$30 million revolving line of credit with Foothill Capital Corporation and itsour
foreign line of credit, 48%39% of the Company'sour total debt would be in fixed-rate
instruments.
In addition, the
Company maintains an average maturity of its short-term investment portfolio
under three months to avoid large changes in its market value. As of December
31, 2000, all investments had maturities within 90 days.
The information below summarizes the Company'sE&S's market risks associated with debt
obligations as of December 31, 2000.2001. Fair values have been determined by quoted
market prices. For debt obligations, the table below presents the principal cash
flows and related interest rates at year end by fiscal year of maturity. Bank
borrowings bear variable rates of interest and the 6% Debentures bear a fixed
rate of interest. The information below should be read in conjunction with
note 11ofNote 10 of Notes to the Consolidated Financial Statements in Part II of this
annual report.
There- Fair
Rate 2001THERE- FAIR
RATE 2002 2003 2004 2005 after Total Value2006 AFTER TOTAL VALUE
-------- ------- ------- ------- ------- ------- ------- ------- --------------- -------- -------- -------- -------- -------- -------- --------
Debt
Notes payable ........... VariousDEBT
Bank Borrowings 9.1% $ 34420,830 -- $ 71 -- -- -- $ 20,901 $ 20,901
======== ======== ======== ======== ======== ======== ======== ========
6% Debentures 6.0% -- -- -- -- -- $ 34418,015 $ 344
======= ======= ======= ======= ======= ======= ======= =======
6% Debentures ........... 6.0%18,015 $ 6,756
-------- -------- -------- -------- -------- -------- -------- --------
Total debt $ 20,830 -- $ 71 -- -- -- -- -- $18,015 $18,015 $ 7,927
Bank borrowings ......... 12.5% --18,015 $ 7,34438,916 $ 204 -- -- -- 7,548 7,548
------- ------- ------- ------- ------- ------- ------- -------
Total long-term debt .... -- $ 7,344 $ 204 -- -- $18,015 $25,563 $15,475
======= ======= ======= ======= ======= ======= ======= =======27,657
======== ======== ======== ======== ======== ======== ======== ========
3442
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following constitutes a list of Financial Statements included in
Part II of this report:
o- Report of Management
o- Report of Independent Accountants
oAuditors
- Consolidated Balance Sheets as of December 31, 2001 and 2000
and 1999
o- Consolidated Statements of Operations for each of the years in the
three-year period ended December 31, 2000
o2001
- Consolidated Statements of Comprehensive Loss for each of the years in the
three-year period ended December 31, 2000
o2001
- Consolidated Statements of Stockholders' Equity for each of the years in
the three-year period ended December 31, 2000
o2001
- Consolidated Statements of Cash Flows for each of the years in the
three-year period ended December 31, 2000
o2001
- Notes to Consolidated Financial Statements for each of the years in the
three-year period ended December 31, 20002001
The following consists of a list of Financial Statement Schedules included
in Part IV of this report:
o- Schedule II - ValuationII--Valuation and Qualifying Accounts for each of the years in
the three-year period ended December 31, 20002001
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.
3543
REPORT OF MANAGEMENT
Responsibility for the integrity and objectivity of the financial
information presented in this report rests with the management of Evans &
Sutherland. The accompanying financial statements have been prepared in
conformity with generally accepted accounting principles applied on a consistent
basis and, where necessary, include estimates based on management judgment.
Management also prepared other information in this report and is responsible for
its accuracy and consistency with the financial statements.
Evans & Sutherland has established and maintains an effective system of
internal accounting controls. The Company believesWe believe this system provides reasonable
assurance that transactions are executed in accordance with management
authorization in order to permit the financial statements to be prepared with
integrity and reliability and to safeguard, verify, and maintain accountability
of assets. In addition, Evans & Sutherland's business ethics policy requires
employees to maintain the highest level of ethical standards in the conduct of
the Company'sour business.
Evans & Sutherland's financial statements have been audited by KPMG LLP,
independent public accountants. Management has made available all the
Company'sof our
financial records and related data to allow KPMG LLP to express an informed
professional opinion in their accompanying report.
The Audit Committee of the Board of Directors is composed of three
independent directors and meets regularly with the independent accountants, as
well as with Evans & Sutherland management, to review accounting, auditing,
internal accounting control and financial reporting matters.
James R. Oyler William M. Thomas
President and
Vice President and Chief Financial
President and Chief Executive Officer Officer
Chief Financial Officer
REPORT OF INDEPENDENT ACCOUNTANTSAUDITORS
The Board of Directors and Stockholders
Evans & Sutherland Computer Corporation:
We have audited the consolidated financial statements of Evans & Sutherland
Computer Corporation and subsidiaries as listed in the accompanying index. In
connection with our audits of the consolidated financial statements, we have
also audited the financial statement schedule as listed in the accompanying
index. These consolidated financial statements and financial statement schedule
are the responsibility of the Company'sEvans & Sutherland's management. Our responsibility is
to express an opinion on these consolidated financial statements and financial
statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Evans &
Sutherland Computer Corporation and subsidiaries as of December 31, 20002001 and
1999,2000, and the results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 2000,2001, in conformity with
accounting principles generally accepted in the United States of America. Also
in our opinion, the related financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
KPMG LLP
Salt Lake City, Utah
FebruaryMarch 15, 2001
362002
44
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
DecemberDECEMBER 31,
----------------------------------------------------
2001 2000
1999
------------ -------------------- --------
Assets:
Cash and cash equivalents ....................................$ 10,651 $ 11,898
$ 22,110
Restricted cash ..............................................870 2,024 --
Short-term investments ....................................... -- 748
Accounts receivable, less allowances for doubtful
receivables of $6,413 in 2001 and $4,411 in 2000 and $1,322 in 1999 ..........30,516 34,572
28,743
Inventories ..................................................38,226 38,383 40,588
Costs and estimated earnings in excess of billings on
uncompleted contracts ..................................47,761 68,464 80,457
Deferred income taxes ........................................ -- 15,923
Prepaid expenses and deposits ................................4,817 5,326
7,844
------------ -------------------- --------
Total current assets ................................132,841 160,667 196,413
Property, plant and equipment, net ..............................41,967 48,665
52,184
Investment securities ...........................................Investments 1,952 5,429 4,467
Deferred income taxes ........................................... -- 4,418
Goodwill and other intangible assets, net .......................-- 374 552
Other assets ....................................................593 943
430
------------ -------------------- --------
Total assets ........................................ $ 216,078 $ 258,464
============ ============$177,353 $216,078
======== ========
Liabilities and stockholders' equity:
Current portion of long-term debt ............................$ 154 $ 344 $ --
Line of credit agreements ....................................20,676 -- 2,657
Accounts payable .............................................11,503 27,087 19,575
Accrued expenses ............................................. 39,832 40,11917,272 26,527
Customer deposits ............................................3,650 3,908 4,720
Billings in excess of costs and estimated earnings on
uncompleted contracts .....................................25,053 27,710
12,412
------------ -------------------- --------
Total current liabilities ........................... 98,881 79,483
------------ ------------78,308 85,576
-------- --------
Long-term debt ..................................................18,086 25,563
18,015
------------ ------------Pension and retirement obligations 16,300 13,305
-------- --------
Total liabilities 112,694 124,444
Commitments and contingencies (notes 7, 106, 9 and 14)13)
Redeemable preferred stock, class B-1, no par value;
authorized 1,500,000 shares; issued and outstanding zero
shares in 2001 and 901,408 shares ......in 2000 -- 24,000
23,772
------------ -------------------- --------
Stockholders' equity:
Preferred stock, no par value; authorized 8,500,000
shares; no shares issued and outstanding .......................... -- --
Common stock, $.20 par value; authorized 30,000,000
shares; issued 10,739,753 shares in 2001 and 9,772,118
shares in 2000 and 9,678,938 shares in 19992,148 1,954 1,936
Additional paid-in capital ...................................49,030 24,752 24,086
Common stock in treasury, at cost; 352,500 shares ............ (4,709) (4,709)
Retained earnings ............................................18,561 46,018 115,816
Accumulated other comprehensive income .......................loss (371) (381)
65
------------ -------------------- --------
Total stockholders' equity ..........................64,659 67,634
137,194
------------ -------------------- --------
Total liabilities and stockholders' equity .......... $ 216,078 $ 258,464
============ ============$177,353 $216,078
======== ========
See accompanying notes to consolidated financial statements
3745
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
Year ended DecemberYEAR ENDED DECEMBER 31,
------------------------------------
2001 2000 1999
1998
------------ ------------ -------------------- -------- --------
Sales ...................................................... $ 166,980 $ 200,885 $ 191,766$145,263 $166,980 $200,885
Cost of sales ..............................................115,823 137,532 127,556 110,320
Write-off of inventories ...................................-- -- 13,230
--
------------ ------------ -------------------- -------- --------
Gross profit ...................................29,440 29,448 60,099
81,446
------------ ------------ -------------------- -------- --------
Expenses:
Selling, general and administrative ..................... 34,229 43,039 40,08830,061 34,406 44,554
Research and development ................................28,844 44,264 44,358
31,797
Amortization of goodwill and other intangible assets .... 177 1,515 4,767REALimage transition costs 5,297 -- --
Restructuring charges 2,843 (761) 1,460
Impairment loss .........................................220 -- 9,693
--
Restructuring charge .................................... (761) 1,460 --
Write-off-------- -------- --------
Operating expenses 67,265 77,909 100,065
-------- -------- --------
(37,825) (48,461) (39,966)
Gain on sale of acquired in-process technology .............assets held for sale 9,000 -- -- 20,780
------------ ------------ ------------
Operating expenses .......................... 77,909 100,065 97,432
------------ ------------ ------------
(48,461) (39,966) (15,986)
Gain on sale of business unit ..............................774 1,918 --
--
------------ ------------ -------------------- -------- --------
Operating loss ..............................(28,051) (46,543) (39,966) (15,986)
Other income (expense):
Interest income .........................................31 659 1,849
2,659
Interest expense ........................................(2,456) (2,195) (1,333) (1,335)
Loss on write down of investment securities .............(306) (7,786) (350) (1,075)
Gain on sale of investment securities ...................538 6,472 --
2,493
Other ...................................................(385) (1,154) 933
(613)
------------ ------------ -------------------- -------- --------
(2,578) (4,004) 1,099
2,129
------------ ------------ -------------------- -------- --------
Loss before income taxes ...................................(30,629) (50,547) (38,867) (13,857)
Income tax expense (benefit) ...............................(3,172) 19,023 (15,413)
2,126
------------ ------------ -------------------- -------- --------
Net loss ......................................(27,457) (69,570) (23,454) (15,983)
Accretion of redeemable preferred stock ....................-- 228 228
95
------------ ------------ -------------------- -------- --------
Net loss applicable to common stock ........................ $ (69,798) $ (23,682) $ (16,078)
============ ============ ============$(27,457) $(69,798) $(23,682)
======== ======== ========
Net loss per common share:
Basic and Diluted .......................................$ (2.70) $ (7.45) $ (2.49)
$ (1.70)
============ ============ ==================== ======== ========
Basic and diluted weighted average common shares
outstanding 10,169 9,372 9,501
9,461
============ ============ ==================== ======== ========
See accompanying notes to consolidated financial statements
3846
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(IN THOUSANDS)
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands)
Year ended DecemberYEAR ENDED DECEMBER 31,
------------------------------------
2001 2000 1999
1998
------------ ------------ -------------------- -------- --------
Net loss ............................................. $ (69,570) $ (23,454) $ (15,983)$(27,457) $(69,570) $(23,454)
Other comprehensive income (loss):
Foreign currency translation adjustments ..........14 (419) (337) 126
Unrealized losses on securities ...................(4) (27) (48) (89)
Reclassification adjustment for losses included in net
loss ...................................-- -- 275
--
------------ ------------ -------------------- -------- --------
Other comprehensive income (loss) before income taxes 10 (446) (110) 37
Income tax expense related to items of other
comprehensive income (loss) .....-- -- 70
12
------------ ------------ -------------------- -------- --------
Other comprehensive income (loss), net of income taxes 10 (446) (180)
25
------------ ------------ -------------------- -------- --------
Comprehensive loss ................................... $ (70,016) $ (23,634) $ (15,958)
============ ============ ============$(27,447) $(70,016) $(23,634)
======== ======== ========
See accompanying notes to consolidated financial statements
3947
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except share amounts)
Accumulated
Common Stock Additional Other
---------------------- Paid-In Treasury Retained Comprehensive
Shares Amount Capital Stock Earnings Income Total
--------- --------- --------- --------- --------- --------- ---------ACCUMULATED
COMMON STOCK ADDITIONAL OTHER
----------------------- PAID-IN TREASURY RETAINED COMPREHENSIVE
SHARES AMOUNT CAPITAL STOCK EARNINGS INCOME (LOSS) TOTAL
---------- ---------- ---------- ---------- ---------- ---------------- ----------
Balance at December 31, 1997 .... 9,0671998 9,598 $ 1,8131,920 $ 8,02523,420 $ -- $ 155,576139,498 $ 220245 $ 165,634
Issuance of common stock for cash 156 32 1,990 -- -- -- 2,022
Common stock issued in
connection with acquisitions . 1,109 222 28,373 -- -- -- 28,595
Common stock repurchased
and retired .................. (734) (147) (15,538) -- -- -- (15,685)
Compensation expense on
employee stock purchase plan . -- -- 186 -- -- -- 186
Tax benefit from issuance of
common stock to employees .... -- -- 384 -- -- -- 384
Other comprehensive income ...... -- -- -- -- -- 25 25
Net loss ........................ -- -- -- -- (15,983) -- (15,983)
Accretion of redeemable
preferred stock .............. -- -- -- -- (95) -- (95)
--------- --------- --------- --------- --------- --------- ---------
Balance at December 31, 1998 .... 9,598 1,920 23,420 -- 139,498 245 165,083
Issuance of common stock for cash 142 28 1,361 -- -- -- 1,389
Repurchase of 413,500 common
shares ....................... (61) (12) (911) (4,709) -- -- (5,632)
Compensation expense on employee
stock purchase plan . -- -- 117 -- -- -- 117
Tax benefit from issuance of
common stock to employees .... -- -- 99 -- -- -- 99
Other comprehensive loss ........ -- -- -- -- -- (180) (180)
Net loss ........................ -- -- -- -- (23,454) -- (23,454)
Accretion of redeemable preferred
stock ............. -- -- -- -- (228) -- (228)
--------- --------- --------- --------- --------- --------- ------------------- ---------- ---------- ---------- ---------- ---------------- ----------
Balance at December 31, 1999 .... 9,679 1,936 24,086 (4,709) 115,816 65 137,194
Issuance of common stock for cash 93 18 562 -- -- -- 580
Compensation expense on employee
stock purchase plan . -- -- 104 -- -- -- 104
Other comprehensive loss ........ -- -- -- -- -- (446) (446)
Net loss ........................ -- -- -- -- (69,570) -- (69,570)
Accretion of redeemable preferred
stock ............. -- -- -- -- (228) -- (228)
--------- --------- --------- --------- --------- --------- ------------------- ---------- ---------- ---------- ---------- ---------------- ----------
Balance at December 31, 2000 .... 9,772 1,954 24,752 (4,709) 46,018 (381) 67,634
Issuance of common stock for cash 67 14 392 -- -- -- 406
Compensation expense on employee
stock purchase plan -- -- 66 -- -- -- 66
Other comprehensive income -- -- -- -- -- 10 10
Net loss -- -- -- -- (27,457) -- (27,457)
Conversion of redeemable
preferred stock for common
stock 901 180 23,820 -- -- -- 24,000
---------- ---------- ---------- ---------- ---------- ---------------- ----------
Balance at December 31, 2001 10,740 $ 1,9542,148 $ 24,75249,030 $ (4,709) $ 46,01818,561 $ (381)(371) $ 67,634
========= ========= ========= ========= ========= ========= =========64,659
========== ========== ========== ========== ========== ================ ==========
See accompanying notes to consolidated financial statements
4048
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year ended DecemberYEAR ENDED DECEMBER 31,
---------------------------------------
2001 2000 1999
1998
---------- ---------- --------------------- ----------- -----------
Cash flows from operating activities:
Net loss ...........................................................................$ (27,457) $ (69,570) $ (23,454) $ (15,983)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Write-off of inventories .....................................................-- -- 13,230
--
Impairment loss ..............................................................220 -- 9,693 --
Depreciation and amortization ................................................13,709 14,264 15,499 15,934
Gain on sale of a business unit ..............................................(774) (1,918) --
Gain on sale of assets held for sale (9,000) -- --
Loss on disposal of property, plant and equipment ............................130 2,794 -- --
Provision for losses on accounts receivable ..................................2,358 3,829 558 496
Provision for obsolete and excess inventories ................................943 6,613 910 1,987
Provision for warranty expense ...............................................2,197 1,189 958 872
Deferred income taxes ........................................................-- 20,341 (8,475) (2,919)
Loss on write-down of investment securities ..................................306 7,786 350 1,075
Gain on sale of investment securities ........................................(538) (6,472) --
(2,493)
Write-off of acquired in-process technology .................................. -- -- 20,780
Other, net ...................................................................18 852 732 868
Changes in assets and liabilities, net of effect of
purchase/sale of business:
Accounts receivable .......................................................1,698 (9,977) 17,474
(3,613)
Inventories ...............................................................(786) (5,992) (6,104) (28,867)
Costs and estimated earnings in excess of billings on
uncompleted contracts, net ............................................12,520 27,296 (16,446) (6,110)
Prepaid expenses and deposits .............................................508 2,407 (565)
(3,533)
Accounts payable ..........................................................(15,584) 6,932 (5,041)
5,699
Accrued expenses ..........................................................(8,456) (1,720) 9,695
(1,739)
Customer deposits .........................................................(258) (812) 1,381
(3,235)
---------- ---------- --------------------- ----------- -----------
Net cash provided by (used in) operating
activities .................(28,246) (2,158) 10,395
(20,781)
---------- ---------- --------------------- ----------- -----------
Cash flows from investing activities:
Purchases of short-term investments ................................................-- (1,875) (14,700) (22,217)
Proceeds from sale of short-term investments .......................................-- 2,627 39,767 47,691
Purchase of investment securities ..................................................-- (500) (636) (541)
Proceeds from sale of investment securities ........................................3,780 1,428 -- 3,304
Proceeds from sale of business unit ................................................6,300 1,400 --
Proceeds from sale of assets held for sale 9,000 -- --
Investment in joint venture ........................................................-- (754) -- --
Purchases of property, plant and equipment .........................................(6,646) (13,868) (14,530) (18,516)
Proceeds from sale of property, plant and equipment ................................26 1,382 -- --
Proceeds from sale of certain manufacturing assets .................................-- -- 6,010
--
Payments for business acquisitions, net of cash acquired ...........................Decrease (increase) in other assets (44) -- --
(7,603)
---------- ---------- --------------------- ----------- -----------
Net cash provided by (used in) investing
activities .................12,416 (10,160) 15,911
2,118
---------- ---------- --------------------- ----------- -----------
Cash flows from financing activities:
Borrowings under line of credit agreements and other
long-term debt ................239,223 22,365 716 3,915
Payments under line of credit agreements and other
long-term debt ..................(226,214) (16,919) (1,869) (1,575)
Payments of debt issuance costs ....................................................-- (1,296) --
--
IncreaseDecrease (increase) in restricted cash ........................................................1,154 (2,024) -- --
Proceeds from issuance of common stock .............................................406 580 1,389 2,022
Proceeds from issuance of preferred stock .......................................... -- -- 23,544--
Payments for repurchases of common stock ...........................................-- -- (5,478)
(15,685)
---------- ---------- --------------------- ----------- -----------
Net cash provided by (used in) financing
activities .................14,569 2,706 (5,242)
12,221
---------- ---------- --------------------- ----------- -----------
Effect of foreign exchange rates on cash and cash
equivalents .........................14 (600) (788)
100
---------- ---------- --------------------- ----------- -----------
Net change in cash and cash equivalents ...............................................(1,247) (10,212) 20,276 (6,342)
Cash and cash equivalents at beginning of year ........................................11,898 22,110 1,834
8,176
---------- ---------- --------------------- ----------- -----------
Cash and cash equivalents at end of year ..............................................$ 10,651 $ 11,898 $ 22,110
$ 1,834
========== ========== ===================== =========== ===========
Supplemental Disclosures of Cash Flow Information
Cash paid (received) during the year for:
Interest ...........................................................................$ 2,426 $ 1,539 $ 1,321
$ 1,309
Income taxes .......................................................................846 (5,887) (5,846) 7,130
Accretion of redeemable preferred stock ............................................... 228-- 228 95228
See accompanying notes to consolidated financial statements
4149
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DecemberDECEMBER 31, 2001, DECEMBER 31, 2000 DecemberAND DECEMBER 31, 1999 and December 31, 1998
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of BusinessDESCRIPTION OF BUSINESS
Evans & Sutherland Computer Corporation ("E&S"Evans & Sutherland," "E&S," "we,"
"us" or the "Company""our") is an established high-technology company with outstanding
computer graphics technology and a worldwide presence in high-performance 3D
visual simulation. In addition, E&S is now applying this core technology into
higher-growth personal computer ("PC") products for both simulation and
workstations. The Company'sOur core computer graphics technology is used to produce high
performance image generators for simulation including PC-based visual system
products, to provide graphics acceleration technology to the professional
digital content creation market, and to apply the Company'sour core technologies to the
expanding market of PC-based applications and products.
Basis of PresentationBASIS OF PRESENTATION
The consolidated financial statements include the accounts of the
CompanyE&S and its
wholly-owned subsidiaries. All intercompanyinter-company accounts and transactions have been
eliminated in consolidation. Certain reclassifications have been made in the
19992000 and 19981999 consolidated financial statements and notes to conform to the 20002001
presentation.
LiquidityLIQUIDITY
Management believes that existing cash, cash equivalents, borrowings
available under its various borrowing facilities, cash expected from the
anticipated sale of certain of E&S's buildings, other asset-related cash sources
and expected cash from future operations will be sufficient to meet the Company'sour
anticipated working capital needs, routine capital expenditures and current debt
service obligations for the next twelve months. The Foothill Facility expires in
December 2002 and the Overdraft Facility expires on November 30, 20012002 (see
note 11)Note 10). There can be no assurances that the
Companywe will be successful in renegotiating
itsour existing borrowing facilities or obtaining additional debt or equity
financing. The
Company'sOur cash and cash equivalents, subject to various restrictions, are
available for working capital needs, capital expenditures, strategic
investments, mergers and acquisitions, stock repurchases and other potential
cash needs as they may arise.
During 2002, we expect to generate cash due to improved earnings, moving
unbilled receivables into receivables and cash, reducing inventory and the sale
of some of our real estate. Due to these expected developments, we expect our
liquidity position to improve and for Foothill to continue the facility.
In the event the Company'sour various borrowing facilities were to become unavailable, the Companywe
were unable to timely deliver products pursuant to the terms of various
agreements with third parties, or certain of the Company'sour contracts were adversely
impacted for failure to meet delivery requirements, the Companywe may be unable to meet itsour
anticipated working capital needs, routine capital expenditures, and current
debt service obligations on a short-term and long-term basis.
Revenue RecognitionREVENUE RECOGNITION
Sales includesinclude revenue from system and software products, software license
rights and service contracts.
The Company has50
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
We have adopted the American Institute of Certified Public Accountants
("AICPA") Statement of Position ("SOP") 97-2, Software"Software Revenue Recognition,Recognition", as
modified by SOP 98-9. SOP 97-2 generally requires revenue earned on software
arrangements involving multiple elements such as software products,
enhancements, post-contract customer support, installation and training to be
allocated to each element based on the relative fair values of the elements. The
fair value of an element must be based on evidence that is specific to the
vendor. The revenue allocated to software products is generally recognized upon
delivery of the products. The revenue allocated to post-contract customer
support is generally recognized over the support period.
42
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company recognizesWe recognize revenues from product sales that do not require significant
production, modification, or customization when the following criteria are met:
the Company haswe have signed a noncancelablenon-cancelable agreement; the Company haswe have delivered the product; there
are no uncertainties surrounding product acceptance; the fees are fixed and
determinable; and collection is considered probable.
Revenue from long-term contracts which require significant production,
modification or customization is recordedrecognized in accordance with provisions of SOP
81-1 "Accounting for Performance of Construction-Type and Certain
Production-Type Contracts" using the
percentage-of-completion method, determined by the units-delivered
method, or when there is significant nonrecurring engineering, the ratio of costs incurred to management's
estimate of total anticipated costs. If estimated total costs on any contract
indicate a loss, the Company provideswe provide currently for the total anticipated loss on the
contract. Billings on uncompleted long-term contracts may be greater than or
less than incurred costs and estimated earnings and are recorded as an asset or
liability in the accompanying consolidated balance sheets.
Cash and Cash Equivalents
The Company considersCASH AND CASH EQUIVALENTS
We consider all highly liquid financial instruments purchased with an
original maturity to the CompanyE&S of 90 days or less to be cash equivalents. Cash
equivalents consist ofinclude debt securities and money marketmoney-market funds of $0 and
$3.8 million and $15.5 million
as ofat December 31, 2001 and 2000, and 1999, respectively.
Restricted Cash
The Company hasRESTRICTED CASH
We have restricted deposits pledged as collateral on overdraft protection,
letters of credit and certain other obligations all of which mature or expire
within one year.
Inventories
InventoriedINVENTORIES
Inventory amounts include materials at standard costs. Inventory also
includes inventoried costs on programs and long-term contracts includewhich includes
direct engineering and production costs and applicable overhead, not in excess
of estimated realizable value. In accordance with industry
practice, inventoried costs include amounts relating to programs and
contracts with long production cycles, a portionvalue, which have not yet been recognized as cost of
which is not
expected to be realized within one year. Inventories are stated at
standard cost, which approximates average cost.sales. Spare parts and general stock materials are stated at cost not in excess
of realizable value. The CompanyWe periodically reviewsreview inventories for excess and obsolete
amounts and providesprovide a reserve that it considerswe consider sufficient to cover any excess
and obsolete inventories.
Property, Plant and EquipmentPROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Depreciation and
amortization are computed using the straight-line method based on the estimated
useful lives of the related assets.
Accounting for Impairment of Long-Lived Assets
The CompanyACCOUNTING FOR IMPAIRMENT OF LONG-LIVED ASSETS
We periodically reviewsreview the value assigned to the separate components of
goodwill, intangibles and other long-lived assets through comparison to
anticipated, undiscounted cash flows from the underlying
51
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
assets to assess recoverability. The assets are considered to be impaired when
the expected future undiscounted cash flows from these assets do not exceed the
carrying balances of the related assets. The impairment loss of $9.7 million for
the year ended December 31, 1999, as determined in accordance with Statement of
Financial Accounting Standards No. 121 ("SFAS 121"), Accounting"Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of,of",
relates to the write-down to fair value of goodwill, intangibles and other
long-lived assets acquired in the acquisition of AccelGraphics, Inc. ("AGI") and
Silicon Reality, Inc. ("SRI"). Fair value was determined utilizing discounted
cash flow analyses and the replacement cost approach. The impairment loss
consisted of the write-off of $4.9 million of goodwill, $4.4 million of
intangible assets and $0.4 million of property, plant and equipment.
43
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In addition to continued losses at AGI, the impairment loss was the result
of the following additional circumstances: (i) delays in production
introductions for the AccelGALAXY, E&S Lightning 1200 and the
multiple-controller graphics subsystems product line; (ii) the developer of the
chip used on the AccelGMX acquired a board company and entered the graphics
accelerator market in direct competition with the AccelGMX; and
(iii) introduction of lower-end products by competitors which can perform many
of the functions of the higher-end 3D graphics cards. Furthermore, the Companywe determined
that a manufacturer of a chip to be used in various new board products was
unable to manufacture a designed chip with agreed upon specifications.
Goodwill and Other Intangible AssetsGOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and other intangible assets consistat December 31, 2000 consisted
primarily of goodwill and other intangible assets recorded in connection with
the acquisitions of AccelGraphics, Inc. and Silicon Reality, Inc. on June 26,
1998. The goodwill and other intangible assets arewere being amortized using the
straight-line method over a period of seven years for goodwill and six months to
seven years.years for other intangible assets. As of December 31, 2000 and 1999, accumulated
amortization of goodwill and other intangible assets was $15.9 million and $15.7 million,
respectively.
Software Development Costsmillion.
SOFTWARE DEVELOPMENT COSTS
Software development costs, if material, are capitalized from the date
technological feasibility is achieved until the product is available for general
release to customers. Such deferrable costs have not been material during the
periods presented.
Investments
The Company classifies itsINVESTMENTS
We classify our marketable debt and equity securities as available-for-sale.
Available-for-sale securities are recorded at fair value. Unrealized holding
gains and losses, net of the related tax effect, are excluded from earnings and
are reported as a component of accumulated other comprehensive income (loss)
until realized. Dividend income is recognized when earned. Realized gains and
losses from the sale of securities are included in results of operations and are
determined on the specific-identification basis. A decline in the market value
below cost that is deemed other than temporary is charged to results of
operations resulting in the establishment of a new cost basis for both
marketable and nonmarketablenon-marketable investment securities.
NonmarketableNon-marketable investment securities are recorded at the lower of cost or
fair value. Some of the factors that are considered in determining the fair
value of these securities include analyses of each investee's financial
condition and operations, the status of its technology and strategies in place
to
52
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
achieve its objectives. The Company'sOur 50% investment in a joint venture is stated at cost,
adjusted for equity in undistributed earnings since acquisition.
Warranty Reserve
The Company providesWARRANTY RESERVE
We provide a warranty reserve for estimated future costs of servicing
products under warranty agreements extending for periods from 90 days to one
year. Anticipated costs for product warranty are based upon estimates derived
from experience factors and are recorded at the time of sale or over the
contract period for long-term contracts.
44
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Stock-Based Compensation
The Company hasSTOCK-BASED COMPENSATION
We have adopted the footnote disclosure provisions of Statement of Financial
Accounting Standards No. 123 ("SFAS 123"), Accounting"Accounting for Stock Based
Compensation.Compensation". SFAS 123 encourages entities to adopt a fair value based method
of accounting for stock options or similar equity instruments. However, it also
allows an entity to continue measuring compensation cost for stock based
compensation using the intrinsic-value method of accounting prescribed by
Accounting Principles Board Opinion No. 25 ("APB 25"), Accounting"Accounting for Stock
Issued to Employees. The Company hasEmployees". We have elected to continue to apply the provisions of APB
25 and provide pro forma footnote disclosures required by SFAS 123.
Income Taxes
The Company usesINCOME TAXES
We use the asset and liability method of accounting for income taxes. Under
the asset and liability method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases and operating loss and tax credit carryforwards.carry-forwards.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
Foreign Currency Translation
TheFOREIGN CURRENCY TRANSLATION
Prior to their disposition in 2000 (See Note 2) the local foreign currency
iswas the functional currency for the
Company'sour German subsidiaries. TheOur United Kingdom
subsidiary uses the U.S. dollar as its functional currency. Assets and
liabilities of German operations arewere translated to U.S. dollars at the current
exchange rates as of the applicable balance sheet date. Sales and expenses arewere
translated at the average exchange rates prevailing during the period.
Adjustments resulting from translation arewere reported as a separate component of
stockholders' equity. Certain transactions of the German subsidiaries arewere
denominated in currencies other than the functional currency, including
transactions with the parent company. Transaction gains and losses arewere included
in other income (expense) for the period in which the transaction occurs.
Estimatesoccurred.
ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted accounting principlesin the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities, the disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of sales and
expenses during the reporting period. Actual results could differ from those
estimates.
Concentration of Credit Risk53
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the CompanyE&S to concentrations of
credit risk are primarily cash, cash equivalents, short-term investments and
accounts receivable. The Company'sOur short-term investment portfolio consists of
investment-grade securities diversified among security types, industries and
issuers. The Company'sOur investments are managed by recognized financial institutions that
follow the Company'sour investment policy. The
Company'sOur policy limits the amount of credit exposure in
any one issue, and the Companywe believes no significant concentration of credit risk
exists with respect to these investments.
In the normal course of business, the CompanyE&S provides unsecured credit terms to its
customers. Accordingly, the Company performswe perform ongoing credit evaluations of itsour customers
and maintainsmaintain allowances for possible losses which, when realized, have generally
been within the range of management's expectations.
45
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In accordance with accounting for long-term contracts, the Company
recordswe record an asset
for costs and estimated earnings in excess of billings on uncompleted contracts.
At December 31, 2000, $46.02001, $29.8 million of the costs and estimated earnings in
excess of billings on uncompleted contracts pertain to fivefour contracts with fivefour
different customers. The billing of these amounts is contingent upon the
successful completion of contractual milestones related to the delivery and
integration of Harmony image generators. The Company
expectsWe expect to achieve thesemost of the
remaining billing milestones during 2001. The
Company's2002. Our inability to achieve these
contractual milestones may significantly impact the realization of such amounts.
Recent Accounting Pronouncementsamounts
and have a material adverse impact to the operating results and liquidity of
E&S.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB")(FASB) issued
Statement of Financial Accounting Standards No. 133 ("SFAS 133"), Accounting"Accounting
for Derivative Instruments and Hedging Activities.Activities". SFAS 133, as amended by
SFAS 137 and SFAS 138, is effective for all fiscal years beginning after
June 15, 2000. SFAS 133 establishes new accounting and reporting standards for
companies to report information about derivative instruments, including certain
derivative instruments embedded in other contracts (collectively referred to as
derivatives), and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the balance sheet and measure
those instruments at fair value. For a derivative not designated as a hedging
instrument, changes in the fair value of the derivative are recognized in
earnings in the period of change. The CompanyWe adopted SFAS 133 as of January 1, 2001. The
impact of adopting SFAS 133 was not material to the financial statements.
In July 2001, the FASB issued SFAS No. 141, "Accounting for Business
Combinations" and No. 142, "Accounting for Goodwill and Other Intangible
Assetds". SFAS 141 is effective for E&S beginning July 1, 2001. The Statement
establishes accounting and reporting standards for business combinations and
prohibits the use of the pooling-of-interests method of accounting for those
transactions after June 30, 2001. SFAS 142 is effective for E&S beginning
January 1, 2002. The Statement establishes accounting and reporting standards
for goodwill and intangible assets. Beginning January 1, 2002, we do not have
any goodwill, therefore the impact of adopting SFAS 142 is not anticipatedexpected to be
material to the financial statements.
In December 1999,October 2001, the SecuritiesFASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations" and Exchange Commission issued
Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements" ("SAB 101")144, "Accounting for the Impairment or Disposal
of Long-Lived Assets", that replaces SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of".
SAB 101 provides guidance onSFAS 143 is effective for E&S beginning July 1, 2002. The Statement addresses
financial accounting and reporting for obligations associated with the
recognition, presentationretirement of tangible long-lived assets and disclosurethe associated asset retirement
costs. The impact of revenue inadopting SFAS 143 is not expected to be material
54
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
to the financial statements. The Company'sSFAS 144 establishes one accounting model for
long-lived assets to be disposed of by sale and addresses significant
implementation issues. SFAS No. 144 is effective for E&S beginning after
January 1, 2002. Management does not expect the adoption of SAB 101 in the fourth quarter
of 2000 did notthis statement to
have a material impact on its financial statements.
(2) BUSINESS ACQUISITIONS AND DISPOSITIONS
In the third quarter of 2001, E&S sold the REALimage group to Real
Vision, Inc., a Japanese company. The sale was for a maximum value of
$12 million, consisting of cash of $6.3 million plus future royalties, on a when
and if earned basis, up to $6 million for REALimage technology, other assets,
and the performance of certain development support during a seven-month
transition period leading to closing the transaction in April 2002. Real Vision
has indicated it will continue the development of the technology, and E&S is
maintaining a technical staff to support Real Vision in Salt Lake City during
the transition period. As part of the sale of the REALimage Group, E&S closed
its offices in Seattle, Washington, and San Jose, California and recorded an
impairment loss of $0.2 million related to the write-off of certain remaining
goodwill balances. E&S is recognizing the proceeds received on the sale of the
REALimage Group on a percent complete basis over the seven-month transition
period ending in April, 2002. The gain on sale of business unit recognized
through December 31, 2001 is calculated based on the ratio of costs incurred to
management's estimate of anticipated costs to be incurred during the transition
period and excludes $0.6 million of withholding taxes which have been recorded
as income tax expense on the accompanying statement of operations.
In the fourth quarter of 2001 we recognized $9.0 million on the sale of
certain of our key 3D-graphics patents, which were being held for sale, to
NVIDIA Corporation.
In December 2000, the Companywe completed the divestiture of itsour German subsidiary via
a management-led buyout and recorded a loss of $0.3 million. The former
subsidiary, which was called Evans & Sutherland Computer GmbH, now operates
under a new name. The divested company has no remaining connection with E&S. The CompanyWe
will continue to operate in Germany and throughout Europe under itsour own name,
providing marketing, sales, and support for the Company'sour growing visual systems business
and traditional customer base.
On March 28, 2000, the Companywe sold certain assets of its Applications Group relating
to digital video products to RT-SET Real Time Synthesized Entertainment
Technology Ltd. and its subsidiary, RT-SET America Inc., for $1.4 million in
cash, common stock of RT-SET Real Time Synthesized Entertainment
Technology Ltd. valued at approximately $1.0 million, and the assumption of
certain liabilities. On June 15, 2000, the Companywe received additional common stock of
RT-SET Real Time Synthesized Entertainment Technology Ltd. valued at
$1.5 million as consideration for the successful development of a product
included in the purchased assets. The CompanyWe recognized a gain of $1.9 million on the
sale of these assets.
On June 26, 1998,3, 1999, we sold certain of our manufacturing capital assets and
inventory of $6.0 million to Sanmina-SCI as part of our efforts to outsource the
Company acquired allproduction of certain electronic products and assemblies. In addition, we
entered into an electronic manufacturing services agreement with Sanmina-SCI.
The electronic manufacturing services agreement commits E&S to purchase a
minimum of $22.0 million of electronic products and assemblies from Sanmina-SCI
each year until June 3, 2002. If we fail to meet these minimum purchase levels,
subject to adjustment, we may be required to pay 25% of the outstanding stock
of AccelGraphics, Inc. for approximately $23.7 million in cash and
1,109,303 shares ofdifference between
the Company's common stock, which was valued at
$25.7 million. In addition, the Company converted all outstanding
AGI options into options to purchase approximately 351,000 shares of
common stock of the Company with a fair value of $3.4$22.0 million and incurred transaction costs of approximately $1.1 million. AGI was
based in Milpitas, California, and was a provider of
high-performance, cost-effective, three-dimensional graphics
subsystem products for the professional Windows NT and Windows 95
markets. The acquisition was accounted for by the purchase method
and, accordingly, the results of operations of AGI have been
included in the Company's consolidated financial statements from
June 26, 1998 forward.
46amount purchased.
55
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Also on June 26, 1998, the Company acquired the assets and assumed
certain liabilities of Silicon Reality, Inc. for a purchase price of
approximately $1.2 million, including transaction costs of
approximately $250,000. SRI is based in Federal Way, Washington, and
designs and produces three-dimensional graphics hardware and
software products for the personal computer marketplace. This
acquisition was accounted for by the purchase method and,
accordingly, the results of operations of SRI have been included in
the Company's consolidated financial statements from June 26, 1998
forward.
A modified income approach was used to allocate a portion of the
purchase price to the acquired in-process technology. Under this
method, the fair value for the in-process technology in each
acquisition was based on analysis of the markets, projected cash
flows and risks associated with achieving such projected cash flows.
In developing these cash flow projections, sales were forecasted
based on relevant factors, including aggregate sales growth rates
for the business as a whole, individual product sales,
characteristics of the potential market for the products, the
anticipated life of the technology under development and the stage
of completion of each project. Operating expenses and resulting
profit margins were forecasted based on the characteristics and cash
flow generating potential of the acquired in-process technology, and
included assumptions that certain expenses would decline over time
as operating efficiencies were obtained or support requirements
decreased. Appropriate adjustments were made to operating income to
derive net cash flow, and the estimated net cash flows of the
in-process technologies in each acquisition were then discounted to
present value using rates of return that the Company believes
reflect the specific risk/return characteristics of these research
and development projects.
The projected sales used in the income approach are based upon the
sales likely to be generated upon completion of the projects and the
beginning of commercial sales, as estimated by management. The
projections assume that the product will be successful and that the
product's development and commercialization meet management's
current time schedule.
In determining the operating cash flows related exclusively to
in-process technology, management has considered the contribution of
both prior technologies (as demonstrated by prior products) and core
technology or know-how that is generic among most or all products.
Where appropriate, the operating income estimates for each project
have been apportioned between in-process technology and the
appropriate intangible asset (i.e. various core technologies). The
operating income apportionment factor was determined on the basis of
an analysis of the specific contribution of each element of core
technology to the subject in-process technology, the estimated
effect of this contribution on the profitability of the subject
in-process project, and the relative importance of the core
technology to the product's ultimate customer.
The discount rate applicable to in-process technology projects
reflects the risks inherent in each project. This rate is higher
than the rate applied to AGI's current products, as the current
products have already demonstrated their technological feasibility
product and market acceptance.
The discount rate for in-process technology considers the following
risk elements (in addition to the baseline business and market risks
considered as part of the current product discount rate); risk of
successfully completing the in-process technology project, risk that
market demand will exist in the future for the in-process technology
product, risk that the forecasted cost structure will be possible,
and the risk that as yet unknown competitive products will emerge.
An after-tax rate of 20 to 30 percent was applied to the in-process
technology projects.
The sales earned by the in-process technology products represent the
return on all of the assets acquired under the agreement. The cash
flows generated by the new products must provide a return on each
asset purchased that is consistent with the value and the relative
risk of that asset. To separately value in-process technology, the
value and required rate of return for other identifiable assets must
be determined. The required return on these other assets is charged
to (deducted from) the cash flows generated by the projects shown in
the in-process technology model to determine the incremental cash
flows specifically attributable to the in-process technology
project.
47
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As part of the analysis, management determined individual rates of
return applicable to each asset identified in the allocation table
and estimated the effective capital charge to be applied to the
valuation of in-process technology. Capital charges have been made
for returns related to current assets, fixed assets, workforce and
tradename.
The total purchase price and final allocation among the tangible and
intangible assets and liabilities acquired (including acquired
in-process technology) is summarized as follows (dollars in
thousands):
Total Purchase Price:
Total cash consideration $ 24,688
Total stock consideration 25,695
Value of options assumed 3,400
Transaction costs 1,350
---------
$ 55,133
=========
Amortization
Period
(Months)
------------
Purchase Price Allocation:
Net tangible assets $ 17,329
Intangible assets:
Workforce-in-place 1,019 60
Customer list 250 60
AccelGraphics name 699 36
Current products 5,640 6 - 24
Core technology 1,754 84
Goodwill 7,662 84
In-process technology 20,780 Expensed
---------
$ 55,133
=========
At the time of the acquisition, the estimated costs to complete the
projects related to in-process technology were $1.2 million. As of
December 31, 1999 and 1998, costs incurred on these projects were
$2.6 million and $0.9 million, respectively. All projects were
complete as of December 31, 1999 and no further costs are expected
to be incurred.
The following unaudited pro forma financial information (in
thousands, except per share amounts) presents the combined results
of operations of the Company, AGI and SRI for 1998 as if the
acquisitions had occurred as of the beginning of 1998, after giving
effect to certain adjustments, including, but not limited to,
amortization of goodwill and other intangible assets, decreased
interest income and entries to conform to the Company's accounting
policies. The $20.8 million charge for acquired in-process
technology has been excluded from the pro forma results as it is a
material non-recurring charge.
Net sales $ 208,503
Net loss (4,836)
Loss per share:
Basic (0.46)
Diluted (0.46)
48
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)
(3) SHORT-TERM INVESTMENTS
At December 31, 1999, the Company had short-term available-for-sale
marketable investments of $0.8 million stated at cost, which
approximates market. Short-term investments consisted of state and
municipal securities maturing in one year or less.
(4) INVENTORIES
Inventories consist of the following (in thousands):
December 31,
2000 1999
------------ ------------
Raw materials $ 26,701 $ 26,803
Work-in-process 9,219 11,479
Finished goods 2,463 2,306
------------ ------------
$ 38,383 $ 40,588
============ ============
During the third quarter of 1999, the Company performed significant
testing of the software relating to its Harmony image generator
product that had been delayed. As a result of the testing, the
Company determined that certain of the inventories previously
purchased for the Harmony image generator had become technologically
obsolete and did not properly function with the updated software. In
connection with this assessment, the Company recorded a charge of
$12.1 million to write-off obsolete, excess and overvalued
inventories. In addition, during the third quarter of 1999, the
Company wrote-off $1.1 million of inventories related to end-of-life
or abandoned product lines in the REALimage Solutions Group.
(5)
DECEMBER 31,
------------------------
2001 2000
--------- ---------
Raw materials $ 22,437 $ 26,701
Work-in-process 10,047 9,219
Finished goods 5,742 2,463
--------- ---------
$ 38,226 $ 38,383
========= =========
(4) COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
Comparative information with respect to uncompleted contracts is summarized
as follows (in thousands):
DecemberDECEMBER 31,
------------------------
2001 2000
1999
------------ --------------------- ---------
Accumulated costs and estimated earnings on
uncompleted contracts $ 252,012294,774 $ 350,193252,012
Less total billings on uncompleted contracts (272,066) (211,258)
(282,148)
------------ --------------------- ---------
$ 22,708 $ 40,754
$ 68,045
============ ===================== =========
Costs and estimated earnings in excess of billings
on uncompleted contracts $ 68,46447,761 $ 80,45768,464
Billings in excess of costs and estimated earnings
on uncompleted contracts (25,053) (27,710)
(12,412)
------------ --------------------- ---------
$ 22,708 $ 40,754
$ 68,045
============ ===================== =========
49
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(6)(5) PROPERTY, PLANT AND EQUIPMENT
The cost and estimated useful lives of property, plant and equipment are
summarized as follows (dollars in thousands):
Estimated DecemberDECEMBER 31,
useful livesESTIMATED ------------------------
USEFUL LIVES 2001 2000
1999
------------ ------------ --------------------- ---------
Land -- $ -- $ 1,436
Buildings and improvements 40 years $ 42,044 $ 41,343 39,983
Manufacturing machinery and equipment 3 to 8 years 75,865 80,212 86,433
Office furniture and equipment 8 years 5,546 6,308 9,265
Construction-in-process -- 2,329 2,779
3,559
------------ --------------------- ---------
125,784 130,642 140,676
Less accumulated depreciation and
amortization (83,817) (81,977)
(88,492)
------------ --------------------- ---------
$ 41,967 $ 48,665
$ 52,184
============ ===================== =========
56
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
All buildings and improvements owned by the CompanyE&S are constructed on land leased
from an unrelated third party. Such leases extend for a term of 40 years from
1986, with options to extend two of the leases for an additional 40 years and
the remaining five leases for an additional ten years. At the end of the lease
term, including any extension, the buildings and improvements revert to the
lessor. (7)We have undertaken actions to sell certain buildings that are not, or
will not be used in operations by us. Accordingly, subsequent to December 31,
2001, we have designated these as assets to be disposed of.
(6) LEASES
The Company leasesWe lease certain of itsour buildings and related improvements to third parties
under noncancelablenon-cancelable operating leases. Cost and accumulated depreciation of the
leased buildings and improvements at December 31, 20002001 were $8.9 million and
$3.5$3.7 million, respectively. Rental income for all operating leases for 2001,
2000 and 1999 and 1998 was $2.2 million, $1.8 million and $1.6 million, and $1.5 million, respectively.
The Company occupiesWe occupy real property and usesuse certain equipment under lease arrangements
that are accounted for as operating leases. Rental expenses for all operating
leases for 2001, 2000 and 1999 and 1998
were $1.6$4.0 million, $2.1$2.0 million and
$2.3$2.1 million, respectively.
At December 31, 2000,2001, the future minimum rental income and lease payments
under operating leases that have initial or remaining noncancelable lease terms
in excess of one year are as follows (in thousands):
Rental Rental
Income Commitment
------------ ------------
Year ending December 31,
2001 $ 2,202 $ 1,816
2002 2,120 1,478
2003 2,097 1,339
2004 1,218 878
2005 1,050 608
Thereafter 1,050 9,155
------------ ------------
$ 9,737 $ 15,274
============ ============
50
RENTAL RENTAL
INCOME COMMITMENT
----------- -----------
Year ending December 31,
2002 $ 1,393 $ 3,527
2003 1,265 2,912
2004 180 971
2005 -- 667
2006 -- 665
Thereafter -- 9,460
----------- -----------
$ 2,838 $ 18,202
=========== ===========
57
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (8)(CONTINUED)
(7) INVESTMENTS
The CompanyWe had the following investments in marketable equity securities, adjusted
for unrealized holding gains and losses and other-than-temporary declines in
fair value, nonmarketable equity securities, adjusted for other-than-temporary
declines in fair value and a joint venture (in thousands):
DecemberDECEMBER 31,
------------------------
2001 2000
1999
------------ --------------------- ---------
Marketable securities:
Cypress Semiconductor, Inc. (Cypress) $ 3,276-- $ --3,276
vi[z]rt (formerly RT-SET Real Time Synthesized
Entertainment Technology Ltd.) 57 358 --
Iwerks Entertainment, Inc. (Iwerks) 37 9 150
C3-D Digital Inc. (C3-D) 14 16
525
------------ --------------------- ---------
108 3,659
675
------------ --------------------- ---------
Nonmarketable securities:
Silicon Light Machines, Inc. (SLM) -- 3,276
Quantum Vision, Inc. (Quantum) 500 --500
Total Graphics Solutions N.V. (TGS) 500 500
Other 16 16
------------ --------------------- ---------
1,016 3,792
------------ ------------1,016
--------- ---------
Investment in joint venture:
Quest Flight Training Ltd. 828 754
--
------------ --------------------- ---------
Total investment securities $ 1,952 $ 5,429
$ 4,467
============ ===================== =========
Cypress is a global supplier of high-performance integrated
circuits. vi[z]rt develops and markets fully integrated broadcast
graphics solutions using real-time visualization systems. Iwerks
designs, engineers, manufactures, markets and services high-tech
entertainment attractions which employ a variety of projection, show
control, ride simulation and software technologies. C3-D develops
and manufacturers three-dimensional imagery and virtual reality
entertainment for television and the Internet.
Quantum is a start-up company that owns patented technology to improve
cathode raytube (CRT) performance used in large projection systems. TGS develops
and markets portable graphics software tools, which provide hardware
independence for application developers. Each investment in nonmarketablenon-marketable
investment securities was made either to enhance a current technology of the CompanyE&S or
to complement the Company'sour strategic direction.
The Company owns,We own, including total shares purchased or available to purchase under
warrants, less than 15% of the outstanding common stock and common stock
equivalents of Quantum and TGS. The Company
hasWe have one of six seats on TGS's board of
directors. There are no intercompanyinter-company transactions, technological dependencies,
related guarantees, obligations, contingencies, interchange of personnel, nor
ability to exercise significant influence on any of the companies in which the Company haswe
have investments. Accordingly, the
Company accountswe account for Quantum and TGS utilizing the cost
method.
51
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company hasWe have a 50% interest in Quest Flight Training Ltd. (Quest), a joint
venture providing aircrew training services for the United Kingdom Ministry of
Defence under a 30 year contract. The investment is accounted for under the
equity method. Equity in earnings of Quest of $74,000 in 2001 and $43,000 in
2000 is recorded in other income (expense). The Company guaranteesfinancial position and operating
results of Quest are immaterial to our financial results. We guarantee a portion
of the joint venture's third-party borrowings. At December 31, 2000,2001, Quest had
outstanding debt of $2.1$7.4 million. Management believes, based on current facts
and circumstances and the joint venture's financial position and operating
results, that the likelihood of a payment pursuant to such guarantee is remote.
However, if we were required to make such a payment it would have a material
adverse impact on our operating results and liquidity.
58
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
During 2000, the Companywe recognized a $6.7 million gain on the sale of the Company'sour investment
in SLM to Cypress in which the Companywe received shares of Cypress stock which was offset
by a $0.2 million loss on the subsequent sale of certain Cypress shares. During
1998,
the Company2001, we sold all of its holdingsour remaining interest in Sense8 CorporationCypress for netcash proceeds of
$3.3 million, recognizing a $2.5 million gain.$3.8 million. During 2001, 2000 and 1999 and 1998, the Companywe wrote down itsour investments in
marketable securities by $0.3 million, $7.8 million $0.4 million and $1.5$0.4 million
respectively due to other-than-temporary declines in market value. These amounts
are recorded in other income (expense), net in the Company'sour consolidated statements of
operations.
(9)(8) ACCRUED EXPENSES
Accrued expenses consist of the following (in thousands):
December
DECEMBER 31,
------------------------
2001 2000
1999
------------ --------------------- ---------
Pension plan obligation (note 10) $ 13,305 $ 12,124
Compensation and benefits $ 8,880 $ 11,277 13,021
Liquidated damages and late delivery penalties 1,500 3,091
8,200
Other 6,892 12,159
6,774
------------ --------------------- ---------
$ 39,83217,272 $ 40,119
============ ============26,527
========= =========
On October 16, 1997, the CompanyE&S and CAE Electronics Ltd. ("CAE") entered into a
Sub-Contract (the "Sub-Contract") for the CompanyE&S to design, develop and deliver the
visual system components and visual databases required for certain dynamic
mission simulators and tactical control centers, to be integrated with the Company'sour
Harmony image generation equipment (the "Harmony VSC"). As of December 31, 1999,
the Harmony VSC had not been integrated with the dynamic mission simulators or
tactical control centers. Pursuant to the terms of the Sub-Contract, the
integration was to be completed during 1999. Consequently, as of December 31,
1999, in accordance with the liquidated damages provision of the Sub-Contract,
the
Companywe incurred liquidated damages on this Sub-Contract totaling $6.0 million. The CompanyE&S
and CAE agreed to an interim solution, which provides for the installation of
the Company'sour ESIG 4530 image generators to integrate with the dynamic mission simulators
and tactical control centers until the Company'sour Harmony VSC are able to support the
dynamic mission simulators and tactical control centers. As of December 31,
2000, integration of a Harmony VSC with a dynamic mission simulator has been
tested. A Harmony VSC is currently being installed and integrated with a dynamic
mission simulator at the training site. Upon successful completion of the
integration, the ESIG 4530 image generators currently installed at the training
site will be replaced with Harmony VSCs. The Company hasWe have agreed to pay CAE
(i) $0.5 million for reimbursement of certain expenses and costs incurred by CAE
relating to the integration and retrofit of the ESIG 4530 to the dynamic mission
simulators and tactical control centers and (ii) $5.5 million as liquidated
damages resulting from certain delays of the Harmony VSC. As of December 31,
2000, the Company haswe have paid $6.0 million to CAE. As of December 31, 2001 we have agreed
to pay $1.5 million of additional costs incurred by CAE for retrofit of the
simulators with the Harmony Visual System (VSC). If further delays in the
integration of the Harmony VSC occur, the Companywe may be obligated to pay CAE additional
liquidated damages. The Company will also be obligated to
pay certain costs associated with the anticipated switch-over from
the ESIG 4530 to the Harmony VSC. In addition, the Company incurred
late delivery penalties related to two other sub-contracts of $0.9
million and $2.2 million in 2000 and 1999, respectively.
52penalties.
59
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (10)(CONTINUED)
(9) EMPLOYEE BENEFIT PLANS
Pension Plan (the "Plan") - The Company has--We have a defined benefit pension plan covering
substantially all employees who have attained age 21 with service in excess of
one year. Benefits at normal retirement age (65) are based upon the employee's
years of service and the employee's highest compensation for any consecutive
five of the last ten years of employment. The Company'sOur funding policy is to contribute
amounts sufficient to satisfy regulatory funding standards, based upon
independent actuarial valuations.
Supplemental Executive Retirement Plan ("SERP") - The Company has--We have a non-qualified
SERP. The SERP, which is unfunded, provides eligible executives defined pension
benefits, outside the Company'sour pension plan, based on average earnings, years of service
and age at retirement.
The following provides a reconciliation of benefit obligations, plan assets,
and funded assets of the Plan and SERP (in thousands):
Pension PlanPENSION PLAN SERP
--------------------------- --------------------------------------------------- ------------------------
2001 2000 19992001 2000
1999
------------ ------------ ------------ ------------
Change in benefit obligation:--------- --------- --------- ---------
Change in benefit obligation:
Beginning of year $ 36,904 $ 42,637 $ 5,749 $ 5,431
Service cost 2,460 3,252 815 739
Interest cost 2,759 2,892 410 418
Actuarial (gain) loss 3,722 (8,780) (521) 216
Benefits paid (1,889) (3,097) (184) (92)
Curtailment -- -- -- (963)
------------ ------------ ------------ ------------
End of year $ 43,956 $ 36,904 $ 6,269 $ 5,749
============ ============ ============ ============Service cost 2,891 2,460 746 815
Interest cost 3,127 2,759 447 410
Actuarial (gain) loss 200 3,722 (518) (521)
Benefits paid (1,075) (1,889) (200) (184)
Curtailment -- -- -- --
--------- --------- --------- ---------
End of year $ 49,099 $ 43,956 $ 6,744 $ 6,269
========= ========= ========= =========
Change in plan assets:
Fair value at beginning of year $ 43,72144,566 $ 40,22143,721
Actual return on plan assets (333) 2,086 6,597
Employer contributions -- 648 --
Benefits paid (1,075) (1,889)
(3,097)
------------ --------------------- ---------
Fair value at end of year $ 43,158 $ 44,566
$ 43,721
============ ===================== =========
Reconciliation of funded status:
Funded status $ (5,940) $ 610 $ 6,817(5,706) $ (6,269) $ (5,749)
Unrecognized actuarial (gain) loss (4,300) (9,018) (15,254)(1,241) 68 590
Unrecognized prior service cost 688 730 771-- 495 543
Unrecognized transition obligation -- 79 158 -- --
------------ ------------ ------------ ------------Contribution -- -- 199 --
--------- --------- --------- ---------
Accrued benefit liability $ (9,552) $ (7,599) $ (7,508)(6,748) $ (5,706)
$ (4,616)
============ ============ ============ ===================== ========= ========= =========
Assumptions (weighted average):
Discount rate 7.25% 7.8% 6.8%7.25% 7.3% 7.8%
Expected return on plan assets 9.0% 9.0% N/A N/A
N/ACompensation increase 4.5% 4.5% 4.5% 4.5%
5360
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Net periodic pension and other postretirement benefit costs include the
following components (in thousands):
Pension PlanPENSION PLAN SERP
----------------------------- --------------------------------------------------------- ------------------------------
2001 2000 1999 19982001 2000 1999
1998
------- ------- ------- ------- ------- -------
Components of net periodic benefit cost:-------- -------- -------- -------- -------- --------
Components of net periodic benefit
cost:
Service cost $ 2,891 $ 2,460 $ 3,252 $ 2,601746 $ 815 $ 739
$ 828
Interest cost 3,127 2,759 2,892 2,501447 410 418 355
Expected return on assets (3,921) (3,907) (3,575) (3,264) -- -- --
Amortization of actuarial (gain)
loss (264) (692) -- (15)-- 1 53 143
Amortization of prior year service
cost 41 41 37 4 48 7348 73
Amortization of transition 79 79 79 -- -- --
------- ------- ------- ------- ------- --------------- -------- -------- -------- -------- --------
Net periodic benefit cost $ 1,953 $ 740 $ 2,685 $ 1,9061,241 $ 1,274 $ 1,283
$ 1,399
======= ======= ======= ======= ======= =============== ======== ======== ======== ======== ========
Deferred Savings Plan - The Company hasPlan--We have a deferred savings plan that qualifies under
Section 401(k) of the Internal Revenue Code. The plan covers all employees of
the CompanyE&S who have at least one year of service and who are age 18 or older. The Company makesWe make
matching contributions of 50 percent of each employee's contribution not to
exceed six percent of the employee's compensation. The Company'sOur contributions to this
plan for 2001, 2000 and 1999 and 1998 were $1.1 million, $1.0 million $1.1 million and $1.0$1.1 million,
respectively.
Life Insurance - The Company purchasesInsurance--We purchase company-owned life insurance policies insuring
the lives of certain employees. The policies accumulate asset values to meet
future liabilities including the payment of employee benefits such as
supplemental retirement benefits. At December 31, 20002001 and 1999,2000, the investment
in the policies was $3.2$2.7 million and $3.1$3.2 million, respectively, and net life
insurance expense was $0.1 million, $0.1 million and $0.2 million and $0.5
million for 2001,
2000, 1999, and 1998, respectively.
(11)(10) LONG-TERM DEBT
Included in long-term debt is approximately $18.0 million of 6% Convertible
Subordinated Debentures due in 2012 (the "6% Debentures"). The 6% Debentures are
unsecured and are convertible at each bondholder's option into shares of the Company'sour
common stock at a conversion price of $42.10 or 428,000 shares of the Company'sour common
stock subject to adjustment. The 6% Debentures are redeemable at the Company'sour option, in
whole or in part, at par.
61
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following is a summary of lines of credit (dollars in thousands):
2001 2000
1999
---------- ------------------- ---------
Balance at end of year $ 7,34520,676 $ 2,6577,345
Weighted average interest rate at end of year 9.1% 12.5% 6.0%
Maximum balance outstanding during the year $ 7,34525,530 $ 4,2987,345
Average balance outstanding during the year $ 1,61213,617 $ 3,3201,612
Weighted average interest rate during the year 10.8% 9.6% 6.4%
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.
54
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On March 31, 2000, the Company entered into a secured credit
facility (the "Zions Facility") with Zions First National Bank. The
Zions Facility provided for borrowings of up to $15.0 million, which
included a $7.0 million sublimit for the issuance of letters of
credit. In December 2000, the Companywe entered into a secured credit facility (the "Foothill
Facility") with Foothill Capital Corporation ("Foothill"). In connection with the Foothill Facility, additional
borrowings under the Zions Facility were terminated in December 2000
and outstanding letters of credit were secured through the issuance
of a letter of credit from Wells Fargo Bank, National Association,
the parent of Foothill. The Foothill Facility
provides for borrowings and the issuance of letters of credit up to
$30.0 million. On February 22, 2002, E&S and Foothill amended the Foothill
Facility whereby Foothill waived all events of financial covenant default
through December 31, 2001 and revised E&S's 2002 financial covenants. The
Foothill Facility expires in December 2002. Borrowings under the Foothill
Facility bear interest at the Wells Fargo Bank National Association prevailing
prime rate plus 1.5% to 3.0%, depending on the amount outstanding. In addition,
the Foothill Facility has an unused line fee equal to 0.375% per annum times the
difference between $30.0 million and the sum of the average undrawn portion of
the letters of credit and the average daily balance of all outstanding
borrowings, payable each quarter. The Foothill Facility provides Foothill with a
first priority perfected security interest in substantially all of the Company'sour assets,
including, but not limited to, all of the Company'sour intellectual property. Pursuant to the
terms of the Foothill Facility, all cash receipts of the CompanyE&S must be deposited into
a Foothill controlled account.
The Foothill Facility, among other things, (i) requires the CompanyE&S to maintain
certain financial ratios and covenants, including a minimum tangible net worth
that adjusts each quarter, a minimum unbilled receivables to billed receivables
ratio, and a limitation of $12.0 million of aggregate capital expenditures in
any fiscal year; (ii) restricts the Company'sour ability to incur debt or liens; sell,
assign, pledge or lease assets; merge with another company; and (iii) restricts
the payment of dividends and repurchase of any of the Company'sour outstanding shares without
the prior consent of the lender. The Company isDue to Foothill's waiver on February 22, 2002
of E&S's noncompliance with financial covenants through December 31, 2001 and
the modification of the financial covenants, we are currently in compliance with
its financial covenants and ratios, although a continuation of recent negative
trends could impact future compliance with such covenants. Should the need
arise, the Companywe will negotiate with Foothill to modify and expand various financial
ratios and covenants, however no assurance can be given that such negotiations
will result in modifications that will allow the Companyus to continue to be in compliance
or otherwise be acceptable to E&S. E&S will need to replace the Company.Foothill
Facility on or before December 14, 2002. In the event E&S is not able to obtain
an acceptable credit facility to replace the Foothill Facility on or before
December 14, 2002, E&S may be unable to meet its anticipated working capital
needs, routine capital expenditures, and current debt service obligations on a
short-term and long-term basis. As of December 31, 2000, the Company has $7.32001, we have $15.7 million
in outstanding borrowings and $15.2$6.0 million in outstanding letters of credit
under the Foothill Facility.
Evans & Sutherland Computer Limited, a wholly-owned subsidiary of Evans &
Sutherland Computer Corporation, has a $5.0$3.0 million overdraft facility (the
"Overdraft Facility") with Lloyds TSB Bank plc ("Lloyds"). Borrowings under the
Overdraft Facility bear interest at Lloyds' short-term offered rate plus 1.75%
per annum. As of December 31, 2000,2001, there were no borrowings under the Overdraft
Facility.$4.9 million in outstanding
62
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
borrowings. The Overdraft Facility is subject to reduction or demand repayment
for any reason at any time at Lloyds' discretion and expires on November 30,
2001.2002. Evans & Sutherland Computer Limited executed a letter of negative pledge
in favor of Lloyds whereby it agreed not to sell or encumber its assets, except
in the ordinary course of business. Covenants contained in the Overdraft
Facility restrict dividend payments from Evans & Sutherland Computer Limited and
require maintenance of certain financial covenants. In addition, at
December 31, 2000, the Company has $1.52001, we have $0.9 million of cash on deposit with Lloyds in a
restricted cash collateral account to support certain obligations that the bank
guarantees.
At December 31, 2000,(11) INCOME TAXES
Income tax benefit of $3.2 million for 2001 is primarily attributable to
adjustments to prior years tax provisions as a result of the Company has unsecured lettersresolution of
credit
totaling approximately $1.1certain worldwide tax contingencies. Included in this amount is $0.6 million outstandingfor
withholding taxes paid in Japan for taxes associated with U.S. Bank, N.A.
that expire between March 2001 and June 2001.
55
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(12) INCOME TAXESthe REALimage
transaction. Components of income tax expense (benefit) attributable to earnings
before income taxes for 2000 and 1999 are as follows (in thousands):
Share
and
stock
option
Current Deferred benefit TotalSHARE AND
STOCK OPTION
CURRENT DEFERRED BENEFIT TOTAL
----------- ----------- ------------ ------------ ------------ -----------------------
Year ended December 31, 2000:
Federal $ (1,598) $ 17,750 $ -- $ 16,152
State (230) 2,591 -- 2,361
Foreign 510 -- -- 510
------------ ------------ ------------ ----------------------- ----------- ----------- -----------
$ (1,318) $ 20,341 $ -- $ 19,023
============ ============ ============ ======================= =========== =========== ===========
Year ended December 31, 1999:
Federal $ (6,734) $ (6,816) $ 85 $ (13,465)
State (150) (2,056) 14 (2,192)
Foreign 244 -- -- 244
------------ ------------ ------------ ----------------------- ----------- ----------- -----------
$ (6,640) $ (8,872) $ 99 $ (15,413)
============ ============ ============ ============
Year ended December 31, 1998:
Federal $ 3,520 $ (2,336) $ 330 $ 1,514
State 761 (385) 54 430
Foreign 182 -- -- 182
------------ ------------ ------------ ------------
$ 4,463 $ (2,721) $ 384 $ 2,126
============ ============ ============ ======================= =========== =========== ===========
The actual tax expense differs from the expected tax expense (benefit) as
computed by applying the U.S. federal statutory tax rate of 35 percent as a
result of the following (in thousands):
2001 2000 1999
1998
------------ ------------ --------------------- --------- ---------
Tax (benefit)benefit at U.S. federal statutory rate $ (10,720) $ (17,692) $ (13,603) $ (4,850)
In-process research and development -- -- 7,245
Losses (gains) of foreign subsidiaries (320) -- --
(101)Adjustment to prior year tax provisions (3,172) -- --
Earnings of foreign sales corporation -- -- (232) (305)
State taxes (net of federal income tax benefit) -- 1,521 (1,425) 280
Research and development and foreign tax credits (681) (437) (925) (604)
Foreign taxes 510 244 182
Change in federal valuation allowance 12,599 35,607 -- --
Other, net (486) 528 279
------------ ------------ ------------(878) 24 772
--------- --------- ---------
$ (3,172) $ 19,023 $ (15,413)
$ 2,126
============ ============ ===================== ========= =========
5663
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities as of
December 31, 20002001 and 1999,2000, are presented below (in thousands):
2001 2000
1999
------------ --------------------- ---------
Deferred tax assets:
Warranty, vacation, and other accruals $ 4,4815,475 $ 3,3574,481
Inventory reserves and other inventory-related
temporary basis differences 3,348 4,407 4,106
Pension accrual 6,387 5,204 4,469
Long-term contract related temporary differences 882 612 1,000
Net operating loss carryforwards 30,538 19,803 2,529
Unrealized loss on marketable equity securities -- 17--
Write-down of investment securities 2,191 2,350 1,341
Liquidated damages and late delivery penalties 1,034 134 3,198
Credit carryforwards 5,190 4,987
2,012
Other 343 332
343
------------ --------------------- ---------
Total gross deferred tax assets 55,388 42,310 22,372
Less valuation allowance 54,094 40,866
117
------------ --------------------- ---------
Total deferred tax assets 1,294 1,444
22,255
------------ --------------------- ---------
Deferred tax liabilities:
Intangible assets -- (111) (155)
Plant and equipment, principally due to
differences in depreciation (1,181) (1,108)
(1,707)
Other (113) (225)
(52)
------------ --------------------- ---------
Total gross deferred tax liabilities (1,294) (1,444)
(1,914)
------------ --------------------- ---------
Net deferred tax asset $ -- $ 20,341
============ ============
Net current deferred tax asset $ --
$ 15,923
Net non-current deferred tax asset -- 4,418
------------ ------------
Net deferred tax asset $ -- $ 20,341
============ ===================== =========
Worldwide income before income taxes for the years ended December 31, 2001,
2000 1999 and 1998,1999, consisted of the following (in thousands):
2000 1999 1998
------------ ------------ ------------
United States $ (51,395) $ (40,113) $ (15,054)
Foreign 848 1,246 1,197
------------ ------------ ------------
$ (50,547) $ (38,867) $ (13,857)
============ ============ ============
The Company has
2001 2000 1999
--------- --------- ---------
United States $ (31,570) $ (51,395) $ (40,113)
Foreign 941 848 1,246
--------- --------- ---------
$ (30,629) $ (50,547) $ (38,867)
========= ========= =========
We have total federal net operating loss carryovers of $51.8$81.0 million, of
which $44.6$24.3 million expire in 2021, $45.4 million expire in 2020, and the
remainder expireexpires between 2006 and 2019, and2019. We have various tax credit carryovers
of $4.0$5.2 million that expire between 2003 and 2020. The Company2021. We also hashave state net
operating loss carryovers that expire depending on the rules of the various
states to which the loss is allocated.
During the yearyears ended December 31, 2001 and 2000, the Companywe increased the
valuation allowance on deferred tax assets by approximately $13.2 million and
$40.7 million. Themillion, respectively. These amounts relate to an increase relates primarily toin the general
valuation allowance established under the provisions of Statement of Financial
Accounting Standards No. 109, Accounting"Accounting for Income Taxes,Taxes", which requires that
a valuation allowance be established when it is more likely than not that the
net deferred tax assets will not be realized.
5764
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (13)(CONTINUED)
On March 9, 2002, President Bush signed into law the Jobs Creation and
Worker Assistance Act of 1992. Among other provisions, the Act provides for a
5-year carryback of losses generated in 2001 without the normal alternative
minimum tax limitation. We expect to be able to generate some additional federal
tax refunds due to this new law.
(12) DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash and cash equivalents, receivables, line of
credit agreements, accounts payable, and accrued expenses approximates fair
value because of their short maturity. The fair value of the Company'sour 6% Debentures ($7.9 million6.8
and $13.1$7.9 million as of December 31, 20002001 and 1999,2000, respectively) is based on
quoted market prices.
(14)(13) COMMITMENTS AND CONTINGENCIES
On November 27, 2000, the Companywe entered into a three year agreement with a third
party to provide the CompanyE&S with certain copy service, mail service, software and
equipment through November 30, 2003. Minimum commitments under this agreement
totaled $1.0
million$640,000 at December 31, 2000.2001.
On September 26, 2000, the Companywe entered into a purchase agreement with a third
party that commits the CompanyE&S to purchase a minimum $4.5 million of licensed products
and support for design development software. The agreement is effective for a
period of three years with an option to renew the agreement for an additional
two-year term.
On June 3, 1999, the Company sold certain manufacturing capital
assets and inventory for $6.0 million to Sanmina Corporation as part
of the Company's efforts to outsource the production of certain
electronic products and assemblies. In addition, the Companywe entered into an electronic manufacturing services
agreement with Sanmina Corporation.Corporation (now Sanmina-SCI). The electronic manufacturing services agreement commits the Companyus
to purchase a minimum of $22.0$22 million of electronic products and assemblies from
Sanmina CorporationSanmina-SCI each year until June 3, 2002. If the Company failswe fail to meet these minimum
purchase levels, subject to adjustment, the Companywe may be required to pay 25 percent of
the difference between the $22.0$22 million and the amount purchased. Management expects thatWe have fully
satisfied the Company will satisfyrequirements of this minimum purchase commitment.contract, which ends in June 2002. Various
alternatives, which include a renewed contract with Sanmina-SCI, are being
evaluated.
Certain of the Company'sour contracts to deliver Harmony image generators contain
liquidated damage provisions for delays in delivery. The CompanyWe incurred $2.9 million,
$0.9 million and $8.2 million for such damages in 2001, 2000 and 1999,
respectively. If further delays in the delivery of the Harmony image generator
occur, the Companywe may incur additional liquidated damages.
(15)(14) LEGAL PROCEEDINGS
LOCKHEED MARTIN CORPORATION V. EVANS & SUTHERLAND COMPUTER CORPORATION
(UNITED STATES (MIDDLE) DISTRICT COURT (FLORIDA), CASE NO. 6:00-CV-755-ORL-19C,
FILED ON MAY 23, 2000). On May 23, 2000, Lockheed Martin Corporation (the "Plaintiff")
served the CompanyE&S
with a civil complaint filed in the Circuit Court of the Ninth Judicial Circuit
in and for Orange County, Florida. The
PlaintiffLockheed alleged in the complaint that the Companywe
breached a contract to provide certain visual systems for the Combined Arms
Tactical Trainer program for the United Kingdom Ministry of Defence. The
contract has an original value of $33.9 million. In the complaint, the PlaintiffLockheed
seeks compensatory damages of $8.5 million plus interest as well as
consequential damages and attorneys' fees. The $8.5 million being sought from
the CompanyE&S by the PlaintiffLockheed was paid to the Companyus from May 1999 to March 2000 and was recognized as
revenue by the Companyus during 1999. On June 12, 2000, the Companywe filed its answer and
counterclaim. In the counterclaim, the Company
allegeswe allege as grounds for recovery against
the PlaintiffLockheed (1) breach of contract, (2) breach of implied covenant of good faith
and fair dealing, (3) unjust enrichment, (4) unfair competition,
(5) misappropriation of trade secrets, (6) intentional interference with
advantageous business relationship, (7) replevin, and (8) promissory
65
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
estoppel. In its counterclaim, the Company seekswe seek compensatory damages of not less than
$10.0 million and not more than $25.4 million.
On June 14, 2000, the case was removed to the Orlando Division of the United
States District Court for the District of Florida where it currently remains. On
July 7, 2000, the PlaintiffLockheed answered the Company'sour counterclaim but also filed a motion for
dismissal of the Company'sour counterclaims for unjust enrichment, unfair competition,
promissory estoppel, and incidental damages. On July 24, 2000, the Companywe filed itsour
opposition to the Plaintiff'sLockheed's motion to dismiss these certain counterclaims of the Company.E&S.
On
58
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS October 20, 2000 the court denied the Plaintiff'sLockheed's motion to dismiss in its
entirety, without prejudice. On January 16, 2001, the Companywe filed a motion for partial
summary judgement,judgment, asking the court to dismiss all of the Plaintiff'sLockheed's breach of
contract claims. The court denied that motion on August 30, 2001, citing the
existence of material disputed facts. On September 6, 2001 the court granted
Lockheed's leave to amend its complaint, which was filed on September 17, 2001.
We filed a motion to dismiss these new claims on October 4, 2001, and Lockheed
has indicatedopposed it. The court currently has that it will take the motion under advisement.
Discovery in the matter is scheduled to conclude on September 30, 2002. A
trial date is currently set for September 2002. Management disputes the
Plaintiff'sMarch, 2003. We dispute Lockheed's allegations
in the complaint, is vigorously defending the action, and is vigorously
prosecuting its counterclaims. Although management believes the CompanyE&S will ultimately
prevail in the litigation, an unfavorable outcome of these matters would have a
material adverse impact on the Company'sour financial condition and operations.
In the normal course of business, the CompanyE&S has various other legal claims and
other contingent matters, including items raised by government contracting
officers and auditors. Although the final outcome of such matters cannot be
predicted, the Company believeswe believe the ultimate disposition of these matters will notwould have a
material adverse effect on the Company'sour consolidated financial condition, liquidity or
results of operations.
(16)(15) STOCK OPTION AND STOCK PURCHASE PLANS
Stock Option Plans - The Company hasPlans--We have stock incentive plans that provide for the grant
of options to officers and employees to acquire shares of the Company'sour common stock at a
purchase price generally 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 grantsWe grant options to itsour directors under itsour Director Plan. Option
grants are
66
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
limited to 10,000 shares per director in each fiscal year. Options generally
vest ratably over four years and expire ten years from the date of grant. A
summary of activity follows (shares in thousands):
2001 2000 1999
1998
---------------------- ---------------------- ----------------------
Weighted- Weighted- Weighted-
average average average
Number of exercise Number of exercise Number of exercise
shares price shares price shares price
--------- --------- --------- --------- --------- ----------------------------------- -------------------------- --------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
NUMBER EXERCISE NUMBER EXERCISE NUMBER EXERCISE
OF SHARES PRICE OF SHARES PRICE OF SHARES PRICE
---------- ---------- ---------- ---------- ---------- ----------
Outstanding at
beginning of year 2,657 $ 12.63 2,087 $ 14.05 2,084 $ 13.80
1,640 $ 20.38
Granted 267 7.35 865 9.18 472 14.25
2,105 16.80
Assumed in acquisitions -- -- -- -- 351 9.69
Exercised (3) 5.17 (9) 1.03 (84) 7.72
(116) 10.70
Canceled (411) 11.76 (286) 13.30 (385) 14.32
(1,896) 22.15
--------- --------- ------------------- ---------- ----------
Outstanding at end of
year 2,510 12.22 2,657 12.63 2,087 14.05
2,084 13.80
========= ========= =================== ========== ==========
Exercisable at end of
year 1,803 1,480 14.12 1,219 14.16
532 13.74
========= ========= =================== ========== ==========
Weighted-average fair
value of options
granted during the
year 1.92 5.91 5.32 5.82
Shareholders authorized an additional 400,000, 450,000850,000 and 400,000 shares to be
granted under the plans during 2000, 19992001 and 1998,2000, respectively. As of December 31,
2000,2001, options to purchase 509,0001,303,000 shares of common stock were authorized and
reserved for future grant.
On September 29, 1998, the Board of Directors approved a stock
option repricing program whereby each eligible stock option could be
amended to have an exercise price equal to $13.56 (the closing price
of the Company stock on September 29, 1998) if the optionee agreed
to reduce the amount of options repriced by 20% and to accept an
amended vesting period. The vesting period for the repriced options
was amended to vest in one year for all options that were vested as
of September 29, 1998 and to vest ratably over three years for all
options that were not yet vested as of September 29, 1998. As a
result, approximately 1,698,000 options were surrendered by
employees for approximately 1,354,000 repriced options and are
included in the table above. The repriced options expire ten years
from the date of the repriced grant.
59
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes information about fixed stock options
outstanding as of December 31, 20002001 (options in thousands):
Options outstanding Options exercisable
------------------------------------- -------------------------
Weighted-
Number average Weighted- Number Weighted-
Range of outstanding remaining average exercisable average
exercise as of contractual exercise as of exercise
pricesOPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------- ----------------------------
WEIGHTED-
NUMBER AVERAGE WEIGHTED- NUMBER WEIGHTED-
OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE
RANGE OF EXERCISE AS OF CONTRACTUAL EXERCISE AS OF EXERCISE
PRICES 12/31/00 life price01 LIFE PRICE 12/31/00 price
--------------------- ----------01 PRICE
----------------- ----------- --------- ----------- -------------------- ----------- -----------
$ 0.731.21 - $ 10.69 558 9.48.04 478 8.8 $ 8.19 26.75 86 $ 1.08
10.756.06
8.26 - 12.25 484 6.6 11.82 262 12.19
12.3612.22 546 6.7 11.34 323 11.67
12.23 - 13.25 186 8.0 12.92 114 13.13212 6.0 12.81 185 12.84
13.31 - 13.56 945 7.7853 6.7 13.56 781852 13.56
13.56 - 20.88 464 7.0 16.33 302 17.12
21.2522.50 419 5.9 16.51 355 16.82
24.38 - 32.87 20 5.6 23.47 19 23.43
---------- -----------
0.7332.88 2 6.0 28.20 2 28.19
1.21 - 32.87 2,657 7.7 12.63 1,480 14.12
========== ===========32.88 2,510 6.9 12.22 1,803 13.45
The Company accountsWe account for these plans under APB 25, under which no compensation cost
has been recognized. Had compensation cost for these plans been determined
consistent with SFAS 123, the Company'sour net
67
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
loss and loss per common share would have been changed to the following pro
forma amounts (in thousands, except per share data):
2001 2000 1999
1998
---------- ---------- --------------------- ----------- -----------
Net loss Pro forma $ (28,352) $ (71,923) $ (26,995) $ (21,093)
Basic and diluted loss per common
share Pro forma (2.79) (7.67) (2.84) (2.22)
The per share weighted-average fair value of stock options granted during
2001, 2000 and 1999 was $1.92, $5.91 and $5.32, respectively. The fair value of
each option grant is estimated on the date of the grant using the Black-Scholes
option-pricing model with the following weighted-average assumptions used for
grants during 2001, 2000 1999 and 1998:
2000 1999 1998
-------- -------- --------1999:
2001 2000 1999
--------- --------- ---------
Expected life (in years) 2.6 4.5 2.6 2.3
Risk-free interest rate 3.0% 6.1% 6.3% 4.6%
Expected volatility 37% 79% 52% 49%
Dividend yield -- -- --
Stock Purchase Plan - The Company hasPlan--We have an employee stock purchase plan whereby
qualified employees are allowed to have up to 10% of their annual earnings
withheld to purchase the company'sour common stock at 85% of the market value of the stock at
the time of the sale. A total of 500,000 shares are authorized under the plan.
Shares totaling 63,000, 84,000 58,000 and 43,00058,000 were purchased under this plan in
fiscal 2001, 2000 1999 and 1998,1999, and as of December 31, 2000,
113,0002001, 50,000 shares were
available for future issuance under this plan.
60
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(17)(16) PREFERRED STOCK
Preferred Stock - ClassPREFERRED STOCK--CLASS A
The Company hasWe have 5,000,000 authorized shares of Class A Preferred Stock. Prior to
1998, the Companywe had reserved 300,000 shares of Class A Preferred Stock as Series A
Junior Preferred Stock under a shareholder rights plan which expired in
November 1998. In November 1998, the Board of Directors declared a dividend of
one preferred stock purchase right ("Right") for each outstanding share of
common stock, par value $0.20 per share of the CompanyE&S for shareholders of record on
November 19, 1998, and for all future issuances of common stock. The Rights are
not currently exercisable or transferable apart from the common stock and have
voting rights or rights to receive dividends. Each Right entitles the registered
holder to purchase from the CompanyE&S one thousandth of a share of Preferred Stock at a
price per share of $60.00, subject to adjustment. The Rights will be exercisable
ten business days following a public announcement of a person or group of
affiliated persons acquiring beneficial ownership of 15% or more of the Company'sour
outstanding common shares or following the announcement of a tender offer or
exchange offer upon the consummation of which would result in the beneficial
ownership by a person or group of affiliated persons of 15% or more of the
outstanding Company's stock. The Rights may be redeemed by the CompanyE&S at a price of
$0.01 per Right before November 30, 2008.
68
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In the event that the Company iswe are acquired in a merger or other business combination
transaction, provision shall be made so that each holder of a Right, excluding
the Rights beneficially owned by the acquiring persons, will have the right to
receive, upon exercise thereof at the then current exercise price, that number
of shares of common shares of the surviving company which at the time of such
transaction will have a market value of two times the exercise price of the
Right. In the event that a person or group of affiliated persons acquires
beneficial ownership of 15% or more of the
Company'sour outstanding common shares, provision
shall be made so that each holder of a Right, excluding the Rights beneficially
owned by the acquiring persons, shall have the right to receive, upon exercise
thereof, a share of common stock at a purchase price equal to 50% of the then
current exercise price.
On June 7, 2000, the CompanyE&S and American Stock Transfer & Trust Company amended the
Rights to allow the State of Wisconsin Investment Board to acquire beneficial
ownership up to 19.9% of the
Company'sour outstanding common shares without triggering the
exercisability of the Rights.
Preferred Stock - ClassPREFERRED STOCK--CLASS B
The Company hasWe have 5,000,000 authorized shares of Class B Preferred Stock. On July 22,
1998, Intel Corporation ("Intel") purchased 901,408 shares of the Company'sour preferred
stock plus a warrant to purchase an additional 378,462 shares of the preferred
stock at an exercise price of $33.28125 per share for approximately
$24.0 million. In March 2001, Intel converted the 901,408 shares of the
Company'sour
preferred stock into 901,408 shares of the Company'sour common stock. In March 2001, Intel
and the CompanyE&S amended the preferred stock and warrant purchase agreement to terminate
certain contractual rights of Intel, including registration rights, board and
committee observation rights, right of first refusal, right of participation,
right of maintenance, standstill agreement, and right to require the CompanyE&S to
repurchase the preferred stock in the event of any transaction qualifying as a
specific corporate event.
(18)(17) NET INCOME (LOSS) PER COMMON SHARE
Net income (loss) per common share is computed based on the weighted-average
number of common shares and, as appropriate, dilutive common stock equivalents
outstanding during the period. Stock options, warrants, Class B-1 Preferred Stock and the 6% Debentures
are considered to be common stock equivalents.
61
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Basic net income (loss) per common share is the amount of net income (loss)
for the period available to each share of common stock outstanding during the
reporting period. Diluted net income (loss) per share is the amount of net
income (loss) for the period available to each share of common stock outstanding
during the reporting period and to each share that would have been outstanding
assuming the issuance of common shares for all dilutive potential common shares
outstanding during the period.
In calculating net loss per common share, the net loss was the same for both
the basic and diluted calculation. The diluted weighted average number of common
shares outstanding during 2001, 2000 1999 and 19981999 excludes common stock issuable
pursuant to outstanding stock options, the 6% Debentures and the Class B-1
Preferred Stock because to do so would have had an anti-dilutive effect on earningsloss
per common share. (19)The total number of common shares excluded from diluted loss
per share related to the above was approximately 2.2 million, 2.8 million and
2.5 million in 2001, 2000 and 1999, respectively.
(18) SEGMENT AND RELATED INFORMATION
The Company'sOur business units have been aggregated into three reportable segments:
simulation,Simulation, REALimage Solutions and applications.Applications. These reportable segments
offer different products and services and are
69
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
managed and evaluated separately because each segment uses different
technologies and requires different marketing strategies. The simulationSimulation segment
provides a broad line of visual systems for flight and ground simulators for
training purposes to government, aerospace and commercial airline customers. The
REALimage Solutions segment provides graphics acceleration technology to the
professional digital content creation market. The applicationsApplications segment provides
digital video applications for entertainment, educational and multimedia
industries. As discussed in Note 2, we sold the REALimage Solutions segment in
the third quarter of 2001.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies (Note 1). The Company evaluatesWe evaluate segment
performance based on income (loss) from operations before income taxes, interest
income and expense, other income and expense and foreign exchange gains and
losses. The
Company'sOur assets are not identifiable by segment.
REALimage
Simulation Solutions Applications TotalREALIMAGE
SIMULATION SOLUTIONS APPLICATIONS TOTAL
------------ ------------ ------------ ------------
Year ended DecemberYEAR ENDED DECEMBER 31, 2001:
Sales $ 135,309 $ 1,714 $ 8,240 $ 145,263
Operating income (loss) (31,359) 4,132 (824) (28,051)
YEAR ENDED DECEMBER 31, 2000:
Sales $ 149,909 $ 5,736 $ 11,335 $ 166,980
Operating loss (43,106) ( 3,132)(3,132) (305) (46,543)
Year ended DecemberYEAR ENDED DECEMBER 31, 1999:
Sales $ 170,578 $ 21,961 $ 8,346 $ 200,885
Operating loss (8,686) (26,685) (4,595) (39,966)
Year ended December 31, 1998:
Sales $ 167,014170,578 $ 17,45321,961 $ 7,2998,346 $ 191,766200,885
Operating income (loss) 22,094 (30,663) (7,417) (15,986)loss (8,686) (26,685) (4,595) (39,966)
The 2001 operating income amount for the REALimage Solutions segment
includes a $9.0 million gain on the sale of assets held for sale, a
$0.8 million gain on sale of business unit and an impairment loss of
$0.2 million. The restructuring charge of $2.8 million in 2001 affected all
segments. The operating loss amount for 2000 for the REALimage Solutions segment
included a credit of $0.8 million related to the reversal of restructuring
charge accruals established in prior years.
The operating loss in 1999 for the simulationSimulation segment includes a write-off
of inventories of $12.1 million. The operating loss in 1999 for the REALimage
Solutions segment includes an impairment loss of $9.7 million, a restructuring
charge of $1.5 million and a write-off of inventories of $1.1 million.
The operating loss in 1998
for the REALimage Solutions segment includes a write-off of acquired
in-process technology of approximately $20.8 million.
6270
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (20)(CONTINUED)
(19) GEOGRAPHIC INFORMATION
The following table presents sales by geographic location based on the
location of the use of the product or services. Sales within individual
countries greater than 10% of consolidated sales are shown separately (in
thousands):
2001 2000 1999
1998
---------- ---------- ------------------- --------- ---------
United States $ 95,734 $ 106,045 $ 114,190
$ 106,858
United Kingdom 26,960 26,584 50,100 41,029
Europe (excluding United Kingdom) 10,479 21,723 27,777
25,039
Pacific Rim 9,069 8,162 8,324
18,257
Other 3,021 4,466 494
583
---------- ---------- ------------------- --------- ---------
$ 145,263 $ 166,980 $ 200,885
$ 191,766
========== ========== =================== ========= =========
The following table presents property, plant and equipment by geographic
location based on the location of the assets (in thousands):
2001 2000 1999
--------- ---------
United States $ 40,488 $ 47,777 $ 51,715
Europe 1,479 888 469
--------- ---------
Total property, plant and equipment, net $ 41,967 $ 48,665 $ 52,184
========= =========
(21)
(20) SIGNIFICANT CUSTOMERS
Sales to the U.S. government, either directly or indirectly through sales to
prime contractors or subcontractors, accounted for $69.5 million or 48% of total
sales, $66.7 million or 40% of total sales, and $84.5 million or 42% of total
sales, in 2001, 2000 and $70.8 million or 37% of total sales in 2000, 1999, and 1998, respectively. Sales to the United Kingdom
Ministry of Defence ("UK MOD"), either directly or indirectly through sales to
prime contractors or subcontractors, accounted for $13.6 million or 9% of total
sales, $22.3 million or 13% of total sales, and $33.8 million or 17% of total
sales in 2001, 2000 and $32.11999, respectively.
In 2001, sales to Thales Training & Simulation ("Thales") were
$23.9 million or 17%16% of total sales, in 2000, 1999of which 57% related to UK MOD sales and
1998, respectively.sales to The Boeing Company ("Boeing") were $15.1 million of 10% of total sales,
of which 100% related to U.S. government or UK MOD contracts.
In 2000, sales to Lockheed Martin Corporation ("Lockheed") were
$22.5 million or 14% of total sales, of which 100% related to U.S. government
and UK MOD contracts and sales to Thales Training & Simulation Ltd. were
$19.6 million or 12% of total sales, of which 58% related to UK MOD contracts.
In 1999, sales to Lockheed were $35.8 million or 18% of total sales, of which
100% related to U.S. government and UK MOD contracts, and sales to The Boeing
Company ("Boeing") were $25.4 million or 13% of total sales, of which 100%
related to U.S. government and UK MOD contracts.
In 1998, sales to
Boeing were approximately $28.1 million or 15% of total sales, of
which approximately 98% related to U.S. government and UK MOD
contracts, and sales to Lockheed were approximately $22.0 million or
11% of total sales, of which approximately 91% related to U.S.
government contracts. All sales to significant customers are within
the simulation segment.
63
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Aggregated accounts receivable from agencies of the United States
government, either directly or indirectly through prime or subcontractors, was
$10.8 million or 29% of gross accounts receivable at December 31, 2001 and
$9.3 million or 24% of gross accounts receivable at December 31, 2000 and $7.2 million or 24% of gross accounts
receivable at December 31, 1999.2000.
Aggregated accounts receivable from the UK MOD, either directly or indirectly
through prime or subcontractors, was $5.4 million or 15% of gross accounts
receivable at December 31, 2001 and
71
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
$2.1 million or 5% of gross accounts receivable at December 31, 2000 and $5.6 million or 19% of gross accounts
receivable at December 31, 1999.2000. Aggregated
accounts receivable from the Federal Department of Defense of the Federal
Republic of Germany, either directly or indirectly through prime or
subcontractors, was $3.3 million or 9% of gross accounts receivable at
December 31, 2001 and $10.6 million or 27% of gross accounts receivable at
December 31, 20002000.
The amount of costs and $3.2estimated earnings in excess of billings on
uncompleted contracts from agencies of the United States government and the UK
MOD, either directly or indirectly through prime or subcontractors was
$9.8 million and $28.7 million, or 11%21% and 60% of gross
accounts receivabletotal costs and estimated
earnings in excess of billings on uncompleted contracts, respectively, at
December 31, 1999.2001. The amount of costs and estimated earnings in excess of
billings on uncompleted contracts from agencies of the United States government
and the UK MOD, either directly or indirectly through prime or subcontractors,
was $16.8 million and $20.5 million, or 25% and 30% of total costs and estimated
earnings in excess of billings on uncompleted contracts, respectively, at
December 31, 2000.
The amount
of costs and estimated earnings in excess of billings on uncompleted
contracts from agencies of the United States government and the UK
MOD, either directly or indirectly through prime or subcontractors,
was $11.1 million and $41.3 million, or 14% and 51% of total costs
and estimated earnings in excess of billings on uncompleted
contracts, respectively, at December 31, 1999.
(22)(21) RESTRUCTURING CHARGE
In the third quarter of 2001, we initiated a restructuring plan focused on
reducing the operating cost structure of E&S. As part of the plan, we recorded a
charge of $2.1 million relating to a reduction in force of approximately 80
employees. In the fourth quarter of 2001, we extended the restructuring plan
initiated in the third quarter. As part of the plan, we recorded a charge of
$0.7 million relating to a reduction in force of approximately 12 employees. As
of December 31, 2001, we had paid $1.9 million in severance benefits related to
these restructurings. The majority of the remaining benefits will be paid out
over the next two quarters. The charge was recorded in accordance with Emerging
Issues Task Force Issue 94-03 "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit (Including Certain Cost Incurred in
a Restructuring)" and Staff Accounting Bulletin No. 100, "Restructuring and
Impairment Charges".
In the third quarter of 1999, the Companywe initiated a restructuring plan focused on
reducing the operating cost structure of its REALimage Solutions Group. As part
of the plan, the Companywe recorded a charge of $1.5 million relating to 28 employee
terminations, including 17 employees in San Jose and 11 employees in Salt Lake
City.
The charge was recorded in accordance with Emerging Issues
Task Force Issue 94-03, Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit (Including Certain
Costs Incurred in a Restructuring).
During 2000, after all employee severance costs were incurred, the
Companywe reversed
$0.8 million of the 1999 restructuring charge as a result of certain employees
being transferred within the CompanyE&S rather than being terminated and estimated
severance and related charges being lower than expected for the terminated
employees.
(23)(22) RELATED PARTY TRANSACTIONS
The CompanyWe had purchases of $0.4 million and $1.4 million during 1999, and 1998, respectively, from a supplier for which the Company'sour
Chief Executive Officer serves as a director.
64(23) REALIMAGE TRANSITION COSTS
Early in 2001, we announced our intention to spin out or sell its REALimage
Solutions Group. Therefore, we categorized all the costs and expenses associated
with the REALimage Solutions Group from the beginning of 2001 until the sale of
the business in the third quarter of 2001 in the REALimage transition costs
expense category. These expenses totaled $5.3 million.
72
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
"None"
FORM 10-K
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding our directors of the Company is incorporated by reference from
"Election of Directors" in the Proxy Statement to be delivered to shareholders
in connection with the 20012002 Annual Meeting of Shareholders to be held on
May 24, 2001.16, 2002.
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 Proxy Statement to be delivered to shareholders in connection with
the 20012002 Annual Meeting of Shareholders to be held on May 24, 2001.16, 2002.
Information concerning our current executive officers of the Company is incorporated by
reference to the section in Part I hereof found under the caption "Executive
Officers of the Registrant."
ITEM 11. EXECUTIVE COMPENSATION
Information regarding this item is incorporated by reference from "Executive
Compensation" in the Proxy Statement to be delivered to shareholders in
connection with the 20012002 Annual Meeting of Shareholders to be held on May 24,
2001.16,
2002.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
Information regarding this item is incorporated by reference from "Security
Ownership of Certain Beneficial Owners and Management" in the Proxy Statement to
be delivered to shareholders in connection with the 20012002 Annual Meeting of
Shareholders to be held on May 24, 2001.16, 2002.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding this item is incorporated by reference from "Executive
Compensation - SummaryCompensation--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 Proxy Statement to be delivered to
shareholders in connection with the 20012002 Annual Meeting of Shareholders to be
held on May 24, 2001.
6516, 2002.
73
FORM 10-K
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
The following constitutes a list of Financial Statements, Financial
Statement Schedules, and Exhibits required to be used in this report:
1. Financial Statements - IncludedStatements--Included in Part II, Item 8 of this report:
Report of Management
Report of Independent AccountantsAuditors
Consolidated Balance Sheets as of December 31, 20002001 and 19992000
Consolidated Statements of Operations for each of the years in the
three-year period ended December 31, 20002001
Consolidated Statements of Comprehensive Loss for each of the years in the
three-year period ended December 31, 20002001
Consolidated Statements of Stockholders' Equity for each of the years in the
three-year period ended December 31, 20002001
Consolidated Statements of Cash Flows for each of the years in the
three-year period ended December 31, 20002001
Notes to Consolidated Financial Statements for each of the years in the
three-year period ended December 31, 20002001
2. Financial Statement Schedules - includedSchedules--included in Part IV of this report:
Schedule II - ValuationII--Valuation and Qualifying Accounts
Schedules other than those listed above are omitted because of the absence
of conditions under which they are required or because the required
information is presented in the financial statements or notes thereto.
3. Exhibits
2.1 Agreement and Plan of Merger, dated April 22, 1998, among the Company,Evans &
Sutherland Computer Corporation, E&S Merger Corp., and
AccelGraphics, Inc., filed as Annex I to the Company'sEvans & Sutherland Computer
Corporation's Registration Statement on Form S-4, SEC File
No. 333-51041, and incorporated herein by this reference.
3.1 Articles of Incorporation, as amended, filed as Exhibit 3.1 to the Company'sEvans &
Sutherland Computer Corporation's Annual Report on Form 10-K, SEC File
No. 000-08771, for the fiscal year ended December 25, 1987, and
incorporated herein by this reference.
3.1.1 Amendments to Articles of Incorporation filed as Exhibit 3.1.1 to
the Company'sEvans & Sutherland Computer Corporation's Annual Report on Form 10-K,
SEC File No. 000-08771, for the fiscal year ended December 30, 1988,
and incorporated herein by this reference.
66
3.1.2 Certificate of Designation, Preferences and Other Rights of the
Class B-1 Preferred Stock of the Company,Evans & Sutherland Computer Corporation,
filed as Exhibit 3.1 to the Company'sEvans & Sutherland Computer Corporation's
Form 10-Q for the quarter ended September 25, 1998, and incorporated
herein by this reference.
74
3.2 Amended and Restated Bylaws of Evans & Sutherland Computer Corporation,
filed herein.as Exhibit 3.2 to Evans & Sutherland Computer Corporation's
Form 10-K for the year ended December 31, 2000, and incorporated herein
by this reference.
3.3 Amendment No. 1 to the Amended and Restated Bylaws of Evans &
Sutherland Computer Corporation, filed herein.as Exhibit 3.3 to Evans &
Sutherland Computer Corporation's Form 10-K for the year ended
December 31, 2000, and incorporated herein by this reference.
4.1 Form of Rights Agreement, dated as of November 19, 1998, between
Evans & Sutherland Computer Corporation and American Stock Transfer
Trust Company which includes as Exhibit A, the form of Certificate of
Designation for the Rights, as Exhibit B, the form of Rights
Certificate and as Exhibit C, a Summary of Rights, filed as Exhibit 1
to the Company'sEvans & Sutherland Computer Corporation's Registration Statement on
Form 8-A filed December 8, 1998, and incorporated herein by this
reference.
4.2 First Amendment to Rights Agreement dated as of June 7, 2000 between
Evans & Sutherland Computer Corporation and American Stock Transfer &
Trust Company, filed as Exhibit 10.14 to the Company'sEvans & Sutherland Computer
Corporation's Form 10-Q for the quarter ended June 30, 2000, and
incorporated herein by this reference.
*10.1* 10.1 1985 Stock Option Plan, as amended, filed as Exhibit 1 to the
Company'sEvans &
Sutherland Computer Corporation's Post-Effective Amendment No. 1 to
Registration Statement on Form S-8, SEC File No. 2-76027, and
incorporated herein by this reference.
*10.2* 10.2 1989 Stock Option Plan for Non-employee Directors, filed as
Exhibit 10.5 to the Company'sEvans & Sutherland Computer Corporation's Annual Report
on Form 10-K, SEC File No. 000-08771, for the fiscal year ended
December 29, 1989, and incorporated herein by this reference.
*10.3 The Company's* 10.3 1991 Employee Stock Purchase Plan of Evans & Sutherland Computer
Corporation, as amended as of February 21, 2001, filed as Exhibitexhibit 4.1
to the Company'sEvans & Sutherland Computer Corporation's Post Effective Amendment
No. 1 to Registration Statement on Form S-8, SEC File No. 33-39632, and
incorporated herein by this reference.
*10.4* 10.4 Evans & Sutherland Computer Corporation 1998 Stock Option Plan, as
amended as through May 17, 2000, filed as Appendix Aexhibit 4.1 to the
Company's Definitive ProxyEvans &
Sutherland Computer Corporation's Post Effective Amendment No. 1 to
Registration Statement filed April 20,
1998,on Form S-8, SEC File No. 333-58733, and
incorporated herein by this reference.
*10.5 The Company's* 10.5 Evans & Sutherland Computer Corporation's 1995 Long-Term Incentive
Equity Plan, filed as Exhibit 10.11 to the Company'sEvans & Sutherland Computer
Corporation's Annual Report on Form 10-K, SEC File No. 000-08771, for
the fiscal year ended December 29, 1995, and incorporated herein by
this reference.
*10.6 The Company's* 10.6 Evans & Sutherland Computer Corporation's Executive Savings Plan, filed
as Exhibit 10.14 to the Company'sEvans & Sutherland Computer Corporation's Annual
Report on Form 10-K, SEC File No. 000-08771, for the fiscal year ended
December 29, 1995, and incorporated herein by this reference.
*10.7 The Company's* 10.7 Evans & Sutherland Computer Corporation's Supplemental Executive
Retirement Plan (SERP), filed as Exhibit 10.15 to the Company'sEvans & Sutherland
Computer Corporation's Annual Report on Form 10-K, SEC File
No. 000-08771, for the fiscal year ended December 29, 1995, and
incorporated herein by this reference.
10.8 Business Loan Agreement by and between U.S. Bank National Association
and Evans & Sutherland Computer Corporation as of November 13, 1998,
filed as Exhibit 10.8 to the Company'sEvans &
75
Sutherland Computer Corporation's Annual Report on Form 10-K for the
fiscal year ended December 31, 1998, and incorporated herein by this
reference.
10.9 Addendum to Business Loan Agreement by and between U.S. Bank National
Association and Evans & Sutherland Computer Corporation ("Borrower") as of
February 5, 1999, filed as Exhibit 10.9 to the Company'sEvans & Sutherland Computer
Corporation's Annual Report on Form 10-K for the fiscal year ended
December 31, 1998, and incorporated herein by reference.
67
*10.10 Severance Agreement dated December 11, 1998, by and
between Evans & Sutherland Computer Corporation and Mark
C. McBride, filed as Exhibit 10.11 to the Company's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1998, and incorporated herein by this
reference.
10.11 Series B Preferred Stock and Warrant Purchase Agreement dated as of
July 20, 1998, between the CompanyEvans & Sutherland Computer Corporation and
Intel Corporation, filed as Exhibit 4.2 to the Company'sEvans & Sutherland Computer
Corporation's Form 10-Q for the quarter ended September 25, 1998, and
incorporated herein by this reference.
10.12 Warrant to Purchase Series B Preferred Stock dated as of July 22, 1998,
between the CompanyEvans & Sutherland Computer Corporation and Intel Corporation,
filed as Exhibit 4.3 to the Company'sEvans & Sutherland Computer Corporation's
Form 10-Q for the quarter ended September 25, 1998, and incorporated
herein by this reference.
10.13 Master Agreement for Electronic Manufacturing Services, dated as of
June 3, 1999, between Evans & Sutherland Computer Corporation and
Sanmina Corporation, filed as Exhibit 10.1 to the Company'sEvans & Sutherland
Computer Corporation's Form 10-Q for the quarter ended July 2, 1999,
and incorporated herein by this reference.
10.14 Loan Agreement by and between Zions First National Bank, a national
banking association, and Evans & Sutherland Computer Corporation, dated
March 31, 2000, filed as Exhibit 10.1 to the Company'sEvans & Sutherland Computer
Corporation's Form 10-Q for the quarter ended March 31, 2000 and
incorporated herein by this reference.
10.15 $15,000,000 Promissory Note in favor of Zions First National Bank, a
national banking association, dated March 31, 2000, filed as
Exhibit 10.2 to the Company'sEvans & Sutherland Computer Corporation's Form 10-Q for
the quarter ended March 31, 2000, and incorporated herein by this
reference.
10.16 Trust Deed, Assignment of Rents, Security Agreement and Fixture Filing
executed by Evans & Sutherland Computer Corporation to Zions First
National Bank, a national banking association, in favor of Zions First
National Bank, a national banking association, dated March 31, 2000,
filed as Exhibit 10.3 to the Company'sEvans & Sutherland Computer Corporation's
Form 10-Q for the quarter ended March 31, 2000, and incorporated herein
by this reference.
10.17 Assignment of tenant's Interest in Ground Lease for Security executed
by Evans & Sutherland Computer Corporation and Zions First National
Bank, a national banking association, dated March 31, 2000, filed as
Exhibit 10.4 to the Company'sEvans & Sutherland Computer Corporation's Form 10-Q for
the quarter ended March 31, 2000, and incorporated herein by this
reference.
10.18 Assignment of Lease by Evans & Sutherland Computer Corporation and
Zions First National Bank, a national banking association, dated
March 31, 2000, filed as Exhibit 10.5 to the Company'sEvans & Sutherland Computer
Corporation's Form 10-Q for the quarter ended March 31, 2000, and
incorporated herein by this reference.
10.19 Commercial Credit and Security Agreement, dated March 2, 1998, between
Evans & Sutherland Computer Corporation and First Security Bank, N.A.,
filed as Exhibit 10.6 to the Company'sEvans & Sutherland Computer Corporation's
Form 10-Q for the quarter ended March 31, 2000, and incorporated herein
by this reference.
76
10.20 Modification Agreement dated February 22, 2000, between Evans &
Sutherland Computer Corporation and First Security Bank, N.A., filed as
Exhibit 10.7 to the
Company'sEvans & Sutherland Computer Corporation's Form 10-Q for
the quarter ended March 31, 2000, and incorporated herein by this
reference.
10.21 Letter of Credit and Reimbursement Agreement between Evans & Sutherland
Computer Corporation and Zions First National Bank, dated April 24,
2000, filed as Exhibit 10.1 to the Company'sEvans & Sutherland Computer
Corporation's Form 10-Q for the quarter ended June 30, 2000, and
incorporated herein by this reference.
68
10.22 Supplemental Letter of Credit and Reimbursement Agreement between
Evans & Sutherland Computer Corporation and Zions First National Bank,
dated May 31, 2000, filed as Exhibit 10.2 to the Company'sEvans & Sutherland
Computer Corporation's Form 10-Q for the quarter ended June 30, 2000,
and incorporated herein by this reference.
10.23 Managed Agency Account Assignment Agreement between Evans & Sutherland
Computer Corporation and Zions First National Bank, dated May 31, 2000,
filed as Exhibit 10.3 to the Company'sEvans & Sutherland Computer Corporation's
Form 10-Q for the quarter ended June 30, 2000, and incorporated herein
by this reference.
10.24 Second Loan Modification Agreement made and entered into effective
June 30, 2000 by and among Evans & Sutherland Computer Corporation,
Evans & Sutherland Computer GmbH, Evans & Sutherland Computer Limited,
Evans & Sutherland Graphics Corporation and Zions First National Bank,
a national banking association, filed as Exhibit 10.4 to the Company'sEvans &
Sutherland Computer Corporation's Form 10-Q for the quarter ended
June 30, 2000, and incorporated herein by this reference.
10.25 $15,000,000 Renewal and Substitute promissory Note in favor of Zions
First National Bank, a national banking association, dated June 30,
2000, filed as Exhibit 10.5 to the Company'sEvans & Sutherland Computer
Corporation's Form 10-Q for the quarter ended June 30, 2000, and
incorporated herein by this reference.
*10.26* 10.26 Employment agreement between Evans & Sutherland Computer Corporation
and James R. Oyler, dated May 16, 2000, filed as Exhibit 10.6 to
the Company'sEvans & Sutherland Computer Corporation's Form 10-Q for the quarter
ended June 30, 2000, and incorporated herein by this reference.
*10.27* 10.27 Employment agreement between Evans & Sutherland Computer Corporation
and Richard J. Gaynor, dated May 16, 2000, filed as Exhibit 10.7 to
the Company'sEvans & Sutherland Computer Corporation's Form 10-Q for the quarter
ended June 30, 2000, and incorporated herein by this reference.
*10.28* 10.28 Employment agreement between Evans & Sutherland Computer Corporation
and David B. Figgins, dated May 16, 2000, filed as Exhibit 10.8 to
the Company'sEvans & Sutherland Computer Corporation's Form 10-Q for the quarter
ended June 30, 2000, and incorporated herein by this reference.
*10.29* 10.29 Employment agreement between Evans & Sutherland Computer Corporation
and George K. Saul, dated May 16, 2000, filed as Exhibit 10.9 to
the Company'sEvans & Sutherland Computer Corporation's Form 10-Q for the quarter
ended June 30, 2000, and incorporated herein by this reference.
*10.30* 10.30 Employment agreement between Evans & Sutherland Computer Corporation
and Robert H. Ard, dated May 16, 2000, filed as Exhibit 10.10 to
the Company'sEvans & Sutherland Computer Corporation's Form 10-Q for the quarter
ended June 30, 2000, and incorporated herein by this reference.
*10.3177
* 10.31 Employment agreement between Evans & Sutherland Computer Corporation
and Thomas Atchison, dated July 25, 2000, filed as Exhibit 10.11 to
the Company'sEvans & Sutherland Computer Corporation's Form 10-Q for the quarter
ended June 30, 2000, and incorporated herein by this reference.
10.32 Overdraft Facility dated June 15, 2000 between Evans & Sutherland
Computer Limited and Lloyds TSB Bank plc, filed as Exhibit 10.12 to
the Company'sEvans & Sutherland Computer Corporation's Form 10-Q for the quarter
ended June 30, 2000, and incorporationincorporated herein by this reference.
*10.33* 10.33 Amendment to employment agreement between Evans & Sutherland Computer
Corporation and James R. Oyler, dated September 22, 2000, filed as
Exhibit 10.1 to the
Company'sEvans & Sutherland Computer Corporation's Form 10-Q for
the quarter ended September 29, 2000, and incorporated herein by this
reference.
*10.34* 10.34 Amendment to employment agreement between Evans & Sutherland Computer
Corporation and Richard J. Gaynor, dated September 22, 2000, filed as
Exhibit 10.2 to the
Company'sEvans & Sutherland Computer Corporation's Form 10-Q for
the quarter ended September 29, 2000, and incorporated herein by this
reference.
69
*10.35* 10.35 Amendment to employment agreement between Evans & Sutherland Computer
Corporation and David B. Figgins, dated September 22, 2000, filed as
Exhibit 10.3 to the
Company'sEvans & Sutherland Computer Corporation's Form 10-Q for
the quarter ended September 29, 2000, and incorporated herein by this
reference.
*10.36* 10.36 Amendment to employment agreement between Evans & Sutherland Computer
Corporation and George K. Saul, dated September 22, 2000, filed as
Exhibit 10.4 to the
Company'sEvans & Sutherland Computer Corporation's Form 10-Q for
the quarter ended September 29, 2000, and incorporated herein by this
reference.
*10.37* 10.37 Amendment to employment agreement between Evans & Sutherland Computer
Corporation and Robert H. Ard, dated September 22, 2000, filed as
Exhibit 10.5 to the
Company'sEvans & Sutherland Computer Corporation's Form 10-Q for
the quarter ended September 29, 2000, and incorporated herein by this
reference.
*10.38* 10.38 Amendment to employment agreement between Evans & Sutherland Computer
Corporation and Thomas Atchison, dated September 22, 2000, filed as
Exhibit 10.6 to the
Company'sEvans & Sutherland Computer Corporation's Form 10-Q for
the quarter ended September 29, 2000, and incorporated herein by this
reference.
*10.39* 10.39 Employment agreement between Evans & Sutherland Computer Corporation
and Nicholas J. Iuanow, dated September 22, 2000, filed as
Exhibit 10.7 to the Company'sEvans & Sutherland Computer Corporation's Form 10-Q for
the quarter ended September 29, 2000, and incorporated herein by this
reference.
*10.40* 10.40 Employment agreement between Evans & Sutherland Computer Corporation
and William M. Thomas, dated December 22, 2000, filed as Exhibit 10.40
to Evans & Sutherland Computer Corporation's Form 10-K for the year
ended December 31, 2000, and incorporated herein by this reference
herein.
10.41 Loan and Security Agreement by and between Evans & Sutherland Computer
Corporation and Foothill Capital Corporation, dated December 14, 2000,
filed herein.as Exhibit 10.41 to Evans & Sutherland Computer Corporation's
Annual Report on Form 10-K for the fiscal year ended December 31, 2001,
and incorporated herein by this reference.
10.42 Leasehold Deed of Trust, Assignment of Rents, Security Agreement and
Fixture filing between Evans & Sutherland Computer Corporation, Chicago
Title Company, Foothill
78
Capital Corporation, dated December 14, 2001, filed as Exhibit 10.42 to
Evans & Sutherland Computer Corporation's Form 10-K for the year ended
December 31, 2000, and incorporated herein by this reference herein.
10.43 Leasehold Deed of Trust, Assignment of Rents, Security Agreement and
Fixture filing between Evans & Sutherland Computer Corporation, Chicago
Title Company, Foothill Capital Corporation, dated December 14, 2001,
filed as Exhibit 10.43 to Evans & Sutherland Computer Corporation's
Form 10-K for the year ended December 31, 2000, and incorporated herein
by this reference herein.
10.44 Leasehold Deed of Trust, Assignment of Rents, Security Agreement and
Fixture filing between Evans & Sutherland Computer Corporation, Chicago
Title Company, Foothill Capital Corporation, dated December 14, 2001,
filed herein.as Exhibit 10.44 to Evans & Sutherland Computer Corporation's
Form 10-K for the year ended December 31, 2000, and incorporated herein
by this reference.
10.45 Absolute Assignment of Sub-Leases and Rent by Evans & Sutherland
Computer Corporation, dated December 14, 2001, filed herein.as Exhibit 10.45
to Evans & Sutherland Computer Corporation's Form 10-K for the year
ended December 31, 2000, and incorporated herein by this reference.
10.46 Absolute Assignment of Sub-Leases and Rent by Evans & Sutherland
Computer Corporation, dated December 14, 2001, filed herein.as Exhibit 10.46
to Evans & Sutherland Computer Corporation's Form 10-K for the year
ended December 31, 2000, and incorporated herein by this reference.
10.47 Absolute Assignment of Sub-Leases and Rent by Evans & Sutherland
Computer Corporation, dated December 14, 2001, filed herein.as Exhibit 10.47
to Evans & Sutherland Computer Corporation's Form 10-K for the year
ended December 31, 2000, and incorporated herein by this reference.
10.48 Pledge and Security Agreement between Evans & Sutherland Computer
Corporation and Foothill Capital Corporation, dated December 14, 2001,
filed herein.as Exhibit 10.48 to Evans & Sutherland Computer Corporation's
Form 10-K for the year ended December 31, 2000, and incorporated herein
by this reference.
10.49 Intellectual Property Security Agreement between Evans & Sutherland
Computer Corporation and Foothill Capital Corporation, dated
December 14, 2001, filed herein.as Exhibit 10.49 to Evans & Sutherland
Computer Corporation's Form 10-K for the year ended December 31, 2000,
and incorporated herein by this reference.
10.50 Amendment No. 1 to Series B Preferred Stock and Warrant Purchase
Agreement between Evans & Sutherland Computer Corporation and Intel
Corporation, dated effective as of March 1, 2001, filed as
Exhibit 10.50 to Evans & Sutherland Computer Corporation's Form 10-K
for the year ended December 31, 2000, and incorporated herein by this
reference.
10.51 Asset Purchase and Intellectual Property License Agreement between Real
Vision Inc. and Evans & Sutherland Computer Corporation, dated
August 31, 2001, filed as Exhibit 10.1 to Evans & Sutherland Computer
Corporation's Form 10-Q for the quarter ended September 28, 2001, and
incorporated herein by reference.
10.52 Initial License Agreement between Real Vision Inc. and Evans &
Sutherland Computer Corporation, dated August 31, 2001, filed as
Exhibit 10.2 to Evans & Sutherland Computer Corporation's Form 10-Q for
the quarter ended September 28, 2001, and incorporated herein by
reference.
79
10.53 Foothill Covenant waiver for the third quarter 2001, filed as
Exhibit 10.3 to Evans & Sutherland Computer Corporation's Form 10-Q for
the quarter ended September 28, 2001, and incorporated herein by
reference.
10.54 Master Sales Agreement between Evans & Sutherland Computer Corporation
and ATI Technologies Inc., dated August 27, 2001, filed as
Exhibit 10.4 to Evans & Sutherland Computer Corporation's Form 10-Q for
the quarter ended September 28, 2001, and incorporated herein by
reference.
10.55 Software License Agreement between Evans & Sutherland Computer
Corporation and ATI Technologies Inc., dated August 27, 2001, filed as
Exhibit 10.5 to Evans & Sutherland Computer Corporation's Form 10-Q for
the quarter ended September 28, 2001, and incorporated herein by
reference.
10.56 Amendment Number One to Loan and Security Agreement and Waiver by and
between Foothill Capital Corporation and Evans & Sutherland Computer
Corporation, dated February 22, 2002, filed herein.
70
10.57 Patent Purchase and License Agreement between Nvidia
International Inc., Evans & Sutherland Computer Corporation, and
Evans & Sutherland Graphics Corporation, dated October 15, 2001, filed
herein.
10.58 Patent Cross License Agreement between Nvidia Corporation and Evans &
Sutherland Computer Corporation, dated October 15, 2001, filed herein.
Certain information in this exhibit will be omitted and filed
separately with the Securities and Exchange Commission pursuant to a
confidential treatment request under Rule 24b-2 of the Securities and
Exchange Act of 1934, as amended.
21.1 Subsidiaries of Registrant, filed herein.
23.1 Consent of Independent Accountants,Auditors, filed herein.
24.1 Powers of Attorney for Messrs. Stewart Carrell, James R. Oyler, William M. Thomas,
Gerald S. Casilli, Peter O.
CrispWolf-Dieter Hass and Ivan E. Sutherland, filed
herein.
- ------------------------
* Management contract for Compensatory plan or arrangement required to be
filed as an exhibit pursuant to Item 14(c) of Form 10-K.
4. Reports on Form 8-K: The Company did not file any reports on Form
8-K during the last quarter of 2000.
TRADEMARKS USED IN THIS FORM 10-K
AccelGALAXY, AccelGMX, Digistar, E&S, E&S Lightning 1200, EaSIEST, Ensemble,
ESIG, Harmony, Integrator,INTegrator, RAPIDsite, REALimage, simFUSION, StarRider, Symphony
and Vanguard are trademarks or registered trademarks of Evans & Sutherland
Computer Corporation. All other product, service, or trade names or marks are
the properties of their respective owners.
7180
ScheduleSCHEDULE II
-----------
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
Years ended DecemberYEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
and 1998
(in thousands)(IN THOUSANDS)
Additions Deductions
--------------------------- Charged
Balance at Charged to Through (recovered) Balance
beginning of cost and business against at end of
year expenses acquisitions allowance year
------------ ------------ ------------ ------------ ------------DEDUCTIONS
BALANCE AT ADDITIONS CHARGED
BEGINNING CHARGED TO (RECOVERED) BALANCE
OF COST AND AGAINST AT END OF
YEAR EXPENSES ALLOWANCE YEAR
----------- ----------- ----------- -----------
Allowance for doubtful receivables
December 31, 2001 $ 4,411 $ 2,358 $ 356 $ 6,413
December 31, 2000 $ 1,322 $ 3,829 $ -- $ 740 $ 4,411
December 31, 1999 1,616 558 -- 852 1,322
December 31, 1998 851 496 1,013 744 1,616
Inventory Reserves
December 31, 2001 $ 9,894 $ 943 $ 3,652 $ 7,185
December 31, 2000 $ 6,047 $ 6,613 $ -- $ 2,766 $ 9,894
December 31, 1999 6,963 910 -- 1,826 6,047
December 31, 1998 7,635 1,987 1,350 4,009 6,963
Warranty Reserves
December 31, 2001 $ 1,447 $ 2,197 $ 1,678 $ 1,966
December 31, 2000 $ 1,376 $ 1,189 $ -- $ 1,118 $ 1,447
December 31, 1999 1,436 958 -- 1,018 1,376
December 31, 1998 880 872 494 810 1,436
7281
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 30, 2001 By: /S/ James R. Oyler
----------------------------------
EVANS & SUTHERLAND COMPUTER CORPORATION
March 29, 2002 By: /s/ JAMES R. OYLER
-----------------------------------------
JAMES R. OYLER, PRESIDENT
Pursuant to the requirements of the Securities and Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
* Chairman of the March 30, 2001
- -------------------------
STEWART CARRELL Board of Directors
/S/ James R. Oyler Director, Chief Executive March 30, 2001
- -------------------------
JAMES R. OYLER Officer and President
(Principal Executive Officer)
/S/ William M. Thomas Vice President, Chief Financial March 30, 2001
- -------------------------
WILLIAM M. THOMAS Officer and Corporate Secretary
(Principal Financial and
Accounting Officer)
* Director March 30, 2001
- -------------------------
GERALD S. CASILLI
* Director March 30, 2001
- -------------------------
PETER O. CRISP
* Director March 30, 2001
- -------------------------
Director, Chief Executive
/s/ JAMES R. OYLER Officer and President
------------------------------------------- (Principal Executive March 29, 2002
JAMES R. OYLER Officer)
Vice President, Chief
/s/ WILLIAM M. THOMAS Financial Officer, Treasurer
------------------------------------------- and Corporate Secretary March 29, 2002
WILLIAM M. THOMAS (Principal Financial and
Accounting Officer)
*
------------------------------------------- Director March 29, 2002
GERALD S. CASILLI
*
------------------------------------------- Director March 29, 2002
WOLF-DIETER HASS
*
------------------------------------------- Director March 29, 2002
IVAN E. SUTHERLAND
By: /S/ William M. Thomas March 30, 2001
----------------------------------
*By: /s/ WILLIAM M. THOMAS
--------------------------------------
WILLIAM M. THOMAS March 29, 2002
*Attorney-in-Fact
73
82