SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------ FORM 10-K (Mark One) [ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 ForUse these links to rapidly review the
Fiscal Year ended December 31, 2000 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________ to ____________ Commission file number 0-8771 ------------document
EVANS & SUTHERLAND COMPUTER CORPORATION(ExactFORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2003UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549FORM 10-K
| (Mark One) | |
ý | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Fiscal Year ended December 31, 2003 | |
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to | |
Commission file number 0-8771
EVANS & SUTHERLAND
COMPUTER CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
Utah 87-0278175
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
600 Komas Drive, Salt Lake City, Utah 84108
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (801) 588-1000
Securities registered pursuant to Section 12(b) of the Act:
"None"
Securities registered pursuant to Section 12(g) of the Act:
Title of Class
------------------------------------------------------------
Common Stock, $.20 par value
6% Convertible Debentures Due 2012
| Utah (State or Other Jurisdiction of Incorporation or Organization) | 87-0278175 (I.R.S. Employer Identification No.) | |
600 Komas Drive, Salt Lake City, Utah (Address of Principal Executive Offices) | 84108 (Zip Code) | |
Registrant's telephone number, including area code:(801) 588-1000 | ||
Securities registered pursuant to Section 12(b) of the Act: | ||
"None" | ||
Securities registered pursuant to Section 12(g) of the Act: | ||
| Title of Class | ||||
|---|---|---|---|---|
| Common Stock, $.20 par value 6% Convertible Debentures Due 2012 Preferred Stock Purchase Rights |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes Xý No ______o
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. [ ]o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes o No ý
The aggregate market value of the voting and non-voting Common Stock held by non-affiliates of the registrant as of March 2, 2001June 27, 2003, the last business day of the registrant's most recently completed second fiscal quarter was approximately $23,640,000,$27,165,816 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, 2001February 27, 2004 was 9,434,537.
10,486,637.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 20012004 Annual Meeting of Shareholders to be held on May 24, 200118, 2004, are incorporated by reference into Part III hereof.
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EVANS & SUTHERLAND COMPUTER CORPORATION
FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2000
2003
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The financial data in this Annual Report on Form 10-K for the first three quarters of 2003 has been restated from amounts previously reported. A discussion of the restatement in relation to the affected quarters of 2003 is provided in Note 3 of the Notes to Consolidated Financial Statements. An overview of the restatement is also provided in Management's Discussion and Analysis of Financial Condition and Results of Operations.
General
Evans & Sutherland Computer Corporation ("Evans & Sutherland,Sutherland", "E&S®"
"E&S(R)," "we", "our", or "the Company") produces high-quality visual systems used to display computer-generated images of the "Company")real world rapidly and accurately. With a 35-year history in computer graphics, E&S is widely regarded as both a pioneer and leader in providing the world's most realistic visual systems. We design, manufacture, market and support visual systems to provide simulation training for a wide range of military and commercial applications. We also provide visual systems for planetariums, science centers, and entertainment venues. Our products use a wide range of hardware, from desktop personal computers (PCs) to what we believe are the most advanced image generation and display components in the world.
E&S was incorporated in the Statestate of Utah on May 10, 1968. The Company is an established high-technology company with outstanding
computer graphics technology and a worldwide presence in high-performance 3D
visual simulation. In addition, E&S applies its core technology into
higher-growth personal computer (PC) products for both simulation and
workstations. During 2000, the Company's 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;
(2) REALimage(R) Solutions Group, which provided graphics acceleration
products to the professional digital content creation (DCC) market and
now focuses on integrating video processing with graphics processing
in products that will support content creation for broadcasting and
netcasting graphic applications; and
(3) Applications Group, which applies the Company's core technologies to
other growth markets.
Unless the context otherwise requires, as used herein, the term
"Company" refers to Evans & Sutherland Computer Corporation and its
subsidiaries. The Company's headquartersOur principal offices are located at 600 Komas Drive, Salt Lake City, Utah 84108, and itsour telephone number is (801) 588-1000. Through a link on our Web site,www.es.com, we make available, free of charge, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC. We make our Web site content available for informational purposes only. The Company's
web pageinformation provided on our Web site is not incorporated by reference into this Form 10-K. The above reports and other information are available, free of charge, atwww.sec.gov. Alternatively, the public may read and copy any materials we file with the SEC at the SEC's Public Reference Room at 450 Fifth Street, NW, Washington, D.C. 20549. Information on the worldwide web is http://www.es.com.
RECENT DEVELOPMENTS
On July 22, 1998, Intel Corporation ("Intel") purchased 901,408
sharesoperation of the Company's preferredPublic Reference Room may be obtained by calling the SEC at 1-800-SEC-0330.
For more than 30 years, we have had a significant share of the overall market for visual systems. We believe our market share has ranged from 20% to 50%. The market for simulation visual systems varies from year to year, but we have estimated that it is generally in the range of $300 million to $500 million annually. Many visual system providers serve this market, but our most significant competitors are companies that build the entire simulator. These companies sometimes choose to follow a strategy of vertical integration by providing their own visual systems. Other competitors include a number of smaller companies that generally offer components rather than complete visual systems. In addition, large contractors and system integrators sometimes build visual systems from components available in the open market.
E&S visual systems are extremely important components of a complete simulator because the visual system is the most critical element in creating a realistic immersive environment—the visual system is, by definition, "what you see." Most E&S visual systems are used as part of vehicle simulators, which are models of actual vehicles, such as aircraft cockpits. These simulators are used for training operators as well as for practicing tactics or strategy, which may require the coordinated operation of multiple simulators. Simulators are used in both commercial and military settings and include all types of vehicles operating in space, air, ground, sea or undersea locations. The simulator itself may be built by one of many companies, often the same company that built the actual vehicle.
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We also produce digital planetarium systems, which are based on the same technology as our products for simulation. These systems are essentially simulators of the larger universe, and can create simulated trips through other worlds, or through parts of our own world not accessible to real vehicles.
Visual systems are made of three major components: a visual computer, a display and a visual database. E&S designs and manufactures all of these components at varying prices and performance levels.
The computer portion of an E&S visual system is made of hardware and software, which is either designed and manufactured by us or is based on commercially available components. The hardware may be as simple as a standard PC with a commercial graphics card, or as complex as a connected system of multiple racks of sophisticated electronics. The software takes advantage of commercially available programs (such as Microsoft Windows) where possible, augmenting them with E&S-designed software to achieve the required image quality, functionality, and system performance.
The displays offered by E&S also cover a broad range, from standard computer monitors, to domes (as large as 24 meters in diameter), to cockpit-type displays with complex mirrors and other optics. The image may be projected by different types of equipment, including multiple projector types.
Visual databases are an important and growing part of our business. The visual database is the "content" that the system will display. Most customers have a desire for more content (visual databases) to enhance the richness and variety of their training and simulations. In addition, visual databases are finding new applications in mission planning, damage assessment, intelligence and other highly-time-sensitive defense and homeland security initiatives. We have developed a sophisticated set of tools to make the development of databases more efficient and less costly, whether built by E&S or by others. E&S has an extensive library of databases, including airports, vehicles, large geographic areas, oceans, and seas with accurate wave dynamics, and special effects.
All E&S products are supported by an extensive R&D program as well as innovative, customer-tailored service and support. These programs, as well as specific E&S products, are discussed in the Description of Products section of this report.
Description of Products
E&S offers a full range of visual system products for simulation, strategic visualization and digital theaters. These products are available either as complete systems or subsystems and can include system integration and installation service and support.
Image Generators
Image generators (IGs) create computer-generated real-time images and send these images to display devices, such as projectors or computer monitors. Primary IG offerings span the full range of price and performance, and simulation of all types of sensors is available, often configured as a separate IG, for nearly all E&S IG products. IGs are used for military and commercial training simulation, strategic visualization and digital theater applications.
Our high-end products include, EP™-1000CT, EPX™-5000, Harmony® 2 and ESIG® products. EP-1000CT and EPX-5000 are based on E&S's Environment Processor™ (EP) software. EP offers a revolutionary approach to the way visual databases are created, updated, and stored, and it is equipped with a whole-earth database model as part of the standard offering. Unlike traditional systems that use separate databases of specific, contained areas, this whole-earth model provides customers with a trainable database of the entire world, an excellent advantage for long-range flight training. EP-1000CT, introduced in 2002, is designed for commercial airline training and other simulation applications that require turnkey visual systems. EP-1000CT was certified Level D by the Joint Aviation Authority ("JAA") in 2003. EPX-5000, introduced in late 2003, is the top of the line of our EPX (Environment
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Processor Technology with Military Extensions) products. EPX-5000 has all the features of the EP-1000CT along with additional functionality required for military training, such as sensor simulation. EPX-5000 shares a common hardware platform with the other E&S high-end image generators, the Pixel Engine™-1. Harmony 2, another of our high-end offerings, operates on our Integrator software but uses the same hardware as the EPX-5000. Typical applications include fast jet and helicopter training.
The ESIG image generator family has been sold worldwide in both the military and commercial markets for more than a decade. The ESIG product line was one of the most popular IGs in the history of the simulation industry, and continues to operate successfully in thousands of applications, often with E&S service and support. We still supply ESIGs to allow our customers to maintain compatibility with installed systems.
Our mid-range products include EPX-500 and RenderBeast™. EPX-500, based on the same EPX technology as the EPX-5000, runs on our simFUSION value-added PC IG. EPX-500 is extremely scalable, allowing customers a variety of configurations and price points. RenderBeast, introduced in 2003, is aimed at the design visualization market. RenderBeast is made of a rack of simFUSION® image generators and application specific software that allows engineers and designers to create immersive visualizations of their designs.
Our low-cost IGs include the simFUSION product family and the EPX-50. The simFUSION value-added PC IG family of products was introduced in 1999. The product's newest version, the simFUSION 6500, we believe offers the best simulation performance for its price. EPX-50 was designed for price-sensitive simulation applications and offers the features of EPX software running on a commercially available PC and a commercially available graphics accelerator board. A true image generator, EPX-50 provides customers with the most realistic scene fidelity, image quality, and performance available using consumer graphics boards.
Our Digital Theater products include Digistar® 3, Digistar 3 SP, and Digistar II. Digistar 3 is designed for planetariums and domed theaters. It combines a complete color star projection and astronomy package with a fully interactive, real-time 3D computer graphics system (image generator) adding all-dome video playback and digital surround sound. Digistar 3 offers planetariums another unique advantage—it can interact in real time with large audiences. Digistar 3 SP uses the same hardware and software as Digistar 3 projected through a single DLP projector at lower resolution for domes 30 feet in diameter and smaller. Digistar II, a monochrome digital planetarium system, is still offered and supported.
Display Systems
Display systems consist of projectors, display screens, computer monitors and specialized optics. We offer these display systems in a broad range of configurations, from onboard instrument displays to domes offering a 360-degree field of view, depending on the application. Our fully integrated systems include full dome mosaics, collimated displays, rear projection systems, and retrofits and upgrades. Our display system products include the ESCP® family of calligraphic projectors, the TargetView® family of target projectors, and the VistaView® head-tracked area-of-interest projector. In addition E&S offers supplemental display functions, such as head trackers, night vision goggles, distortion correction and edge blending.
In 2003, we delivered the first-generation prototypes of our new laser based projector. This projector uses lasers and grating light valves to create images with unprecedented resolution, brightness, contrast and color. In 2004, we plan to build the next generation of prototypes as well as plan to begin delivery of production laser projectors. The first deliveries will go to the United States Air Force and to customers in the digital theater market, then to our other markets in 2005.
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Visual Databases, Tools, and Content
We offer a full complement of database (often referred to as synthetic environments) products and services. In addition to development of new databases, we will update existing databases created by E&S or other companies. We offer a complete set of correlated databases in a variety of industry-standard formats. In addition, E&S has an extensive library of models and textures that includes the majority of the world's major airports and military airfields. We also provide database training and support. In addition, we have an extensive library of shows and show content for our digital theater market. These databases and shows constitute a significant competitive advantage for us.
In 2003, we introduced our EP and EPX software technology (described below). An extremely important part of this software is the way the software handles the visual databases used to depict the real world. In the past, simulation systems (including those built by E&S) prepared the visual database by first collecting all the needed source data (such as imagery, elevation data, features such as roads and buildings, moving models, etc.), then compiling all this data into a single database to be used by the image generator. The compilation step was difficult and generally lengthy, and resulted in a form that was proprietary to the specific hardware for which it was designed. It was difficult to make any changes in this database, since a change would require that the entire process of compilation be started again.
In contrast, with EP and EPX, we have launched a revolutionary new way to build and distribute the visual database. As before, the first step is still to collect source data. However, these source materials are not compiled into a single final form. Instead, the individual source elements are kept in their original form and stored in separate files. The EP or EPX software, running on IG hardware, then assembles the source components in real time to create the image just as it is being viewed. In using this method, a "database" is actually a correlated set of source data, not a single, pre-assembled entity.
We believe this approach provides several significant benefits to our customers. First, it is very easy to make changes and update data, since new information can simply be inserted into the relevant files. The EP or EPX system will identify the new information and use it in the simulation as needed. Second, our customers receive the actual source data, and with appropriate licensing can use it with other systems that they may already have, since it is delivered in standard open formats.
Finally, all EP and EPX systems are shipped with a whole-earth database already in place. Customers can begin using this database immediately. Later, they can add inserts with more details or with special qualities for any geography of special interest or training value. Each additional area of interest simply adds to the whole-earth background already in place with the system. Airports, military landing sites, mission-rehearsal zones and other items of interest can be added quite simply as inserts in this way.
Complete Training Solutions
We develop complete custom training solutions, such as the Mission Command Trainer (MCT™) now in training for the United Kingdom's School of Army Aviation (Aviation Command and Tactics Trainer, ACTT). MCT is a low-cost tactics simulator that provides realistic command training, mission planning, and mission rehearsal in a virtual environment against an intelligent virtual enemy.
Customer Support Services
Customer support services are offered to prime contractors, system integrators and military and commercial end-users. Our service and support product offerings include a customized support package, called EncoreSM, which provides complete maintenance, spares and round-the-clock technical support; SimTech™ Training, which provides training to customers' simulation technicians and engineers; and computer-based training.
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Description of Markets
We operate as one business; providing visual simulation solutions to an international customer base. Our customer base can be categorized into four customer markets: military simulation, commercial simulation, digital theater and strategic visualization.
Military Simulation
We are an industry leader in providing visual systems to government simulation customers, offering tailored solutions to meet a full range of training requirements. We offer a complete line of products, from low-cost desktop solutions to highly advanced visual systems, to the domestic and international military simulation market. In addition, we offer complete training solutions for tactical command and air traffic control, database development services, custom display systems, and long-term service and support.
The military simulation market has continued to shrink as funds have been and continue to be diverted to immediate military requirements. As a result, we project this market to remain flat at least for the next year, and then expect to see growth in 2005.
During 2003, we launched a new visual system product line for military simulation, EPX. EPX is Environment Processor (EP) Technology with Military Extensions. Already in training for commercial aviation applications, EP offers customers unprecedented value, flexibility and reliability. EPX is available in our high-end, mid-range and low cost IG products, EPX-5000, EPX-500 and EPX-50. The EP and EPX systems are the only software products in the simulation industry that can run across a full range of hardware platforms, using the same software and the same databases. This commonality offers customers the significant capability to exactly match hardware performance and cost to their specific application, and to mix different platforms in a total system while maintaining software, database and training commonality.
EPX features rapid database creation and update, a whole-earth model with high-resolution insets, host compatibility with our ESIG system, revolutionary environment creation tools, legacy database compatibility, and a common sensor architecture. EPX is already gaining market acceptance worldwide.
Early in 2004, we announced that the U.S. Army has chosen the EPX-50 system for the Close Combat Tactical Trainer (CCTT) visual upgrade program. CCTT is one of the largest simulation programs ever fielded, using the E&S ESIG image generator for nearly 450 simulators for ground warfare operations. The EPX-50 will offer the U.S. Army increased performance and lower cost, while assisting in their transformation objectives to use standardized hardware to reduce costs over time.
We continue to market and sell other visual systems products in this market, including Harmony 2, simFUSION and ESIG, along with a variety of display systems solutions.
Commercial Simulation
E&S supplies visual systems to the world's commercial airlines, airframe manufacturers, and independent training providers for pilot training. Developed to meet the exacting statutory requirements of the world's civil aviation authorities, we believe our commercial simulation products have an excellent reputation for quality, reliability and innovation.
During 2003, commercial airlines reduced their purchases of new aircraft compared to prior years. This resulted in a reduction in the number of new simulators required for training. However, many airlines are upgrading their installed simulators as a cost-effective way to improve training at minimal additional cost. Due to our large share of the installed base of visual systems in this market and because our EP products provide an attractive upgrade path, we have benefited from significant upgrade activity. In 2003, we were successful in securing contracts for both new simulators and
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upgrades from customers that include Lufthansa, Air France, Southwest Airlines, Emirates, Federal Express, GECAT, Alteon and CHC. We project this market to remain flat with expected market recovery to occur sometime in 2005.
EP-1000CT received its first JAA Level D certification in May of 2003, and an additional nine systems were certified before the year ended. In 2003, we received an order for an EP-1000CT visual system for a helicopter simulator. This will be the first application of EP-1000CT for this very demanding form of pilot training.
Digital Theater
E&S uses state-of-the-art visual simulation technology to provide one of the world's most advanced digital theater systems for planetariums, science centers and themed entertainment venues. During 2003, the digital theater market grew and our products gained market share. We expect a rebounding worldwide economy and project funding increases to continue to drive the digital theater market growth into 2004. We believe that the Digistar 3 Laser now being introduced to this market also has the potential to broaden the market and increase our market share.
Sales of Digistar 3 products in 2003 were strong, with Digistar 3 now sold to or installed in 25 locations around the world. Key wins for Digistar 3 included new installations at planetariums in Hamburg and Kiel, Germany and the Eugenides Foundation in Athens, Greece, which will be open for the 2004 Summer Olympics.
E&S continues to produce and license show content for Digistar customers. E&S also introduced the Digistar 3 Laser™ to the science center and planetarium community late in 2003. This product was well received, and we expect to receive orders for the first Digistar 3 Laser systems early in 2004.
Strategic Visualization
In 2002, we began leveraging our simulation technologies and capabilities to address the emerging market for defense, intelligence and homeland security visualization applications. Using our EP technology, we are developing strategic databases, which are special forms of visual databases built to allow visualization of a geographic area for mission planning, mission preview, damage assessment and other time-sensitive applications.
In 2003, we received a 3-year contract from the Navy's Defense Modeling and Simulation Office to conceptualize, create, and test an architecture and process that will enable imagery and sensor data from disparate sources to be rapidly validated, correlated, distributed and displayed in a standard format. In addition, we provided this visualization technology to ABC News for its coverage of the war in Iraq.
Competitive Conditions
The primary competitive factors for our visual simulation products in the military, commercial and strategic visualization markets are performance, price, service, and product availability. Many of our competitors in the military and commercial simulation markets, not only provide visual systems, they also build entire simulators and may sometimes choose to follow a strategy of vertical integration by providing their own visual system. Such competitors include Boeing, CAE and Lockheed Martin. Other prime contractors that offer competing visual systems are Flight Safety International and Thales Training and Simulation. Due to these competitive forces, we constantly strive to improve our products in order to offer the best performance possible at a competitive price. We believe our range of products at different price points and performance points, our research and development investments and our ability to design and manufacture value-added parts when not available as commercial parts enable us to compete effectively in this environment and will continue to do so in the foreseeable
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future. In the military simulation market, we compete primarily with Lockheed Martin Training Systems, CAE and Quantum 3D. In the low-cost, PC-based market, our simFUSION product competes against companies that focus on PC simulation using graphics accelerator cards. In the commercial simulation market we compete primarily with CAE. In the strategic visualization market we compete primarily with General Dynamics, BAE and Northrop Grumman.
The primary competitive factors in the digital theater market are functionality, performance, price, and access to customers and distribution channels. Our digital theater products compete with traditional optical-mechanical products and digital display systems offered by Konica-Minolta Planetarium Co. Ltd., GOTO Optical Mfg. Co., Carl Zeiss Inc., Spitz, Inc. and Sky-Skan, Inc.
Backlog
On December 31, 2003, our backlog was $65 million compared with $60 million on December 31, 2002. The 2003 ending backlog contains $9.8 million of government firm, unfunded orders. All government orders included in the 2002 year ending backlog were firm and funded orders. We anticipate that approximately two-thirds of the 2003 backlog will be converted to sales in 2004.
Significant Customers
Worldwide customers using E&S products include U.S. and international armed forces, aerospace companies, most major airlines, laboratories, museums, planetariums, and science centers. We measure and identify our significant customers based on direct sales. We no longer measure significant customers based on indirect sales through subcontractors or prime contractors. While we no longer measure indirect sales, the U.S. government and the United Kingdom Ministry of Defence have been considered significant customers based on indirect sales in prior years.
In 2003, direct sales to the U.S. government totaled $15.2 million or 18% of total sales, sales to Thales Training & Simulation Ltd. totaled $7.2 million or 9% of total sales, and sales to The Boeing Company totaled $3.3 million or 4% of total sales.
In 2002, direct sales to the U.S. government totaled $35.4 million or 29% of total sales, sales to Thales Training & Simulation Ltd. totaled $19.8 million or 16% of total sales, sales to The Boeing Company totaled $17.1 million or 14% of total sales, and sales to Lockheed Martin Corporation totaled $2.9 million or 2% of sales.
In 2001, sales to the U.S. government totaled $35.1 million or 24% of total sales, sales to Thales Training & Simulation Ltd. totaled $23.9 million or 16% of total sales, sales to The Boeing Company totaled $15.1 million or 10% of total sales, and sales to Lockheed Martin Corporation totaled $1.8 million or 1% of sales.
Seasonality
We believe there is no inherent seasonal pattern to our business. Sales volume fluctuates quarter-to-quarter due to relatively large and nonrecurring individual sales and customer driven shipping dates.
Intellectual Property
We own a number of patents and trademarks and we are a licensee under several others. Our portfolio of patents and trademarks is, as a whole, material to our business. However, no one piece of intellectual property is critical to our business, thus no individual piece of our intellectual property is discussed on its own. In the U.S. and internationally, we hold active patents that cover many aspects of our visualization technology. Several patent applications are presently pending in the U.S., Japan and several European countries, and other patent applications are in preparation. We actively pursue
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patents on our new technology and we intend to vigorously protect our patent rights. We routinely copyright software, documentation and chip masks designed by us and institute copyright registration for such software, documentation and masks when appropriate.
Research & Development
We consider the timely development and introduction of new products to be essential to maintain a competitive position and to capitalize on market opportunities. Our research and development expenses were $21.7 million, $26.0 million and $32.8 million, in 2003, 2002 and 2001, respectively. As a percentage of sales, research and development expenses were 26%, 21% and 23%, in 2003, 2002 and 2001, respectively. We continue to fund essentially all research and development efforts internally. We anticipate that high levels of research and development will be needed to continue to ensure that we maintain our technical excellence, leadership and market competitiveness.
As planned, E&S completed the next-generation civil airline product, EP-1000CT, enhanced the simFUSION PC image generator product line, and completed the development of an improved in-line calligraphic projector in 2003. We also leveraged our EP technology for military applications, resulting in the EPX product line. This development included the development of our PC image generator products EPX-50 and EPX-500, which are based on the EPX software architecture. Also, the associated toolset to complement these products, Environment Creation Tool (ECT™), was initiated in 2003. We anticipate completion of these products and toolset in 2004.
Another focus for our R&D over the past five years has been the development of what we believe is a revolutionary new type of projector. This projector uses lasers and grating light valves to create images with unprecedented resolution, brightness, contrast and color. We developed several prototypes of the laser projector in 2003, including deliveries to the U.S. Air Force. The prototypes used first-generation components to provide proof-of-concept and allowed us to gather data on the applications and reliability of the grating light valves, the lasers, and the electronic components. In 2004, we anticipate we will complete the second generation of the laser projector, and plan to begin delivery of production-ready laser projectors. In addition, in 2004 we anticipate we will develop additional display applications for the laser projector, including planetariums and wide displays used in commercial airline and military simulation applications.
Dependence on Suppliers
Most of our 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, we either stock adequate inventory to cover the future product demands, or obtain the agreement of the vendor to maintain adequate stock for future demands, and/or attempt to develop alternative components or sources where appropriate.
International Sales
International sales are calculated based on the location of the purchasing customer and were $45.2 million, $48.4 million, and $49.5 million in 2003, 2002 and 2001, respectively. International sales represented 53%, 39% and 34% of total sales in 2003, 2002 and 2001, respectively. We believe that any inherent risk that may exist in our foreign operations is not material. For additional information on our international sales and long-lived assets by location, see Note 21 of Notes to Consolidated Financial Statements included in Part II of this annual report.
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Employees
As of February 27, 2004, Evans & Sutherland and its subsidiaries employed a total of 364 persons compared to 500 employees as of February 28, 2003. We believe our relations with our employees are good. None of our employees is subject to collective bargaining agreements.
Environmental Standards
We 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.
Strategic Relationships
In the normal course of business E&S develops and maintains various types of relationships with key customers and technology partners. These relationships include joint technology and product development agreements, research and development agreements, joint marketing agreements, teaming and joint venture agreements, value-added reseller agreements and original equipment manufacturer agreements. These agreements are of necessity somewhat dynamic in nature to enable us to rapidly address changes in market and customer needs and leverage key trends in related technology areas. It is anticipated that this philosophy will continue in 2004, and agreements will be continued or consummated as necessary to maintain our industry leading position.
Acquisitions and Dispositions
Pursuant to our most recent quarterly report filed on November 7, 2003, we announced our execution of an agreement to sell one of our buildings for $8 million. The agreement required that we close on the sale no later than December 29, 2003; however, pursuant to the terms of the agreement, the potential buyer elected to terminate the agreement on December 2, 2003, and we did not sell the building. We continue to market the property to prospective buyers.
Business Subject to Government Contract Renegotiation
A significant portion of the visual simulation business is dependent on contracts and subcontracts associated with government business. The U.S. Government, and other governments, may terminate any of our government contracts and, in general, subcontracts, at their convenience as well as for default based on lack of performance. If any of our government contracts were to be terminated for convenience, we generally would be entitled to receive payment for work completed; work performed, but not completed; allowable termination or cancellation costs; and a negotiated profit for work performed, but not completed. Depending on the contract, if such an event was to occur, it could materially affect our sales, profits, and cash flow. Historically, our experience indicates that termination for convenience is a rare occurrence.
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 loss. 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 warrant to purchase an additional
378,462 sharesportion 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 sharesfee. The amount of the Company's preferred stock into 901,408 sharesfee recovered, if any, is related to the portion of the Company's common stock.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 or restructuring if appropriations for subsequent performance periods become unavailable or are reduced from planned levels. Congress usually appropriates funds on a fiscal-year basis even though contract performance may extend over many years. Consequently, at the outset of a program, a contract may be partially funded, and Congress determines the annual appropriations and authorizations for subsequent fiscal-years in a multi-year contract.
11
Restructuring
In March 2001, Intelthe first quarter of 2003, we restructured to reduce our operating costs in line with anticipated sales. As part of this restructuring, we recorded a charge of $1.3 million related to a reduction in force of approximately 50 full-time equivalent employees. In the third quarter of 2003, we restructured to reduce our operating costs in order to operate profitably going forward based on projected sales and the Company amended the
preferred stockexpenses. As part of this restructuring, we recorded a total charge of $2.1 million, related primarily to a reduction in force of approximately 70 full-time equivalent employees. We estimate that these restructurings will reduce expenses approximately $7.5 million per year going forward
Forward-Looking Statements 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 qualifying as a specific
corporate event.
FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKSAssociated 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,""projects" and similar expressions. These forward-looking statements include projections of growth in
the military and commercial airline training simulator market; pilot training
utilizing Harmony will commence at four additional training sites during 2001;
the use of digital video to create, edit, and distribute rich visual content is
a market ready for growth; 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's products and services;
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 underSee Item 7 - Management's Discussion and Analysis of Financial Condition and Results offrom Operations, included in Part II of this annual report, important factors to consider in evaluating such
forward-looking statements include riskfor a list of product demand, market acceptance,
economic conditions, competitive products and pricing, difficulties in product
development, product delays and failure to meet certain milestones or delivery
requirements. In lightsome of these risks and uncertainties, there can be no
assurance that the events contemplated by the forward-looking statements containedincluded, in this annual report will, in fact, occur.
REPORTABLE SEGMENTS
The Company's business units have been aggregated into the following
three reportable segments: the Simulation Group, the REALimage Solutions Group,Form 10-K, 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. Financial information by reportable segment for each
of the three years ended December 31, 2000 is included in note 19 of the Notes
to Consolidated Financial Statements included in Part II of this annual report.
Simulation Group
- ----------------
E&S is an industry leader in providing visual systems to both
government and commercial simulation customers for military and commercial
airline training simulators worldwide. The Company anticipates growth infactors that may affect these marketplaces as simulation training is used in place of other training methods,
and as simulation training technology and cost-effectiveness improve.
Throughout 2000, the Company continued development of its
Integrator(R) software product, which provides the real-time control and
modeling tools for the Symphony(TM) family of hardware platforms. Performance
optimizations and new functionality have continuously been added with each new
software release to meet existing contract requirements and to increase the
product performance. The Company plans further improvements to Integrator in
2001, which will expand its functionality and help secure the Company's
favorable position in its main target markets, both commercial and military. In
addition to continued development of Integrator software, during 2000 the
Company made enhancements of its most advanced image generator product,
Harmony(R).
During the fourth quarter 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.
Products & Markets
The Simulation Group provides a broad line of visual systems for
flight and ground training and related services to the United States and
international armed forces, NASA, and aerospace companies. E&S remains an
industry leader in visual systems sales to various 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.
The group's visual systems create dynamic, high-quality,
out-the-window scenes that simulate the view vehicle operators see when
performing tasks under actual operating conditions. The visual systems are an
integral part of full mission simulators, which incorporate a number of other
components, including cockpits or vehicle cabs and large hydraulic motion
systems.
6
Generally, the Simulation Group's visual systems products consist of
the following six major components. These components are available as
subsystems, but are typically sold together as a complete visual-system solution
delivered to an end user or prime contractor.
(1) Image generators (IGs) create computer-generated real-time images and
send these images to display devices, such as projectors or computer
monitors. The group's primary IG offerings include the Symphony family
of products from Harmony on the high end to OpenGL(R), PC-based
simFUSION at the low end and its legacy ESIG(R)products, which
continue to experience 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's flagship for highest performance,
Ensemble(TM)is the first PC-based true image generator offering
deterministic performance and simulation-specific functionality, and
simFUSION(TM)is the first OpenGL PC-based image generation system
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 of synthetic environments are offered as options or as
custom creations. The group provides database development as well as
database development tools such as Integrator and EaSIEST(R).
Databases developed using Integrator are a key element of the Symphony
product family. These can be run on a full range of image generators
from the PC-based simFUSION to the high-end Harmony systems.
(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 sensor simulation, including the Vanguard(TM) radar image
generator, infrared post processors, 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 has 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 approach to customer
service and support. Encore combines the latest advancements in
manufacturing and interactive communications technology to offer E&S
customers a comprehensive, flexible, and cost-effective customer
service and support program. Encore combines web-based technology 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 news 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.
The Simulation Group's products are marketed worldwide by the
Company 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 has OEM and value added reseller agreements with a
number of major distributors in Europe and Asia.
7
Competitive 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 superior performance at a competitive price.
Prime contractors, including Lockheed Martin, Flight Safety International (FSI),
and CAE Electronics, Ltd. (CAE), offer competing visual systems in the
simulation market. The Company believes it is able to compete effectively in
this environment and will continue to be able to do so in the foreseeable
future. In 2000, 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's
simFUSION product competes against companies producing graphics accelerator
cards, such as Quantum 3D.
Backlog
The Simulation Group's backlog was $134.6 million on December 31,
2000 compared with $149.1 million on December 31, 1999. It is anticipated that
most of the 2000 backlog will be converted to sales in 2001 and replaced with
new orders.
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 course of this business, the 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
terminations of the Company's contracts were to occur, such events would have a
material adverse effect on the Company's consolidated financial condition,
liquidity, or results of operations.
REALimage Solutions Group
- -------------------------
The goal of the REALimage Solutions Group is to integrate 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 use of digital video to create, edit, and distribute
rich visual content is a market ready 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, and the emerging streaming
video phenomena over networks, all cause the Company to anticipate that the
demand for professional video production equipment will grow in the future.
Similarly, the rate of spending on network infrastructure 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 of the REALimage
Solutions Group to a wholly-owned subsidiary and seeking outside investment to
assist with the development of the REALimage Solutions Group's products.
Products & Markets
The REALimage Solutions Group develops and sells 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 REALimage 5000. This product, referred to as
"studio-on-a-chip", brings together both graphics and video processing
technology on a single chip for digital video content creation and
post-production. 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 completion of the
REALimage 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 new REALimage chipset are expected to be Pinnacle Systems
and Matrox Graphics.
Backlog
The REALimage Solutions Group's backlog was $0.7 million on 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
- ------------------
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 the technology of the Company's Simulation and REALimage Solutions
groups and apply them to other growth markets.
Products & Markets
The Applications Group's digital theater products include hardware,
software, and content for both the entertainment and educational marketplaces.
Digital theater focuses on immersive all-dome theater applications combining
colorful, digitally produced imagery, full-spectrum audio, and
audience-participation capability. The group provides turnkey solutions
incorporating visual systems and sub-systems from the Simulation and REALimage
Solutions groups. E&S integrates these systems with projection equipment, audio
components, and audience-participation systems from other suppliers. Products
include Digistar(R), a calligraphic star projection system designed to compete
with analog star projectors in planetariums, and StarRider(R), a full-color,
domed theater experience available in interactive or video playback formats. The
group is a leading supplier of digital display systems in the planetarium
marketplace. In addition to projection and theater systems, the group develops
and markets show content for planetariums and domed theaters.
9
In 2000, the Applications Group continued to expand the market for
E&S RAPIDsite(TM). E&S RAPIDsite is a photo-realistic 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 GL graphics accelerator. During 2000, 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 Conditions
Primary competitive factors for the Applications Group's products
are functionality, performance, price, and access to customers and distribution
channels. The Company's 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, Inc.
Backlog
The Applications Group's backlog was $7.4 million on December 31,
2000, compared with $7.2 million on December 31, 1999. It is anticipated that
most of the 2000 backlog will be converted to sales in 2001.
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 $66.7 million or 40%
of total sales, $84.5 million or 42% of total sales, 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 $22.3 million or 13% of total
sales, $33.8 million or 17% of total sales and $32.1 million or 17% of total
sales in 2000, 1999 and 1998, respectively.
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 of the Company's sales to significant customers are within the
Simulation Group.
10
DEPENDENCE ON SUPPLIERS
Most of the Company's 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 stocks a
substantial inventory, or obtains the agreement of the vendor to maintain
adequate stock for future demands, and/or attempts to develop alternative
components or sources where appropriate.
On June 3, 1999, the Company entered into an electronic
manufacturing services agreement with Sanmina Corporation. The agreement commits
the Company to purchase a minimum of $22.0 million of electronic products and
assemblies from Sanmina Corporation each year until June 3, 2002. If the Company
fails to meet these minimum purchase levels, subject to adjustment, the Company
may be required to pay 25 percent of the difference between the $22.0 million
and the amount purchased. Management expects that the Company will satisfy this
minimum purchase commitment.
SEASONALITY
E&S believes there is no inherent seasonal pattern to any of its
business segments. 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 active patents that cover many
aspects of the Company's 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 Company and has instituted copyright
procedures for these masks 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, E&S actively
pursues patents on its new technology.
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's research and development
expenses were $44.3 million, $44.4 million and $31.8 million in 2000, 1999 and
1998, respectively. As a percentage of sales, research and development expenses
were 27%, 22% and 17% in 2000, 1999 and 1998, respectively. The Company
continues 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 maintains technical excellence, leadership,
and market competitiveness. However, the Company believes that research and
development expenses as a percentage of sales will decline in 2001.
INTERNATIONAL SALES
Sales of products known to be ultimately installed outside the
United States are considered international sales by the Company and were $60.9
million, $86.7 million and $84.9 million in 2000, 1999 and 1998, respectively.
International sales represented 36%, 43% and 44% of total sales in 2000, 1999
and 1998, respectively. For additional information, see note 20 of Notes to
Consolidated Financial Statements included in Part II of this annual report.
EMPLOYEES
As of March 2, 2001, Evans & Sutherland and its subsidiaries
employed a total of 847 persons. The Company believes its relations with its
employees are good. None of the Company's employees are subject to collective
bargaining agreements.
11
ENVIRONMENTAL STANDARDS
The Company believes its facilities and operations are within
standards fully acceptable to the Environmental Protection Agency and that all
facilities and procedures are in accordance with environmental rules and
regulations, and international, federal, state, and local laws.
STRATEGIC RELATIONSHIP
On July 22, 1998, Intel purchased 901,408 shares of the Company'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's preferred stock into 901,408 shares of the Company's common stock. In
March 2001, Intel and 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 qualifying as a specific corporate event. The Company 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
In December 2000, the Company completed the divestiture of its
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 Company will continue to operate in Germany and
throughout Europe under its own name, providing marketing, sales, and support
for the Company's growing visual systems business and traditional customer base.
On March 28, 2000, the Company 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 Company received
additional common stock of RT-SET Real Time Synthesized entertainment Technology
Ltd. valued at $1.5 million related to the successful development of a product
included in the purchased assets.
On June 3, 1999, the Company sold certain of its 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 Company entered into an electronic
manufacturing services agreement with Sanmina Corporation. The electronic
manufacturing services agreement commits the Company to purchase a minimum of
$22.0 million of electronic products and assemblies from Sanmina Corporation
each year until June 3, 2002. If the Company fails to meet these minimum
purchase levels, subject to adjustment, the Company may be required to pay 25%
of the difference between the $22.0 million and the amount purchased.
On June 26, 1998, the Company, through its wholly-owned subsidiary,
Evans & Sutherland Graphics Corporation ("ESGC"), acquired all of the
outstanding stock of AccelGraphics, Inc. ("AGI") to expand the Company's
workstation graphics development, integration and distribution within the
workstation graphics marketplace. To acquire AGI the Company paid approximately
$23.7 million in cash and 1,109,303 shares of 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 million and incurred transaction
costs of approximately $1.1 million.
To further expand the Company's presence within the workstation
graphics marketplace, on June 26, 1998, the Company 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 Company paid approximately $1.2 million and incurred
transaction costs of approximately $250,000.
12
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 sevenwe own five buildings totaling approximately 450,000350,000 square feet. E&S occupies fiveWe occupy four buildings and leases the remaining twobuilding is vacant. We plan to sell the building we do not occupy. The buildings to other businesses, which are located on land leased from the University of Utah (the "U of U Property") with an initial term of 40 years or longer. All of the buildings are on 40-year land leases that expire in 2026 (the "U of U Property"). Two buildings located on the U of U
Property have options to renew the land leases for an additional 40 years, and
five have options to renew the land leases for 10 years.2030, with a ten-year renewal option. All of the Company'sour interests in the U of U Property are subject to a lien held by Wells Fargo Foothill Capital
Corporation to secure repayment of the borrowing facility as set forth in the
Liquidity and Capital Resources sectionNote 12 of the Management's Discussion and
AnalysisNotes to Consolidated Financial Statements in Part II of Financial Condition and Results of Operations. The Company and its
subsidiariesthis Form 10-K. We hold leases, including our subsidiaries, 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 believesWe believe that these properties are suitable for itsour immediate needs and it
doeswe do not currently plan to expand itsour facilities or relocate.
In May 23, 2000, Lockheed Martin Corporation (the "Plaintiff")
served the Company with2003, a civil complaint filed in the Circuit Court of the
Ninth Judicial Circuit in and for Orange County, Florida. The Plaintiff alleged
in the complaint that the Company 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 Plaintiff seeks compensatory damages of $8.5 million plus
interest as well as consequential damages and attorneys' fees. The $8.5 million
being sought fromclaim was made against the Company by RealVision, Inc. relative to matters arising from the Plaintiffsale of a business unit to RealVision, Inc. in 2001. The parties entered mediation in the fourth quarter of 2003, and continued discussions into 2004. In March 2004, an agreement was paidreached under which RealVision will receive a settlement in the amount of $2.4 million of which E&S will pay approximately $0.9 million to resolve this claim, with the Company from May
1999 to March 2000 and was recognized as revenue by the Company during 1999. On
June 12, 2000, the Company filed its answer and counterclaim. In the
counterclaim, the Company alleges as grounds for recovery against the Plaintiff
(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 its counterclaim,
the Company seeks 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
Divisionremainder of the United States District Court for the District of Florida where
it currently remains. On July 7, 2000, the Plaintiff answered the Company's
counterclaim but also filed a motion for dismissalsettlement amount being paid by E&S's insurance carrier. The Company has accrued its portion of the Company's
counterclaims for unjust enrichment, unfair competition, promissory estoppel,
and incidental damages. On July 24, 2000, the Company filed its opposition to
the Plaintiff's motion to dismiss these certain counterclaims of the Company. On
October 20, 2000 the court denied the Plaintiff's motion to dismiss in its
entirety, without prejudice. On January 16, 2001, the Company filed a motion for
partial summary judgement, asking the court to dismiss all of the Plaintiff's
breach of contract claims. The court has indicated that it will take the motion
under advisement. A trial date is currently set for September 2002. Management
disputes the Plaintiff's allegations in the complaint, is vigorously defending
the action, and is vigorously prosecuting its counterclaims. Although management
believes the Company will ultimately prevail in the litigation, an unfavorable
outcome of these matters would have a material adverse impact on the Company's
financial condition and operations.settlement.
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 not have a material adverse effect on the Company'sour consolidated financial condition, liquidity or results of operations.
13
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.
2003.
12
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 DirectorsFebruary 27, 2004:
| Name | Age | Position | ||
|---|---|---|---|---|
| James R. Oyler | 57 | President and Chief Executive Officer | ||
| E. Thomas Atchison | 55 | Vice President, Chief Financial Officer, and Corporate Secretary | ||
| Bob Morishita | 53 | Vice President Human Resources |
James R. Oyler 55 President and Chief Executive Officer
Robert H. Ard 47 Vice President - Applications Group
David B. Figgins 52 Vice President - 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 CompanyEvans & Sutherland and a member of the Board of Directors in DecemberNovember 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 through December 1994 and asa Senior Vice President offor Harris Corporation from 1976 through mid-1990.Corporation. He has sixnine years of service with the
Company.
Mr. ArdE&S.
E. Thomas Atchison was appointed Vice President of the Applications GroupChief Financial Officer and Corporate Secretary in May 1999.July 2003. He joined the CompanyEvans & Sutherland in June 1998 as Vice President and General Manager.
Previously, he was President of Model Technology,a Director, when E&S acquired Silicon Reality, Inc. where he was employed
from July 1996 to May 1998. From June 1989 to July 1996, Mr. Ard was employed by
Mentor Graphics Corporation as Vice President and General Manager of various
divisions. He has two years of service with the Company.
Mr. Figgins was appointed Vice President of the Simulation Group in January
1999. He joined the Company in April 1998 as Vice President of PC Simulation in
the Simulation Group. Previously, he was Vice President of Business Development
and Marketing for Raytheon Training where he was employed from May 1986 to April
1998. He has two years of service with the Company.
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. Saul was appointed Vice President of the REALimage Solutions Group in
December 1999. He joined the Company in June 1998, and was appointed Vice President of AdministrationManufacturing, Service, and Support in October 1998. From January2001. At Silicon Reality, Mr. Atchison was Vice President, Operations, Chief Operating Officer, and Chief Financial Officer from October 1997 to June 1998, he
was President and Chief Executive Officer of Silicon Reality, Inc., a graphics
technology start-up company E&S acquired in June 1998. Previously, Mr. Saul was
Vice President of Hitachi Semiconductor America where he was employed from
January 1991 to January 1997. He also held various management positions at
Fairchild Semiconductor Corporation and National Semiconductor Corporation. He has twofive years of service with the Company.
Mr. ThomasE&S.
Bob Morishita is Vice President of Human Resources. He joined Evans & Sutherland as Compensation Manager in 1982 and was appointed Human Resources Director in 1997 and Human Resources Vice President and Chief Financial Officer in December
2000 and Corporate Secretary in March 2001. He joined the Company in August 2000
as Vice President, Finance of the Simulation Group. Prior to joining the
Company, he was Executive Vice President and Chief Financial Officer for Edge
Technologies, Inc. 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 Director of Finance for Hughes Aircraft Company where he was
employed from March 1982 to February 1995. He has less than one year22 years of service with the Company.
15
FORM 10-K
E&S.
13
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
PRICE RANGE OF COMMON STOCK
The Company's
Price Range of Common Stock
Our 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 pricesbids per share of the Company'sour common stock for the fiscal quarters indicated, as reported by The Nasdaq Stock Market. Quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily 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 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 HOLDERStransactions.
| | HIGH | LOW | ||||
|---|---|---|---|---|---|---|
| 2003 | ||||||
| First Quarter | $ | 6.90 | $ | 5.00 | ||
| Second Quarter | $ | 6.42 | $ | 3.30 | ||
| Third Quarter | $ | 6.74 | $ | 5.25 | ||
| Fourth Quarter | $ | 6.20 | $ | 3.92 | ||
2002 | ||||||
| First Quarter | $ | 7.35 | $ | 5.83 | ||
| Second Quarter | $ | 10.00 | $ | 7.11 | ||
| Third Quarter | $ | 8.35 | $ | 3.72 | ||
| Fourth Quarter | $ | 6.25 | $ | 2.06 | ||
Approximate Number of Equity Security Holders
On March 2, 2001,February 27, 2004, there were 701613 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 has
Dividends
We have never paid a cash dividend on itsour common stock, retaining itsas previous retained earnings were used for the operation and expansion of itsour business. The Company intends forCurrently, we have an accumulated deficit. For the foreseeable future, we intend to continue thefollow our policy of retaining itsany future 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's DiscussionNote 12 of the Notes to Consolidated Financial Statements in Part II of this Form 10-K.
14
Securities Authorized For Issuance Under Equity Compensation Plans
As of December 31, 2003:
| | Number of securities to be issued upon exercise of outstanding options, warrants, and rights (a) | Weighted average exercise price of outstanding options, warrants and rights (b) | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c) | ||||
|---|---|---|---|---|---|---|---|
| Equity compensation plans approved by security holders | 2,344,418 | $ | 11.33 | 338,530 | |||
Equity compensation plans not approved by security holders | — | — | — | ||||
| Total | 2,344,418 | $ | 11.33 | 338,530 | |||
Stock Purchase Plan—We have an employee stock purchase plan whereby qualified employees are allowed to have up to 10% of their gross pay withheld each pay period to purchase our common stock at 85% of the market value of the stock at the time of the sale. During the period of December 24, 2002, through February 18, 2003, the Employee Stock purchase Plan was inadvertently oversubscribed in the amount of 10,373 shares. On February 27, 2003, our Board of Directors increased the number of shares available under this plan from 500,000 to 800,000 shares, and Analysisratified all prior issuances of Financial
Condition and Resultsshares under the plan. We filed an S-8 Registration Statement registering these shares on April 25, 2003. As of Operations - Liquidity and Capital Resources."
16
15
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected financial data for the five fiscal years ended December 31 2000 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."
| | 2003 | 2002 | 2001 | 2000 | 1999 | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | (in thousands, except per share amounts) | ||||||||||||||||
| For the Year | |||||||||||||||||
| Sales | $ | 84,776 | $ | 122,578 | $ | 145,263 | $ | 166,980 | $ | 200,885 | |||||||
| Cost of sales | 53,252 | 78,052 | 115,823 | 137,532 | 127,556 | ||||||||||||
| Inventory impairment | 14,566 | 1,392 | — | — | 13,230 | ||||||||||||
| Gross profit | 16,958 | 43,134 | 29,440 | 29,448 | 60,099 | ||||||||||||
| Expenses: | |||||||||||||||||
| Selling, general, and administrative | 27,039 | 27,131 | 31,374 | 34,406 | 44,554 | ||||||||||||
| Research and development | 21,730 | 25,970 | 32,828 | 44,264 | 44,358 | ||||||||||||
| Restructuring charges | 3,416 | 4,492 | 2,843 | (761 | ) | 1,460 | |||||||||||
| Impairment loss | 1,151 | 311 | 220 | — | 9,693 | ||||||||||||
| Operating expenses | 53,336 | 57,904 | 67,265 | 77,909 | 100,065 | ||||||||||||
| Gain on sale of assets held for sale | 1,406 | 1,212 | 9,000 | — | — | ||||||||||||
| Gain on sale of business unit | — | 253 | 774 | 1,918 | — | ||||||||||||
| Gain on curtailment of pension plan | — | 3,575 | — | — | — | ||||||||||||
| Operating loss | (34,972 | ) | (9,730 | ) | (28,051 | ) | (46,543 | ) | (39,966 | ) | |||||||
| Other income (expense), net | (1,987 | ) | (2,454 | ) | (2,578 | ) | (4,004 | ) | 1,009 | ||||||||
| Loss before income taxes | (36,959 | ) | (12,184 | ) | (30,629 | ) | (50,547 | ) | (38,867 | ) | |||||||
| Income tax expense (benefit) | (971 | ) | (463 | ) | (3,172 | ) | 19,023 | (15,413 | ) | ||||||||
| Net loss | (35,988 | ) | (11,721 | ) | (27,457 | ) | (69,570 | ) | (23,454 | ) | |||||||
| Accretion of redeemable preferred stock | — | — | — | 228 | 228 | ||||||||||||
| Net loss applicable to common stock | $ | (35,988 | ) | $ | (11,721 | ) | $ | (27,457 | ) | $ | (69,798 | ) | $ | (23,682 | ) | ||
| Net loss per common share | |||||||||||||||||
| Basic and diluted | $ | (3.44 | ) | $ | (1.12 | ) | $ | (2.70 | ) | $ | (7.45 | ) | $ | (2.49 | ) | ||
| Average weighted number of common shares outstanding: | |||||||||||||||||
| Basic and diluted | 10,471 | 10,422 | 10,169 | 9,372 | 9,501 | ||||||||||||
At End of Year | |||||||||||||||||
| Total assets | $ | 93,382 | $ | 127,576 | $ | 177,353 | $ | 216,078 | $ | 258,464 | |||||||
| Long-term debt, less current portion | 18,015 | 20,685 | 18,086 | 25,563 | 18,015 | ||||||||||||
| Redeemable, preferred stock | — | — | — | 24,000 | 23,772 | ||||||||||||
| Stockholders' equity | 15,566 | 53,363 | 64,659 | 67,634 | 137,194 | ||||||||||||
16
Quarterly Financial Data (Unaudited)
The financial data in this Annual Report on Form 10-K for the Company incurred a write-offfirst three quarters of inventories2003 has been restated from amounts previously reported on Forms 10-Q. A discussion of $13.2 million, an impairment lossthe restatement in relation to the affected quarters of $9.7 million and a
restructuring charge of $1.5 million. See notes 1, 4 and 222003 is provided in Note 3 of the Notes to Consolidated Financial Statements included in Part II of
this annual report.
(2) During 1998, the Company 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 2Statements. An overview of the Notesrestatement is provided in the introduction to ConsolidatedManagement's Discussion and Analysis of Financial Statements included in Part IICondition and Results of this annual report.
17
QUARTERLY FINANCIAL DATA (Unaudited)
(In thousands, exceptOperations.
| | Quarter Ended | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | March 28 | June 27 | Sep. 26 | Dec. 31(3) | ||||||||||
| | Restated | Restated | Restated | | ||||||||||
| | (in thousands, except per share data) | |||||||||||||
| 2003(1) | ||||||||||||||
| Sales | $ | 22,578 | $ | 16,010 | $ | 20,765 | $ | 25,423 | ||||||
| Gross profit (loss) | (6,986 | ) | 6,086 | 7,393 | 10,465 | |||||||||
| Net income (loss) before income taxes | (24,543 | ) | (5,005 | ) | (8,228 | ) | 817 | |||||||
| Net income (loss) | (24,275 | ) | (5,124 | ) | (8,040 | ) | 1,451 | |||||||
| Net income (loss) per share:(2) | ||||||||||||||
| Basic | (2.32 | ) | (0.49 | ) | (0.77 | ) | 0.14 | |||||||
| Diluted | (2.32 | ) | (0.49 | ) | (0.77 | ) | 0.14 | |||||||
| | Quarter Ended | |||||||||||||
March 29 | June 28 | Sep. 27 | Dec. 31 | |||||||||||
| 2002 | ||||||||||||||
| Sales | $ | 32,563 | $ | 34,221 | $ | 26,592 | $ | 29,202 | ||||||
| Gross profit | 9,594 | 12,185 | 11,268 | 10,087 | ||||||||||
| Net loss before income taxes | (3,872 | ) | (649 | ) | (1,684 | ) | (5,979 | ) | ||||||
| Net loss | (3,189 | ) | (724 | ) | (1,759 | ) | (6,049 | ) | ||||||
| Net loss per share:(2) | ||||||||||||||
| Basic | (0.31 | ) | (0.07 | ) | (0.17 | ) | (0.58 | ) | ||||||
| Diluted | (0.31 | ) | (0.07 | ) | (0.17 | ) | (0.58 | ) | ||||||
| | March 28, | June 27, | September 26, | |||||||
|---|---|---|---|---|---|---|---|---|---|---|
| | (in thousands, except per share info) | |||||||||
| Sales | $ | (115 | ) | $ | (6,186 | ) | $ | (2,645 | ) | |
| Cost of sales | 1,128 | (3,634 | ) | (762 | ) | |||||
| Gross profit | (1,243 | ) | (2,552 | ) | (1,883 | ) | ||||
| Net income before income taxes | (1,243 | ) | (2,552 | ) | (1,883 | ) | ||||
| Net income | (1,243 | ) | (2,552 | ) | (1,883 | ) | ||||
| Income per share: basic and diluted | (0.12 | ) | (0.24 | ) | (0.18 | ) | ||||
17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussionsdiscussion and analysis provides information which management believes is relevant to an assessment and understanding of our consolidated results of operations and financial condition. The discussion should be read in conjunction with the
Company'sour Consolidated Financial Statements containedand notes thereto, included herein under Item 8 of this annual report.
Executive Overview
Business
Evans & Sutherland Computer Corporation ("Evans & Sutherland", "E&S", "we", "our", or "the Company") produces high-quality visual systems used to display images of the real world rapidly and accurately. E&S is widely regarded as both a pioneer and a leader in providing the world's most realistic visual systems. We design, manufacture, market and support visual systems for simulation with solutions that meet the training requirements for a wide range of military and commercial applications. We also provide this leading-edge visual system technology and experience to planetariums, science centers, and entertainment venues. We develop and deliver a complete line of image generators, displays, databases, services and support products that match technology to customer requirements. Our products and solutions range from the desktop PC to what we believe are the most advanced visual systems in the world.
2003 Highlights and 2004 Outlook
2003 was an important year for E&S. We made substantial progress resolving many problems from prior years, and achieved initial success with new products and strategies. This combination enabled us to achieve profitable operations in the final quarter of the year and lay the foundation for a return to sustained profitability in the future.
The problems from past years were in two general categories: large military programs with cost overruns, and declining sales for our products.
The large military programs, which we refer to in this report as the "Big Six programs", involved the delivery of advanced visual systems in the US and Europe between 1997 and 2003. The total value was over $130 million, which made up a substantial portion of our sales in those years. The programs were complex in many ways, both contractually and technically, and for various reasons we fell behind and incurred large excess costs and penalties, creating losses which we were not able to offset in other parts of the business. While these programs were extremely difficult for us and caused major financial stress, we nevertheless successfully completed and delivered all requirements, with the exception of a few remaining items which we expect to complete in early 2004.
Declining sales for our products occurred both for external and internal reasons. The primary external reason was a drastic shrinkage in our markets following the events of September 11, 2001. Commercial airlines suffered severe financial disruptions and generally reduced purchases of equipment. In the United States military market, funds were diverted to operational requirements and purchases of simulation equipment fell sharply. Overall, our markets shrank to half their former size, a significant decline in any industry. Internally, we suffered from difficulties with our scheduling systems related to very complex programs and development.
18
Our response was to shrink the size of our company in accordance with the size of our markets and with the completion of the Big Six programs, and to install new management and systems. Overall, we reduced employment by about 60% from the peak in 2000, vs. 1999
- -------------while revenue has fallen by about 50% from the same year. We reduced other recurring costs similarly. In addition, such a drastic reduction in the size of the company led us to reduce excess inventories procured for previously higher sales projections, as well as to recognize other restructuring charges.
To address the problems that we encountered with the Big Six programs and related development, we installed sophisticated new hardware and software infrastructure to provide more accurate and timely management of information. These systems reached maturity in 2003 in our military market, and we have since had no further problems of the types encountered in earlier military programs such as the Big Six programs. We had scheduled the installation of these same systems in 2004 in our United Kingdom subsidiary, where we manage our commercial airline business. However, prior to their installation we encountered problems there, arising from the incorrect recognition of costs, revenue, and profit on percent-complete contracts. To correct the errors, we restated the first three quarters of 2003 condensed consolidated financial statements, which were previously unaudited. As a result, revenues were reduced and losses were increased for the quarters restated. Despite these actions, our transition to profitability in the fourth quarter was still achieved.
Throughout this very difficult period, we steadfastly maintained investment in new products as the primary pathway to rebuilding the company once our markets stabilize. We believe that these efforts have now begun to bear fruit, and will do so increasingly during 2004 and the years beyond. In 2003, we introduced new products in both our simulation and digital theater businesses, and delivered first prototypes of our new laser projector. In 2004, we anticipate we will continue to introduce new products in all these markets, with special emphasis on the delivery of the first production-level model of the laser projector. All of the new products have enjoyed enthusiastic acceptance from our customers, enabling us to gain market share in a down market. We believe that our EP (Environment Processor) software is, in fact, revolutionary in its structure and impact on rapid development of databases for training and mission rehearsal, and we believe that the laser projector will revolutionize the market for large-format, high-accuracy displays. We have already received patents on the laser projector, with a large number of additional patents in process but not yet awarded.
We expect the continued success of our new products to return the company to profitability for the full year 2004, although the pattern of our current order book suggests we are likely to operate moderately below break-even in the first half. Beyond this year, we anticipate a modest recovery in our markets in 2005. In addition, we believe the laser projector will start to ship in higher volumes in 2005 and beyond, contributing a substantial new revenue stream to the company and potentially opening entirely new markets.
Because of the major cost reductions which we have already completed, and because of our major investment in systems and software for internal operations, our infrastructure is capable of meeting substantially higher sales requirements with very little increase in overhead or fixed costs. Therefore, we believe revenue growth will produce accelerating profit growth.
19
Results of Operations
| | Year Ended December 31, | |||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2003 | 2002 | 2001 | |||||||||||||||
| Sales | $ | 84,776 | 100.0 | % | $ | 122,578 | 100.0 | % | $ | 145,263 | 100.0 | % | ||||||
| Cost of sales | 53,252 | 62.8 | 78,052 | 63.7 | 115,823 | 79.7 | ||||||||||||
| Inventory impairment | 14,566 | 17.2 | 1,392 | 1.1 | — | — | ||||||||||||
| Gross profit | 16,958 | 20.0 | 43,134 | 35.2 | 29,440 | 20.3 | ||||||||||||
| Expenses: | ||||||||||||||||||
| Selling, general, and administrative | 27,039 | 31.9 | 27,131 | 22.1 | 31,374 | 21.6 | ||||||||||||
| Research and development | 21,730 | 25.6 | 25,970 | 21.2 | 32,828 | 22.6 | ||||||||||||
| Restructuring charges | 3,416 | 4.0 | 4,492 | 3.7 | 2,843 | 2.0 | ||||||||||||
| Impairment loss | 1,151 | 1.4 | 311 | 0.2 | 220 | 0.2 | ||||||||||||
| Operating expenses | 53,336 | 62.9 | 57,904 | 47.2 | 67,265 | 46.3 | ||||||||||||
| Gain on curtailment of pension plan | — | — | 3,575 | 2.9 | — | — | ||||||||||||
| Gain on sale of assets held for sale | 1,406 | 1.6 | 1,212 | 1.0 | 9,000 | 6.2 | ||||||||||||
| Gain on sale of business unit | — | — | 253 | 0.2 | 774 | 0.5 | ||||||||||||
| Operating loss | (34,972 | ) | (41.3 | ) | (9,730 | ) | (7.9 | ) | (28,051 | ) | (19.3 | ) | ||||||
| Other income (expense), net: | (1,987 | ) | (2.3 | ) | (2,454 | ) | (2.0 | ) | (2,578 | ) | (1.8 | ) | ||||||
| Loss before income taxes | (36,959 | ) | (43.6 | ) | (12,184 | ) | (9.9 | ) | (30,629 | ) | (21.1 | ) | ||||||
| Income tax benefit | (971 | ) | (1.1 | ) | (463 | ) | (0.3 | ) | (3,172 | ) | (2.2 | ) | ||||||
| Net loss | $ | (35,988 | ) | (42.5 | ) | $ | (11,721 | ) | (9.6 | ) | $ | (27,457 | ) | (18.9 | ) | |||
Results of Operations Summary
Our 2003 sales significantly decreased primarily as a result of current conditions in the military market as military customers diverted funds to more pressing requirements. Deliveries to commercial customers also declined because of cutbacks by airline customers after the terrorist attacks in 2001. We did achieve sales growth in both our PC-based image generators and planetarium systems as a result of strong demand for our new simFUSION and Digistar 3 products.
Our gross margins also declined in 2003. This was due primarily to a $14.6 million inventory impairment caused by customer order cancellations as the military realigned its spending priorities. However, offsetting the impairment charges was improvement due to essentially completing the six large Harmony programs ("Big Six programs") which have driven significant losses or extremely low margins in prior years. We also saw a decrease in our commercial gross margins, but expect improvements in 2004.
To offset current market conditions, we executed two restructuring plans in 2003 and reduced our headcount by approximately 120 employees to reduce operating costs and create a cost structure in line with our anticipated sales. These actions were the primary cause of our $4.6 million reduction in our operating expenses from 2002 to 2003.
We achieved strong reductions in our other expenses as we reduced interest expenses and debt levels in 2003, and reduced income tax expenses.
More detailed explanations of our 2003 results are provided below.
20
Consolidated Sales In 2000, the Company'sand Gross Profit
Our total sales decreased $33.9 million, or 17%
($167.0were $84.8 million in 20002003, compared to $200.9with $122.6 million in 1999). Sales in the
Simulation Group decreased $20.7 million, or 12% ($149.92002 and $145.3 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).2001. The 2003 sales decrease was driven mainly by a reduction in sales in the Simulation Group is duemilitary market. Sales to the cancellationmilitary market decreased in 2003 primarily because 2002 contained two large programs with significant final product deliveries. No new programs of this magnitude were awarded during 2003 to produce replacement sales. Also contributing to a decrease in sales to the military market was that approximately 85% of the contract with Lockheed Martin
Corporation ("Lockheed")remaining sales from our Big Six programs were recognized in 2002, while approximately 10% was recognized in 2003. Four of these Big Six programs are now 100% complete and the remaining two are 99.9% complete. Sales to the commercial market also declined in 2003. While orders increased significantly in 2003 from this market, a significant portion of those 2003 orders will routinely be delivered in 2004. In addition, we experienced a slight decrease in service and support sales. Sales of our PC-based image generator increased 70% in 2003 as a result of a strong demand for our new simFUSION products. Sales of our planetarium systems also increased significantly in 2003, 129%, as a result of strong demand for our new Digistar 3 product.
From 2001 to 2002 sales to the military market decreased primarily as a result of a significant drop in orders over a period of these two years. Orders decreased approximately 35% in 2002 and 24% in 2001. Sales of our PC-based image generator declined approximately 50% in 2002 because the updated simFUSION product line was not launched until the third quarter of 2002 and customers were waiting for the deliveryrelease of this enhanced PC-based image generator. The new simFUSION product generated orders and sales in the third and fourth quarters of 2002. In 2002, sales of our planetarium systems declined 60% as customers delayed their orders of existing products in anticipation of our next generation products, which have now been launched and are producing growth in orders and sales. Sales were also impacted by a worldwide slowdown of demand for planetarium equipment in 2002. In 2001, we also sold our REALimage business and discontinued the operations of our RAPIDsite business; therefore, losing related sales in 2002. These 2002 decreases in sales were partially offset by a slight increase in service and support sales.
Trends in the commercial and military markets remained unchanged in 2003, and are expected to continue through 2004. In the commercial market, commercial airlines have reduced purchases of new aircraft compared to prior years. This has resulted in a reduction in the number of new simulators they require for training. However, many commercial airlines are upgrading their currently installed simulators. As a result, we have benefited from this change because we had a large share of the installed base of visual systems and because our newly introduced EP-1000CT product provides an attractive upgrade path due to its compatibility with the installed base. Military markets have continued to shrink as funds are diverted to more pressing military requirements. We believe this diversion of funds will continue during 2004, but may result in some pent-up demand in 2005. In the military and commercial markets some large prime contractors, with whom we may subcontract with, are moving the high-margin database and software work in-house instead of subcontracting out to other companies in order to protect their revenues and margins. If this trend continues in future years it could negatively affect our revenues and profitability.
Our gross margin percentages were 20.0% in 2003, compared with 35.2% in 2002 and 20.3% in 2001. Our 2003 gross margins primarily decreased as a result of a $14.6 million inventory impairment loss. During 2003 certain significant orders that we had expected to receive as of December 31, 2002, and into early 2003 were cancelled by customers. These cancellations were primarily the result of a re-alignment of military spending priorities during the first part of 2003. Accordingly, the future demand for our Harmony 1, ESIG, and TargetView products significantly decreased compared to our prior projections because of these cancellations. As a result, we recorded a $14.6 million impairment to specific inventory during 2003. Note 4 of the Notes to Condensed Consolidated Financial Statements of this annual report on Form 10-K contains a detailed description of this impairment.
21
From 2002 to 2003 gross margins percentages on sales to the United
Kingdom Ministrymilitary market decreased significantly as a result of Defence ("UK MOD") for the Combined Arms Tactical Trainer
program ("UK CATT") and an adjustment to revenue on percent complete contracts
where a reviewmajority of the estimated costs to complete the contracts resulted in a
negative adjustment to revenue$14.6 million of $10.9 millioninventory impairment consisting mainly of products sold in the second quarter of 2000.
The decreasemilitary market. Offsetting this was partially offset by increaseda significant reduction in the negative impact that the Big Six programs had. Gross margin percentages on sales volume of visual systems to commercial airline customers decreased significantly in 2003 as a result of pricing pressure that is currently in the commercial market and due to cost overruns. In addition, we experienced higher than normal warranty and support costs due to part failures and an increase in our warranty provision for anticipated future warranty costs. These decreases were slightly offset by a small increase in our service & support gross margin percentages.
From 2001 to 2002 our gross margins increased significantly because the Big Six programs had less of a negative impact in 2002 than in 2001. These six programs heavily contributed either losses or small positive gross margins to 2001's overall gross profit. Additionally, gross margins on sales volumeto commercial airline customers were up as 2002 included both positive adjustments for completing programs below cost estimates and improved overall cost performance. In 2002 gross margin improvements were offset by an inventory impairment loss of the Company's simFUSION
workstation-based product and increased sales$1.4 million related to our restructuring plan decision to exit the simFUSION 4000 product line. The $1.4 million charge encompassed the total value for the simFUSION 4000 inventory on hand. We took this impairment write-off because we anticipated reduced demand for simFUSION 4000 products as a result of customer servicemigration to the updated simFUSION products.
Operating Expenses, Other Items and support contracts. The decreaseTaxes
Our operating expenses were $53.3 million in sales2003, compared with $57.9 million in 2002 and $67.3 million in 2001. Selling, general, and administrative ("SG&A") expenses decreased $0.1 million during 2003. We achieved significant SG&A expense reductions primarily as a result of lower headcount and reductions in expenditures for travel, consultants, and facilities costs. However, SG&A expenses remained near the 2002 level because in 2002 we reversed previous bad debt accruals of $0.7 million as a result of improved collection experience. Additionally, our SG&A expenses in 2003 increased as a result of reductions in our rental income, which affect our rent expense. Research and development ("R&D") expenses decreased $4.2 million in 2003 as a result of lower headcount and reduced development expenditures for materials and software.
SG&A expenses decreased $2.9 million during 2002 as a result of lower headcount, lower labor costs, reduced use of consultants, and lower overheads. Additionally, due to improved collection experience, previous bad debt accruals were reversed, which lowered 2002 SG&A expenses. SG&A also decreased $1.3 million in 2002 compared to 2001 as a result of our sale of the REALimage Solutions Group is duein 2001. R&D expenses decreased $2.9 million in 2002 as a result of lower headcount, decreased effort on our Integrator software product as it neared completion, and reduced overhead costs. R&D also decreased $4.0 million in 2002 compared to 2001 as a result of our sale of the REALimage Solutions Group in 2001. These R&D decreases were partly offset by one-time material purchases for the development of both our EP-1000 line of new visual systems for commercial simulation and our new PC-based products.
During 2003, we recorded restructuring charges of $3.4 million related to reductions in force of approximately 120 full-time equivalent employees to reduce operating costs as well as to create a cost structure in line with anticipated sales. We estimate that this restructuring will reduce expenses by approximately $7.5 million per year going forward. We are continuing cost reduction actions in order to further reduce operating expenses to return to profitable performance.
During 2002, we recorded a restructuring charge of $4.5 million related to a decreasereduction in force of approximately 230 employees in an attempt to reduce the operating cost structure as well as to create a cost structure in line with future sales. We estimate that this restructuring reduced expenses by
22
approximately $14 million per year going forward. During 2001, we recorded a restructuring charge of $2.8 million relating to a reduction in force of approximately 92 employees.
During 2003, we recognized an impairment loss of $1.2 million on certain fixed assets specifically used to build, test, and demonstrate our Harmony 1 product. During 2002, we recognized an impairment loss of $0.3 million on software licenses that were used by employees who were terminated as a result of the 2002 reduction-in-force actions. During 2001, we recognized an impairment loss of $0.2 million related to the write-off of goodwill acquired in the numberE&S acquisition of units soldAccelGraphics, Inc. and decreased selling pricesSilicon Reality, Inc. in 1998.
During 2002, we recognized a gain on the amendment of existing products dueour pension plan of $3.6 million. In order to increased competitionmatch current market practices, the pension plan was amended to curtail accrual of future benefits. At the same time, the E&S 401(k) plan was amended to permit the Board of Directors to grant additional discretionary matching contributions based on profitability as well as other financial and delays inoperational considerations.
During 2003, E&S recognized a gain on assets held for sale of $1.4 million on the introductionsale of new products. The increase in sales ina building. During 2002, we recognized a gain on assets held for sale of $1.2 million on the Applications Group is due to an
19
increase in sales volumesale of large-format entertainment products and planetarium
systems which is partially offset by decreased salesa building. During 2001, we recognized a gain on the sale of the Company's digital
video productsassets held for sale of $9.0 million due to the sale of thiscertain 3D-graphics patents and a gain on the sale of a business to RT-SET Real Time Synthesized
Entertainment Technology Ltd. and its subsidiary RT-SET America Inc. (together
"RT-SET") in the first quarterunit of 2000.
Gross Profit
Gross profit decreased $30.7$0.8 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 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's digital video products.
Selling, General and Administrative
Selling, general and administrative expenses decreased $8.8 million,
or 20% ($34.2 million in 2000 compared to $43.0 million in 1999). As a percent
of sales, selling, general and administrative expenses were 20.5% in 2000
compared to 21.4% 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 our REALimage Solutions Group.
Our other income (expense) was $2.0 million in net expense in 2003, $2.5 million in net expense in 2002, and $2.6 million in net expense in 2001. Interest expense decreased to $1.4 million in 2003 from $1.8 million in 2002 and from $2.5 million in 2001 due to our continued reduction of debt. During 2003 we also benefited from an increase in interest income; however this was offset primarily by a $0.5 million write-down of a nonmarketable investment in Quantum Vision, Inc. Based on our analysis and meeting with Quantum Vision, Inc. in the first part of 2003, we determined this technology would not enhance our own technology or strategic direction.
Our income tax benefits were $1.0 million in 2003 compared to $0.5 million in 2002 and $3.2 million in 2001. The income tax benefits in 2003 and 2001 were primarily due to the favorable resolution of certain assetspotential tax liabilities of our foreign subsidiaries. The 2002 income tax benefit was the result of a change in the U.S. tax law, which allows us to use additional net operating losses to offset taxable income.
Liquidity and Capital Resources
Overview
Summary information about our financial position as of December 31, 2003 and December 31, 2002, is presented in the following table (in thousands):
| | 2003 | 2002 | |||||
|---|---|---|---|---|---|---|---|
| Cash and cash equivalents | $ | 9,714 | $ | 7,375 | |||
| Restricted cash | 765 | 2,960 | |||||
| Line of credit agreements | (7,685 | ) | (5,213 | ) | |||
| Net short term cash/(indebtedness) | 2,794 | 5,122 | |||||
| Long-term debt | (18,015 | ) | (20,685 | ) | |||
| Net cash/(indebtedness) | $ | (15,221 | ) | $ | (15,563 | ) | |
| Stockholders' equity | $ | 15,566 | $ | 53,363 | |||
During 2003 we continued to take actions to adjust our business in order to reach profitability, to complete certain Harmony 1 programs, and to market two of our Salt Lake City buildings for sale. In
23
addition, to bring costs in line with projected sales, we completed two restructurings during the year. We moved closer to completion of the Company's
digital video products business to RT-SET.
Research and Development
Research and development expenses decreased $0.1 million ($44.3
million in 2000 compared to $44.4 million in 1999). As a percent of sales,
research and development expenses were 26.5% in 2000 compared to 22.1% in 1999.
Research and development expenses in the Simulation Group increased due to
increased efforts of the continued development of the Company's 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 restructuringBig Six programs, with only two remaining for final completion at the end of 2003. This allowed us to collect $11.6 million related to these programs. We sold one of the thirdtwo buildings we had for sale, with cash proceeds of $4.8 million. These events allowed us rely less on our credit facilities during 2003 than in 2002. Our average balance outstanding on the credit facilities was $3.1 million in 2003 compared to $12.3 million in 2002.
In the first quarter of 1999.
Amortization2003 we were able to finalize the renewal of Goodwill and Other Intangible Assets
Amortizationboth of goodwill and other intangible assets decreased $1.3
million, or 87% ($0.2 millionour lines of credit providing a maximum borrowing capability of $28.0 million. In addition, as discussed under Credit Facilities below, we were in 2000 compared to $1.5 million in 1999). The
decrease in this expense was due to the write-offbreach of $9.3 million of goodwill
and other intangible assets during the third quarter of 1999 in the REALimage
Solutions Group.
Impairment Loss
The Company 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's
acquisitions of AccelGraphic, Inc. and Silicon Reality, Inc. in the second
quarter of 1998. The impairment consistedone 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 Company 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 Company 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 Unit
During 2000, the Company sold certain assets of its Applications
Group relating to its digital video business and recognized $1.9 million of gain
on the transaction. See "Item 1 - Business - Acquisitions and Dispositions."
There was no such event in 1999.
Other Income (Expense), Net
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. In 2000 the Company recognized $6.5
million gain on the sale of investment securities. This gain was primarily due
to the sale of the Company's investment in Silicon Light Machines, Inc. to
Cypress Semiconductor, Inc. ("Cypress") in which the Company received Cypress
stock. There was no such event in 1999.
Income Taxes
Income tax expense (benefit) increased $34.4 million (expense of
$19.0 million in 2000 compared to a benefit of $15.4 million in 1999). During
the second quarter of 2000, the Company increased its 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 15 to the consolidated
financial statements, the Company fully reserved its net deferred tax assets
which previously existedcovenants at the end of the first quarter of 20002003 that resulted in a waiver and those
deferred tax assets recognized duringan amended agreement, changing our financial covenants and increasing our interest rates on borrowings. Both line of credit agreements expire in December 2004.
For 2004, we foresee decreasing reliance on our credit facilities, helped by the second quarterexpected sale of 2000. These net
deferred tax assets relateour last building that remains for sale, to temporary differences, tax credit carry forwardsprovide cash to fund our operating activities. Over the past three years we have taken actions to reduce our operating cash requirements and netour capital expenditure requirements. While these actions have significantly reduced our total operating loss carry forwards. The valuation allowance was recordedcash requirements, our current operations may not yield positive cash flow. Circumstances that could materially affect liquidity in accordance with SFAS 109, which requires that a valuation allowance be
established when there is significant uncertainty as2004 include, but are not limited to, the realizabilityfollowing: (i) our ability to successfully develop and produce new technologies and products, (ii) our ability to meet our forecasted sales levels during 2004, (iii) our ability to reduce costs and expenses, and (iv) our ability to favorably negotiate a sale agreement related to the one building that is for sale.
For years beyond 2004, if our projections are broadly correct and our markets start to recover in 2005, we believe that cash from operations will be sufficient for our planned needs. If our projections are incorrect, then we may need to continue to supplement cash from operations with borrowing facilities. In addition, we have the option to use our remaining buildings that are currently not for sale to finance our operations by selling these buildings or using other options available at the time that decision is made. Also, we believe that long-term our investment in research and development and our current product strategy will allow our business to grow; thus future funding requirements are anticipated to be provided from our operating activities.
We believe that existing cash, restricted cash, borrowings available under our various borrowing facilities, the sale of the deferred tax assets. The Company evaluatesone building currently held for sale, and expected cash from future operations will be sufficient to meet our anticipated working capital needs, routine capital expenditures and current debt service obligations for the realizabilitynext twelve months. At December 31, 2003, our total indebtedness was $25.7 million. Both of its deferred tax
assetsour lines of credit expire in December 2004. If we continue to need these credit facilities, we may attempt to replace them; however, there can be no assurances that we will be successful in renegotiating our existing borrowing facilities or obtaining additional debt or equity financing. Our cash and restricted cash, subject to various restrictions previously set forth below, are available for working capital needs, capital expenditures, strategic investments, mergers and acquisitions, stock repurchases and other potential cash needs as they may arise.
Impact of Big Six Programs
We have six Harmony 1 programs that have had a negative impact on a quarterly basis. If the deferred tax assetsour overall financial condition in prior years. Our work is essentially complete on these programs and we are realizedawaiting final acceptance by end users in the
future, or if a portion or alltwo of these programs in order to invoice our last remaining milestones. Four of the valuation allowance is no longer deemed to
be necessary,Big Six programs are fully invoiced and collected.
At 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 millionend of 2002, costs and estimated earnings 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
effectexcess of having a full year of sales in 1999billings on uncompleted contracts relating to the acquisitionBig Six programs were $8.1 million. Our collections in 2003 were $11.6 million. The Big Six programs balance of AccelGraphics, Inc. which was purchasedcost and estimated earnings in excess of billings on uncompleted contracts at
24
the end of 2003 was $3.3 million. We expect to convert this amount to invoicing and collections in 2004.
Cash Flow
| | For the following years ended Dec. 31 | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| | 2003 | 2002 | 2001 | |||||||
| | (In thousands) | |||||||||
| Net cash provided by (used in) operating activities | $ | (771 | ) | $ | 12,039 | $ | (28,312 | ) | ||
| Net cash provided by (used in) investing activities | 997 | (656 | ) | 12,416 | ||||||
| Net cash provided by (used in) financing activities | 2,113 | (12,725 | ) | 12,701 | ||||||
| Increase (decrease) in cash and cash equivalents | $ | 2,339 | $ | (1,342 | ) | $ | (3,195 | ) | ||
In 2003 and 2002 our overall liquidity improved as we were able to reduce the second quartermagnitude 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.our reliance on our credit facilities. As a result, in 2003 we were able to maintain much lower borrowing balances compared to prior years, and in 2002 we effectively reduced our borrowings on our lines of credit $12.8 million.
We were able to accomplish this in three ways. First, the Big Six programs were a significant drain on our cash flow during 2001. In 2002, we made significant progress and neared completion on most of these programs and were able to convert a significant portion of the testing,related costs and estimated earnings in excess of billings on uncompleted contracts into invoicing and then into collections. This trend continued in 2003, where we ended the Company determined that certainyear with only two of the inventories previously purchased forBig Six programs awaiting final completion. Second, over the Harmony image generator had become
technologically obsoletelast two years we have been selling unneeded facilities in Salt Lake City. In 2003 this provided $4.8 million 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% ($60.1in 2002, $2.9 million in 1999
compared to $81.4 millioncash. Third, 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 effortseach of the Company's Integrator
software. This software provides the real-time controllast three years we have taken actions to restructure our business several times, mainly through reductions in force 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 RESOURCESnon-core businesses, which significantly reduced cash requirements.
At December 31, 2000, the Company2003, we had working capital of $61.8$22.8 million, including cash and restricted cash equivalents and short-term investments of $13.9$10.5 million, compared to working capital of $116.9$56.0 million at December 31, 19992002, including cash and restricted cash equivalents and short-term investments of $22.9$10.3 million. During 2000, the Company2003, we used $2.2$0.8 million of cash in itsour operating activities, used $10.2generated $1.0 million of cash in itsfrom our investing activities, and generated $2.7$2.1 million of cash in itsfrom our financing activities.
23
In 2003 cash used in our operating activities was mainly attributable to a $36.0 million net loss, offset by non-cash changes primarily consisting of $15.7 million related to asset impairments and $6.8 million related to depreciation and amortization, and decreases in accrued expenses and accounts payables of $3.3 million and $1.2 million, respectively. Accrued expenses decreased as a result of a reduction in our compensation and benefits accruals. This reduction is a result of our headcount reductions during 2003 and 2002. Accounts payables decreased as a result of our improved liquidity in 2003 as well as a result of an overall shrinkage of our business. Cash from our operating activities of the Company was provided by a
$27.3an $11.6 million decrease in the net costs and estimated earnings in excess of billings on uncompleted contracts and a $6.9$2.4 million increase in accounts payable. The
decreasecustomer deposits. Costs and estimated earnings in excess of billings on uncompleted contracts decreased $11.1 million due to the completion and billings of all but two of the Big Six programs. Customer deposits increased due to strong fourth quarter orders from both the commercial simulation and digital theater customer markets.
In 2002, cash provided by our operating activities was mainly attributable to decreases of $11.9 million in net costs and estimated earnings in excess of billings on uncompleted contracts, $8.8 million in accounts receivables and $3.9 million in inventory. While the $11.7 million loss had a negative impact on cash, it was mainly offset by $9.3 million in depreciation and amortization. Net costs and estimated earnings in excess of billings on uncompleted contracts decreased as a result of a decrease in costs and estimated earnings in excess of billings on uncompleted contracts of
25
approximately $25.7 million primarily due to successful near completion of the achievementBig Six programs and a decrease in billings in excess of billing milestones during
the yearcosts and the adjustmentestimated earnings on uncompleted contracts of approximately $14.0 million due primarily to revenue on percent complete contracts due$6.0 million in deliveries made in 2002 related to the
changecommercial simulation customer orders booked in estimated actual costs2001 and $3.6 million in deliveries made in 2002 related to complete the contracts. Cash usedmilitary simulation product orders in the
Company's operating activities included a net loss adjusted for non-cash
expenses and income for the year of $20.32001. Also contributing to cash from operations was an $8.8 million a $10.0 million increasedecrease in accounts receivable due primarily to collections on the Big Six programs and improved collections overall. The inventory decrease was mainly due to a $6.0 million increasedecrease in inventory.
The Company'sraw material requirements as our sales decreased and due to converting work-in-process inventory related to the Big Six programs into cost of sales as these contracts moved further towards completion.
Cash provided by our investing activities included purchaseswas $1.0 million in 2003. The primary source was the sale of one of our buildings, which provided $4.8 million. This was offset by investments in property, plant and equipment, which used $3.8 million. This is a continuation of $13.9 million, proceeds from sales ofour cost reduction plan associated with our restructuring efforts. Investments in property, plant, and equipment of $1.4were $3.4 million proceeds from the sale of certain assets of its
digital video business of $1.4in 2002, $6.6 million in 2001, and proceeds from sale of investment
securities of $1.4 million.
The Company's$13.9 million in 2000.
Cash provided by our financing activities during the year included net
borrowings of $5.4was $2.1 million proceeds from issuances of common stock of $0.6
million, increasein 2003. This was primarily due to a change in restricted cash that generated $2.1 million. In 2002, we used cash provided from operating activities to mainly reduce our credit facility borrowings by $12.9 million.
Credit Ratings
Our credit ratings were lowered by Moody's Investor Services ("Moody's") on multiple occasions during 2003. Our 6% Convertible Subordinated Debentures due in 2012 credit ratings were lowered from B2 to Caa2. Our Senior Implied Rating was downgraded from Ba to B3. These credit rating downgrades may affect our future ability to renew our credit facilities, negotiate new credit facilities, and issue debt and equity securities.
With respect to Moody's, issuers with a Ba rating are judged to have speculative elements and are subject to substantial credit risk. Issuers with a B rating are judged to have speculative elements and are subject to high credit risk. Issuers with Caa ratings are in poor standing with Moody's and subject to very high credit risk. These issuers may be in default, according to Moody's, or there may be present elements of $2.0 milliondanger with respect to principal and paymentsinterest. The "1,2,3" modifiers show relative standing within the major categories, 1 being the highest, or best, modifier in terms of credit quality.
Moody's Senior Implied Ratings are generally employed for speculative grade corporate issuers. The Senior Implied Rating is an opinion of a corporate family's ability to honor its financial obligations and is assigned to a corporate family as if it had a single class of debt issuance costsand a single consolidated legal entity structure.
Credit Facilities
We have in place two lines of $1.3 million.
On March 31, 2000,credit that allow us to bridge 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 sublimitgap between our daily cash requirements and the cash we have on hand, as well as provide for the issuance ofability to issue letters of credit. We require access to these lines of credit, or others, in order to operate.
The ability to issue letters of credit has become more important to our business as sales in countries other than North America and Western Europe have grown and become a larger percentage of our gross sales. Letters of credit in many of these countries are required as part of any final contract.
In December 2000, the
CompanyE&S 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 that provided for borrowings and the issuance of letters of credit up to $30.0 million. TheIn December 2002, E&S and 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's assets, including, but not limited to, all of the Company's
intellectual property. Pursuant torenegotiated and renewed the terms of the Foothill Facility, all cash
receiptsproviding for borrowings and the issuance of the Company must be deposited into a Foothill controlled account.letters of credit up to $25.0 million. The
26
Foothill Facility, among other things, (i) requires the CompanyE&S to maintain certain financial ratios and covenants, including a minimum tangible net worthcombined cash and borrowing availability financial covenant that adjusts each quarter 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 is currentlyFoothill Facility expires in December 2004.
Borrowings under the Foothill Facility bear interest at the Wells Fargo Bank National Association prevailing prime rate plus 3.0% to 4.5%, 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 $25 million and the sum of the average undrawn portion of the borrowings, payable each quarter. The Foothill Facility provides Foothill with a first priority perfected security interest in substantially all of our assets, including, but not limited to, all of our intellectual property.
In March 2003, we were not in compliance with itsthe tangible net worth financial covenantscovenant of our Foothill Facility. In July 2003, the Foothill Facility was amended and ratios,
althoughthe March 2003 covenant breach was waived. The amendments deleted the tangible net worth covenant from the Foothill Facility and replaced it with a continuationcombined cash and borrowing availability financial covenant that went into effect on June 27, 3003, and is in effect until the Foothill Facility expires. In addition, the interest rate that borrowings bear interest at was amended, from a range of recent negative trends could impact future compliance
with such covenants. Should1.5% to 3.0% to a range of 3.0% to 4.5% over the need arise,Wells Fargo Bank, N.A. prevailing prime rate, depending on the Companyamount outstanding. Also, at no time will negotiate withborrowings under the 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 Company to continue to be in compliance or otherwise be
acceptable to the Company.Facility bear interest at a rate less than 10.25%. As of December 31, 2000, the Company has $7.32003, we were in compliance with all covenants.
As of December 31, 2003, E&S had $3.7 million in outstanding borrowings and $15.2$3.6 million in outstanding letters of credit under the Foothill Facility. Our customers can draw against these letters of credit if we fail to meet the performance requirements contained within the terms of each letter of credit. As of December 31, 2003, no amounts have been accrued for any estimated losses under the obligations, as we believe it is probable that we will perform as required under our contracts. As of February 27, 2004, there were no outstanding borrowings and the outstanding letters of credit were $4.3 million.
Evans & Sutherland Computer Limited, a wholly-owned subsidiary of Evans & Sutherland Computer Corporation, hashad a $5.0$3.0 million overdraft facility (the "Overdraft Facility") with Lloyds TSB Bank plc ("Lloyds"). At the discretion of Lloyds, the maximum amount borrowed against the Overdraft Facility can be increased for a short period of time that is predetermined by Lloyds. Borrowings under the Overdraft Facility bear interest at Lloyds' short-term offered rate plus 1.75% per annum. As of December 31, 2000,2003, there were no borrowings under the
Overdraft Facility.$4.0 million in outstanding borrowings. The Overdraft Facility is subject to reduction or demand repayment for any reason at any time at Lloyds' discretiondiscretion. The Overdraft Facility expired on December 31, 2003. We have renewed the Overdraft Facility with essentially the same terms, except that the borrowing limit is $2.5 million and it expires on November 30, 2001.December 31, 2004. 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 requirerequired maintenance of certain financial covenants. In addition, at December 31, 2000, the Company has $1.52003, we had $0.8 million of cash on deposit with Lloyds in a restricted cash collateral accountamount to support certain obligations that the bank guarantees. At December 31, 2000, the Company has unsecured lettersAs of credit
totaling approximately $1.1 millionFebruary 27, 2004, there were not outstanding with U.S. Bank, N.A. that expire
between March 2001 and June 2001.
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6% Convertible Subordinated Debentures due in 2012
As of December 31, 2000, the Company2003, 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.
27
In 2004, we expect capital expenditures to be similar to 2003, spending approximately $3.0 million. There were no material capital expenditure commitments at the end of 2003, nor do we anticipate any over the next several years.
On February 18, 1998, the Company'sE&S's 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 toOn February 18, 1998 through December
1999, the Company repurchased 1,136,500 shares of its common stock, leaving27, 2004, 463,500 shares remained available for repurchase as of March 2,repurchase. No shares were repurchased during 2003, 2002, or 2001. The Company did not
repurchase any shares of the Company's common stock in 2000. 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.
Management believes that existing cash, cash equivalents, borrowings
available under its various borrowing facilities, other asset-related cash
sources and expected cash from future operations will be sufficient to meet the
Company's 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. There can be no assurances that the Company will be successful in
renegotiating its existing borrowing facilities or obtaining additional debt or
equity financing. The Company's cash and cash equivalents, 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.
ACQUIRED IN-PROCESS TECHNOLOGY
In connection with the acquisitions
Effects of AGI and SRI, the Company made
allocations of the purchase price to various acquired in-process technology
projects. These amounts were expensed as non-recurring charges in the quarter
ended June 26, 1998 because the acquired in-process technology had not yet
reached technological feasibility and had no future alternative uses.
Failure to complete the development of these projects in their
entirety, or in a timely manner, has had a material adverse impact on the
Company's results of operations. During the third quarter of 1999, the Company
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 Company 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's current projections for operating results for the acquired businesses
or the Company as a whole. Following is a description of the acquired in-process
technology and the estimates made by the Company for each of the technologies.
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Mid-range Professional Graphics Subsystem (2100). This technology is
a graphics subsystem with built in VGA core and integral DMA
engines. This technology provides superior graphics performance over
previous technologies, and includes features such as stereo and dual
monitor support and various texture memory configurations. The
technology is used in the AccelGALAXY product, which was completed
and began shipping to customers in late third quarter of 1998. The
cost to complete this project subsequent to the acquisition of AGI
was $0.3 million, $0.1 million over the budgeted amount and was
funded by working capital. The project was also completed a month
later than scheduled. The assigned value for this acquired
in-process technology was $6.1 million.
CAD-focused Professional Graphics Subsystem (1200). This technology
is a graphics subsystem with lower costs compared to the mid-range
technology, resulting in 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 Subsystems (2200). This technology is a
high-end graphics subsystem involving the parallel use of two or
four controllers. This technology is aimed at super users in the
graphics area who need significant increases in performance and
features to accomplish their tasks and are willing to pay the
increased price necessary to support those requirements. During the
third quarter of 1999, the Company determined the technology and
graphics subsystem, as originally designed, would not be a viable
product in the workstation marketplace. The cost to complete this
project subsequent to the acquisition of AGI was $1.7 million. The
project was completed in the fourth quarter of 1999, approximately 9
months later than planned. This project was funded by working
capital. The assigned value for this acquired in-process technology
was $2.7 million.
On-board Geometry Engine Graphics Subsystem (AccelGMX). This
technology is a mid-range graphics subsystem with a geometry engine
on board. This technology is aimed at the performance intensive
graphics end-user. It has fewer features than the mid-range
professional technology, but faster geometry performance compared to
the mid-range professional technology on Pentium II processors. This
technology was completed in the third quarter of 1998 and the
AccelGMX product that uses this technology began shipping to
customers at that time. The cost to complete this project subsequent
to the acquisition of AGI was $0.1 million and was funded by working
capital. The assigned value for this acquired in-process technology
was $5.3 million.
The AccelGALAXY performed below sales estimates due to the delay in
product introduction by the Company 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's 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 Company no longer expects to generate significant sales from
this product. The E&S Lightning 1200 performed below sales estimates due to the
delay in product introduction by the Company. 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 Company periodically reviews the value assigned to the separate
components of goodwill, intangibles and other long-lived assets through
comparison to anticipated, undiscounted cash flows 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 Company
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 INFLATIONInflation
The effects of inflation were not considered material during fiscal years 2000, 19992003, 2002, and 1998,2001, and are not expected to be material for fiscal year 2001.
OUTLOOK
Looking forward,2004.
Off-Balance Sheet Arrangements
As part of our ongoing business, we normally do not participate in transactions that generate relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities ("SPEs"), which can be established for the Company expects salespurpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.
In July 2000, we formed a joint venture with Quadrant Group plc ("Quadrant") known as Quest Flight Training Limited ("Quest"). Quest provides certain equipment, software, training and other goods and services to increasethe U.K. Ministry of Defence ("U.K. MoD") and other related governmental entities with regard to an upgrade of the U.K. MoD E-3D Facility and E-3D Sentry Aircrew Training Services. We have a 50% interest in 2001.Quest which is accounted for as an investment under the equity method and therefore is not consolidated in our financial statements. The increase in expected sales is due primarilyfinancial position and operating results of Quest are immaterial to higher anticipated sales inour financial results.
In connection with the Simulation and Application Groups offset by lower anticipated sales inservices of Quest to the REALimage Solutions Group. Sales in the Simulation Group are expected to
increase in 2001 as compared toU.K. MoD, during 2000 as orders and backlog continue to grow in
those businesses.we entered into guarantees of various obligations of Quest. As of December 31, 20002003, we had four guaranties outstanding related to Quest. Pursuant to the Company's orders backlog was
$142.7 million.
We believefirst guaranty, we have guarantied, jointly and severally with Quadrant, the Company's main challenge isperformance of Quest in relation to its contract with the completionU.K. MoD. If Quest fails to meet its obligations under the contract then we (and Quadrant) are required to perform under the terms of the Company's significant contracts. The Companycontract. Due to the length of the contract and the uncertainty of performance for which we would be liable if Quest fails to perform, we cannot estimate the maximum amount of possible future payments. This guaranty is in place until 2030. Pursuant to the processsecond guaranty, we have guarantied, jointly and severally with Quadrant, up to a maximum amount of completing
certain contracts, which include the Harmony image generator. Certain of these
contracts were to be completed and integrated during 1999 and 2000.
Consequently,£1.0 million ($1.8 million as of December 31, 2000,
28
2003), the performance of Quest, where not subcontracted, and the performance of Quest where subcontracted, and the subcontractor is not liable to meet its obligation due to any limitation of liability in accordancethe sub-contract agreement, thus preventing Quest from meeting its obligation under its contract with originalthe U.K. MoD. This guaranty is in place until 2020. Pursuant to the third guaranty, we have pledged our equity shares in Quest to guaranty payment by Quest of a loan agreement executed by Quest. The loan agreement terminates in 2020. The pledge of our equity shares in Quest will expire at such time as Quest's obligations under the loan agreement are satisfied or the date on which the loan agreement is otherwise terminated. In the event of default on this loan agreement, the lending institution can request that the trustee holding such equity shares surrender them to the lending institution in order to satisfy all amounts then outstanding under the loan agreement. Pursuant to the fourth guaranty, we have guarantied payment, up to a maximum of £0.13 million ($0.2 million as of December 31, 2003), in the event that Quest has a default event, as defined by its loan agreement. This guaranty is in place until 2020. As of December 31, 2003, no amounts have been accrued for any estimated losses under these guaranties because we believe that Quest will meet all of its performance and financial obligations in relation to its contract with the U.K. MoD. However, if we are required to perform under any or all of the four guaranties, it could have a material adverse impact on our operating results and liquidity.
Contractual Obligations
The impact that our contractual provisions,obligations as of December 31, 2003, are expected to have on our liquidity and cash flow in future periods is as follows:
| | Payments due by period | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | ||||||||||
| Contractual obligations | |||||||||||||||
| Long-term debt, including current portion(1) | $ | 25,700 | $ | 7,685 | $ | — | $ | — | $ | 18,015 | |||||
| Operating lease obligations | 12,582 | 1,330 | 1,592 | 855 | 8,805 | ||||||||||
| Purchase obligations(2) | 1,447 | 923 | 524 | — | — | ||||||||||
| Total(3) | $ | 39,729 | $ | 9,938 | $ | 2,116 | $ | 855 | $ | 26,820 | |||||
Restatement of 2003 Quarterly Financial Statements
The financial data in this Annual Report on Form 10-K for the first three quarters of 2003 has been restated from amounts previously reported for the correction of certain accounting errors. A discussion of the restatement in relation to the affected quarters of 2003 is provided in Note 3 of the Notes to Consolidated Financial Statements. All information presented in this Management's Discussion and Analysis of Financial Condition and Results of Operations reflects the restatement.
29
Management Overview
Restatement of Financial Information. We restated certain of our previously filed unaudited condensed consolidated financial statements for the three fiscal quarters ended March 28, 2003, June 27, 2003 and September 26, 2003 for the correction of accounting errors identified by management.
The aggregate effect of the restatement decreased sales previously reported for the first three quarters of 2003 by an aggregate of $8.9 million, increased net loss previously reported for these periods by an aggregate of $5.7 million and increased the loss per share by $0.12, $0.24 and $0.18 for the fiscal quarter ended March 28, June 27 and September 26, 2003, respectively.
Background on the Restatement. During our 2003 year-end close process and review, we discovered certain errors that affected our previously issued quarterly unaudited condensed consolidated financial statements of the first three quarters of 2003. Accordingly, our 2003 quarterly unaudited, condensed consolidated financial statements have been restated.
The adjustments reflected in the restatement resulted from the incorrect application of certain accounting principles at our wholly-owned subsidiary, Evans & Sutherland Computer Limited, that we determined were in error as a result of our in depth review of all aspects of the matter.
Management and the Audit Committee took a leadership role in assessing these issues and in taking corrective action. Management performed an in depth review into several accounting issues that arose in connection with the restatement, as more specifically described in Note 3 of the Notes to Consolidated Financial Statements included in this Form 10-K. Following our in depth review, we concluded that while there were material weaknesses in our control environment, we cannot conclude that there was misconduct or that our employees intentionally used improper accounting practices to manipulate earnings or that there was any fraud or intentional misconduct on the part of our officers or employees. Item 9A of this Annual Report on Form 10-K provides a description of actions we have taken to improve our internal controls and procedures based on our review of our accounting and reporting policies.
Critical Accounting Policies
The policies discussed below are considered by management to be critical to an understanding of E&S's financial statements. Their application places significant demands on management's judgment, with financial reporting results relying on estimates about the effect of matters that are inherently uncertain. Specific risks for these critical accounting policies are described in the following paragraphs. A summary of significant accounting policies can be found in Note 2 of the Notes to Consolidated Financial Statements. For all of these policies, management cautions that future results rarely develop exactly as forecast, and the best estimates routinely require adjustment.
Revenue Recognition
Revenue from long-term contracts requiring significant production, modification or customization is recorded using the percentage-of-completion method. This method uses the ratio of costs incurred to management's estimate of total anticipated costs. Our estimates of total costs include assumptions, such as man-hours to complete, estimated materials cost, 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 is understated.
30
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. As a result, these differences are recorded as an asset or liability on the balance sheets. Since 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 includes materials at standard costs, which approximates average costs, as well as inventoried costs on programs (including material, labor, subcontracting costs, as well as an allocation of indirect costs). We periodically review inventories for excess supply, obsolescence, and valuations above estimated realizable amounts, and then provide a reserve we consider sufficient to cover these items. Reserve adequacy is based on estimates of future sales, product pricing, and requirements to complete projects. Revisions of these estimates would result in adjustments to our operating results.
Accrued Expenses
Accrued expenses include amounts for liquidated damages and late delivery penalties totaling $9.1 million.(See Note 10 of the Notes to Consolidated Financial Statements). While current contracts could include additional liquidated damages and late delivery penalties, we have included all amounts management believes E&S is liable for as of December 31, 2003. These liquidated damages are based primarily on estimates of project completion dates. To the extent completion dates are not consistent with our estimates, these damage and penalty accruals may require additional adjustments.
Allowance for Doubtful Accounts
The Company paid $6.0 millionpreparation 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 receivables and consider historic experience, customer creditworthiness, facts and circumstances specific to outstanding balances, current economic trends, and payment term changes when evaluating adequacy of the allowance for doubtful accounts. Changes in these factors could result in material adjustments to the expense recognized for bad debts.
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 sheets. 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.
31
Recent Accounting Pronouncements
In December 2003, the Financial Accounting Standards Board ("FASB") issued a revised Financial Accounting Standard No. 132 ("SFAS 132 (revised)"), "Employer's Disclosures about Pension and Other Postretirement Benefits—an amendment of FASB Statements No. 87, 88, and 106." SFAS 132 (revised) revises employer's disclosure about pension plans and other post retirement benefits. SFAS 132 (revised) does not change the recognition or measurement of those plans required by SFAS Nos. 87, 88, and 106. It retains the disclosure requirements of the original SFAS 132 as well as requires additional disclosures about the assets, obligations, cash flow, and net periodic benefit cost of defined benefit pension plans and other defined benefit postretirement plans. Certain of the additional disclosure are required for fiscal years ending after December 15, 2003, and are included in the notes to these consolidated financial statements as applicable.
In December 2003, the FASB issued a revision to Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN46R"). FIN46R clarifies the application of ARB No. 51, "Consolidated Financial Statements" to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support. FIN46R requires the consolidation of these entities, known as variable interest entities, by the primary beneficiary of the entity. The primary beneficiary is the entity, if any, that will absorb a majority of the entity's expected losses, receive a majority of the entity's expected residual returns, or both. Among other changes, the revisions of FIN46R (a) clarified some requirements of the original FIN46, which had been issued in January 2003, (b) eased some implementation problems, and (c) added new scope exceptions. FIN46R deferred the effective date of the Interpretation for public companies, to the end of the first reporting period ending after March 15, 2004. Under these guidelines, we will adopt FIN46R in the first quarter of fiscal 2004. The adoption of this amount in 2000. The
Companyinterpretation is investing considerable resources in capital equipment, human
resourcesnot expected to have a material effect on our business, results of operations, financial position, or liquidity.
In May 2003, the FASB issued Statement of Financial Accounting Standard No. 150 (SFAS 150), "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and other researchEquity." SFAS 150 establishes standards for how an issuer classifies and development expenses to develop Harmony-related
products. The near-term successmeasures certain financial instruments with characteristics of both liabilities and equity. SFAS 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the Company is dependent in large partfirst interim period beginning after June 15, 2003. The adoption of this statement did not have a material impact on the
successful execution of these programs.
The Company is currently evaluating various business arrangements of
its REALimage Solutions Group and its E&S RAPIDsite business in order to enhance
the value of these businesses, including, but not limited to, transferring the
assets of each of these businesses to wholly-owned subsidiaries and seeking
outside investment to assistour financial statements.
In May 2003, FASB's Emerging Issues Task Force (EITF) finalized EITF Issue 00-21, "Revenue Arrangements with the developmentMultiple Deliverables." EITF Issue 00-21 addresses certain aspects of the productsaccounting by a vendor for arrangements under which it will perform multiple revenue-generating activities. Specifically, this EITF Issue 00-21 addresses how to determine whether an arrangement involving multiple deliverables contains more than one unit of these
businesses.accounting. EITF Issue 00-21 applies to all deliverables within contractually binding arrangements in all industries under which a vendor will perform multiple revenue-generating activities, except as noted in the Issue. EITF Issue 00-21 is effective for revenue arrangements entered into in fiscal periods beginning after June 15, 2003. The adoption of EITF Issue 00-21 did not have a material impact on our financial statements.
In April 2003, the FASB issued Statement of Financial Accounting Standard No. 149 ("SFAS 149"), "Amendment to Statement 133 on Derivative Instruments and Hedging Activities." SFAS 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under SFAS 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS 149 is generally effective for contracts entered into or modified after June 30, 2003. The adoption of this statement did not have a material impact on our financial statements.
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Forward Looking Statements
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, projectionsbut are not limited to, the following statements:
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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.
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FACTORS THAT MAY AFFECT FUTURE RESULTS
Evans & Sutherland's
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Factors that may affect future results
Our 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
Cash Flow May Be Insufficient to Guarantee Access to Capital and Retire Existing Debt
If the company does not generate sufficient earnings to increase its cash position, then our ability to obtain future capital and to repay existing debt will be reduced. While we have significantly reduced our debt in the last two years, we still have both short term and long term debt.
The long term debt is in the form of convertible preferred bonds due in 2012. A portion of our short term debt bears interest at variable rates. Any increase in interest rates will reduce funds available to us for our operations and future business opportunities.
Our Business Model Is Changing and May Suffer ifNot Produce Consistent Earnings
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. AsIn 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
When new systems are ordered, prices are below similar systems in the past. This condition requires a new business model to adaptbe successful in the market for visual systems. The new business model emphasizes smaller systems and associated hardware revenue, with more dependence on software, databases, and support services.
While E&S has made significant progress in adapting to domestic and worldwide political, economic, and technological
developments that have strongly affected our markets. Under our current
competitive strategy, we endeavor to remain competitivethis business model by growing existing
businesses, developingintroducing products emphasizing the 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 havefactors for success, there is no assurance that wethis model 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 Expectations
Our stock price is subject to significant volatilityachieve its full objectives 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 1999 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.
Our earnings may not meet either investor or internal expectations
because our budgeted operating expenses are relatively fixedensure profitability 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.
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Our 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, total indebtedness was $25.9 million and our
total stockholders' equity was $67.6 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) some of our existing debt
contains financial and restrictive covenants that limit our ability to, among
other things, borrow additional funds, acquire and dispose of assets, and pay
cash dividends.
A portion of our outstanding indebtedness bears interest at variable
rates. Any increase in interest rates will reduce funds available to us for our
operations and future business opportunities and will exacerbate the
consequences of our leveraged capital structure.
Covenants and Restrictions in Our Credit Documents Limit Our Ability to Take Certain Actions
Our credit documents contain significant 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
We must also meet certain financial ratios and tests, including a minimum tangible net worthcombined cash and borrowing availability financial covenant that adjusts each quarter 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. We are currentlyDue to Foothill's amendments and waivers on July 16, 2003 and July 25, 2003, of E&S's noncompliance with financial covenants on March 28, 2003, we were in compliance with our
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financial covenants although a continuationas of recent negative
operating trends could impact our future compliance with such covenants.December 31, 2003. 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.
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Delays in the Timely Delivery of Our Products
Competitors 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, $46.0 million
of our costs and estimated earnings that exceeded our billings on uncompleted
contracts related to five contracts with five 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 ProtectInfringe 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
Specifically, 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
These factors all become more important as we rely more on software and other forms of intellectual property rights. Wethat are more difficult to control than hardware.
Military Markets May Not Recover, Depressing Our Revenue and Earnings
Since September 11, 2001 both commercial and military markets for our products have declined significantly. The size of this decline was unprecedented in our industry, and has created a condition of gross oversupply and extreme competition. This condition has put intense pressure on prices and margins, as well as forcing every company to significantly reduce costs and operating expenses used in the production of visual systems.
While commercial markets have begun to recover, military markets have not yet produced significant new revenue. In the US, the reduction in military spending for visual systems is generally due to the demands of overseas deployments, while in Europe defense budgets have been under pressure for a number of years.
There is no assurance that military spending will recover in the years ahead, leading to continued pressure on our revenue and earnings.
The Market for Visual Systems May Not Support Our Current R&D Spending
In a very fragmented market, there may be subjectinsufficient business 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 insupport current Research and Development May NotDevelopment. The market for visual systems is unusual in that it is a small market that requires specialized and expensive R&D to achieve optimal results.
Unless there is significant consolidation among competitors, the market may be Realizedtoo small to support any company large enough to invest in the necessary R&D. Currently, only two companies are significantly investing in visual system R&D—E&S, which invests its own funds, and CAE, whose R&D is supported by Canadian government subsidies.
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E&S has addressed this situation by sharply targeting its R&D. We believe our R&D is highly efficient at this time, but we have no assurance that our significant investmentthe market will provide sufficient earnings in research and
development will generatethe future sales or benefits. We currently make and plan to continue to make a significant investment in researchthis program.
Prime Contractors May Bring Workshare into Their Own Company and development. Total
spendingDecrease the Demand for research and development was $44.3 million or 27% 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 competeE&S Products
Large prime contractors in the graphicsdefense and aerospace industry have encountered the same competitive pressures described earlier for simulation industry.
Developingand training revenue. To protect their own revenue and margins, most have responded by putting pressure on smaller suppliers, as well as bringing work in-house to protect established engineering organizations wherever possible.
This trend has, in effect, created new productscompetitors for E&S's traditional business. These in-house engineering groups attempt to do only the most profitable work, such as software and databases, and leave hardware to others. Often the costs of these efforts are not visible to the end customer because they are part of a much larger contract.
If these trends continue and the end customers accept the results, they could reduce demand for the most profitable future portions of our revenue stream and business model, 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&Sdatabases.
We 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.
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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
The process of planning and managing production, inventory levels, and delivery schedules also becomesis 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
Changes in Government Priorities May Impact the penalties, including liquidated damages that are includedMilitary Simulation Market
During the last several years significant changes have been taking place in somebudget priorities for both US and international government spending, especially military spending. Some of our customer contracts, and terminationthese changes have resulted in delays or reductions 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,
o 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 Damages
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,visual systems. While we have paid $6.0
milliondownsized our company in connectionaccordance with liquidated damages. During 2000, we accrued an
additional $0.9 million for late delivery penalties that is expected to be
settled in 2001. 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 Contracts
In 2000, 40% 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,these changes, we have no assurance that wesuch delays will be ablenot continue 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 policiesoccur or accelerate 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,cause further declines in our opinion there are no spending reductions or funding
limitations pending that would impactrevenue from this market.
We Depend on Several Significant Customers and our contracts.
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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.
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'sNet Sales MayCould Suffer if We Lose Certain Significant CustomersTheir Purchases Decline
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 fourfive 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%25% of our consolidated sales in 2000 and 1999, respectively.2003. 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
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Our Operations Could Be Hurt by Terrorist Attacks and Other Activities that Make Air Travel Difficult or Reduce the Willingness of Our Commercial Airline Customers to MaintainPurchase Our International Business
Any reductionSimulation Products
During 2003, $20.0 million, or 24% of our international business could significantly
affect our sales. Our international business accounted for 36%total revenue generated was derived from sales of our 2000
sales. We expect that international sales will continuesimulation products to be a significant
portioncommercial airline companies and other third parties in the commercial airline industry. The demand for our various commercial simulation products and services is heavily dependent 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 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 exposurecustomers 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 Price
Although we recorded net sales of $167.0 million for the twelve
months ended December 31, 2000, we incurred a net loss of $69.6 million in 2000.
We have incurred net losses totaling $109.0 million over the past three 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.
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If E&S's Commercial Simulation Business Fails, E&S's Sales will Decrease
We have no assurance thatpurchase our commercial simulation (airline)
business will continue to succeed. Our commercial simulation business currently
accounts for approximately 15% to 20% ofproducts, our sales. This business is subject to
many of the risks related to the commercial simulation market thatrevenue may 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 decline substantially.
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 Value of our REALimage
Solutions Group and RAPIDsite Business May not be Successful.
We are considering various business arrangements relating to our
REALimage Solutions Group and our RAPIDsite business in order to enhance the
value of these businesses, including, but not limited to, transferring the
assets of each of these two businesses to wholly-owned subsidiaries 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 markets 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 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 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.
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We May Face Risks Related to an SEC Investigation and Securities Litigation in Connection with the Restatement of our Financial Statements.
We are not aware that the SEC has begun any formal or informal investigation in connection with accounting errors requiring restatement of 2003 quarterly financial statements for the first three quarters, or that any laws have been violated. However, if the SEC makes a determination that the Company has violated Federal securities laws, the Company may face sanctions, including, but not limited to, monetary penalties and injunctive relief. In addition, the Company or its officers and directors could be named defendants in civil proceedings arising from the restatement. We are unable to estimate what our liability in either event might be.
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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%53% of the Company'sour total sales in 20002003, are concentrated in the United Kingdom, continental Europe and Asia. Foreign currency purchase and sale contracts aremay be 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 Company2003, we had nonine material salessale or purchase contracts in currencies other than U.S. dollars anddollars. As of December 31, 2003, we had no foreign currency sales or purchasederivative contracts.
The Company reduces its
We 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%2003, 70% of the Company'sour total debt was in fixed-rate instruments. Had the Companywe fully drawn on its $30our $25 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, 2000.2003. 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 12 of the Notes to the Consolidated Financial Statements in Part II of this annual report.
| | Rate | 2004 | 2005 | 2006 | 2007 | 2008 | Thereafter | Total | Fair Value | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Debt | ||||||||||||||||||||||
| Bank Borrowings | 6.1 | % | $ | 7,685 | — | — | — | — | — | $ | 7,685 | $ | 7,685 | |||||||||
| 6% Debentures | 6.0 | % | — | — | — | — | — | $ | 18,015 | $ | 18,015 | $ | 10,291 | |||||||||
| Total debt | $ | 7,685 | — | — | — | — | $ | 18,015 | $ | 25,700 | $ | 17,976 | ||||||||||
40
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
o
The following consists of a list of Financial Statement Schedules included in Part IV of this report:
o
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.
35
REPORT OF MANAGEMENT
Responsibility for the integrity and objectivity
Report of the financial
information presented in this report rests with the management of Evans &
Sutherland. The accompanying financial statements have been prepared in
conformity with generally accepted accounting principles applied on a consistent
basis and, where necessary, include estimates based on management judgment.
Management also prepared other information in this report and is responsible for
its accuracy and consistency with the financial statements.
Evans & Sutherland has established and maintains an effective system
of internal accounting controls. The Company believes this system provides
reasonable assurance that transactions are executed in accordance with
management authorization in order to permit the financial statements to be
prepared with integrity and reliability and to safeguard, verify, and maintain
accountability of assets. In addition, Evans & Sutherland's business ethics
policy requires employees to maintain the highest level of ethical standards in
the conduct of the Company's business.
Evans & Sutherland's financial statements have been audited by KPMG
LLP, independent public accountants. Management has made available all the
Company's 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 Executive Officer Chief Financial Officer
REPORT OF INDEPENDENT ACCOUNTANTS
Independent Auditors
The Board of Directors and Stockholders
Evans & Sutherland Computer Corporation:
We have audited the consolidated financial statements of Evans & Sutherland Computer Corporation and subsidiaries ("the Company") 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'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, 20002003 and 1999,2002, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2000,2003, 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
February 15, 2001
36
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
December 31,
------------------------------
2000 1999
------------ ------------
Assets:
Cash and cash equivalents .................................... $ 11,898 $ 22,110
Restricted cash .............................................. 2,024 --
Short-term investments ....................................... -- 748
Accounts receivable, less allowances for doubtful
receivables of $4,411 in 2000 and $1,322 in 1999 .......... 34,572 28,743
Inventories .................................................. 38,383 40,588
Costs and estimated earnings in excess of billings
on uncompleted contracts .................................. 68,464 80,457
Deferred income taxes ........................................ -- 15,923
Prepaid expenses and deposits ................................ 5,326 7,844
------------ ------------
Total current assets ................................ 160,667 196,413
Property, plant and equipment, net .............................. 48,665 52,184
Investment securities ........................................... 5,429 4,467
Deferred income taxes ........................................... -- 4,418
Goodwill and other intangible assets, net ....................... 374 552
Other assets .................................................... 943 430
------------ ------------
Total assets ........................................ $ 216,078 $ 258,464
============ ============
Liabilities and stockholders' equity:
Current portion of long-term debt ............................ $ 344 $ --
Line of credit agreements .................................... -- 2,657
Accounts payable ............................................. 27,087 19,575
Accrued expenses ............................................. 39,832 40,119
Customer deposits ............................................ 3,908 4,720
Billings in excess of costs and estimated earnings on
uncompleted contracts ..................................... 27,710 12,412
------------ ------------
Total current liabilities ........................... 98,881 79,483
------------ ------------
Long-term debt .................................................. 25,563 18,015
------------ ------------
Commitments and contingencies (notes 7, 10 and 14)
Redeemable preferred stock, class B-1, no par value; authorized
1,500,000 shares; issued and outstanding 901,408 shares ...... 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 9,772,118 shares in 2000 and 9,678,938 shares in 1999 1,954 1,936
Additional paid-in capital ................................... 24,752 24,086
Common stock in treasury, at cost; 352,500 shares ............ (4,709) (4,709)
Retained earnings ............................................ 46,018 115,816
Accumulated other comprehensive income ....................... (381) 65
------------ ------------
Total stockholders' equity .......................... 67,634 137,194
------------ ------------
Total liabilities and stockholders' equity .......... $ 216,078 $ 258,464
============ ============
See accompanying notes to consolidated financial statements
37
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
Year ended December 31,
2000 1999 1998
------------ ------------ ------------
Sales ...................................................... $ 166,980 $ 200,885 $ 191,766
Cost of sales .............................................. 137,532 127,556 110,320
Write-off of inventories ................................... -- 13,230 --
------------ ------------ ------------
Gross profit ................................... 29,448 60,099 81,446
------------ ------------ ------------
Expenses:
Selling, general and administrative ..................... 34,229 43,039 40,088
Research and development ................................ 44,264 44,358 31,797
Amortization of goodwill and other intangible assets .... 177 1,515 4,767
Impairment loss ......................................... -- 9,693 --
Restructuring charge .................................... (761) 1,460 --
Write-off of acquired in-process technology ............. -- -- 20,780
------------ ------------ ------------
Operating expenses .......................... 77,909 100,065 97,432
------------ ------------ ------------
(48,461) (39,966) (15,986)
Gain on sale of business unit .............................. 1,918 -- --
------------ ------------ ------------
Operating loss .............................. (46,543) (39,966) (15,986)
Other income (expense):
Interest income ......................................... 659 1,849 2,659
Interest expense ........................................ (2,195) (1,333) (1,335)
Loss on write down of investment securities ............. (7,786) (350) (1,075)
Gain on sale of investment securities ................... 6,472 -- 2,493
Other ................................................... (1,154) 933 (613)
------------ ------------ ------------
(4,004) 1,099 2,129
------------ ------------ ------------
Loss before income taxes ................................... (50,547) (38,867) (13,857)
Income tax expense (benefit) ............................... 19,023 (15,413) 2,126
------------ ------------ ------------
Net loss ...................................... (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)
============ ============ ============
Net loss per common share:
Basic and Diluted ....................................... $ (7.45) $ (2.49) $ (1.70)
============ ============ ============
Basic and diluted weighted average common shares outstanding 9,372 9,501 9,461
============ ============ ============
See accompanying notes to consolidated financial statements
38
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands)
Year ended December 31,
2000 1999 1998
------------ ------------ ------------
Net loss ............................................. $ (69,570) $ (23,454) $ (15,983)
Other comprehensive income (loss):
Foreign currency translation adjustments .......... (419) (337) 126
Unrealized losses on securities ................... (27) (48) (89)
Reclassification adjustment for losses included
in net loss ................................... -- 275 --
------------ ------------ ------------
Other comprehensive income (loss) before income taxes (446) (110) 37
Income tax expense related
to items of other comprehensive income (loss) ..... -- 70 12
------------ ------------ ------------
Other comprehensive income (loss), net of income taxes (446) (180) 25
------------ ------------ ------------
Comprehensive loss ................................... $ (70,016) $ (23,634) $ (15,958)
============ ============ ============
See accompanying notes to consolidated financial statements
39
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
--------- --------- --------- --------- --------- --------- ---------
Balance at December 31, 1997 .... 9,067 $ 1,813 $ 8,025 $ -- $ 155,576 $ 220 $ 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
========= ========= ========= ========= ========= ========= =========
See accompanying notes to consolidated financial statements
40
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year ended December 31,
2000 1999 1998
---------- ---------- ----------
Cash flows from operating activities:
Net loss ........................................................................... $ (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 .............................................................. -- 9,693 --
Depreciation and amortization ................................................ 14,264 15,499 15,934
Gain on sale of a business unit .............................................. (1,918) -- --
Loss on disposal of property, plant and equipment ............................ 2,794 -- --
Provision for losses on accounts receivable .................................. 3,829 558 496
Provision for obsolete and excess inventories ................................ 6,613 910 1,987
Provision for warranty expense ............................................... 1,189 958 872
Deferred income taxes ........................................................ 20,341 (8,475) (2,919)
Loss on write-down of investment securities .................................. 7,786 350 1,075
Gain on sale of investment securities ........................................ (6,472) -- (2,493)
Write-off of acquired in-process technology .................................. -- -- 20,780
Other, net ................................................................... 852 732 868
Changes in assets and liabilities, net of effect of purchase/sale of business:
Accounts receivable ....................................................... (9,977) 17,474 (3,613)
Inventories ............................................................... (5,992) (6,104) (28,867)
Costs and estimated earnings in excess of billings on
uncompleted contracts, net ............................................ 27,296 (16,446) (6,110)
Prepaid expenses and deposits ............................................. 2,407 (565) (3,533)
Accounts payable .......................................................... 6,932 (5,041) 5,699
Accrued expenses .......................................................... (1,720) 9,695 (1,739)
Customer deposits ......................................................... (812) 1,381 (3,235)
---------- ---------- ----------
Net cash provided by (used in) operating activities ................. (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 ........................................ 1,428 -- 3,304
Proceeds from sale of business unit ................................................ 1,400 -- --
Investment in joint venture ........................................................ (754) -- --
Purchases of property, plant and equipment ......................................... (13,868) (14,530) (18,516)
Proceeds from sale of property, plant and equipment ................................ 1,382 -- --
Proceeds from sale of certain manufacturing assets ................................. -- 6,010 --
Payments for business acquisitions, net of cash acquired ........................... -- -- (7,603)
---------- ---------- ----------
Net cash provided by (used in) investing activities ................. (10,160) 15,911 2,118
---------- ---------- ----------
Cash flows from financing activities:
Borrowings under line of credit agreements and other long-term debt ................ 22,365 716 3,915
Payments under line of credit agreements and other long-term debt .................. (16,919) (1,869) (1,575)
Payments of debt issuance costs .................................................... (1,296) -- --
Increase in restricted cash ........................................................ (2,024) -- --
Proceeds from issuance of common stock ............................................. 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 ................. 2,706 (5,242) 12,221
---------- ---------- ----------
Effect of foreign exchange rates on cash and cash equivalents ......................... (600) (788) 100
---------- ---------- ----------
Net change in cash and cash equivalents ............................................... (10,212) 20,276 (6,342)
Cash and cash equivalents at beginning of year ........................................ 22,110 1,834 8,176
---------- ---------- ----------
Cash and cash equivalents at end of year .............................................. $ 11,898 $ 22,110 $ 1,834
========== ========== ==========
Supplemental Disclosures of Cash Flow Information
Cash paid (received) during the year for:
Interest ........................................................................... $ 1,539 $ 1,321 $ 1,309
Income taxes ....................................................................... (5,887) (5,846) 7,130
Accretion of redeemable preferred stock ............................................... 228 228 95
See accompanying notes to consolidated financial statements
41
March 12, 2004
42
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
| | December 31, | ||||||||
|---|---|---|---|---|---|---|---|---|---|
| | 2003 | 2002 | |||||||
| ASSETS | |||||||||
| Current assets: | |||||||||
| Cash and cash equivalents | $ | 9,714 | $ | 7,375 | |||||
| Restricted cash | 765 | 2,960 | |||||||
| Accounts receivable, less allowances for doubtful receivables of $351 in 2003 and $856 in 2002 | 22,298 | 22,481 | |||||||
| Inventories, net | 15,973 | 31,373 | |||||||
| Costs and estimated earnings in excess of billings on uncompleted contracts | 10,922 | 22,083 | |||||||
| Prepaid expenses and deposits | 4,731 | 4,487 | |||||||
| Assets held for sale | 2,463 | 5,793 | |||||||
| Total current assets | 66,866 | 96,552 | |||||||
| Property, plant and equipment, net | 24,115 | 28,288 | |||||||
| Investments | 2,011 | 2,002 | |||||||
| Other assets | 390 | 734 | |||||||
| Total assets | $ | 93,382 | $ | 127,576 | |||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | |||||||||
| Current liabilities: | |||||||||
| Current portion of long-term debt | $ | — | $ | 53 | |||||
| Line of credit agreements | 7,685 | 5,213 | |||||||
| Accounts payable | 8,446 | 9,671 | |||||||
| Accrued expenses | 12,526 | 13,093 | |||||||
| Customer deposits | 3,928 | 1,507 | |||||||
| Billings in excess of costs and estimated earnings on uncompleted contracts | 11,499 | 11,022 | |||||||
| Total current liabilities | 44,084 | 40,559 | |||||||
| Long-term debt | 18,015 | 20,685 | |||||||
| Pension and retirement obligations | 15,717 | 12,969 | |||||||
| Total liabilities | 77,816 | 74,213 | |||||||
| Commitments and contingencies (Notes 8, 11, and 15) | |||||||||
| Stockholders' equity: | |||||||||
| Preferred stock, no par value; authorized 10,00,000 shares; no issued and no outstanding shares | — | — | |||||||
| Common stock, $0.20 par value; authorized 30,000,000 shares; issued 10,836,072 in 2003 and 10,806,040 in 2002 | 2,167 | 2,161 | |||||||
| Additional paid-in-capital | 49,575 | 49,413 | |||||||
| Common stock in treasury, at cost; 352,500 shares | (4,709 | ) | (4,709 | ) | |||||
| Retained earnings (accumulated deficit) | (29,148 | ) | 6,840 | ||||||
| Accumulated other comprehensive loss | (2,319 | ) | (342 | ) | |||||
| Total stockholders' equity | 15,566 | 53,363 | |||||||
| Total liabilities and stockholders' equity | $ | 93,382 | $ | 127,576 | |||||
See accompanying Notes to the Consolidated Financial Statements
43
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
| | Year ended December 31, | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2003 | 2002 | 2001 | |||||||||
| Sales | $ | 84,776 | $ | 122,578 | $ | 145,263 | ||||||
| Cost of sales | 53,252 | 78,052 | 115,823 | |||||||||
| Inventory impairment | 14,566 | 1,392 | — | |||||||||
| Gross profit | 16,958 | 43,134 | 29,440 | |||||||||
| Expenses: | ||||||||||||
| Selling, general, and administrative | 27,039 | 27,131 | 31,374 | |||||||||
| Research and development | 21,730 | 25,970 | 32,828 | |||||||||
| Restructuring charges | 3,416 | 4,492 | 2,843 | |||||||||
| Impairment loss | 1,151 | 311 | 220 | |||||||||
| Operating expenses | 53,336 | 57,904 | 67,265 | |||||||||
| Gain on sale of assets held for sale | 1,406 | 1,212 | 9,000 | |||||||||
| Gain on curtailment of pension plan | — | 3,575 | — | |||||||||
| Gain on sale of business unit | — | 253 | 774 | |||||||||
| Operating loss | (34,972 | ) | (9,730 | ) | (28,051 | ) | ||||||
| Other income (expense): | ||||||||||||
| Interest income | 412 | 25 | 31 | |||||||||
| Interest expense | (1,376 | ) | (1,839 | ) | (2,456 | ) | ||||||
| Loss on write-down of investment securities | (500 | ) | (16 | ) | (306 | ) | ||||||
| Gain on sale of investment securities | — | 27 | 538 | |||||||||
| Other | (523 | ) | (651 | ) | (385 | ) | ||||||
| Total other income (expense), net | (1,987 | ) | (2,454 | ) | (2,578 | ) | ||||||
| Loss before income taxes | (36,959 | ) | (12,184 | ) | (30,629 | ) | ||||||
| Income tax benefit | (971 | ) | (463 | ) | (3,172 | ) | ||||||
| Net loss | $ | (35,988 | ) | $ | (11,721 | ) | $ | (27,457 | ) | |||
| Net loss per common share: | ||||||||||||
| Basic and diluted | $ | (3.44 | ) | $ | (1.12 | ) | $ | (2.70 | ) | |||
| Basic and diluted weighted average common shares outstanding | 10,471 | 10,422 | 10,169 | |||||||||
See accompanying Notes to the Consolidated Financial Statement
44
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands)
| | Year Ended December 31, | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2003 | 2002 | 2001 | ||||||||
| Net loss | $ | (35,988 | ) | $ | (11,721 | ) | $ | (27,457 | ) | ||
| Other comprehensive income (loss): | |||||||||||
| Foreign currency translation adjustments | — | — | 14 | ||||||||
| Unrealized gain (loss) on securities | 444 | 29 | (4 | ) | |||||||
| Minimum pension liability adjustment (Note 11) | (2,421 | ) | — | — | |||||||
| Other comprehensive income (loss) before income taxes | (1,977 | ) | 29 | 10 | |||||||
| Income tax expense related to items of other comprehensive income (loss) | — | — | — | ||||||||
| Other comprehensive income (loss), net of income taxes | (1,977 | ) | 29 | 10 | |||||||
| Comprehensive loss | $ | (37,965 | ) | $ | (11,692 | ) | $ | (27,447 | ) | ||
See accompanying Notes to the Consolidated Financial Statements
45
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the years ended December 31, 2003, 2002 and 2001
(In thousands)
| | Common Stock | | | Retained Earnings (Accumulated Deficit) | Accumulated Other Comprehensive Income (Loss) | | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Additional Paid-In Capital | Treasury Stock | | ||||||||||||||||||
| | Shares | Amount | Total | ||||||||||||||||||
| 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 | 458 | — | — | — | 472 | ||||||||||||||
| Other comprehensive income | — | — | — | — | — | 10 | 10 | ||||||||||||||
| Net loss | — | — | — | — | (27,457 | ) | — | (27,457 | ) | ||||||||||||
| Conversion of preferred stock for common stock | 901 | 180 | 23,820 | — | — | — | 24,000 | ||||||||||||||
| Balance at December 31, 2001 | 10,740 | 2,148 | 49,030 | (4,709 | ) | 18,561 | (371 | ) | 64,659 | ||||||||||||
| Issuance of common stock for cash | 66 | 13 | 383 | — | — | — | 396 | ||||||||||||||
| Other comprehensive income | — | — | — | — | — | 29 | 29 | ||||||||||||||
| Net loss | — | — | — | — | (11,721 | ) | — | (11,721 | ) | ||||||||||||
| Balance at December 31, 2002 | 10,806 | 2,161 | 49,413 | (4,709 | ) | 6,840 | (342 | ) | 53,363 | ||||||||||||
| Issuance of common stock for cash | 30 | 6 | 162 | — | — | — | 168 | ||||||||||||||
| Other comprehensive income | — | — | — | — | — | (1,977 | ) | (1,977 | ) | ||||||||||||
| Net loss | — | — | — | — | (35,988 | ) | — | (35,988 | ) | ||||||||||||
| Balance at December 31, 2003 | 10,836 | $ | 2,167 | $ | 49,575 | $ | (4,709 | ) | $ | (29,148 | ) | $ | (2,319 | ) | $ | 15,566 | |||||
See accompanying Notes to the Consolidated Financial Statements
46
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
| | 2003 | 2002 | 2001 | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Cash flows from operating activities: | ||||||||||||
| Net loss | $ | (35,988 | ) | $ | (11,721 | ) | $ | (27,457 | ) | |||
| Adjustments to reconcile net loss to net cash provided by (used in) operating activies: | ||||||||||||
| Depreciation and amortization | 6,782 | 9,311 | 13,709 | |||||||||
| Gain on sale of business unit | — | (253 | ) | (774 | ) | |||||||
| Gain on curtailment of pension plan | — | (3,575 | ) | — | ||||||||
| Inventory impairment | 14,566 | 1,392 | — | |||||||||
| Impairment loss | 1,151 | 311 | 220 | |||||||||
| Gain on sale of assets held for sale | (1,406 | ) | (1,212 | ) | (9,000 | ) | ||||||
| Loss on disposal of property, plant, and equipment | 16 | 40 | 130 | |||||||||
| Gain on sale of investment securities | — | (27 | ) | (538 | ) | |||||||
| Write-down of investment | 500 | 16 | 306 | |||||||||
| Provisions for losses on accounts receivable | 68 | (734 | ) | 2,358 | ||||||||
| Provision for excess and obsolete inventory | 1,499 | 1,802 | 943 | |||||||||
| Provision for warranty expense | 2,274 | 617 | 2,197 | |||||||||
| Other | 107 | 214 | (48 | ) | ||||||||
| Change in assets and liabilities: | ||||||||||||
| Accounts receivable | 333 | 8,769 | 1,698 | |||||||||
| Inventories | 141 | 3,898 | (786 | ) | ||||||||
| Costs and estimated earnings in excess of billings on uncompleted contracts, net | 11,638 | 11,900 | 12,520 | |||||||||
| Prepaid expenses and deposits | (328 | ) | (181 | ) | 508 | |||||||
| Accounts payable | (1,225 | ) | (1,832 | ) | (15,584 | ) | ||||||
| Accrued expenses | (3,320 | ) | (4,553 | ) | (8,456 | ) | ||||||
| Customer deposits | 2,421 | (2,143 | ) | (258 | ) | |||||||
| Net cash provided by (used in) operating activities | (771 | ) | 12,039 | (28,312 | ) | |||||||
Cash flows from investing activities: | ||||||||||||
| Proceeds from sale of investment securities | — | 39 | 3,780 | |||||||||
| Proceeds from sale of business unit | — | — | 6,300 | |||||||||
| Purchases of property, plant and equipment | (3,767 | ) | (3,394 | ) | (6,646 | ) | ||||||
| Proceeds from sale of property, plant and equipment | 4 | — | 26 | |||||||||
| Proceeds from sale of assets held for sale | 4,760 | 2,917 | 9,000 | |||||||||
| Decrease (increase) in other assets | — | (218 | ) | (44 | ) | |||||||
| Net cash provided by (used in) investing activities | 997 | (656 | ) | 12,416 | ||||||||
Cash flows from financing activities: | ||||||||||||
| Net borrowings (payments) on line of credit agreements | (250 | ) | (12,965 | ) | 13,009 | |||||||
| Decrease (increase) in restricted cash | 2,195 | (156 | ) | (780 | ) | |||||||
| Proceeds from issuance of common stock | 168 | 396 | 472 | |||||||||
| Net cash provided by (used in) financing activities | 2,113 | (12,725 | ) | 12,701 | ||||||||
| Effect of foreign exchange rate changes on cash and cash equivalents | — | — | 14 | |||||||||
Net change in cash and cash equivalents | 2,339 | (1,342 | ) | (3,181 | ) | |||||||
Cash and cash equivalents at beginning of year | 7,375 | 8,717 | 11,898 | |||||||||
Cash and cash equivalents at end of year | $ | 9,714 | $ | 7,375 | $ | 8,717 | ||||||
Supplemental Disclosure of Cash Flow Information | ||||||||||||
| Cash paid (received) during the year for: | ||||||||||||
| Interest | $ | 965 | $ | 1,814 | $ | 2,426 | ||||||
| Income taxes | (209 | ) | (534 | ) | 846 | |||||||
See accompanying Notes to the Consolidated Financial Statements
47
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000,2003, December 31, 19992002 and December 31, 1998
2001
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS AND BACKGROUND
Description of Business
Evans & Sutherland Computer Corporation ("EEvans & Sutherland", "E&S", "we", "our", or the "Company""the Company") is
an established high-technology company with outstanding computer
graphics technology and a worldwide presence in high-performance 3Dproduces visual simulation. In addition, E&S is now applying this core
technology into higher-growth personal computer ("PC") products for
both simulation and workstations. The Company's core computer
graphics technology issystems used to produce high performancedisplay images of the real world rapidly and accurately. We design, manufacture, market and support visual systems for simulation for use in a wide range of military and commercial applications. We also provide visual system technology to planetariums, science centers, and entertainment venues. We develop and deliver a complete line of image generators, for simulation including PC-based visual systemdisplays, databases, services and support products to provide graphics accelerationthat match technology to customer requirements. Our products and solutions range from the professional
digital content creation market,desktop PC to what we believe are the most advanced visual systems in the world.
Restatement
During our 2003 fiscal year-end close process, we identified certain errors that affected our previously issued quarterly unaudited condensed consolidated financial statements for 2003. Accordingly, our 2003 quarterly unaudited condensed consolidated financial statements and to applyrelated financial information previously issued for the Company's core
technologies tofirst three quarters of 2003 have been restated. For further details on the expanding marketnature of PC-based applicationsthe errors and products.
the related effects on our previously issued quarterly unaudited condensed consolidated financial statements see Note 3. Where appropriate, we have identified all amounts that have been restated with the notation "restated" and all amounts previously reported in our previously issued quarterly unaudited condensed consolidated financial statements for 2003 "previously reported."
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompanyinter-company accounts and transactions have been eliminated in consolidation. Certain reclassifications have been made in the 19992002 and 19982001 consolidated financial statements and notes to conform to the 2000 presentation.
Liquidity
Management believes2003 presentations.
Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that existing cash, cash equivalents, borrowings
available under its various borrowing facilities, other
asset-related cash sourcesaffect the reported amounts of assets and expected cash from future operations
will be sufficient to meetliabilities, the Company's anticipated working capital
needs, routine capital expendituresdisclosure of contingent assets and current debt service
obligations forliabilities at the next twelve months. The Foothill Facility
expires in December 2002date of the financial statements and the Overdraft Facility expiresreported amounts of sales and expenses during the reporting period. Critical accounting estimates include revenue recognition based on November 30, 2001 (see note 11). There can be no assurances that the Company will be successful in renegotiating its existing borrowing
facilities or obtaining additional debt or equity financing. The
Company's cashpercentage-of completion method, inventory reserve estimates, accruals for potential liquidated damages and cash equivalents, subject to various
restrictions, are availablelate penalties, allowance for working capital needs, capital
expenditures, strategic investments, mergersdoubtful accounts estimates and acquisitions, stock
repurchases and other potential cash needs as they may arise.
In the event the Company's various borrowing facilities were to
become unavailable, the Company were unable to timely deliver
products pursuant to the termsestimates of various agreements with third
parties, or certain of the Company's contracts were adversely
impacted for failure to meet delivery requirements, the Company 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.
our income taxes. Actual results could differ from those estimates.
Revenue Recognition
Sales includesinclude revenue from system hardware and software products, database and software license rightslicenses and service contracts.
48
The Company has adoptedfollowing table provides information concerning revenue recognized based on type of revenue recognition applied (in thousands):
| | 2003 | 2002 | 2001 | |||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Percentage of completion | $ | 38,358 | $ | 63,263 | $ | 73,626 | ||||
| Product sales | 40,590 | 54,939 | 65,167 | |||||||
| Time and materials | 4,602 | 1,168 | 3,814 | |||||||
| Other | 1,226 | 3,208 | 2,656 | |||||||
| Total sales | $ | 84,776 | $ | 122,578 | $ | 145,263 | ||||
Percentage-of-Completion. In arrangements where software is considered more than incidental to the arrangement, revenue is recognized in accordance with SOP 97-2, "Software Revenue Recognition". In accordance with the provisions of SOP 97-2, revenue from arrangements that require significant production, modification or customization of the software is recognized in accordance with the provisions of American Institute of Certified Public Accountants ("AICPA") Statement of Position ("SOP") 97-2, Software
Revenue Recognition, as modified by SOP 98-9. SOP 97-2 generally
requires revenue earned on software arrangements involving multiple
elements such as software products, enhancements, post-contract
customer support, installation81-1 "Accounting for Performance of Construction-Type 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 recognizes revenues from product sales that do not
require significant production, modification, or customization when
the following criteria are met: the Company has signed a
noncancelable agreement; the Company has 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 recordedCertain Production-Type Contracts" using the percentage-of-completion method, determinedmethod. The Company utilizes a methodology of estimating the percent complete by the units-delivered
method, or when there is significant nonrecurring engineering,calculating the ratio of costs incurred to management's estimate of total anticipated costs. If estimated totalContract costs include material, labor and subcontracting costs, as well as an allocation of indirect costs. We routinely review estimates on any contract indicate
a loss, the Company provides currentlypercent-complete contracts and estimates are regularly revised to adjust for the total anticipated
loss on the contract.changes. 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
Our percentage of completion sales include the design, manufacture and Cash Equivalentsinstallation of complex visual systems generally sold as a single element arrangement to our customers. In those rare cases where arrangements include multiple elements, we utilize SOP 97-2 as modified by SOP 98-9. SOP 97-2 generally requires revenue earned on software arrangements involving multiple elements such as software and maintenance to be allocated to each element based on the relative fair values of the elements. The Company considers all highly liquid financial instruments
purchased withfair value of an original maturityelement must be based on vendor specific objective evidence ("VSOE") that is specific to the Companyvendor. The revenue allocated to software is generally recognized upon delivery of 90 daysthe products. The revenue allocated to maintenance is recognized over the maintenance period, based upon VSOE, which we determine based on renewal rates in contracts.
Product Sales. Product sales are comprised of contracts which typically require a relatively short period of time to complete the production, modification and customization of the software, and accordingly revenue is not recognized until delivery of the completed embedded software product occurs, the fee is fixed and determinable, and collection is considered probable.
Time and Materials. Services sold to customers on a time and materials or lesscost-plus basis are recognized as the related services are performed.
Other. Other revenue consists primarily of amounts earned under maintenance contracts that are generally sold as a single element to be cash equivalents. Cash equivalents consist of debt
securitiesour customers. Revenue from product maintenance contracts,
49
including separately priced extended warranty contracts, is deferred and money market funds of $3.8 million and $15.5 million
as of December 31, 2000 and 1999, respectively.
recognized on a straight-line basis over the contract period.
Restricted Cash
The Company has
We have restricted deposits related to borrowings on one of our line of credit agreements that are pledged as collateral on
overdraft protection, letters of credit and certain other
obligations all of which mature or expire within one year.
Trade Accounts Receivable
In the normal course of business, we provide unsecured credit terms to our customers. Accordingly, we maintain an allowance for doubtful accounts for possible losses on uncollectable accounts receivable. We routinely analyze accounts receivable and costs in excess of billings, and consider history, customer creditworthiness, facts and circumstances specific to outstanding balances, current economic trends, and payment term changes when evaluating adequacy of the allowance for doubtful accounts. Changes in these factors could result in material differences to bad debt expense. Past due balances are reviewed individually for collectibility.
For uncollectable accounts receivable we record a loss against the allowance for doubtful accounts only after exhaustive efforts have been made to collect and with management's approval. Generally, realized losses have been within the range of management's expectations.
The table below represents changes in allowance for doubtful receivables, in thousands:
| | Balance at beginning of year | Additions charged (reversed) to cost and expenses | Deductions charged (recovered) against provision | Balance at end of year | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Allowance for doubtful receivables | ||||||||||||
| December 31, 2003 | $ | 856 | $ | 68 | $ | 573 | $ | 351 | ||||
| December 31, 2002 | 6,413 | (734 | ) | 4,823 | 856 | |||||||
| December 31, 2001 | 4,411 | 2,358 | 356 | 6,413 | ||||||||
Inventories
Inventoried
Inventory includes materials at standard costs, which approximates average costs, as well as inventoried costs on programs and long-term contractscontracts. Inventoried costs include material, 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 portion of which is not expected to be realized within one year. Inventories are stated at
standard cost, which approximates average cost. Spare parts and general stock materials are stated at cost not in excess of realizable value. The CompanyWe periodically reviewsreview inventories for excess supply, obsolescence, and obsoletevaluations above estimated realizable amounts, and providesprovide a reserve that it considerswe consider sufficient to cover any excess and obsolete inventories.
these items. Revisions of these estimates could result in the need for adjustments.
50
Property, 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. Expenditures that materially increase values or capacities or extend useful lives of property and equipment are capitalized. Routine maintenance, repairs and renewal costs are expensed as incurred.
Accounting for Impairment of Long-Lived Assets
The Company
Long-lived assets are reviewed for impairment when events or changes in circumstances indicate that the book value of an asset may not be fully recoverable. When this occurs, 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 whenWhen 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 forassets, the year
ended December 31, 1999, as determined in accordance with Statement
of Financial Accounting Standards No. 121 ("SFAS 121"), Accounting
forCompany then determines the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of, relates to the write-down toestimated fair value of goodwill,
intangibles and other long-lived assets acquired insuch assets. The amount of impairment to be recognized is measured by the acquisition
of AccelGraphics, Inc. ("AGI") and Silicon Reality, Inc. ("SRI").
Fair value was determined utilizing discounted cash flow analyses
andamount by which the replacement cost approach. The impairment loss consistedcarrying amount 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,exceeds the impairment loss was the
resultfair value of the following additional circumstances: (i) delays in
production introductionsassets. Assets held for sale are reported at the AccelGALAXY, E&S Lightning 1200 and
the multiple-controller graphics subsystems product line; (ii) the
developerlower 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 Company determined
that a manufacturer of a chiptheir carrying amount or fair value less costs to be used in various new board
products was unable to manufacture a designed chip with agreed upon
specifications.
Goodwill and Other Intangible Assets
Goodwill and other intangible assets consist 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 other intangible assets are being amortized using
the straight-line method over six months to seven years. As of
December 31, 2000 and 1999, accumulated amortization of goodwill and
other intangible assets was $15.9 million and $15.7 million,
respectively.
sell.
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 its
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-identificationspecific- 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, non-marketable and nonmarketableequity method investment securities.
Nonmarketable investment
We account for our investments in non-marketable securities are recorded aton both the lowercost and equity methods of cost or fair value. Some of the factors that are considered in
determiningaccounting. In assessing the fair value of these securities include analysessuch investments, we consider recent equity transactions that investees have entered into, the status of each investee's financial condition and operations, the status of
its technology and strategies in place to achieve its objectives.
The Company's 50%their objectives, as well as the investee's financial condition and results of operations. To the extent there are changes in these assessments, adjustments may need to be recorded. For our investment in a joint venture is stated at cost,
adjustedaccounted for on the equity method, adjustments are made to the carrying amount of the investment to account for our equity in undistributed earnings since acquisition.
of the investee. Investments are periodically evaluated for a decline in value that is considered other-than-temporary. Any such decline is recognized as a loss in the statement of operations.
51
Warranty Reserve
The Company provides
We provide a warranty reserve for estimated future costs of servicing products under warranty agreements extending for periods from 90 days to one year.several years. Anticipated costs for product warrantywarranties 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
The following table provides the changes in our warranty reserves (in thousands):
| | 2003 | 2002 | |||||
|---|---|---|---|---|---|---|---|
| Beginning balance | $ | 968 | $ | 1,966 | |||
| Provision for warranty expense | 2,274 | 617 | |||||
| Warranty charges against the reserve | (1,952 | ) | (1,615 | ) | |||
| Ending Balance | $ | 1,290 | $ | 968 | |||
Stock-Based Compensation
The Company has
We have adopted the footnote disclosure provisions of StatementStatements of Financial Accounting Standards No.("SFAS") 123 ("SFAS 123"),
Accountingand 148, "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.
123 and 148.
We account for our stock option plans under APB 25, under which no compensation cost has been recognized as all options granted under these plans had an exercise price equal to the market value of the underlying common stock on the date of grant. Had compensation cost for these plans been determined consistent with SFAS 123, our net loss and loss per common share would have been changed to the following pro forma amounts (in thousands, except per share data):
| | 2003 | 2002 | 2001 | |||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Net loss, as reported | $ | (35,988 | ) | $ | (11,721 | ) | $ | (27,457 | ) | |
| Deduct: Total stock based employee compensation expense determined under the fair value method for all awards | (442 | ) | (688 | ) | (1,482 | ) | ||||
| Pro forma net loss | $ | (36,430 | ) | $ | (12,409 | ) | $ | (28,939 | ) | |
| Loss per share: | ||||||||||
| Basic and diluted—as reported | $ | (3.44 | ) | $ | (1.12 | ) | $ | (2.70 | ) | |
| Basic and diluted—pro forma | (3.48 | ) | (1.19 | ) | (2.85 | ) | ||||
52
Income Taxes
The Company uses
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
The local foreign currency is the functional currency for the
Company's German subsidiaries. The United Kingdom subsidiary uses
the U.S. dollar as its functional currency. Assets and liabilities
of German operations are translated to U.S. dollars at the current
exchange rates as of the applicable balance sheet date. Sales and
expenses are translated at the average exchange rates prevailing
during the period. Adjustments resulting from translation are
reported as a separate component of stockholders' equity. Certain
transactions of the German subsidiaries are denominated in
currencies other than the functional currency, including
transactions with the parent company. Transaction gains and losses
are included in other income (expense) for the period in which the
transaction occurs.
Estimates
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.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to
concentrations of credit risk are primarily cash, cash equivalents,
short-term investments and accounts receivable. The Company's
short-term investment portfolio consists of investment-grade
securities diversified among security types, industries and issuers.
The Company's investments are managed by recognized financial
institutions that follow the Company's investment policy. The
Company's policy limits the amount of credit exposure in any one
issue, and the Company believes no significant concentration of
credit risk exists with respect to these investments.
In the normal course of business, the Company provideswe provide unsecured credit terms to itsour 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
records an asset for costs and estimated earningsAs discussed further in excessNote 22, we derive a significant portion of billings on uncompleted contracts. At December 31, 2000, $46.0
millionour sales from a limited number of the costs and estimated earnings in excess of billings on
uncompleted contracts pertain to five contracts with five different customers. The billingloss of any one or more of these amounts is contingent upon the
successful completion of contractual milestones related to the
delivery and integration of Harmony image generators. The Company
expects to achieve these billing milestones during 2001. The
Company's inability to achieve these contractual milestones may
significantly impact the realization of such amounts.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. 133 ("SFAS
133"), Accounting for Derivative Instruments and Hedging Activities.
SFAS 133, as amended by SFAS 137 and SFAS 138, is effective for all
fiscal years beginning after June 15, 2000. SFAS 133 establishes new
accounting and reporting standards for companies to report
information about derivative instruments, including certain
derivative instruments embedded in other contracts (collectively
referred to as derivatives), and for hedging activities. It requires
that an entity recognize all derivatives as either assets or
liabilities in the 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 Company adopted SFAS 133 as of
January 1, 2001. The impact of adopting SFAS 133 is not anticipated
to be material to the financial statements.
In December 1999, the Securities and Exchange Commission issued
Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements" ("SAB 101"). SAB 101 provides guidance on the
recognition, presentation and disclosure of revenue in financial
statements. The Company's adoption of SAB 101 in the fourth quarter
of 2000 did notcustomers could have a material impactadverse effect on itsour financial statements.
(2) BUSINESS ACQUISITIONS AND DISPOSITIONS
In December 2000,condition and results of operations.
(3) RESTATEMENT OF 2003 QUARTERLY FINANCIAL STATEMENTS—UNAUDITED
The Company's previously issued unaudited condensed consolidated balance sheets and unaudited condensed consolidated statements of operations, comprehensive loss and cash flows for the Company completedfirst three fiscal quarters of 2003 have been restated to correct certain accounting errors.
The aggregate effect of the divestiturerestatement increased previously reported net loss for the quarters ended March 28, 2003, June 27, 2003 and September 26, 2003 by $1.2 million, $2.6 million and $1.9 million, respectively. The aggregate effect of its
Germanthe restatement increased previously reported basic and diluted loss per share for the quarters ended March 28, 2003, June 27, 2003 and September 26, 2003, by $0.12, $0.24 and $0.18, respectively.
During our 2003 year-end close process and review of the financial statements of our wholly-owned 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 operatesLimited ("E&S Ltd."), we identified certain errors in E&S Ltd.'s 2003 quarterly financial statements due to the incorrect application of certain accounting principles during the first three quarters of 2003.
Adjustments as a result of the restatement have been divided into the following three categories:
1.Early Recognition of Costs. During 2003, hardware costs were charged to certain long-term projects before the underlying costs were actually incurred. Because these long-term projects are accounted for under a new name. The
divested company has no remaining connection with E&S. The Company
will continue to operatethe percentage of completion method, these charges resulted in Germany and throughout Europe under its
own name, providing marketing,the recognition of both sales and support for the Company's
growing visual systems business and traditional customer base.
On March 28, 2000, the Company 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 Company 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 Company recognized a gain of $1.9 million on the sale of
these assets.
On June 26, 1998, the Company acquired all of the outstanding stock
of AccelGraphics, Inc. for approximately $23.7 million in cash and
1,109,303 shares of 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 million and
incurred transaction costs of approximately $1.1 million. AGI was
basedsales in Milpitas, California,periods earlier than appropriate. These overstatements of sales and was a providercosts of high-performance, cost-effective, three-dimensional graphics
subsystem products for the professional Windows NTsales occurred during 2003 and Windows 95
markets. The acquisition was accounted for by the purchase method
and, accordingly, the results of operations of AGI have beenwere included in the Company's consolidated financial statements from
June 26, 1998 forward.
46
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 productspreviously issued 10-Q filings for the personal computer marketplace.first three quarters of 2003.
2.Overstatement of Program Margins. During 2003, gross margins on certain long-term projects were recorded in excess of the actual gross margins expected to be realized based upon
53
the percentage of completion revenue recognition method. This acquisition was accounted for by the purchase methodresulted in an overstatement of sales and accordingly, the results of operations of SRI have beengross profit during 2003 and were 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 valuepreviously issued 10-Q filings for the in-process technologyfirst three quarters of 2003.
3.Recognition of Sales and Margin in each
acquisition was based on analysisExcess of Contract Value. During 2003, hardware costs were charged to certain long-term projects which exceeded 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 ratestotal estimated costs 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 expensesof these projects. Sales for these projects were recognized using the original ratio of contract value to estimated total costs at project completion. As a result, underlying project sales were recognized in excess of total contract value. These overstatements of sales and resulting
profit marginsgross margin were forecasted basedincluded in the Company's previously issued 10-Q filings for the first three quarters of 2003.
Summary of Restated Items
| | Three months ended | Three months ended | Three months ended | ||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | March 28, 2003 | March 28, 2003 | Net Effect | June 27, 2003 | June 27, 2003 | Net Effect | Sep. 26 2003 | Sep. 26 2003 | Net Effect | ||||||||||||||||||||
| | Restated | Previously Reported | | Restated | Previously Reported | | Restated | Previously Reported | | ||||||||||||||||||||
| | (in thousands, except per share amounts) | ||||||||||||||||||||||||||||
| Sales | $ | 22,578 | $ | 22,693 | $ | (115 | ) | $ | 16,010 | $ | 22,196 | $ | (6,186 | ) | $ | 20,765 | $ | 23,410 | $ | (2,645 | ) | ||||||||
| Cost of sales | 14,998 | 13,870 | 1,128 | 9,924 | 13,558 | (3,634 | ) | 13,372 | 14,134 | (762 | ) | ||||||||||||||||||
| Gross profit (loss) | (6,986 | ) | (5,743 | ) | (1,243 | ) | 6,086 | 8,638 | (2,552 | ) | 7,393 | 9,276 | (1,883 | ) | |||||||||||||||
| Operating loss | (23,703 | ) | (22,460 | ) | (1,243 | ) | (4,507 | ) | (1,955 | ) | (2,552 | ) | (7,426 | ) | (5,543 | ) | (1,883 | ) | |||||||||||
| Loss before income taxes | (24,543 | ) | (23,300 | ) | (1,243 | ) | (5,005 | ) | (2,453 | ) | (2,552 | ) | (8,228 | ) | (6,345 | ) | (1,883 | ) | |||||||||||
| Net loss | $ | (24,275 | ) | $ | (23,032 | ) | $ | (1,243 | ) | $ | (5,124 | ) | $ | (2,572 | ) | $ | (2,552 | ) | $ | (8,040 | ) | $ | (6,157 | ) | $ | (1,883 | ) | ||
Net loss per common share: | |||||||||||||||||||||||||||||
| Basic and diluted | $ | (2.32 | ) | $ | (2.20 | ) | $ | (0.12 | ) | $ | (0.49 | ) | $ | (0.25 | ) | $ | (0.24 | ) | $ | (0.77 | ) | $ | (0.59 | ) | $ | (0.18 | ) | ||
| Comprehensive loss | $ | (24,248 | ) | $ | (23,005 | ) | $ | (1,243 | ) | $ | (5,059 | ) | $ | (2,507 | ) | $ | (2,552 | ) | $ | (7,819 | ) | $ | (5,936 | ) | $ | (1,883 | ) | ||
| | | | | ||||||||||||||||||||||||||
| | March 28, 2003 | March 28, 2003 | Net Effect | June 27, 2003 | June 27, 2003 | Net Effect | Sep. 26 2003 | Sep. 26 2003 | Net Effect | ||||||||||||||||||||
| | Restated | Previously Reported | | Restated | Previously Reported | | Restated | Previously Reported | | ||||||||||||||||||||
| | (in thousands, except per share amounts) | ||||||||||||||||||||||||||||
| Costs and estimated earnings in excess of billings on uncompleted contracts | $ | 19,975 | $ | 18,630 | $ | 1,345 | $ | 14,422 | $ | 13,077 | $ | 1,345 | $ | 12,081 | $ | 16,924 | $ | (4,843 | ) | ||||||||||
| Total current assets | 82,102 | 80,757 | 1,345 | 70,837 | 69,492 | 1,345 | 64,451 | 69,294 | (4,843 | ) | |||||||||||||||||||
| Total assets | $ | 110,429 | $ | 109,084 | $ | 1,345 | $ | 98,099 | $ | 96,754 | $ | 1,345 | $ | 90,979 | $ | 95,822 | $ | (4,843 | ) | ||||||||||
Customer deposits | $ | 3,665 | $ | 2,538 | $ | 1,127 | $ | 1,262 | $ | 3,768 | $ | (2,506 | ) | $ | 1,843 | $ | 5,111 | $ | (3,268 | ) | |||||||||
| Billings in excess of costs and estimated earnings on uncompleted contracts | 10,684 | 9,223 | 1,461 | 14,140 | 6,494 | 7,646 | 10,996 | 6,893 | 4,103 | ||||||||||||||||||||
| Total current liabilities | 50,128 | 47,540 | 2,588 | 39,874 | 34,734 | 5,140 | 39,447 | 38,612 | 835 | ||||||||||||||||||||
| Total liabilities | 81,262 | 78,674 | 2,588 | 73,944 | 68,804 | 5,140 | 74,595 | 73,760 | 835 | ||||||||||||||||||||
| Accumulated deficit | (17,435 | ) | (16,192 | ) | (1,243 | ) | (22,558 | ) | (18,763 | ) | (3,795 | ) | (30,599 | ) | (24,921 | ) | (5,678 | ) | |||||||||||
| Total stockholders' equity | 29,167 | 30,410 | (1,243 | ) | 24,155 | 27,950 | (3,795 | ) | 16,384 | 22,062 | (5,678 | ) | |||||||||||||||||
| Total liabilities and stockholders' equity | $ | 110,429 | $ | 109,084 | $ | 1,345 | $ | 98,099 | $ | 96,754 | $ | 1,345 | $ | 90,979 | $ | 95,822 | $ | (4,843 | ) | ||||||||||
There was no net effect due to the errors discovered on the characteristicscash provided by (used in) operations, cash provided (used in) investing activities, and cash provided by (used in) financing activities in our previously issued quarterly condensed consolidated statements of cash flow generating potentialin each of the acquired in-process technology,first three quarters of 2003.
54
(4) IMPAIRMENTS
Inventory impairments 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,impairment losses in 2003, 2002, 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 used2001 are presented 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 followsbelow (dollars in thousands):
Total Purchase Price:
Total cash consideration $ 24,688
Total stock consideration 25,695
Value
| | 2003 | 2002 | 2001 | |||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Inventory impairment (by product): | ||||||||||
| Harmony 1 | $ | 10,000 | $ | — | $ | — | ||||
| ESIG | 3,300 | — | — | |||||||
| TargetView | 1,266 | — | — | |||||||
| simFUSION 4000 | — | 1,392 | — | |||||||
| Total inventory impairment | $ | 14,566 | $ | 1,392 | $ | — | ||||
| Impairment loss: | ||||||||||
| Fixed assets | $ | 1,151 | $ | — | $ | — | ||||
| Software licenses | — | 311 | — | |||||||
| Goodwill | — | — | 220 | |||||||
| Total impairment loss | $ | 1,151 | $ | 311 | $ | 220 | ||||
During the first quarter 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 costs2003 certain significant orders that we had expected 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
completereceive as of December 31, 19992002, and into early 2003, were canceled by customers. We believe these cancellations were primarily the result of a re-alignment of military spending priorities which occurred during the first quarter of 2003. The future demand for our Harmony 1, ESIG, and TargetView products significantly decreased compared to our prior projections because of these cancellations. As a result, during the quarter ended March 28, 2003, we recorded a $14.6 million impairment to specific inventory and a $1.2 million impairment to certain fixed assets related to the manufacture of these products.
Approximately $10.0 million of the first quarter 2003 impairment related to our Harmony 1 inventory. Through the end of 2002 and into early 2003, we expected to finalize a sale of two Harmony 1 systems, one as an option to a current U.S. government contract and another to a European prime contractor. During March 2003, we received notification from the U.S. customer that it would not purchase the Harmony 1 system, as had been forecasted, due to a decision to migrate to a more current technology, specifically commercial off-the-shelf PCs or our next-generation Harmony 2 product. Feedback from the European prime contractor was quite similar. Thus, the loss of these orders coupled with the overall shift in market demand resulted in our determination that we had excess Harmony 1 inventory on hand. We currently do not have other prospects to sell this excess Harmony 1 inventory, and these components cannot be used in the manufacture of other products. Accordingly, we determined that $10.0 million of inventory related to these systems was impaired. In addition, because we do not expect to sell any additional Harmony 1 systems, we determined we had no further costs areneed for certain fixed assets specifically used to build, test, and demonstrate our Harmony 1 product. We recorded an additional impairment related to these fixed assets, as we believe this equipment has no alternative use.
Approximately $3.3 million of the first quarter 2003 impairment related to our ESIG inventory. Through the end of 2002 and into early 2003, we expected to be incurred.
The following unaudited pro forma financial information (in
thousands, except per share amounts) presentsfinalize the combined resultssale of operationsas many as nine ESIG systems to a particular commercial customer. During March of 2003, we received notification from this customer that it would not purchase the ESIG systems as had been forecasted due to its interest in our
55
next-generation EP™-1000CT technology, which provides enhanced functionality at a comparable price. While we continue to have ESIG related inventory on hand for other forecasted ESIG systems, the loss of this order, coupled with the increased demand for our next-generation EP-1000CT product, caused us to determine that we had inventory in excess of our current purchase orders and forecasted demand.
Approximately $1.3 million of the Company, AGIfirst quarter 2003 impairment related to our TargetView 100 inventory. In the first quarter of 2003, we had opportunities to propose TargetView 100 technology for a significant number of systems. During this timeframe, we discussed many potential solutions to the customer's requirements and SRIbecame convinced that the TargetView 100 technology had been superseded by newer technology. In light of this, our business opportunities for 1998 as ifTargetView 100 systems have all but been eliminated and has resulted in our determination that we had excess inventory on hand. Accordingly, we determined that $1.3 million of inventory related to these systems was impaired.
In 2002, we recorded an inventory impairment loss of $1.4 million related to our decision to exit the acquisitions had occurred assimFUSION 4000 product line. This impairment encompassed the total value of the beginningsimFUSION 4000 inventory on hand. This decision was based on anticipated reduced demand as a result of 1998, after giving
effectcustomer migration to certain adjustments, including, but not limitedthe next-generation simFUSION products.
In 2002, we recorded an impairment loss of $0.3 million related to amortizationsoftware licenses that were used by employees that were terminated as a result of the fourth quarter 2002 reduction-in-force.
In 2001, we recorded an impairment loss of $0.2 million for the write-off of goodwill acquired in our acquisition of AccelGraphics, Inc. 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
(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 maturingSilicon Reality, Inc. in one year or less.
(4)1998.
(5) INVENTORIES
Inventories consist of the following (in thousands):
| | December 31, | ||||||
|---|---|---|---|---|---|---|---|
| | 2003 | 2002 | |||||
| Raw materials | $ | 6,950 | $ | 13,597 | |||
| Work-in-process | 3,301 | 10,467 | |||||
| Finished goods | 5,722 | 7,309 | |||||
| Total inventory | $ | 15,973 | $ | 31,373 | |||
56
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
obsolete2003, December 31, 2002 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
(6) COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
Comparative information with respect to uncompleted contracts is summarized as follows (in thousands):
| | December 31, | ||||||
|---|---|---|---|---|---|---|---|
| | 2003 | 2002 | |||||
| Accumulated costs and estimated earnings on uncompleted contracts | $ | 229,970 | $ | 325,655 | |||
| Less total billing on uncompleted contracts | (230,547 | ) | (314,594 | ) | |||
| (577 | ) | $ | 11,061 | ||||
| Costs and estimated earnings in excess of billings on uncompleted contracts | 10,922 | $ | 22,083 | ||||
| Billings in excess of costs and estimated earnings on uncompleted contracts | (11,499 | ) | (11,022 | ) | |||
| $ | (577 | ) | $ | 11,061 | |||
(7) PROPERTY, PLANT AND EQUIPMENT
The cost and estimated useful lives of property, plant and equipment are summarized as follows (dollars in thousands):
| | | December 31, | |||||||
|---|---|---|---|---|---|---|---|---|---|
| | Estimated useful lives | ||||||||
| | 2003 | 2002 | |||||||
| Buildings and improvements | 40 years | $ | 29,249 | $ | 29,366 | ||||
| Manufacturing machinery and equipment | 3 to 8 years | 73,231 | 76,679 | ||||||
| Office furniture and equipment | 8 years | 5,454 | 5,410 | ||||||
| Construction-in-process | — | 1,702 | 128 | ||||||
| 109,636 | 111,583 | ||||||||
| Less accumulated depreciation and amortization | (85,521 | ) | (83,295 | ) | |||||
| $ | 24,115 | $ | 28,288 | ||||||
See Note 4 for information concerning impairment of property, plant and improvements owned by the Company are constructed
on land leased from an unrelated third party. Such leases extend for
a term of 40 years from 1986, with options to extend two of the
leases for an additional 40 years and the remaining 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)equipment that occurred in 2003.
(8) LEASES
The Company leases certain of its buildings and related improvements
to third parties under noncancelable operating leases. Cost and
accumulated depreciation of the leased buildings and improvements at
December 31, 2000 were $8.9 million and $3.5 million, respectively.
Rental
Sublease rental income for all operating leases for 2000, 19992003, 2002 and 19982001 was $1.8$0.8 million, $1.6$1.3 million, and $1.5$2.2 million, respectively.
The Company occupies
We occupy real property and usesuse certain equipment under lease arrangements that are accounted for as operating leases. Rental expenses for all operating leases for 2000, 19992003, 2002 and 19982001 were $1.6$3.9 million, $2.1$3.9 million, and $2.3$4.0 million, respectively.
57
At December 31, 2000,2003, the future minimum sublease 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
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(8)
| | Rental income | Rental commitment | |||||
|---|---|---|---|---|---|---|---|
| Year ending December 31, | |||||||
| 2004 | $ | 237 | $ | 1,330 | |||
| 2005 | — | 828 | |||||
| 2006 | — | 764 | |||||
| 2007 | — | 427 | |||||
| Thereafter | — | 9,232 | |||||
| $ | 237 | $ | 12,581 | ||||
(9) INVESTMENTS
The Company
We had the following investments in marketable equity
securities adjusted for unrealized holding gains and losses and
other-than-temporary declines in fair value, nonmarketable equity
securities, adjusted for other-than-temporary declines in fair value and a joint venture (in thousands):
| | December 31, | |||||||
|---|---|---|---|---|---|---|---|---|
| | 2003 | 2002 | ||||||
| Marketable securities available for sale | $ | 557 | $ | 112 | ||||
| Nonmarketable securities | ||||||||
| Quantum Vision Inc., (Quantum) | — | 500 | ||||||
| Total Graphics Solution, N.V. (TGS) | 500 | 500 | ||||||
| Other | 16 | 16 | ||||||
| Total nonmarketable securities | 516 | 1,016 | ||||||
| Investment in joint venture | ||||||||
| Quest Flight Training Ltd. (Quest) | 938 | 874 | ||||||
| Total investment securities | $ | 2,011 | $ | 2,002 | ||||
Quantum is a start-up company that owns patented technology to improve cathode raytuberay tube (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%5% of the outstanding common stock and common stock equivalents of Quantum and less than 15% of TGS. The Company
hasWe have rights to 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 anyfor either of the
companies in which the Company has investments.these companies. 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 has
58
In 2003, we determined that the technology that Quantum was developing was no longer a marketable, leading edge technology that had a foreseeable future. Also it was determined that this technology would not benefit or enhance our current technology or strategic direction. As a result, management determined that the value of the investment had experienced a decline in value that was deemed to be other-than-temporary. As a result, we wrote down the total value of this security.
We have a 50% interest in Quest, Flight Training Ltd.
(Quest), a joint venture with Quadrant Group plc ("Quadrant") providing aircrew training services for the United Kingdom Ministry of Defence ("U.K. MoD") under a 30 year30-year contract. The investment is accounted for under the equity method. Equity in earnings of Quest of $43,000 in 2000$64,000, $46,000, and $74,000 is recorded in other income (expense). in 2003, 2002, and 2001, respectively. The Company guarantees a portion of the joint venture's
third-party borrowings. At December 31, 2000, Quest had outstanding
debt of $2.1 million. Management believes, based on current facts
and circumstances and the joint venture's financial position thatand operating results of Quest are immaterial to our financial results.
In connection with the likelihoodservices of a payment pursuantQuest to such guarantee is remote.
Duringthe U.K. MoD, during fiscal 2000 the Company recognized a $6.7 million gain on the sale
of the Company's investment in SLM to Cypress in which the Company
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 Company sold all of its holdings in Sense8 Corporation for net
proceeds of $3.3 million, recognizing a $2.5 million gain. During
2000, 1999 and 1998, the Company wrote down its investments in
marketable securities by $7.8 million, $0.4 million and $1.5
million, respectively, due to other-than-temporary declines in
market value. These amounts are recorded in other income (expense),
net in the Company's consolidated statements of operations.
(9) ACCRUED EXPENSES
59
(10) ACCRUED EXPENSES
Accrued expenses and costs
incurred by CAE relating to the integration and retrofitconsist 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 has
paid $6.0 million to CAE. If further delays in the integration of
the Harmony VSC occur, the Company 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.
52
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(10)following (in thousands):
| | December 31, | |||||
|---|---|---|---|---|---|---|
| | 2003 | 2002 | ||||
| Compensation and benefits | $ | 3,924 | $ | 5,740 | ||
| Liquidated damages and late delivery penalties | 1,734 | 1,050 | ||||
| Restructuring (see Note 23) | 1,611 | 2,032 | ||||
| Warranty reserve (see Note 2) | 1,290 | 968 | ||||
| Other | 3,967 | 3,303 | ||||
| $ | 12,526 | $ | 13,093 | |||
(11) EMPLOYEE RETIREMENT BENEFIT PLANS
Pension Plan (the "Plan") - The Company has a defined benefit—Effective April 23, 2002, the Board of Directors approved the redesign of our employee retirement plans to match contemporary market practices and to improve our competitive position by aligning future funding for employee retirement benefits into the 401(k) plan. This action was implemented by amending the Plan to curtail accrual of future benefits under the Plan. At the same time, the 401(k) plan was amended to permit the Board of Directors to grant additional discretionary matching contributions based on our profitability and other financial and operational considerations. This change to the pension plan covering substantially allhad no effect on the benefits vested to current and previous employees who have attained
age 21 with service in excess of one year.for their past service. Those benefits will be paid on retirement. Retirees currently receiving pension payments are also unaffected. Benefits at normal retirement age (65) are based upon the employee's years of service, as of the date of the curtailment for employees not yet retired, and the employee's highest compensation for any consecutive five ofprior to the last ten years of employment. The Company'scurtailment. This pension plan is a funded noncontributory defined benefit pension plan. Our funding policy is to contribute amounts sufficient to satisfy regulatory funding standards, based upon independent actuarial valuations.
Supplemental Executive Retirement Plan ("SERP") - The—Amendments to curtail the SERP were approved at the May 16, 2002 Board meeting. Those amendments were made for consistency with changes to our pension plan earlier in 2002. Specifically, we changed the executive retirement benefits from defined pension benefits under the SERP, funded solely by E&S, to 401(k) and deferred compensation retirement benefits funded through both employee and Company hascontributions. As a non-qualified SERP.result of the curtailment, the SERP is now consistent with our pension plan in other areas including closing the SERP to new participants and freezing further SERP gains from any future salary increases. 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 Plan SERP
--------------------------- ---------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
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
============ ============ ============ ============
Change in plan assets:
Fair value at beginning of year $ 43,721 $ 40,221
Actual return on plan assets 2,086 6,597
Employer contributions 648 --
Benefits paid (1,889) (3,097)
------------ ------------
Fair value at end of year $ 44,566 $ 43,721
============ ============
Reconciliation of funded status:
Funded status $ 610 $ 6,817 $ (6,269) $ (5,749)
Unrecognized actuarial (gain) loss (9,018) (15,254) 68 590
Unrecognized prior service cost 730 771 495 543
Unrecognized transition obligation 79 158 -- --
------------ ------------ ------------ ------------
Accrued benefit liability $ (7,599) $ (7,508) $ (5,706) $ (4,616)
============ ============ ============ ============
Assumptions (weighted average):
Discount rate 7.8% 6.8% 7.3% 7.8%
Expected return on plan assets 9.0% 9.0% N/A N/A
53
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Net periodic pension and other postretirement benefit costs include
the following components (in thousands):
Pension Plan SERP
----------------------------- ---------------------------
2000 1999 1998 2000 1999 1998
------- ------- ------- ------- ------- -------
Components of net periodic benefit cost:
Service cost $ 2,460 $ 3,252 $ 2,601 $ 815 $ 739 $ 828
Interest cost 2,759 2,892 2,501 410 418 355
Expected return on assets (3,907) (3,575) (3,264) -- -- --
Amortization of actuarial (gain) loss (692) -- (15) 1 53 143
Amortization of prior year service cost 41 37 4 48 73 73
Amortization of transition 79 79 79 -- -- --
------- ------- ------- ------- ------- -------
Net periodic benefit cost $ 740 $ 2,685 $ 1,906 $ 1,274 $ 1,283 $ 1,399
======= ======= ======= ======= ======= =======
401(k) Deferred Savings Plan - The Company has—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 on employee contributions. The 401(k) plan was amended on April 23, 2002, to permit the Board of 50 percent of each employee's contribution notDirectors to exceed six percent of the employee's compensation. The Company'sgrant additional discretionary matching contributions based on our profitability and other financial and operational considerations. Our contributions to this plan for 2000, 19992003, 2002 and 19982001 were $1.0$0.6 million, $0.9 million and $1.1 million, and $1.0 million respectively.
60
Executive Savings Plan (ESP)—The ESP is a deferred compensation plan that allows tax-deferred retirement savings beyond the amount that can be contributed to the 401(k) plan. The ESP, a nonqualified plan that does not have the same protections as a qualified 401(k) plan, covers only a select group of management employees. Participants earn matching amounts on their contributions. Consistent with the curtailment of the SERP, the ESP was amended on May 16, 2002 to permit the Board of Directors to grant additional discretionary contributions. This plan is unfunded.
Life Insurance - The Company purchases—We purchase company-owned life insurance policies insuring the lives of certain employees.participants in the ESP. The policies accumulate asset values and exist to meet future liabilities includingcover the paymentcost of employee benefits such as supplemental retirement benefits.benefit liabilities. At December 31, 20002003 and 1999,2002, the investment in the policies was $3.2$2.2 million and $3.1$2.0 million, respectively, and net life insurance expense was $0.1 million $0.2 million, and $0.5$0.1 million, for 2000, 19992003, 2002, and 1998,2001, respectively.
(11) LONG-TERM
E&S uses a December 31 measurement date for both the Pension Plan and SERP.
Obligations and Funded Status
| | At December 31 | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Pension Plan | SERP | |||||||||||
| | 2003 | 2002 | 2003 | 2002 | |||||||||
| | (in thousands) | ||||||||||||
| Change in benefit obligation | |||||||||||||
| Benefit obligation at beginning of year | $ | 38,585 | $ | 49,099 | $ | 6,545 | $ | 6,744 | |||||
| Service cost | — | 700 | 451 | 454 | |||||||||
| Interest cost | 2,533 | 2,442 | 480 | 446 | |||||||||
| Actuarial (gain) loss | 3,591 | (6,060 | ) | 135 | 156 | ||||||||
| Benefits paid | (5,889 | ) | (4,021 | ) | (334 | ) | (270 | ) | |||||
| Assumption change | — | — | 388 | 454 | |||||||||
| Curtailment | — | (3,575 | ) | — | (1,439 | ) | |||||||
| Benefit obligation at year end | $ | 38,820 | $ | 38,585 | $ | 7,665 | $ | 6,545 | |||||
| Change in plan assets | |||||||||||||
| Fair value at beginning of year | $ | 36,663 | $ | 43,158 | |||||||||
| Actual return on plan assets | 254 | (2,474 | ) | ||||||||||
| Employer contributions | — | — | |||||||||||
| Benefits paid | (5,889 | ) | (4,021 | ) | |||||||||
| Fair value at end of year | $ | 31,028 | $ | 36,663 | |||||||||
| Funded status | $ | (7,792 | ) | $ | (1,923 | ) | $ | (7,665 | ) | $ | (6,545 | ) | |
| Unrecognized net actuarial loss (gain) | 2,421 | (3,727 | ) | 614 | 160 | ||||||||
| Unrecognized prior service cost (benefit) | — | — | (875 | ) | (934 | ) | |||||||
| Net amount recognized | $ | (5,371 | ) | $ | (5,650 | ) | $ | (7,926 | ) | $ | (7,319 | ) | |
61
Amounts recognized in the balance sheet consist of:
| | Pension Plan | SERP | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2003 | 2002 | 2003 | 2002 | |||||||||
| Prepaid benefit cost | $ | — | $ | — | $ | — | $ | — | |||||
| Accrued benefit cost | (7,792 | ) | (5,650 | ) | (7,926 | ) | (7,319 | ) | |||||
| Accumulated other comprehensive income | 2,421 | — | — | — | |||||||||
| Net amount recognized | $ | (5,371 | ) | $ | (5,650 | ) | $ | (7,926 | ) | $ | (7,319 | ) | |
The accumulated benefit obligation for the Pension Plan was $38.8 million and $38.6 million at December 31, 2003 and 2002, respectively. The accumulated benefit obligation for the SERP was $7.7 million and $6.5 million at December 31, 2003 and 2002, respectively.
Information for pension plans with an accumulated benefit obligation in excess of plan assets
| | Pension Plan | SERP | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2003 | 2002 | 2003 | 2002 | ||||||||
| Projected benefit obligation | $ | 38,820 | $ | 38,585 | $ | 7,665 | $ | 6,545 | ||||
| Accumulated benefit obligation | 38,820 | 38,585 | 7,665 | 6,545 | ||||||||
| Fair value of plan assets | 31,028 | 36,663 | 0 | 0 | ||||||||
Components of Net Periodic Benefit Cost
| | Pension Plan | SERP | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2003 | 2002 | 2001 | 2003 | 2002 | 2001 | ||||||||||||
| Service cost | $ | — | $ | 700 | $ | 2,891 | $ | 451 | $ | 454 | $ | 746 | ||||||
| Interest cost | 2,533 | 2,442 | 3,127 | 480 | 446 | 447 | ||||||||||||
| Expected return on assets | (2,813 | ) | (3,462 | ) | (3,921 | ) | — | — | — | |||||||||
| Amortization of actuarial (gain) loss | — | — | (264 | ) | — | — | — | |||||||||||
| Amortization of prior year service cost | — | (16 | ) | 41 | (59 | ) | (59 | ) | 48 | |||||||||
| Curtailment gain | — | (3,575 | ) | — | — | — | — | |||||||||||
| Amortization of transition | — | 10 | 79 | — | — | — | ||||||||||||
| Net periodic benefit cost | $ | (280 | ) | $ | (3,901 | ) | $ | 1,953 | $ | 872 | $ | 841 | $ | 1,241 | ||||
Additional Information
| | Pension Plan | SERP | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| | 2003 | 2002 | 2003 | 2002 | ||||||
| Additional minimum liability included in other comprehensive income | $ | 2,421 | $ | — | N/A | N/A | ||||
We recorded an additional minimum liability related to our Pension Plan of $2.4 million during 2003 due mainly to a net $5.6 million decrease in related plan assets. Because the accumulated benefit obligation exceeded the fair value of plan assets and the accrued benefit cost (before the additional
62
minimum liability) was less than the unfunded benefit obligation, the additional minimum liability was charged to other comprehensive income.
Assumptions
Weighted-average assumptions used to determine benefit obligations at December 31
| | Pension Plan | SERP | |||||||
|---|---|---|---|---|---|---|---|---|---|
| | 2003 | 2002 | 2003 | 2002 | |||||
| Discount rate | 6.25 | % | 6.75 | % | 6.25 | % | 6.75 | % | |
| Rate of compensation increase | N/A | N/A | N/A | N/A | |||||
Weighted-average assumptions used to determine net periodic benefit cost for years ended December 31
| | Pension Plan | SERP | |||||||
|---|---|---|---|---|---|---|---|---|---|
| | 2003 | 2002 | 2003 | 2002 | |||||
| Discount rate | 6.75 | % | 7.25 | % | 6.75 | % | 7.25 | % | |
| Expected long-term return on plan assets | 8.0 | % | 8.0 | % | N/A | N/A | |||
| Rate of compensation increase | N/A | N/A | N/A | N/A | |||||
The long term rate of return on plan assets was determined as the weighted average of expected return of each of the asset classes in the target allocation of plan assets. The expected return of each asset class is the investment managers' assessment of future returns. These expectations were compared to historical market returns to ensure that the expected return for each class was a conservative estimate.
Plan Assets
E&S' Pension Plan weighted-average asset allocations at December 31, 2003 and 2002, by asset category, weighted-average planned targeted asset allocations going forward, by asset category, and expected long-returns on plan assets, by category:
| | Target % | 2003 (actual) | 2002 (actual) | Expected Return | ||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Allocation of plan assets | ||||||||||
| Cash and cash equivalents | 0 | % | 100 | % | 100 | % | 0.0 | % | ||
| Fixed income | 45 | % | 0 | % | 0 | % | 2.5 | % | ||
| Domestic equities | ||||||||||
| Small cap growth | 15 | % | 0 | % | 0 | % | 1.7 | % | ||
| Large cap growth | 15 | % | 0 | % | 0 | % | 1.4 | % | ||
| Large cap value | 15 | % | 0 | % | 0 | % | 1.4 | % | ||
| International equities | 10 | % | 0 | % | 0 | % | 1.0 | % | ||
| 8.0 | % | |||||||||
63
The asset allocation policy, consistent with the long-term growth objectives of the Pension Plan, will be to invest on a diversified basis among the various asset classes as determined by the Plan Administrative Committee. The assets of the Pension Plan were temporarily invested in cash equivalents beginning in September 2002. The Committee has implemented a plan in 2004 to return to the targeted asset allocation. Assets will be invested in a manner that will provide for long-term growth with a goal to achieve returns equal to or greater than applicable benchmarks. Investments will be managed by registered investment advisors. When investing Pension Plan assets, the investment managers of separately managed accounts shall not utilize derivative instruments for speculative purposes or to create leveraged positions.
No equity securities of E&S were part of the Pension Plan assets as of December 31, 2003, and 2002, respectively.
Cash Flow—Contributions
E&S does not expect to make any contributions to either the Pension Plan or the SERP in 2004. Our funding policy is to contribute amounts sufficient to satisfy regulatory funding standards, based upon independent actuarial valuations.
(12) 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.
The following is a summary of linesour line of credit agreements (dollars in thousands):
| | 2003 | 2002 | |||||
|---|---|---|---|---|---|---|---|
| Balance at end of year | $ | 7,685 | $ | 7,883 | |||
| Weighted average interest rate at end of year | 6.1 | % | 5.2 | % | |||
| Maximum balance outstanding during the year | $ | 11,298 | $ | 24,647 | |||
| Average balance outstanding during the year | $ | 3,054 | $ | 12,282 | |||
| Weighted average interest rate during the year | 4.1 | % | 7.8 | % | |||
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 Company entered into
E&S has a secured credit facility (the "Foothill Facility") with Wells Fargo 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 that provides for borrowings and the issuance of letters of credit up to $30.0$25.0 million. 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's assets, including, but not
limited to, all of the Company's intellectual property. Pursuant to
the terms of the Foothill Facility, all cash receipts of the Company
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 worthcombined cash and borrowing availability financial covenant that adjusts each quarter 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 CompanyFoothill Facility expires in December 2004.
64
Borrowings under the Foothill Facility bear interest at the Wells Fargo Bank National Association prevailing prime rate plus 3.0% to 4.5%, 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 $25 million and the sum of the average undrawn portion of the borrowings, payable each quarter. The Foothill Facility provides Foothill with a first priority perfected security interest in substantially all of our assets, including, but not limited to, all of our intellectual property.
In March 2003, the Foothill Facility was amended to delete the tangible net worth covenant from the Foothill Facility and replace it with a combined cash and borrowing availability financial covenant that went into effect at the end of our second quarter fiscal-end, June 2003, and is currently in compliance with its financial
covenants and ratios, althougheffect until the Foothill Facility expires. In addition, the interest rate that borrowings bear interest at was amended, from a continuationrange of recent negative
trends could impact future compliance with such covenants. Should1.5% to 3.0% to a range of 3.0% to 4.5% over the need arise,Wells Fargo Bank, N.A. prevailing prime rate, depending on the Companyamount outstanding. Also, at no time will negotiate withborrowings under the 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 Company to continue to be in
compliance or otherwise be acceptable to the Company.Facility bear interest at a rate less than 10.25%.
As of December 31, 2000, the Company has $7.32003, E&S had $3.7 million in outstanding borrowings and $15.2$3.6 million in outstanding letters of credit under the Foothill Facility. Our customers can draw against these letters of credit if we fail to meet the performance requirements contained within the terms of each letter of credit. As of December 31, 2003, no amounts have been accrued for any estimated losses under the obligations, as we believe it is probable that we will perform as required under our contracts.
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"). At the discretion of Lloyds, the maximum amount borrowed against the Overdraft Facility can be increased for a short period of time that is predetermined by Lloyds. Borrowings under the Overdraft Facility bear interest at Lloyds' short-term offered rate plus 1.75% per annum. As of December 31, 2000,2003, there were no borrowings under the Overdraft
Facility.$4.0 million in outstanding borrowings. The Overdraft Facility is subject to reduction or demand repayment for any reason at any time at Lloyds' discretiondiscretion. The Overdraft Facility expired on December 31, 2003. The Overdraft Facility was renewed after December 31, 2003 with essentially the same terms except that the borrowing limit is $2.5 million and it expires on November 30, 2001.December 31, 2004. 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 $1.52003, we had $0.8 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, the Company has unsecured letters of credit
totaling approximately $1.1 million outstanding 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)
(13) INCOME TAXES
Components of
The income tax benefit of $1.0 million for 2003 is primarily attributable to adjustments to prior years tax provisions as a result of favorable resolution of certain worldwide tax contingencies. The income tax benefit of $0.5 million for 2002 is primarily attributable to the carryback of alternative minimum tax net operating losses pursuant to the Job Creation and Workers Assistance Act of 2002. The income tax benefit of $3.2 million for 2001 is primarily attributable to adjustments to prior years tax provisions as a result of favorable resolution of certain worldwide tax contingencies.
The actual expense (benefit) attributable to earnings
before income taxes (in thousands):
| | 2003 | 2002 | 2001 | |||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Tax benefit at U.S. federal statutory rate | $ | (12,936 | ) | $ | (4,264 | ) | $ | (10,720 | ) | |
| Gains of foreign subsidiaries | — | (325 | ) | (320 | ) | |||||
| Adjustment to prior year tax provisions | (1,002 | ) | — | (3,172 | ) | |||||
| State taxes (net of federal income tax benefit) | — | — | — | |||||||
| Research and development and foreign tax credits | — | — | (681 | ) | ||||||
| Change in federal valuation allowance attributable to operations | 12,807 | 3,582 | 12,599 | |||||||
| Other, net | 160 | 544 | (878 | ) | ||||||
| $ | (971 | ) | $ | (463 | ) | $ | (3,172 | ) | ||
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, 20002003 and 1999,2002 are presented below (in thousands):
| | 2003 | 2002 | |||||||
|---|---|---|---|---|---|---|---|---|---|
| Deferred tax assets: | |||||||||
| Warranty, vacation, and other accruals | $ | 2,516 | $ | 3,075 | |||||
| Inventory reserves and other inventory related temporary basis differences | 9,037 | 4,832 | |||||||
| Pension accrual | 5,931 | 5,091 | |||||||
| Long-term contract related temporary differences | 180 | 181 | |||||||
| Net operating loss carryforwards | 48,750 | 38,109 | |||||||
| Capital loss carryforwards | 44 | 667 | |||||||
| Write-down of investment securities | 1,711 | 1,526 | |||||||
| Credit carryforwards | 3,561 | 3,552 | |||||||
| Other | 285 | 374 | |||||||
| Total gross deferred tax assets | 72,015 | 57,407 | |||||||
| Less valuation allowance | 71,027 | 56,796 | |||||||
| Total deferred tax assets | 988 | 611 | |||||||
| Deferred tax liabilities | |||||||||
| Plant and equipment, principally due to differences depreciation | (959 | ) | (543 | ) | |||||
| Other | (29 | ) | (68 | ) | |||||
| Total gross deferred tax liabilities | (988 | ) | (611 | ) | |||||
| Net deferred tax asset | $ | — | $ | — | |||||
66
Worldwide income (loss) before income taxes for the years ended December 31, 2000, 19992003, 2002, and 1998,2001 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
| | 2003 | 2002 | 2001 | |||||||
|---|---|---|---|---|---|---|---|---|---|---|
| United States | $ | (36,960 | ) | $ | (13,140 | ) | $ | (31,570 | ) | |
| Foreign | 1 | 956 | 941 | |||||||
| $ | (36,959 | ) | $ | (12,184 | ) | $ | (30,629 | ) | ||
We have total federal net operating loss carryovers of $51.8$130 million, of which, $44.6$26 million expireexpires in 20202023, $26 million expires in 2022, $22 million expires in 2021, and the remainder expireexpires between 2006 and 2019, and2019. We have various tax credit carryovers of $4.0$3.5 million that expire between 20032004 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, 2000, the Company2003 and 2002, we increased the valuation allowance on deferred tax assets by approximately $40.7 million. The$14.0 million and $3.6 million, 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.
57
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(13)
(14) 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 ($7.910.3 million and $13.1$5.1 million as of December 31, 20002003 and 1999,2002, respectively) is based on quoted market prices.
(14)
(15) COMMITMENTS AND CONTINGENCIES
On November 27, 2000, the Company entered into a three year
agreement with a third party to provide the Company with certain
copy service, mail service, software and equipment through November
30, 2003. Minimum commitments under this agreement totaled $1.0
million at December 31, 2000.
On September 26, 2000, the Company23, 2003, we entered into a purchase agreement with a third party that commits E&S to purchase $1.1 million in software licenses and engineering support to be used in product development and future products over a two year period, with continuous one year extensions optional. As of December 31, 2003, our remaining commitment totaled $0.5 million.
In November 2003, we entered into a settlement agreement with one of our customers. Based on our estimates, we expect that the Companycosts associated with meeting the requirements of the settlement agreement will approximate $1.2 million and we have accrued this amount.
On December 1, 2003 we entered into a purchase agreement with a third party that commits E&S to purchase a minimum $4.5$1.0 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 parttwo years. As of the Company's efforts to outsource the production of certain
electronic products and assemblies. In addition, the Company entered
into an electronic manufacturing services agreement with Sanmina
Corporation. The electronic manufacturing services agreement commits
the Company to purchase a minimum of $22.0 million of electronic
products and assemblies from Sanmina Corporation each year until
June 3, 2002. If the Company fails to meet these minimum purchase
levels, subject to adjustment, the Company may be required to pay 25
percent of the difference between the $22.0 million and the amount
purchased. Management expects that the Company will satisfy this
minimum purchase commitment.December 31, 2003, our remaining commitment totaled $1.0 million.
Certain of the Company'sour contracts to deliver Harmony image generators contain liquidated damage provisions for delays in delivery. The CompanyWe incurred $0.9$0.6 million and $8.2$2.9 million for such damages in 2000 2003
67
and 1999,2001, respectively. No damages were incurred in 2002. If further delays in the delivery of the Harmony image generator occur, the Companywe may incur additional liquidated damages.
(15)
(16) LEGAL PROCEEDINGS
On
In May 23, 2000, Lockheed Martin Corporation (the "Plaintiff")
served the Company with2003, a civil complaint filed in the Circuit Court
of the Ninth Judicial Circuit in and for Orange County, Florida. The
Plaintiff alleged in the complaint that the Company 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 Plaintiff seeks compensatory damages of $8.5 million
plus interest as well as consequential damages and attorneys' fees.
The $8.5 million being sought fromclaim was made against the Company by RealVision, Inc. relative to matters arising from the Plaintiffsale of a business unit to RealVision, Inc. in 2001. The parties entered mediation in the fourth quarter of 2003, and continued discussions into 2004. In March 2004, an agreement was paidreached under which RealVision will receive a settlement in the amount of $2.4 million of which E&S will pay approximately $0.9 million to resolve this claim, with the Company from May 1999 to March 2000 and was recognized
as revenue by the Company during 1999. On June 12, 2000, the Company
filed its answer and counterclaim. In the counterclaim, the Company
alleges as grounds for recovery against the Plaintiff (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 its counterclaim, the Company seeks 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
Divisionremainder of the United States District Court for the District of
Florida where it currently remains. On July 7, 2000, the Plaintiff
answered the Company's counterclaim but also filed a motion for
dismissalsettlement amount being paid by E&S's insurance carrier. The Company has accrued its portion of the Company's counterclaims for unjust enrichment,
unfair competition, promissory estoppel, and incidental damages. On
July 24, 2000, the Company filed its opposition to the Plaintiff's
motion to dismiss these certain counterclaims of the Company. On
58
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
October 20, 2000 the court denied the Plaintiff's motion to dismiss
in its entirety, without prejudice. On January 16, 2001, the Company
filed a motion for partial summary judgement, asking the court to
dismiss all of the Plaintiff's breach of contract claims. The court
has indicated that it will take the motion under advisement. A trial
date is currently set for September 2002. Management disputes the
Plaintiff's allegations in the complaint, is vigorously defending
the action, and is vigorously prosecuting its counterclaims.
Although management believes the Company will ultimately prevail in
litigation, an unfavorable outcome of these matters would have a
material adverse impact on the Company's financial condition and
operations.settlement.
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 not have a material adverse effect on the Company'sour consolidated financial condition, liquidity or results of operations.
(16)operations
(17) STOCK OPTION AND STOCK PURCHASE PLANS
Stock Option Plans - The Company has—We have stock incentive plans that provide for the grant of options to officers, employees, consultants, and employeesindependent contractors 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 non-employee directors under its Directorour Non-Employee Directors Plan. Option grants are limited to 10,000 shares per director in each fiscal year. Options generally vest ratably over fourthree years and expire ten years from the date of grant. A summary of activity follows (shares in thousands):
2000 1999 1998
---------------------- ---------------------- ----------------------
Weighted- Weighted- Weighted-
average average average
Number of exercise Number of exercise Number of exercise
shares price shares price shares price
--------- --------- --------- --------- --------- ---------
Outstanding at beginning of year 2,087 $ 14.05 2,084 $ 13.80 1,640 $ 20.38
Granted 865 9.18 472 14.25 2,105 16.80
Assumed in acquisitions -- -- -- -- 351 9.69
Exercised (9) 1.03 (84) 7.72 (116) 10.70
Canceled (286) 13.30 (385) 14.32 (1,896) 22.15
--------- --------- ---------
Outstanding at end of year 2,657 12.63 2,087 14.05 2,084 13.80
========= ========= =========
Exercisable at end of year 1,480 14.12 1,219 14.16 532 13.74
========= ========= =========
Weighted-average fair value of
options granted during the year 5.91 5.32 5.82
Shareholders authorized an additional 400,000, 450,000 and 400,000
shares to be granted under the plans during 2000, 1999 and 1998,
respectively.
| | 2003 | 2002 | 2001 | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Number of Shares | Weighted- average exercise price | Number of Shares | Weighted- average exercise price | Number of Shares | Weighted- average exercise price | ||||||||||||
| Outstanding at beginning of year | 2,410 | $ | 11.58 | 2,510 | $ | 12.22 | 2,657 | $ | 12.63 | |||||||||
| Granted | 243 | 5.85 | 254 | 5.80 | 267 | 7.35 | ||||||||||||
| Exercised | — | 5.88 | (12 | ) | 5.92 | (3 | ) | 5.17 | ||||||||||
| Cancelled | (309 | ) | 8.83 | (342 | ) | 12.17 | (411 | ) | 11.76 | |||||||||
| Outstanding at end of year | 2,344 | 11.33 | 2,410 | 11.58 | 2,510 | 12.22 | ||||||||||||
| Exercisable at end of year | 1,951 | 12.41 | 1,879 | 12.86 | 1,803 | 13.45 | ||||||||||||
| Weighted-average per share fair value of options granted during the year | $ | 2.48 | $ | 2.58 | $ | 1.92 | ||||||||||||
As of December 31, 2000,2003, options to purchase 509,000338,530 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
68
The following table summarizes information about fixed stock options outstanding as of December 31, 20002003 (options in thousands):
| | Options outstanding | | | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Options Exercisable | |||||||||||
| | | Weighted average remaining contractual life | | |||||||||
| Range of exercise prices | Number outstanding as of 12/31/03 | Weighted average exercise price | Number exercisable as of 12/31/03 | Weighted average exercise price | ||||||||
| $ 3.15 - $ 6.01 | 442 | 8.36 | $ | 5.64 | 149 | $ | 5.70 | |||||
| 6.03 - 10.69 | 439 | 7.02 | 8.43 | 339 | 8.80 | |||||||
| 11.00 - 13.25 | 447 | 3.57 | 12.26 | 447 | 12.26 | |||||||
| 13.38 - 13.56 | 669 | 4.64 | 13.56 | 669 | 13.56 | |||||||
| 13.57 - 32.88 | 347 | 3.87 | 16.76 | 347 | 16.76 | |||||||
| 3.15 - 32.88 | 2,344 | 5.47 | 11.33 | 1,951 | 12.41 | |||||||
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 2000,
19992003, 2002, and 1998:
2000 1999 1998
-------- -------- --------
Expected life (in years) 4.5 2.6 2.3
Risk-free interest rate 6.1% 6.3% 4.6%
Expected volatility 79% 52% 49%
Dividend yield -- -- --2001:
| | 2003 | 2002 | 2001 | ||||
|---|---|---|---|---|---|---|---|
| Expected life (in years) | 2.6 | 2.5 | 2.6 | ||||
| Risk-free interest rate | 1.5 | % | 1.4 | % | 3.0 | % | |
| Expected volatility | 69 | % | 75 | % | 37 | % | |
| Dividend yield | — | — | — |
Stock Purchase Plan - The Company has—We have an employee stock purchase plan whereby qualified employees are allowed to have up to 10% of their annual earningsgross pay withheld each pay period 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 84,000, 58,00030,031, 54,000, and 43,00063,000, were purchased under this plan in fiscal 2000, 19992003, 2002, and 1998, and as2001. During the period of December 31, 2000,
113,00024, 2002, through February 18, 2003, the Employee Stock purchase Plan was inadvertently oversubscribed in the amount of 10,373 shares, wereleaving no shares available for future issuance under this plan. 60
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(17)On February 27, 2003, our Board of Directors increased the number of shares available under this plan from 500,000 to 800,000 shares, and ratified all prior issuances of shares under the plan. As of December 31, 2003, there were 265,751 shares available for purchase under this plan.
(18) PREFERRED STOCK
Preferred Stock - Stock—Class A
The Company has
We 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 do not have voting rights or rights to receive dividends. Each Right entitles the
69
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'sE&S stock. The Rights may be redeemed by the CompanyE&S at a price of $0.01 per Right before November 30, 2008.
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 - Stock—Class B
The Company has
We 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, Intelwhich were subsequently converted the 901,408 shares of the
Company's preferred stock into 901,408 shares of the Company'sour common stock. In March 2001, Intel and 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 qualifying as a specific corporate event.
(18)2001.
(19) 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 2000, 19992003, 2002, and 19982001 excludes common stock issuable pursuant to outstanding stock options and 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 2.8 million, 2.8 million, and 2.9 million in 2003, 2002, and 2001, respectively.
70
(20) SEGMENT AND RELATED INFORMATION
The Company's business units have been aggregated into three
reportable segments: simulation, REALimage Solutions and
applications. These reportable segments offer different products and
services and are managed and evaluated separately because each
segment uses different technologies and requires different marketing
strategies. The simulation segment provides a broad line of visual
systems for flight and ground simulators for training purposes to
government, aerospace and commercial airline customers. The
REALimage Solutions segment provides graphics acceleration
technology to
During 2001, our operations included the professional digital content creation market. The
applications segment provides digital video applications for
entertainment, educational and multimedia industries.
The accounting policies of the segments are the same as those
described in the summary of significant accounting policies (Note
1). The Company evaluates segment performance based on income (loss)
from operations before income taxes, interest income and expense,
other income and expense and foreign exchange gains and losses. The
Company's assets are not identifiable by segment.
(21) 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):
| | 2003 | 2002 | 2001 | ||||||
|---|---|---|---|---|---|---|---|---|---|
| United States | $ | 39,580 | $ | 74,220 | $ | 95,734 | |||
| United Kingdom | 11,924 | 25,821 | 26,960 | ||||||
| Europe (excluding United Kingdom) | 15,681 | 10,287 | 10,479 | ||||||
| Pacific Rim | 14,655 | 8,889 | 9,069 | ||||||
| Other | 2,936 | 3,361 | 3,021 | ||||||
| Total Sales | $ | 84,776 | $ | 122,578 | $ | 145,263 | |||
The following table presents property, plant and equipment by geographic location based on the location of the assets (in thousands):
2000 1999
--------- ---------
United States $ 47,777 $ 51,715
Europe 888 469
--------- ---------
Total property, plant and equipment, net $ 48,665 $ 52,184
========= =========
(21)
| | 2003 | 2002 | ||||
|---|---|---|---|---|---|---|
| United States | $ | 23,332 | $ | 26,687 | ||
| Europe | 783 | 1,601 | ||||
| Total property, plant and equipment, net | $ | 24,115 | $ | 28,288 | ||
(22) SIGNIFICANT CUSTOMERS
Sales
In 2003, sales to the U.S. government either directlytotaled $15.2 million or indirectly through18% of total sales. We had no other individually significant customers in 2003 based on sales. However, we were dependent on five of our non-U.S. government customers for approximately 25% of our consolidated sales in 2003. In 2002, sales to prime contractors or subcontractors, accounted for $66.7the U.S. government totaled $35.4 million or 40%29% of total sales, $84.5 million or 42% of total sales,
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 $22.3 million or 13% of
total sales, $33.8 million or 17% of total sales and $32.1 million
or 17% of total sales in 2000, 1999 and 1998, respectively.
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("Thales") totaled $19.8 million or 12%16% 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") totaled $17.1 million or 14% of total sales. In 2001, sales to the U.S. government totaled $35.1 million or 24% of total sales, sales to Thales totaled $23.9 million or 16% of total sales, and sales to Boeing totaled $15.1 million of 10% of total sales.
As of December 31, 2003, aggregated accounts receivable from Boeing were $25.4$2.5 million or 12% of gross receivables. As of December 31, 2002, aggregated accounts receivable from CAE, Inc. were
71
$6.1 million or 28% of gross accounts receivable and from agencies of the U. S. government were $2.9 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 $9.3 million or 24% of gross accounts receivable
atreceivable.
As of December 31, 2000 and $7.2 million or 24% of gross accounts
receivable at December 31, 1999. Aggregated accounts receivable from2003, the UK MOD, either directly or indirectly through prime or
subcontractors, was $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. Aggregated accounts receivable from
the Federal Department of Defense of the Federal Republic of
Germany, either directly or indirectly through prime or
subcontractors, was $10.6 million or 27% of gross accounts
receivable at December 31, 2000 and $3.2 million or 11% of gross
accounts receivable at December 31, 1999.
The amount of costs and estimated earnings in excess of billings on uncompleted contracts from agenciesrelated to CAE Inc., Fedex Corporation and Indra Systemas S.A. was 30%, 23%, and 11% 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%total, respectively. As of total costs and estimated earnings in excess of billings on
uncompleted contracts, respectively at December 31, 2000. The2002, the amount of costs and estimated earnings in excess of billings on uncompleted contracts from agenciesrelated to CAE, the U.S. government, and Thales was 28%, 21%, and 14% 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)respectively.
(23) RESTRUCTURING CHARGECHARGES
In the third quarter of 1999, the Company2001, we initiated a restructuring plan focused on reducing the operating cost structure of its
REALimage Solutions Group.E&S. As part of the plan, the Companywe recorded a charge of $1.5$2.1 million relating to 28 employee terminations,
including 17a reduction in force of approximately 80 employees. In the fourth quarter of 2001, we extended the restructuring plan and recorded a charge of $0.7 million relating to a reduction in force of an additional 12 employees. As of December 31, 2001, we had paid $1.9 million in severance benefits related to these restructurings.
In the second quarter of 2002, we recorded an additional restructuring charge. As part of this restructuring, we recorded a charge of $1.9 million related to a reduction in force of approximately 90 employees. In the fourth quarter of 2002, we recorded another restructuring charge in order to create an operating cost structure in line with anticipated 2003 sales. As part of this restructuring, we recorded a charge of $2.6 million related to a reduction in force of approximately 140 employees. In 2002 we had a total reduction in force of approximately 230 employees resulting in San Joserecorded charges of $4.5 million, and 11paid $2.5 million in severance benefits.
In the first quarter of 2003, we restructured to reduce our operating costs in line with anticipated sales. As part of this restructuring, we recorded a charge of $1.3 million related to a reduction in force of approximately 50 full-time equivalent employees. In the third quarter of 2003, we restructured to reduce our operating costs to be in line with projected sales and expenses. As part of this restructuring, we recorded a restructuring charge of $2.1 million. This charge primarily related to a reduction in force of approximately 70 full-time equivalent employees. In 2003 we had a total reduction in force of approximately 120 full-time equivalent employees resulting in Salt Lake
City.recorded charges of $3.4 million, and paid approximately $3.8 million in severance benefits.
The charge was recorded in accordance with Emerging Issues
Task Force Issue 94-03, Liability Recognitionmajority of all remaining benefits will be paid out over 2004. The following table summarizes restructuring charges, severance benefits paid and the remaining restructuring accrual for Certain Employee
Termination Benefits2003, 2002, and Other Costs to Exit (Including Certain
Costs Incurred2001.
| | Balance at 12/31/02 | Restructure charges | Severance benefits paid | Balance at 12/31/03 | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Remaining 2001 accrual | $ | 89 | $ | — | $ | 49 | $ | 40 | ||||
| Remaining 2002 accrual | 1,943 | — | 1,614 | 329 | ||||||||
| 2003 Q1 restructuring provision | — | 1,279 | 1,078 | 201 | ||||||||
| 2003 Q3 restructuring provision | — | 2,137 | 1,096 | 1,041 | ||||||||
| $ | 2,032 | $ | 3,416 | $ | 3,837 | $ | 1,611 | |||||
72
(24) ASSETS HELD FOR SALE
In 2003 we sold one of the two office buildings we had classified as assets held for sale, resulting in a Restructuring).
During 2000, after all employee severance costs were incurred,$1.4 million gain. In 2002, we sold one of three office buildings we had classified as assets held for sale, resulting in a $1.2 million gain. At December 31, 2003, we owned one office building, with a book value of $2.5 million that is being held for sale. This building is no longer depreciated and is considered a current asset. We continue to market this property to prospective buyers.
In the Company reversed $0.8fourth quarter of 2001 E&S recognized $9.0 million ofupon the restructuring charge as a
resultsale of certain employeesof our key 3D-graphics patents, which were being transferred within the Company
rather than being terminated and estimated severance and related
charges being lower than expectedheld for the terminated employees.
(23) RELATED PARTY TRANSACTIONS
The Company had purchases of $0.4 million and $1.4 million during
1999 and 1998, respectively, from a supplier for which the Company's
Chief Executive Officer serves as a director.
64
73
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
"None"
FORM
ITEM 9A. CONTROLS AND PROCEDURES
As of the end of the fiscal quarter ended December 31, 2003, we carried out an evaluation, under the supervision and with the participation of the principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2003. Disclosure controls and procedures are controls and procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in our reports filed with the SEC is accumulated and communicated to management, including the chief executive officer and chief financial officer to allow timely decisions regarding required disclosure.
Based on this evaluation, and except as discussed in the following paragraphs, the principal executive officer and principal financial officer concluded that our disclosure controls and procedures are effective in timely alerting them to material information required to be included in our periodic SEC reports. To enhance our disclosure control procedures, we added a Disclosure Review Board to our process. This requires every executive, senior staff, and our legal counsel to participate in the planning, scheduling, drafting, and/or review process and to notify the Company's chief financial officer of their completion of their associated tasks. It should be noted that the design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.
Evaluation of our internal controls and procedures related to the restatement. Our evaluation of our internal controls and procedures included an in depth review of all aspects of the matter of certain material weaknesses we identified in the internal controls and procedures of our wholly-owned subsidiary, Evans & Sutherland Computer Limited ("E&S Ltd.") as more fully disclosed in Note 3 of the Notes to Consolidated Financial Statements included as part of this Form 10-K, and an in depth review of all aspects of the matter by the Audit Committee, the results of which are described below.
Management and the Audit Committee took a leadership role in assessing the underlying issues giving rise to the restatement and in ensuring proper steps were taken to improve our internal control environment. Based on all information gathered during our in depth review of all aspects of the matter, we cannot conclude that there was misconduct or intentional use of improper accounting practices to manipulate earnings or any fraud or intentional misconduct on the part of our officers or employees. The Audit Committee, however, also concluded that our accounting, financial reporting and internal control functions needed improvement, including our system of documenting transactions. The Audit Committee determined that our management has proactively identified a number of these issues and has appropriately taken steps to address them.
Actions taken in response to our evaluation. As a result of our findings described above, during the first quarter of 2004, we began implementing the following improvements to our internal control procedures and our disclosure controls and procedures to address the issues we identified in our evaluation of the these controls and procedures and those of our subsidiary, E&S Ltd.:
74
We believe that our internal controls and procedures and our disclosure controls and procedures have now been improved due to the scrutiny of such controls and procedures by management and the Audit Committee. We believe our internal controls and procedures and our disclosure controls and procedures will continue to improve as we complete the implementation of the actions described above.
Based in part upon these changes, our CEO and CFO believe that as of the filing date of this Annual Report on Form 10-K, our disclosure controls and procedures are reasonably designed to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC.
Other than as described above, there have been no significant changes in our internal controls and procedures identified in our in depth review of those accounting practices and errors giving rise to our restatement that have materially affected, or are reasonably likely to materially affect, our internal controls and procedures subsequent to the date of our evaluation.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding our directors of the Company is incorporated by reference from "Election of Directors" section in the Proxy Statement to be delivered to shareholders in connection with the 20012004 Annual Meeting of Shareholders to be held on May 24, 2001.18, 2004.
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" section in the Proxy Statement to be delivered to shareholders in connection with the 20012004 Annual Meeting of Shareholders to be held on May 24, 2001.18, 2004.
Information concerning our current executive officers of the Company is incorporated by reference to the section in Part I hereof found under the the caption "Executive Officers of the Registrant."
All other information regarding directors and officers is herein incorporated by reference from the Proxy Statement to be delivered to shareholders in connection with the 2004 Annual Meeting of Shareholders to be held on May 18, 2004.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding this item is incorporated by reference from "Executive Compensation" section in the Proxy Statement to be delivered to shareholders in connection with the 20012004 Annual Meeting of Shareholders to be held on May 24,
2001.
18, 2004.
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" section in the Proxy Statement to be delivered to shareholders in connection with the 20012004 Annual Meeting of Shareholders to be held on May 24, 2001.
18, 2004.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding this item is incorporated by reference from the "Election of Directors" and "Executive Compensation - Summary Compensation Table," "Report of the
Compensation and Stock Options Committee of the Board of Directors," and
"Termination of Employment and Change of Control Arrangements,"Compensation" sections in the Proxy Statement to be delivered to shareholders in connection with the 20012004 Annual Meeting of Shareholders to be held on May 24, 2001.
65
FORM 10-K
18, 2004.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information regarding this item is incorporated by reference from "Report of the Audit Committee of the Board of Directors" section in the Proxy Statement to be delivered to shareholders in connection with the 2004 Annual Meeting of Shareholders to be held on May 18, 2004.
76
ITEM 14.15. 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:
Consolidated Balance Sheets as of December 31, 20002003 and 1999
2002
Consolidated Statements of Operations for each of the years in the three-year period ended December 31, 2000
2003
Consolidated Statements of Comprehensive Loss for each of the years in the three-year period ended December 31, 2000
2003
Consolidated Statements of Stockholders' Equity for each of the years in the three-year period ended December 31, 2000
2003
Consolidated Statements of Cash Flows for each of the years in the three-year period ended December 31, 2000
2003
Notes to Consolidated Financial Statements for each of the years in the three-year period ended December 31, 2000
2003
Schedule II - II—Valuation and Qualifying Accounts
Schedules other than those listed above are omitted because of the absence of conditions under which they are required or because the required information is presented in the financial statements or notes thereto.
On October 16, 2003, the Company E&S Merger Corp., and AccelGraphics,
Inc., filed as Annex Ifurnished to the Company's Registration
StatementSEC a Current Report pursuant to Item 9 of Form 8-K, "Regulation FD Disclosure." In the Report, the Company disclosed its announcement by press release on Form S-4, SEC File No. 333-51041, and
incorporated herein by this reference.
3.1 Articlesthe same date of Incorporation, as amended, filed as Exhibit
3.1 to the Company's Annual Report on Form 10-K, SEC
File No. 000-08771,financial results for the fiscal yearthree and nine months ended September 26, 2003. The Company included in the Report unaudited Summary Statements of Consolidated Operations for the three and nine months ended September 26, 2003, Condensed Consolidated Balance Sheets dated September 26, 2003, and December 25, 1987,31, 2002, and incorporated herein by this reference.
3.1.1 Amendments to Articles of Incorporation filed as Exhibit
3.1.1 to the Company'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, filed
as Exhibit 3.1 to the Company's Form 10-Q for the
quarter ended September 25, 1998, and incorporated
herein by this reference.
3.2 Amended and Restated Bylaws of Evans & Sutherland
Computer Corporation, filed herein.
3.3 Amendment No. 1 to the Amended and Restated Bylaws of
Evans & Sutherland Computer Corporation, filed herein.
4.1 Form of Rights Agreement, datedbacklog as of November 19, 1998,
between Evans & Sutherland Computer CorporationSeptember 26, 2003, 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'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's Form 10-Q for the quarter
ended June 30, 2000, and incorporated herein by this
reference.
*10.1 1985 Stock Option Plan, filed as Exhibit 1 to the
Company'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 1989 Stock Option Plan for Non-employee Directors, filed
as Exhibit 10.5 to the Company's Annual Report on Form
10-K, SEC File No. 000-08771, for the fiscal year ended
December 29, 1989, and incorporated herein by this
reference.
*10.3 The Company's 1991 Employee Stock Purchase Plan, filed
as Exhibit 4.1 to the Company's Registration Statement
on Form S-8, SEC File No. 33-39632, and incorporated
herein by this reference.
*10.4 1998 Stock Option Plan, filed as Appendix A to the
Company's Definitive Proxy Statement filed April 20,
1998, incorporated herein by this reference.
*10.5 The Company's 1995 Long-Term Incentive Equity Plan,
filed as Exhibit 10.11 to the Company'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 Executive Savings Plan, filed as Exhibit
10.14 to the Company'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 Supplemental Executive Retirement Plan
(SERP), filed as Exhibit 10.15 to the Company'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'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'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 Company and Intel
Corporation, filed as Exhibit 4.2 to the Company'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 Company and Intel
Corporation, filed as Exhibit 4.3 to the Company'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'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'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'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'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'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'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's Form 10-Q for the quarter ended March 31,
2000, and incorporated herein by this reference.
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'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'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'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'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'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's Form 10-Q for the quarter ended June
30, 2000, and incorporated herein by this reference.
*10.26 Employment agreement between Evans & Sutherland Computer
Corporation and James R. Oyler, dated May 16, 2000,
filed as Exhibit 10.6 to the Company's Form 10-Q for the
quarter ended June 30, 2000, and incorporated herein by
this reference.
*10.27 Employment agreement between Evans & Sutherland Computer
Corporation and Richard J. Gaynor, dated May 16, 2000,
filed as Exhibit 10.7 to the Company's Form 10-Q for the
quarter ended June 30, 2000, and incorporated herein by
this reference.
*10.28 Employment agreement between Evans & Sutherland Computer
Corporation and David B. Figgins, dated May 16, 2000,
filed as Exhibit 10.8 to the Company's Form 10-Q for the
quarter ended June 30, 2000, and incorporated herein by
this reference.
*10.29 Employment agreement between Evans & Sutherland Computer
Corporation and George K. Saul, dated May 16, 2000,
filed as Exhibit 10.9 to the Company's Form 10-Q for the
quarter ended June 30, 2000, and incorporated herein by
this reference.
*10.30 Employment agreement between Evans & Sutherland Computer
Corporation and Robert H. Ard, dated May 16, 2000, filed
as Exhibit 10.10 to the Company's Form 10-Q for the
quarter ended June 30, 2000, and incorporated herein by
this reference.
*10.31 Employment agreement between Evans & Sutherland Computer
Corporation and Thomas Atchison, dated July 25, 2000,
filed as Exhibit 10.11 to the Company'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's Form 10-Q for
the quarter ended June 30, 2000, and incorporation
herein by this reference.
*10.33 Amendment to employment agreement between Evans &
Sutherland Computer Corporation and James R. Oyler,
dated September 22, 2000, filed as Exhibit 10.1 to the
Company's Form 10-Q for the quarter ended September 29,
2000, and incorporated herein by this reference.
*10.34 Amendment to employment agreement between Evans &
Sutherland Computer Corporation and Richard J. Gaynor,
dated September 22, 2000, filed as Exhibit 10.2 to the
Company's Form 10-Q for the quarter ended September 29,
2000, and incorporated herein by this reference.
69
*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's Form 10-Q for the quarter ended September 29,
2000, and incorporated herein by this reference.
*10.36 Amendment to employment agreement between Evans &
Sutherland Computer Corporation and George K. Saul,
dated September 22, 2000, filed as Exhibit 10.4 to the
Company's Form 10-Q for the quarter ended September 29,
2000, and incorporated herein by this reference.
*10.37 Amendment to employment agreement between Evans &
Sutherland Computer Corporation and Robert H. Ard, dated
September 22, 2000, filed as Exhibit 10.5 to the
Company's Form 10-Q for the quarter ended September 29,
2000, and incorporated herein by this reference.
*10.38 Amendment to employment agreement between Evans &
Sutherland Computer Corporation and Thomas Atchison,
dated September 22, 2000, filed as Exhibit 10.6 to the
Company's Form 10-Q for the quarter ended September 29,
2000, and incorporated herein by this reference.
*10.39 Employment agreement between Evans & Sutherland Computer
Corporation and Nicholas J. Iuanow, dated September 22,
2000, filed as Exhibit 10.7 to the Company's Form 10-Q
for the quarter ended September 29, 2000, and
incorporated herein by this reference.
*10.40 Employment agreement between Evans & Sutherland Computer
Corporation and William M. Thomas, dated December 22,
2000, filed herein.
10.41 Loan and Security Agreement by and between Evans &
Sutherland Computer Corporation and Foothill Capital
Corporation, dated December 14, 2000, filed herein.
10.42 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.
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
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.
10.45 Absolute Assignment of Sub-Leases and Rent by Evans &
Sutherland Computer Corporation, dated December 14,
2001, filed herein.
10.46 Absolute Assignment of Sub-Leases and Rent by Evans &
Sutherland Computer Corporation, dated December 14,
2001, filed herein.
10.47 Absolute Assignment of Sub-Leases and Rent by Evans &
Sutherland Computer Corporation, dated December 14,
2001, filed herein.
10.48 Pledge and Security Agreement between Evans & Sutherland
Computer Corporation and Foothill Capital Corporation,
dated December 14, 2001, filed herein.
10.49 Intellectual Property Security Agreement between Evans &
Sutherland Computer Corporation and Foothill Capital
Corporation, dated December 14, 2001, filed herein.
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 herein.
70
21.1 Subsidiaries of Registrant, filed herein.
23.1 Consent of Independent Accountants, filed herein.
24.1 Powers of Attorney for Messrs. Stewart Carrell, James R.
Oyler, William M. Thomas, Gerald S. Casilli, Peter O.
Crisp and Ivan E. Sutherland, filed herein.
2002.
| 2.1 | Agreement and Plan of Merger, dated April 22, 1998, among Evans & Sutherland Computer Corporation, E&S Merger Corp., and AccelGraphics, Inc., filed as Annex I to Evans & Sutherland Computer Corporation's Registration Statement on Form S-4, SEC File No. 333-51041, and incorporated herein by this reference. | |
3.1 | Articles of Incorporation, as amended, filed as Exhibit 3.1 to Evans & 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 Evans & 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. | |
77
3.1.2 | Certificate of Designation, Preferences and Other Rights of the Class B-1 Preferred Stock of Evans & Sutherland Computer Corporation, filed as Exhibit 3.1 to Evans & Sutherland Computer Corporation's Form 10-Q, SEC File No. 000-08771, for the quarter ended September 25, 1998, and incorporated herein by this reference. | |
3.2 | Amended and Restated Bylaws of Evans & Sutherland Computer Corporation, filed as Exhibit 3.2 to Evans & Sutherland Computer Corporation's Form 10-K for the year ended December 31, 2000, and incorporated herein by this reference. | |
3.3 | Amendment No. 1 to the Amended and Restated Bylaws of Evans & Sutherland Computer Corporation, filed as Exhibit 3.3 to Evans & Sutherland Computer Corporation's Form 10-K for the year ended December 31, 2000, and incorporated herein by this reference. | |
4.1 | Form of Rights Agreement, dated as of November 19, 1998, between Evans & Sutherland Computer Corporation and American Stock Transfer Trust Company which includes as Exhibit A, the form of Certificate of Designation for the Rights, as Exhibit B, the form of Rights Certificate and as Exhibit C, a Summary of Rights, filed as Exhibit 1 to Evans & Sutherland Computer Corporation's Registration Statement on Form 8-A filed December 8, 1998, and incorporated herein by this reference. | |
4.2 | First Amendment to Rights Agreement dated as of June 7, 2000 between Evans & Sutherland Computer Corporation and American Stock Transfer & Trust Company, filed as Exhibit 10.14 to Evans & Sutherland Computer Corporation's Form 10-Q for the quarter ended June 30, 2000, and incorporated herein by this reference. | |
*10.1 | 1985 Stock Option Plan, as amended, filed as Exhibit 1 to Evans & 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 | 1989 Stock Option Plan for Non-employee Directors, filed as Exhibit 10.5 to Evans & 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 | 1991 Employee Stock Purchase Plan of Evans & Sutherland Computer Corporation, as amended as of February 21, 2001, filed as exhibit 4.1 to Evans & 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 | Evans & Sutherland Computer Corporation 1998 Stock Option Plan, as amended as through May 17, 2000, filed as exhibit 4.1 to Evans & Sutherland Computer Corporation's Post Effective Amendment No. 1 to Registration Statement on Form S-8, SEC File No. 333-58733, and incorporated herein by this reference. | |
*10.5 | Evans & Sutherland Computer Corporation's 1995 Long-Term Incentive Equity Plan, filed as Exhibit 10.11 to Evans & Sutherland Computer Corporation's Annual Report on Form 10-K, SEC File No. 000-08771, for the fiscal year ended December 29, 1995, and incorporated herein by this reference. | |
10.6 | Series B Preferred Stock and Warrant Purchase Agreement dated as of July 20, 1998, between Evans & Sutherland Computer Corporation and Intel Corporation, filed as Exhibit 4.2 to Evans & Sutherland Computer Corporation's Form 10-Q, SEC File No. 000-08771, for the quarter ended September 25, 1998, and incorporated herein by this reference. | |
78
10.7 | Warrant to Purchase Series B Preferred Stock dated as of July 22, 1998, between Evans & Sutherland Computer Corporation and Intel Corporation, filed as Exhibit 4.3 to Evans & Sutherland Computer Corporation's Form 10-Q, SEC File No. 000-08771, for the quarter ended September 25, 1998, and incorporated herein by this reference. | |
*10.8 | Employment agreement between Evans & Sutherland Computer Corporation and James R. Oyler, dated May 16, 2000, filed as Exhibit 10.6 to Evans & Sutherland Computer Corporation's Form 10-Q for the quarter ended June 30, 2000, and incorporated herein by this reference. | |
10.9 | Overdraft Facility dated June 15, 2000 between Evans & Sutherland Computer Limited and Lloyds TSB Bank plc, filed as Exhibit 10.12 to Evans & Sutherland Computer Corporation's Form 10-Q for the quarter ended June 30, 2000, and incorporated herein by this reference. | |
*10.10 | Amendment to employment agreement between Evans & Sutherland Computer Corporation and James R. Oyler, dated September 22, 2000, filed as Exhibit 10.1 to Evans & Sutherland Computer Corporation's Form 10-Q for the quarter ended September 29, 2000, and incorporated herein by this reference. | |
10.11 | Loan and Security Agreement by and between Evans & Sutherland Computer Corporation and Foothill Capital Corporation, dated December 14, 2000, filed as Exhibit 10.41 to Evans & Sutherland Computer Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 2000, and incorporated herein by this reference. | |
10.12 | 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, 2000, 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. | |
10.13 | 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, 2000, 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. | |
10.14 | 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, 2000, filed as Exhibit 10.44 to Evans & Sutherland Computer Corporation's Form 10-K for the year ended December 31, 2000, and incorporated herein by this reference. | |
10.15 | Absolute Assignment of Sub-Leases and Rent by Evans & Sutherland Computer Corporation, dated December 14, 2000, filed as Exhibit 10.45 to Evans & Sutherland Computer Corporation's Form 10-K for the year ended December 31, 2000, and incorporated herein by this reference. | |
10.16 | Absolute Assignment of Sub-Leases and Rent by Evans & Sutherland Computer Corporation, dated December 14, 2000, filed as Exhibit 10.46 to Evans & Sutherland Computer Corporation's Form 10-K for the year ended December 31, 2000, and incorporated herein by this reference. | |
10.17 | Absolute Assignment of Sub-Leases and Rent by Evans & Sutherland Computer Corporation, dated December 14, 2000, filed as Exhibit 10.47 to Evans & Sutherland Computer Corporation's Form 10-K for the year ended December 31, 2000, and incorporated herein by this reference. | |
79
10.18 | Pledge and Security Agreement between Evans & Sutherland Computer Corporation and Foothill Capital Corporation, dated December 14, 2000, filed as Exhibit 10.48 to Evans & Sutherland Computer Corporation's Form 10-K for the year ended December 31, 2000, and incorporated herein by this reference. | |
10.19 | Intellectual Property Security Agreement between Evans & Sutherland Computer Corporation and Foothill Capital Corporation, dated December 14, 2000, filed as Exhibit 10.49 to Evans & Sutherland Computer Corporation's Form 10-K for the year ended December 31, 2000, and incorporated herein by this reference. | |
10.20 | 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. | |
10.21 | 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. | |
10.22 | 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. | |
10.23 | 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. | |
10.24 | 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 as Exhibit 10.56 to Evans & Sutherland Computer Corporation's Form 10-K for the year ended December 31, 2001, and incorporated herein by reference. | |
10.25 | Patent Purchase and License Agreement between Nvidia International Inc., Evans & Sutherland Computer Corporation, and Evans & Sutherland Graphics Corporation, dated October 15, 2001, filed as Exhibit 10.57 to Evans & Sutherland Computer Corporation's Form 10-K for the year ended December 31, 2001, and incorporated herein by this reference. | |
10.26 | Patent Cross License Agreement between Nvidia Corporation and Evans & Sutherland Computer Corporation, dated October 15, 2001, filed as Exhibit 10.58 to Evans & Sutherland Computer Corporation's Form 10-K for the year ended December 31, 2001, and incorporated herein by this reference. Certain information in this exhibit was 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. | |
10.27 | Amendment Number Two to Loan and Security Agreement and Waiver by and between Foothill Capital Corporation and Evans & Sutherland Computer Corporation, dated August 14, 2002, filed as Exhibit 10.30 to Evans & Sutherland Computer Corporation's Form 10-K for the year ended December 31, 2002, and incorporated herein by reference. | |
10.28 | Amendment Number Three to Loan and Security Agreement and Waiver by and between Foothill Capital Corporation and Evans & Sutherland Computer Corporation, dated December 11, 2002, filed as Exhibit 10.31 to Evans & Sutherland Computer Corporation's Form 10-K for the year ended December 31, 2002, and incorporated herein by reference. | |
80
10.29 | Amendment Number Four to Loan and Security Agreement and Waiver by and between Foothill Capital Corporation and Evans & Sutherland Computer Corporation, dated January 8, 2003, filed as Exhibit 10.32 to Evans & Sutherland Computer Corporation's Form 10-K for the year ended December 31, 2002, and incorporated herein by reference. | |
10.30 | Foothill Limited Waiver of Certain Financial Covenants for the second quarter 2002 by and between Foothill Capital Corporation and Evans & Sutherland Computer Corporation, dated July 24, 2003, filed as Exhibit 10.33 to Evans & Sutherland Computer Corporation's Form 10-K for the year ended December 31, 2002, and incorporated herein by reference. | |
10.31 | Overdraft Facility Continuation agreement between Evans & Sutherland Computer Limited and Lloyds TSB Bank plc, dated February 18, 2003, filed as Exhibit 10.34 to Evans & Sutherland Computer Corporation's Form 10-K for the year ended December 31, 2002, and incorporated herein by reference. | |
*10.32 | Employment agreement between Evans & Sutherland Computer Corporation and L. Eugene Frazier, dated August 26, 2002, filed as Exhibit 10.35 to Evans & Sutherland Computer Corporation's Form 10-K for the year ended December 31, 2002, and incorporated herein by reference. | |
*10.33 | Amended and restated employment agreement between Evans & Sutherland Computer Corporation and David B. Figgins, dated August 26, 2002, filed as Exhibit 10.37 to Evans & Sutherland Computer Corporation's Form 10-K for the year ended December 31, 2002, and incorporated herein by reference. | |
*10.34 | Amended and restated Evans & Sutherland Computer Corporation's Supplemental Executive Retirement Plan (SERP), dated May 16, 2002, filed as Exhibit 10.38 to Evans & Sutherland Computer Corporation's Form 10-K for the year ended December 31, 2002, and incorporated herein by reference. | |
*10.35 | Amended and restated Evans & Sutherland Computer Corporation's Executive Savings Plan, dated May 16, 2002, filed as Exhibit 10.39 to Evans & Sutherland Computer Corporation's Form 10-K for the year ended December 31, 2002, and incorporated herein by reference. | |
10.36 | Consent and Subordination Agreement by Foothill Capital Corporation, dated December 14, 2002, filed as Exhibit 10.40 to Evans & Sutherland Computer Corporation's Form 10-K for the year ended December 31, 2002, and incorporated herein by reference. | |
*10.37 | Amended and restated employment agreement between Evans & Sutherland Computer Corporation and E. Thomas Atchison, dated July 1, 2003, filed as Exhibit 10.1 to Evans & Sutherland Computer Corporation's Form 10-Q for the quarter ended September 26, 2003, and incorporated herein by reference. | |
10.38 | Amendment Number Five to Loan and Security Agreement and Waiver by and between Foothill Capital Corporation and Evans & Sutherland Computer Corporation, dated July 16, 2003, filed as Exhibit 10.2 to Evans & Sutherland Computer Corporation's Form 10-Q for the quarter ended September 26, 2003, and incorporated herein by reference. | |
10.39 | Amendment Number Six to Loan and Security Agreement and Waiver by and between Foothill Capital Corporation and Evans & Sutherland Computer Corporation, dated July 25, 2003, filed as Exhibit 10.3 to Evans & Sutherland Computer Corporation's Form 10-Q for the quarter ended September 26, 2003, and incorporated herein by reference. | |
21.1 | Subsidiaries of Registrant, filed herein. | |
23.1 | Consent of Independent Auditors, filed herein. | |
81
24.1 | Powers of Attorney for Messrs. James R. Oyler, E. Thomas Atchison, Gerald S. Casilli, Wolf-Dieter Hass, David J. Coghlan, and William Schneider, filed herein. | |
31.1 | Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended, filed herein. | |
31.2 | Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended, filed herein. | |
32 | Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herein. |
82
Trademarks Used in this 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,Harmony, ESIG, Harmony,ESCP, Integrator, simFUSION, EPX, EP, Environment Processor, RenderBeast, TargetView, VistaView, MCT, RAPIDsite, REALimage, simFUSION, StarRider,
SymphonyEncore, and VanguardDigistar 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.
71
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
Years ended December 31, 2000, 19992003, 2002 and 1998
(in2001
(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
------------ ------------ ------------ ------------ ------------
Allowance for doubtful receivables
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, 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, 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
72
| | Balance at beginning of year | Additions charged (reversed) to cost and expenses | Deductions charged (recovered) against provision | Balance at end of year | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Allowance for doubtful receivables | ||||||||||||
| December 31, 2003 | $ | 856 | $ | 68 | $ | 573 | $ | 351 | ||||
| December 31, 2002 | 6,413 | (734 | ) | 4,823 | 856 | |||||||
| December 31, 2001 | 4,411 | 2,358 | 356 | 6,413 | ||||||||
Inventory reserves | ||||||||||||
| December 31, 2003 | $ | 9,111 | $ | 16,065 | $ | 2,231 | $ | 22,945 | ||||
| December 31, 2002 | 7,185 | 3,194 | 1,268 | 9,111 | ||||||||
| December 31, 2001 | 9,894 | 943 | 3,652 | 7,185 | ||||||||
Warranty reserves | ||||||||||||
| December 31, 2003 | $ | 968 | $ | 2,274 | $ | 1,952 | $ | 1,290 | ||||
| December 31, 2002 | 1,966 | 617 | 1,615 | 968 | ||||||||
| December 31, 2001 | 1,447 | 2,197 | 1,678 | 1,966 | ||||||||
Accrued liquidated damages and penalties | ||||||||||||
| December 31, 2003 | $ | 1,050 | $ | 1,850 | $ | 1,166 | $ | 1,734 | ||||
| December 31, 2002 | 1,500 | 150 | 600 | 1,050 | ||||||||
| December 31, 2001 | 3,091 | 1,500 | 3,091 | 1,500 | ||||||||
84
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
----------------------------------
JAMES R. OYLER, PRESIDENT
EVANS & SUTHERLAND COMPUTER CORPORATION | ||||
March 17, 2004 | 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
- -------------------------
IVAN E. SUTHERLAND
By: /S/ William M. Thomas March 30, 2001
----------------------------------
WILLIAM M. THOMAS
*Attorney-in-Fact
73
| /s/ JAMES R. OYLER James R. Oyler | Director, Chief Executive Officer and President (Principal Executive Officer) | March 17, 2004 | |||
/s/ E. THOMAS ATCHISON E. Thomas Atchison | Vice President, Chief Financial Officer, Corporate Secretary (Principal Financial and Accounting Officer) | March 17, 2004 | |||
* Gerald S. Casilli | Director | March 17, 2004 | |||
* Wolf-Dieter Hass | Director | March 17, 2004 | |||
* David J. Coghlan | Director | March 17, 2004 | |||
* William Schneider, Jr. | Director | March 17, 2004 | |||
By: | /s/ E. THOMAS ATCHISON E. Thomas Atchison *Attorney-in-Fact | March 17, 2004 | |||