Back to GetFilings.com
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
For 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
------------
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
Preferred Stock Purchase Rights
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ______
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [ ]
The aggregate market value of the voting and non-voting Common Stock
held by non-affiliates of the registrant as of March 2, 2001 was approximately
$23,640,000, based on the closing market price of the Common Stock on such date,
as reported by The Nasdaq Stock Market.
The number of shares of the registrant's Common Stock outstanding at
March 2, 2001 was 9,434,537.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 2001 Annual Meeting of
Shareholders to be held on May 24, 2001 are incorporated by reference into Part
III hereof.
[THIS SPACE INTENTIONALLY LEFT BLANK]
2
EVANS & SUTHERLAND COMPUTER CORPORATION
FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2000
PART I
Item 1. Business...............................................................................5
Item 2. Properties............................................................................13
Item 3. Legal Proceedings.....................................................................13
Item 4. Submission of Matters to a Vote of Security Holders...................................14
PART II
Item 5. Market For Registrant's Common Equity and
Related Stockholder Matters..........................................................16
Item 6. Selected Consolidated Financial Data..................................................17
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................................19
Item 7A. Quantitative and Qualitative Disclosures About Market Risk............................34
Item 8. Financial Statements and Supplementary Data...........................................35
Report of Management................................................................36
Report of Independent Accountants...................................................36
Consolidated Balance Sheets.........................................................37
Consolidated Statements of Operations...............................................38
Consolidated Statements of Comprehensive Loss.......................................39
Consolidated Statements of Stockholders' Equity.....................................40
Consolidated Statements of Cash Flows...............................................41
Notes to Consolidated Financial Statements..........................................42
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure...............................................65
PART III
Item 10. Directors and Executive Officers of the Registrant...................................65
Item 11. Executive Compensation...............................................................65
Item 12. Security Ownership of Certain Beneficial Owners and Management.......................65
Item 13. Certain Relationships and Related Transactions.......................................65
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.....................66
Signatures .....................................................................................73
3
[THIS SPACE INTENTIONALLY LEFT BLANK]
4
FORM 10-K
PART I
ITEM 1. BUSINESS
GENERAL
Evans & Sutherland Computer Corporation ("Evans & Sutherland,"
"E&S(R)," or the "Company") was incorporated in the State 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 headquarters are located at 600 Komas Drive, Salt
Lake City, Utah 84108, and its telephone number is (801) 588-1000. The Company's
web page on the worldwide web is http://www.es.com.
RECENT DEVELOPMENTS
On July 22, 1998, Intel Corporation ("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.
FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS
This annual report, including all documents incorporated herein by
reference, includes certain "forward-looking statements" within the meaning of
that term in Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Exchange Act of 1934, as amended, including, among others, those
statements preceded by, followed by or including the words "estimates,"
"believes," "expects," "anticipates," "plans," "projects," and similar
expressions.
These forward-looking statements include 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 under Item 7 - Management's
Discussion and Analysis of Financial Condition and Results of Operations in Part
II of this annual report, important factors to consider in evaluating such
forward-looking statements include risk of product demand, market acceptance,
economic conditions, competitive products and pricing, difficulties in product
development, product delays and failure to meet certain milestones or delivery
requirements. In light of these risks and uncertainties, there can be no
assurance that the events contemplated by the forward-looking statements
contained in this annual report will, in fact, occur.
REPORTABLE SEGMENTS
The Company's business units have been aggregated into the following
three reportable segments: the Simulation Group, the REALimage Solutions Group,
and the Applications Group. The three groups benefit from shared core graphics
technology, and each group's new products are based on open Intel and Microsoft
hardware and software standards. Each reportable segment markets its products to
a worldwide customer base. 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 in 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
ITEM 2. PROPERTIES
Evans & Sutherland's principal executive, engineering, manufacturing
and operations facilities for each of its business segments are located in the
University of Utah Research Park, in Salt Lake City, Utah, where it owns seven
buildings totaling approximately 450,000 square feet. E&S occupies five
buildings and leases the remaining two buildings to other businesses, which are
located on land leased from the University of Utah 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. All of the Company's
interests in the U of U Property are subject to a lien by Foothill Capital
Corporation to secure repayment of the borrowing facility as set forth in the
Liquidity and Capital Resources section of the Management's Discussion and
Analysis of Financial Condition and Results of Operations. The Company and its
subsidiaries hold leases on several sales, operations, service and production
facilities located throughout the United States, Europe and Asia, none of which
is material to the Company's manufacturing, engineering or operating facilities.
E&S believes that these properties are suitable for its immediate needs and it
does not currently plan to expand its facilities or relocate.
ITEM 3. LEGAL PROCEEDINGS
On May 23, 2000, Lockheed Martin Corporation (the "Plaintiff")
served the Company with 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 from the Company by the Plaintiff was paid to 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
Division 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 dismissal 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.
In the normal course of business, the Company 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 believes the ultimate disposition of these
matters will not have a material adverse effect on the Company's consolidated
financial condition, liquidity or results of operations.
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.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following sets forth certain information regarding the executive
officers of the Company as of March 30, 2001:
Name Age Position
- ------------------- ------- ------------------------------------------------
Stewart Carrell 67 Chairman of the Board of Directors
James R. Oyler 55 President and Chief Executive Officer
Robert H. Ard 47 Vice President - Applications Group
David B. Figgins 52 Vice 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 Company and
a member of the Board of Directors in December 1994. He is also a director of
Ikos Systems, Inc. Previously, Mr. Oyler served as President of AMG, Inc. from
mid-1990 through December 1994 and as Senior Vice President of Harris
Corporation from 1976 through mid-1990. He has six years of service with the
Company.
Mr. Ard was appointed Vice President of the Applications Group in May 1999. He
joined the Company in June 1998 as Vice President and General Manager.
Previously, he was President of Model Technology, Inc. where he was employed
from July 1996 to May 1998. From June 1989 to July 1996, Mr. Ard was employed by
Mentor Graphics 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 Administration in October 1998. From January 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 two years of service with the Company.
Mr. Thomas was appointed 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 year of service
with the Company.
15
FORM 10-K
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
PRICE RANGE OF COMMON STOCK
The Company's common stock trades on The Nasdaq Stock Market under
the symbol "ESCC." The following table sets forth the range of the high and low
sales prices per share of the Company's common stock for the fiscal quarters
indicated, as reported by The Nasdaq Stock Market. Quotations represent actual
transactions in Nasdaq's quotation system but do not include retail markup,
markdown or commission.
HIGH LOW
-------------------- --------------------
2000
----
First Quarter $ 13 1/2 $ 10 1/16
Second Quarter $ 11 3/8 $ 6 1/4
Third Quarter $ 7 1/4 $ 5 3/8
Fourth Quarter $ 7 3/4 $ 5 1/8
1999
----
First Quarter $ 18 3/16 $ 12
Second Quarter $ 19 $ 12 3/8
Third Quarter $ 15 $ 12 1/16
Fourth Quarter $ 14 1/8 $ 10 7/16
APPROXIMATE NUMBER OF EQUITY SECURITY HOLDERS
On March 2, 2001, there were 701 shareholders of record of the
Company's common stock. Because brokers and other institutions hold many of the
Company's shares on behalf of shareholders, the Company is unable to estimate
the total number of shareholders represented by these record holders.
DIVIDENDS
Evans & Sutherland has never paid a cash dividend on its common
stock, retaining its earnings for the operation and expansion of its business.
The Company intends for the foreseeable future to continue the policy of
retaining its earnings to finance the development and growth of its business.
The payment of dividends is restricted under the terms of the Company's credit
facilities. See "Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources."
16
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's Consolidated Financial Statements. The
selected financial data should be read in conjunction with the Company's
Consolidated Financial Statements and related notes included elsewhere in this
annual report. See also "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
(In thousands, except per share amounts)
2000 1999(1) 1998(2) 1997 1996
--------- --------- --------- --------- ---------
FOR THE YEAR
Sales ............................... $ 166,980 $ 200,885 $ 191,766 $ 159,353 $ 130,564
Net income (loss) before accretion of
preferred stock ..................... (69,570) (23,454) (15,983) 5,080 10,352
Net income (loss) per common share:
Basic ......................... (7.45) (2.49) (1.70) 0.56 1.16
Diluted ....................... (7.45) (2.49) (1.70) 0.53 1.12
Average weighted number of common
shares outstanding
Basic ......................... 9,372 9,501 9,461 9,060 8,944
Diluted ....................... 9,372 9,501 9,461 9,502 9,222
AT END OF YEAR
Total assets ........................ $ 216,078 $ 258,464 $ 275,668 $ 234,390 $ 210,891
Long-term debt, less current portion 25,563 18,015 18,062 18,015 18,015
Redeemable preferred stock .......... 24,000 23,772 23,544 -- --
Stockholders' equity ................ 67,634 137,194 165,083 165,634 160,472
- ----------
(1) During 1999, the Company incurred a write-off of inventories of
$13.2 million, an impairment loss of $9.7 million and a
restructuring charge of $1.5 million. See notes 1, 4 and 22 of the
Notes to Consolidated Financial Statements included in Part II of
this annual report.
(2) 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 2 of the
Notes to Consolidated Financial Statements included in Part II of
this annual report.
17
QUARTERLY FINANCIAL DATA (Unaudited)
(In thousands, except per share amounts)
Quarter Ended
-------------------------------------------
March 31 June 30 Sept. 29 Dec. 31
-------- ------- -------- -------
2000
Sales ...................................... $ 45,955 $ 25,589 $ 48,092 $ 47,344
Gross profit ............................... 16,113 (12,303) 14,804 10,834
Net income (loss) before income taxes ...... (4,827) (31,598) 448 (14,570)
Net income (loss) applicable to common stock (3,229) (52,253) 244 (14,560)
Net income (loss) per common share(2):
Basic ................................... (0.35) (5.58) 0.03 (1.55)
Diluted ................................. (0.35) (5.58) 0.03 (1.55)
Quarter Ended
-------------------------------------------
April 2 July 2 Oct. 1(1) Dec. 31
------- ------ --------- -------
1999
Sales ...................................... $ 49,746 $ 44,023 $ 48,704 $ 58,412
Gross profit ............................... 22,378 17,603 7,477 12,641
Net income (loss) before income taxes ...... 379 (4,980) (28,020) (6,246)
Net income (loss) applicable to common stock 204 (3,493) (18,033) (2,360)
Net income (loss) per common share(2):
Basic ................................... 0.02 (0.36) (1.91) (0.25)
Diluted ................................. 0.02 (0.36) (1.91) (0.25)
- ----------
(1) During the third quarter of 1999, the Company incurred a write-off
of inventories of $13.2 million, an impairment loss of $9.7 million
and a restructuring charge of $1.5 million. See notes 1, 4 and 22 of
the Notes to Consolidated Financial Statements included in Part II
of this annual report.
(2) Earnings per share are computed independently for each of the
quarters presented and therefore may not sum to the total for the
year.
18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussions should be read in conjunction with the
Company's Consolidated Financial Statements contained herein under Item 8 of
this annual report.
Year ended December 31,
2000 1999 1998
---------- ---------- ----------
Sales ................................................... 100.0% 100.0% 100.0%
Cost of sales ........................................... 82.4 63.5 57.5
Write-off of inventories ................................ - 6.6 -
---------- ---------- ----------
Gross profit ....................................... 17.6 29.9 42.5
---------- ---------- ----------
Operating expenses:
Selling, general and administrative ................ 20.5 21.4 20.9
Research and development ........................... 26.5 22.1 16.6
Amortization of goodwill and other intangible assets 0.1 0.8 2.5
Impairment loss .................................... - 4.8 -
Restructuring charge ............................... (0.5) 0.7 -
Write-off of acquired in-process technology ........ - - 10.8
---------- ---------- ----------
Operating expenses ................................. 46.6 49.8 50.8
---------- ---------- ----------
(29.0) (19.9) (8.3)
Gain on sale of business unit ........................... 1.1 - -
---------- ---------- ----------
Operating loss ..................................... (27.9) (19.9) (8.3)
Other income (expense) .................................. (2.4) 0.6 1.1
---------- ---------- ----------
Pretax loss ........................................ (30.3) (19.3) (7.2)
Income tax expense (benefit) ............................ 11.4 (7.6) 1.1
---------- ---------- ----------
Net loss ........................................... (41.7) (11.7) (8.3)
Accretion of preferred stock ............................ 0.1 0.1 0.1
---------- ---------- ----------
Net loss applicable to common stock ..................... (41.8)% (11.8)% (8.4)%
========== ========== ==========
RESULTS OF OPERATIONS
2000 vs. 1999
- -------------
Sales
In 2000, the Company's total sales decreased $33.9 million, or 17%
($167.0 million in 2000 compared to $200.9 million in 1999). Sales in the
Simulation Group decreased $20.7 million, or 12% ($149.9 million in 2000
compared to $170.6 million in 1999). Sales in REALimage Solutions Group
decreased $16.3 million, or 74% ($5.7 million in 2000 compared to $22.0 million
in 1999). Sales in the Applications Group increased $3.0 million, or 36% ($11.3
million in 2000 compared to $8.3 million in 1999). The decrease in sales in the
Simulation Group is due to the cancellation of the contract with Lockheed Martin
Corporation ("Lockheed") for the delivery of visual systems to the United
Kingdom Ministry of Defence ("UK MOD") for the Combined Arms Tactical Trainer
program ("UK CATT") and an adjustment to revenue on percent complete contracts
where a review of the estimated costs to complete the contracts resulted in a
negative adjustment to revenue of $10.9 million in the second quarter of 2000.
The decrease was partially offset by increased sales volume of visual systems to
commercial airline customers, increased sales volume of the Company's simFUSION
workstation-based product and increased sales related to customer service and
support contracts. The decrease in sales in the REALimage Solutions Group is due
to a decrease in the number of units sold and decreased selling prices of
existing products due to increased competition and delays in the introduction of
new products. The increase in sales in the Applications Group is due to an
19
increase in sales volume of large-format entertainment products and planetarium
systems which is partially offset by decreased sales of the Company's digital
video products due to the sale of this business to RT-SET Real Time Synthesized
Entertainment Technology Ltd. and its subsidiary RT-SET America Inc. (together
"RT-SET") in the first quarter of 2000.
Gross Profit
Gross profit decreased $30.7 million, or 51% ($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 certain assets 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 restructuring at the end of
the third quarter of 1999.
Amortization of Goodwill and Other Intangible Assets
Amortization of goodwill and other intangible assets decreased $1.3
million, or 87% ($0.2 million in 2000 compared to $1.5 million in 1999). The
decrease in this expense was due to the write-off of $9.3 million of goodwill
and other intangible assets during the third quarter of 1999 in the REALimage
Solutions Group.
Impairment Loss
The 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 consisted of the write-off of $4.9 million of
goodwill, $4.4 million of intangible assets and $0.4 million of property, plant
and equipment.
20
Restructuring Charge
The 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 existed at the end of the first quarter of 2000 and those
deferred tax assets recognized during the second quarter of 2000. These net
deferred tax assets relate to temporary differences, tax credit carry forwards
and net operating loss carry forwards. The valuation allowance was recorded in
accordance with SFAS 109, which requires that a valuation allowance be
established when there is significant uncertainty as to the realizability of the
deferred tax assets. The Company evaluates the realizability of its deferred tax
assets on a quarterly basis. If the deferred tax assets are realized in the
future, or if a portion or all of the valuation allowance is no longer deemed to
be necessary, the related tax benefits will reduce future income tax provisions.
1999 vs. 1998
- -------------
Sales
In 1999, the Company's total sales increased $9.1 million, or 5%
($200.9 million in 1999 compared to $191.8 million in 1998). Sales in the
Simulation Group increased $3.6 million, or 2% ($170.6 million in 1999 compared
to $167.0 million in 1998). The increase in sales in the Simulation Group is
primarily due to increased sales volumes due to stronger demand by U.S. and
European government customers that offset a decline in sales to commercial
airline customers. Sales in the REALimage Solutions Group increased $4.5
million, or 26% ($22.0 million in 1999 compared to $17.5 million in 1998). The
increase in sales in the REALimage Solutions Group is primarily due to the
21
effect of having a full year of sales in 1999 relating to the acquisition of
AccelGraphics, Inc. which was purchased at the end of the second quarter of
1998. See "Item 1 Business - Acquisitions and Dispositions." Sales in the
Applications Group increased $1.0 million, or 14% ($8.3 million in 1999 compared
to $7.3 million in 1998). The increase in sales in the Applications Group is
primarily due to increased sales volumes of planetarium systems and large-format
entertainment products.
Write-off of Inventories
During the third quarter of 1999, the Company performed significant
testing of the software relating to its Harmony image generator product that had
been delayed. As a result of the testing, the Company determined that certain of
the inventories previously purchased for the Harmony image generator had become
technologically obsolete and did not properly function with the updated
software. In connection with this assessment, the Company recorded a charge of
$12.1 million to write-off obsolete, excess and overvalued inventories. In
addition, during the third quarter of 1999, the Company wrote-off $1.1 million
of REALimage Solutions Group inventories related to end-of-life or abandoned
product lines.
Gross Profit
Gross profit decreased $21.3 million, or 26% ($60.1 million in 1999
compared to $81.4 million in 1998). As a percent of sales, gross margin
decreased to 29.9% in 1999 from 42.5% in 1998. The decrease in gross profit was
impacted by the write-off of $13.2 million of obsolete, excess and overvalued
inventories. Gross profit was also affected by technical issues causing product
delays, which caused some contract milestones to be missed in the Company's
international simulation business. The Company accrued $8.2 million against cost
of sales in 1999 for liquidated damages and late delivery penalties as a result
of these product delays. Excluding the impact of these two charges, gross
margins were 40.6% in 1999, as compared to 42.5% in 1998. The decrease in gross
margin was due to higher than expected costs on certain contracts to government
customers which include the Harmony and Ensemble image generators. In addition,
gross margin in the REALimage Solutions Group decreased in 1999 as it has
changed its business model from one based on royalty income to one based on
sales of graphic subsystems which has product costs consistent with a
manufacturing operation. Gross profit in the REALimage Solutions Group also
decreased due to a decrease in the number of units sold and decreased selling
prices of existing products and the delay in introduction of new products.
Selling, General and Administrative
Selling, general and administrative expenses increased $2.9 million,
or 7% ($43.0 million in 1999 compared to $40.1 million in 1998) and increased as
a percent of sales to 21.4% in 1999 from 20.9% in 1998. The increase in these
expenses was due to the impact of having a full year of costs associated with
ESGC (formerly AccelGraphics, Inc.) in 1999 compared to a half year in 1998, and
higher costs due to increased headcount related to the Company's recruiting
efforts, new business development and launch of E&S RAPIDsite.
Research and Development
Research and development expenses increased $12.6 million, or 40%
($44.4 million in 1999 compared to $31.8 million in 1998) and increased as a
percent of sales to 22.1% in 1999 from 16.6% in 1998. The increase in these
costs was due to increased development efforts of the Company's Integrator
software. This software provides the real-time control and modeling tools for
the Symphony product family, which includes Harmony, Ensemble and simFUSION. In
addition, the increase in these expenses was due to the impact of having a full
year of ESGC costs in 1999 compared to a half year in 1998.
Amortization of Goodwill and Other Intangible Assets
Amortization of goodwill and other intangible assets declined $3.3
million, or 68% ($1.5 million in 1999 compared to $4.8 million in 1998). The
decrease in these expenses was due to the write-off of $9.3 million of goodwill
and other intangible assets during the third quarter of 1999. The goodwill is
being amortized using the straight-line method over an estimated useful life of
seven years. The other intangible assets are being amortized using the
straight-line method over estimated useful lives ranging from six months to
seven years.
22
Impairment Loss
In the third quarter of 1999, the Company recorded an impairment
loss of $9.7 million, as determined in accordance with SFAS 121, relating to the
write-down to fair value of goodwill, intangibles and other long-lived assets
acquired in the acquisitions of AGI and SRI. The impairment loss consisted of
the write-off of $4.9 million of goodwill, $4.4 million of intangible assets and
$0.4 million of property, plant and equipment. No such loss was incurred in
1998.
In addition to continued losses at AGI, the impairment loss was the
result of the following additional circumstances: (i) delays in product
introductions for the AccelGALAXY(TM), E&S Lightning 1200(TM) and the
multiple-controller graphics subsystems product line; (ii) the developer of the
chip used on the AccelGMX(TM) acquired a board company and entered the graphics
accelerator market in direct competition with the AccelGMX; and (iii)
introduction of lower-end products by competitors which can perform many of the
functions of the higher-end 3D graphics cards. Furthermore, the Company
determined that a manufacturer of a chip to be used in various new board
products was unable to manufacture a designed chip with agreed upon
specifications.
Restructuring Charge
In the third quarter of 1999, the Company initiated a restructuring
plan focused on reducing the operating cost structure of its REALimage Solutions
Group. As part of the plan, the Company recorded a charge of $1.5 million
relating to 28 employee terminations. No such charge was incurred in 1998.
Acquired In-Process Technology
In the second quarter of 1998, the Company recognized $20.8 million
of expense to write-off acquired in-process technology related to the
acquisitions of AGI and SRI. No such expense was recognized in 1999.
Other Income (Expense), Net
Other income (expense), net decreased $1.0 million, or 48% ($1.1
million in 1999 compared to $2.1 million in 1998). Interest income was $1.9
million and $2.7 million in 1999 and 1998, respectively. The decrease in
interest income is primarily due to the decrease in the average cash and cash
equivalents and short-term investment balances in 1999 as compared to 1998.
During 1998, the Company recognized a gain of $2.5 million as a result of the
sale of its investment in Sense8 Corporation. The Company recognized a loss due
to the write-down of its investment securities of $0.4 million and $1.1 million
in 1999 and 1998, respectively. The write-downs were necessary as management
believed that the decline in market value of these investments below cost were
other than temporary. Other was $0.9 million income in 1999 and $0.6 million
expense in 1998. Increase in other income is due to foreign currency transaction
gains and other miscellaneous items in 1999 compared to foreign currency
transaction losses in 1998 and other miscellaneous items.
Income Taxes
The effective tax rate was 39.7% of pre-tax loss in 1999 and was
30.7% of pre-tax income excluding the write-off of acquired in-process
technology in 1998. The change in the effective tax rate is due to the Company
incurring a pre-tax loss in 1999 and the benefit of research and other tax
credits. The Company expects the effective income tax rate in 2000 to
approximate the rate in 1998.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2000, the Company had working capital of $61.8
million, including cash, cash equivalents and short-term investments of $13.9
million, compared to working capital of $116.9 million at December 31, 1999
including cash, cash equivalents and short-term investments of $22.9 million.
During 2000, the Company used $2.2 million of cash in its operating activities,
used $10.2 million of cash in its investing activities and generated $2.7
million of cash in its financing activities.
23
Cash from operating activities of the Company was provided by a
$27.3 million decrease in net costs and estimated earnings in excess of billings
on uncompleted contracts and a $6.9 million increase in accounts payable. The
decrease in net costs and estimated earnings in excess of billings on
uncompleted contracts was due to the achievement of billing milestones during
the year and the adjustment to revenue on percent complete contracts due to the
change in estimated actual costs to complete the contracts. Cash used in the
Company's operating activities included a net loss adjusted for non-cash
expenses and income for the year of $20.3 million, a $10.0 million increase in
accounts receivable and a $6.0 million increase in inventory.
The Company's investing activities included purchases of property,
plant and equipment of $13.9 million, proceeds from sales of property, plant and
equipment of $1.4 million, proceeds from the sale of certain assets of its
digital video business of $1.4 million and proceeds from sale of investment
securities of $1.4 million.
The Company's financing activities during the year included net
borrowings of $5.4 million, proceeds from issuances of common stock of $0.6
million, increase in restricted cash of $2.0 million and payments of debt
issuance costs of $1.3 million.
On March 31, 2000, the Company entered into a secured credit
facility (the "Zions Facility") with Zions First National Bank. The Zions
Facility provided for borrowings of up to $15.0 million, which included a $7.0
million sublimit for the issuance of letters of credit. In December 2000, the
Company entered into a secured credit facility (the "Foothill Facility") with
Foothill Capital Corporation ("Foothill"). In connection with the Foothill
Facility, additional borrowings under the Zions Facility were terminated in
December 2000 and outstanding letters of credit were secured through the
issuance of a letter of credit from Wells Fargo Bank, National Association, the
parent of Foothill. The Foothill Facility provides for borrowings and the
issuance of letters of credit up to $30.0 million. 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 Company to maintain
certain financial ratios and covenants, including a minimum tangible net worth
that adjusts each quarter and a limitation of $12.0 million of aggregate capital
expenditures in any fiscal year; (ii) restricts the Company's 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's outstanding shares without the prior consent of the lender. The
Company is currently in compliance with its financial covenants and ratios,
although a continuation of recent negative trends could impact future compliance
with such covenants. Should the need arise, the Company will negotiate with
Foothill to modify and expand various financial ratios and covenants, however no
assurance can be given that such negotiations will result in modifications that
will allow the Company to continue to be in compliance or otherwise be
acceptable to the Company. As of December 31, 2000, the Company has $7.3 million
in outstanding borrowings and $15.2 million in outstanding letters of credit
under the Foothill Facility.
Evans & Sutherland Computer Limited, a wholly-owned subsidiary of
Evans & Sutherland Computer Corporation, has a $5.0 million overdraft facility
(the "Overdraft Facility") with Lloyds TSB Bank plc ("Lloyds"). Borrowings under
the Overdraft Facility bear interest at Lloyds' short-term offered rate plus
1.75% per annum. As of December 31, 2000, there were no borrowings under the
Overdraft Facility. The Overdraft Facility is subject to reduction or demand
repayment for any reason at any time at Lloyds' discretion and expires on
November 30, 2001. 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 $1.5 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.
24
As of December 31, 2000, the Company 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's common stock at a conversion price of $42.10 or 428,000
shares of the Company's common stock, subject to adjustment. The 6% Debentures
are redeemable at the Company's option, in whole or in part, at par.
On February 18, 1998, the Company's Board of Directors authorized
the repurchase of up to 600,000 shares of the Company's common stock, including
the 327,000 shares still available from the repurchase authorization approved by
the Board of Directors on November 11, 1996. On September 8, 1998, the Company's
Board of Directors authorized the repurchase of an additional 1,000,000 shares
of the Company's common stock. Subsequent to February 18, 1998 through December
1999, the Company repurchased 1,136,500 shares of its common stock, leaving
463,500 shares available for repurchase as of March 2, 2001. The Company did not
repurchase any shares of the Company's common stock in 2000. Stock may be
acquired in the open market or through negotiated transactions. Under the
program, repurchases may be made from time to time, depending on market
conditions, share price, and other factors.
The Company also maintains trade credit arrangements with certain of
its suppliers. The unavailability of a significant portion of, or the loss of,
the various borrowing facilities of the Company or trade credit from suppliers
would have a material adverse effect on the Company's financial condition and
operations.
In the event the Company's various borrowing facilities were to
become unavailable, the Company were unable to timely deliver products pursuant
to the terms 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.
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 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.
25
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 INFLATION
The effects of inflation were not considered material during fiscal
years 2000, 1999 and 1998, and are not expected to be material for fiscal year
2001.
OUTLOOK
Looking forward, the Company expects sales to increase in 2001. The
increase in expected sales is due primarily to higher anticipated sales in the
Simulation and Application Groups offset by lower anticipated sales in the
REALimage Solutions Group. Sales in the Simulation Group are expected to
increase in 2001 as compared to 2000 as orders and backlog continue to grow in
those businesses. As of December 31, 2000 the Company's orders backlog was
$142.7 million.
We believe the Company's main challenge is the completion of the
Company's significant contracts. The Company is in the process 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, as of December 31, 2000, in accordance with original contractual
provisions, the Company incurred liquidated damages and late delivery penalties
totaling $9.1 million. The Company paid $6.0 million of this amount in 2000. The
Company is investing considerable resources in capital equipment, human
resources and other research and development expenses to develop Harmony-related
products. The near-term success of the Company is dependent in large part 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 assist with the development of the products of these
businesses.
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 projections of sales and
net income and issues that may affect sales or net income; projections of
capital expenditures; plans for future operations; financing needs or plans;
plans relating to the Company's products and services; plans to enter into
various arrangements to enhance the value of REALimage Solutions Group and the
E&S RAPIDsite business and assumptions relating to the foregoing.
Forward-looking statements are inherently subject to risks and uncertainties,
some of which cannot be predicted or quantified. Future events and actual
results could differ materially from those set forth in, contemplated by, or
underlying the forward-looking information. In addition to the other risks
described below in the "Factors That May Affect Future Results," 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. In light of these risks and uncertainties,
there can be no assurance that the events contemplated by the forward-looking
statements contained in this annual report will, in fact, occur.
27
FACTORS THAT MAY AFFECT FUTURE RESULTS
Evans & Sutherland's domestic and international businesses operate
in highly competitive markets that involve a number of risks, some of which are
beyond our control. While we are optimistic about our long-term prospects, the
following discussion highlights some risks and uncertainties that should be
considered in evaluating our growth outlook.
E&S's Business May Suffer if Our Competitive Strategy is Not Successful
Our continued success depends on our ability to compete in an
industry that is highly competitive, with rapid technological advances and
constantly improving products in both price and performance. As most market
areas in which we operate continue to grow, we are experiencing increased
competition, and we expect this trend to continue. In recent years, we have been
forced to adapt to domestic and worldwide political, economic, and technological
developments that have strongly affected our markets. Under our current
competitive strategy, we endeavor to remain competitive by growing existing
businesses, developing new businesses internally, selectively acquiring
businesses, increasing efficiency, improving access to new markets, and reducing
costs. Although our executive management team and Board of Directors continue to
review and monitor our strategic plans, we have no assurance that we will be
able to continue to follow our current strategy or that this strategy will be
successful.
E&S's Stock Price May be Adversely Impacted if Our Sales or Earnings
Fail to Meet Expectations
Our stock price is subject to significant volatility and will likely
be adversely affected if sales or earnings in any quarter fail to meet the
investment community's expectations. Our sales and earnings may fail to meet
expectations because they fluctuate and are difficult to predict. Our earnings
during 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 fixed in the short term
and even a small sales shortfall may cause a period's results to be below
expectations. Such a sales shortfall could arise from any number of factors,
including:
o delays in the availability of products,
o delays from chip suppliers,
o discontinuance of key components from suppliers,
o other supply constraints,
o transit interruptions,
o overall economic conditions, and
o customer demand.
Another reason our earnings may not meet expectations is that our
gross margins are heavily influenced by mix considerations. These mix
considerations include the mix of lower-margin prime contracts versus
sub-contracts, the mix of new products and markets versus established products
and markets, the mix of high-end products versus low-end products, as well as
the mix of configurations within these product categories. Future margins may
not duplicate historical margins or growth rates.
28
Our Significant Debt Could Adversely Affect Our Financial Resources and Prevent
Us from Satisfying Our Debt Service 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 declare dividends or redeem or repurchase capital stock;
o incur certain additional debt;
o grant liens;
o make certain payments and investments;
o sell or otherwise dispose of assets; and
o consolidate with other entities.
We must also meet certain financial ratios and tests, including a
minimum tangible net worth that adjusts each quarter 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 currently in compliance
with our financial covenants, although a continuation of recent negative
operating trends could impact our future compliance with such covenants. Should
the need arise, we will negotiate with our lenders to modify and expand various
financial covenants, however, no assurance can be given that such negotiations
will result in modifications that will allow us to continue to be in compliance
or otherwise be acceptable to us.
29
Delays in the Timely Delivery of Our Products May Prevent Us From Invoicing Our
Costs and Estimated Earnings in Excess of Billings on Uncompleted Contracts.
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 Protect Our Intellectual Property Could Harm Our Name
Recognition Efforts and Ability to Compete Effectively
Currently, we rely on a combination of patents, trademarks,
copyrights and common law safeguards including trade secret protection. To
protect our intellectual property rights in the future, we intend to continue to
rely on a combination of patents, trademarks, copyrights and common law
safeguards, including trade secret protection. We also rely on restrictions on
use, confidentiality and nondisclosure agreements and other contractual
arrangements with our employees, affiliates, customers, alliance partners and
others. The protective steps we have taken may be inadequate to deter
misappropriation of our intellectual property and proprietary information. A
third party could obtain our proprietary information or develop products or
technology competitive with ours. We may be unable to detect the unauthorized
use of, or take appropriate steps to enforce our intellectual property rights.
Effective patent, trademark, copyright and trade secret protection may not be
available in every country in which we offer or intend to offer our products and
services to the same extent as in the United States. Failure to adequately
protect our intellectual property could harm or even destroy our brands and
impair our ability to compete effectively. Further, enforcing our intellectual
property rights could result in the expenditure of significant financial and
managerial resources and may not prove successful.
We Could Incur Substantial Costs Defending Our Intellectual Property from
Claims of Infringement
The industry is characterized by frequent litigation regarding
copyright, patent and other intellectual property rights. We may be subject to
future litigation based on claims that our products infringe the intellectual
property rights of others or that our own intellectual property rights are
invalid. Claims of infringement could require us to reengineer or rename our
products or seek to obtain licenses from third parties in order to continue
offering our products. Licensing or royalty agreements, if required, may not be
available on terms acceptable to us or at all. Even if successfully defended,
claims of infringement could also result in significant expense to us and the
diversion of our management and technical resources.
E&S's Significant Investment in Research and Development May Not be Realized
We have no assurance that our significant investment in research and
development will generate future sales or benefits. We currently make and plan
to continue to make a significant investment in research and development. Total
spending for research and development was $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 compete in the graphics simulation industry.
Developing new products and software is expensive and often involves a long
payback cycle. While we have every reason to believe these investments will be
rewarded with sales-generating products, customer acceptance ultimately dictates
the success of development and marketing efforts.
E&S May Not Continue to be Successful if We Are Unable to Develop,
Produce and Transition Our Products
Our continued success depends on our ability to develop, produce and
transition technologically complex and innovative products that meet customer
needs. We have no assurance that we will be able to successfully continue such
development, production and transition.
30
The development of new technologies and products is increasingly
complex and expensive, which among other risks, increases the risk of product
introduction delays. The introduction of a new product requires close
collaboration and continued technological advancement involving multiple
hardware and software design and manufacturing teams within E&S as well as teams
at outside suppliers of key components. The failure of any one of these elements
could cause our new products to fail to meet specifications or to miss the
aggressive timetables that we establish and the market demands.
As the variety and complexity of our product families increase, the
process of planning and managing production, inventory levels, and delivery
schedules also becomes increasingly complex. There is no assurance that
acceptance of and demand for our new products will not be affected by delays in
this process. Additionally, if we are unable to meet our delivery schedules, we
may be subject to the penalties, including liquidated damages that are included
in some of our customer contracts, and termination of our contracts.
Product transitions are a recurring part of our business. Our short
product life cycles require our ability to successfully manage the timely
transition from current products to new products. In fact, it is not unusual for
us to announce a new product while its predecessor is still in the final stages
of its development. Our transition results could be adversely affected by such
factors as:
o development delays,
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, we have paid $6.0
million in connection 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, we have no assurance that we
will be able to maintain a significant portion of our sales. These sales are
subject to the inherent risks related to government contracts, including
uncertainty of economic conditions, changes in government policies and
requirements that may reflect rapidly changing military and political
developments, and unavailability of funds. These risks also include
technological uncertainties and obsolescence, and dependence on annual
Congressional appropriation and allotment of funds. In the past, some of our
programs have been delayed, curtailed, or terminated. Although we cannot predict
such uncertainties, in our opinion there are no spending reductions or funding
limitations pending that would impact our contracts.
31
Other characteristics of the government contract market that may
affect our operating results include the complexity of designs, the difficulty
of forecasting costs and schedules when bidding on developmental and highly
sophisticated technical work, and the speed with which product lines become
obsolete due to technological advances and other factors characteristic of the
market. Our earnings may vary materially on some contracts depending upon the
types of government long-term contracts undertaken, the costs incurred in their
performance, and the achievement of other performance objectives. Furthermore,
due to the intense competition for available United States government business,
maintaining or expanding government business increasingly requires us to commit
additional working capital for long-term programs and additional investments in
company-funded research and development.
Our dependence on government contracts may lead to other perils as
well because as a United States government contractor or sub-contractor, our
contracts and operations are subject to government oversight. The government may
investigate and make inquiries of our business practices and conduct audits of
our contract performance and cost accounting. These investigations may lead to
claims against E&S. Under United States government procurement regulations and
practices, an indictment of a government contractor could result in that
contractor being fined and/or suspended for a period of time from eligibility
for bidding on, or for award of, new government contracts; a conviction could
result in debarment for a specified period of time.
E&S's Sales May Suffer if We Lose Certain Significant Customers
We currently derive a significant portion of our sales from a
limited number of non-U.S. government customers. The loss of any one or more of
these customers could have a material adverse effect on our business, financial
condition and results of operations. We were dependent on four of our non-U.S.
government customers for approximately 23% of our consolidated sales and three
of our non-U.S. government customers for approximately 24% of our consolidated
sales in 2000 and 1999, respectively. We expect that sales to a limited number
of customers will continue to account for a substantial portion of our sales in
the foreseeable future. We have no assurance that sales from this limited number
of customers will continue to reach or exceed historical levels in the future.
We do not have supply contracts with any of our significant customers.
E&S's Sales Will Decrease if We Fail to Maintain Our International Business
Any reduction of our international business could significantly
affect our sales. Our international business accounted for 36% of our 2000
sales. We expect that international sales will continue to be a significant
portion of our overall business in the foreseeable future.
Our international business experiences many of the same risks our
domestic business encounters as well as additional risks such as exposure to
currency fluctuations and changes in foreign economic and political
environments. Despite our exposure to currency fluctuations, we are not engaged
in any material hedging activities to offset the risk of exchange rate
fluctuations. The ongoing economic crisis affecting the Asian markets is an
example of a change in a foreign economic environment that could affect our
international business. Any similar economic downturns may also decrease the
number of orders we receive and our receivable collections.
Our international transactions frequently involve increased
financial and legal risks arising from stringent contractual terms and
conditions and widely differing legal systems, customs, and standards in foreign
countries. In addition, our international sales often include sales to various
foreign government armed forces, with many of the same inherent risks associated
with United States government sales identified previously.
Future Losses Could Impair Our Ability to Raise Capital or Borrow Money and
Consequently Affect Our Stock 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.
32
If E&S's Commercial Simulation Business Fails, E&S's Sales will Decrease
We have no assurance that our commercial simulation (airline)
business will continue to succeed. Our commercial simulation business currently
accounts for approximately 15% to 20% of our sales. This business is subject to
many of the risks related to the commercial simulation market that may adversely
affect our business. The following risks are characteristic of the commercial
simulation market:
o uncertainty of economic conditions,
o dependence upon the strength of the commercial airline industry,
o air pilot training requirements,
o competition,
o changes in technology, and
o timely performance by subcontractors on contracts in which
E&S is the prime contractor.
We May Make Acquisitions that are Unsuccessful or Strain or Divert Our
Resources from More Profitable 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.
33
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The principal market risks to which the Company is exposed are
changes in foreign currency exchange rates and changes in interest rates. The
Company's international sales, which accounted for 36% of the Company's total
sales in 2000 are concentrated in the United Kingdom, continental Europe and
Asia. Foreign currency purchase and sale contracts are entered into for periods
consistent with related underlying exposures and do not constitute positions
independent of those exposures. The Company does not enter into contracts for
trading purposes and does not use leveraged contracts. As of December 31, 2000,
the Company had no material sales or purchase contracts in currencies other than
U.S. dollars and had no foreign currency sales or purchase contracts.
The Company reduces its exposure to changes in interest rates by
maintaining a high proportion of its debt in fixed-rate instruments. As of
December 31, 2000, 71% of the Company's total debt was in fixed-rate
instruments. Had the Company fully drawn on its $30 million revolving line of
credit with Foothill Capital Corporation and its foreign line of credit, 48% of
the Company's 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's market risks
associated with debt obligations as of December 31, 2000. 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 11of Notes to the Consolidated Financial
Statements in Part II of this annual report.
There- Fair
Rate 2001 2002 2003 2004 2005 after Total Value
-------- ------- ------- ------- ------- ------- ------- ------- -------
Debt
Notes payable ........... Various $ 344 -- -- -- -- -- $ 344 $ 344
======= ======= ======= ======= ======= ======= ======= =======
6% Debentures ........... 6.0% -- -- -- -- -- $18,015 $18,015 $ 7,927
Bank borrowings ......... 12.5% -- $ 7,344 $ 204 -- -- -- 7,548 7,548
------- ------- ------- ------- ------- ------- ------- -------
Total long-term debt .... -- $ 7,344 $ 204 -- -- $18,015 $25,563 $15,475
======= ======= ======= ======= ======= ======= ======= =======
34
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 Consolidated Balance Sheets as of December 31, 2000 and 1999
o Consolidated Statements of Operations for each of the years in the
three-year period ended December 31, 2000
o Consolidated Statements of Comprehensive Loss for each of the years in
the three-year period ended December 31, 2000
o Consolidated Statements of Stockholders' Equity for each of the years
in the three-year period ended December 31, 2000
o Consolidated Statements of Cash Flows for each of the years in the
three-year period ended December 31, 2000
o Notes to Consolidated Financial Statements for each of the years in
the three-year period ended December 31, 2000
The following consists of a list of Financial Statement Schedules included
in Part IV of this report:
o Schedule II - Valuation and Qualifying Accounts for each of the years
in the three-year period ended December 31, 2000
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 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
The Board of Directors and Stockholders
Evans & Sutherland Computer Corporation:
We have audited the consolidated financial statements of Evans &
Sutherland Computer Corporation and subsidiaries as listed in the accompanying
index. In connection with our audits of the consolidated financial statements,
we have also audited the financial statement schedule as listed in the
accompanying index. These consolidated financial statements and financial
statement schedule are the responsibility of the Company'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, 2000 and
1999, and the results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 2000, 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
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000, December 31, 1999 and December 31, 1998
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Evans & Sutherland Computer Corporation ("E&S" or 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 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 is used to produce high performance image
generators for simulation including PC-based visual system products,
to provide graphics acceleration technology to the professional
digital content creation market, and to apply the Company's core
technologies to the expanding market of PC-based applications and
products.
Basis of Presentation
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All intercompany accounts
and transactions have been eliminated in consolidation. Certain
reclassifications have been made in the 1999 and 1998 consolidated
financial statements and notes to conform to the 2000 presentation.
Liquidity
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 (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 cash and cash equivalents, subject to various
restrictions, are available for working capital needs, capital
expenditures, strategic investments, mergers and acquisitions, stock
repurchases and other potential cash needs as they may arise.
In the event the Company's various borrowing facilities were to
become unavailable, the Company were unable to timely deliver
products pursuant to the terms 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.
Revenue Recognition
Sales includes revenue from system and software products, software
license rights and service contracts.
The Company has adopted the American Institute of Certified Public
Accountants ("AICPA") Statement of Position ("SOP") 97-2, Software
Revenue Recognition, as modified by SOP 98-9. SOP 97-2 generally
requires revenue earned on software arrangements involving multiple
elements such as software products, enhancements, post-contract
customer support, installation and training to be allocated to each
element based on the relative fair values of the elements. The fair
value of an element must be based on evidence that is specific to
the vendor. The revenue allocated to software products is generally
recognized upon delivery of the products. The revenue allocated to
post-contract customer support is generally recognized over the
support period.
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 recorded using the
percentage-of-completion method, determined by the units-delivered
method, or when there is significant nonrecurring engineering, the
ratio of costs incurred to management's estimate of total
anticipated costs. If estimated total costs on any contract indicate
a loss, the Company provides currently for the total anticipated
loss on the contract. Billings on uncompleted long-term contracts
may be greater than or less than incurred costs and estimated
earnings and are recorded as an asset or liability in the
accompanying consolidated balance sheets.
Cash and Cash Equivalents
The Company considers all highly liquid financial instruments
purchased with an original maturity to the Company of 90 days or
less to be cash equivalents. Cash equivalents consist of debt
securities and money market funds of $3.8 million and $15.5 million
as of December 31, 2000 and 1999, respectively.
Restricted Cash
The Company has restricted deposits pledged as collateral on
overdraft protection, letters of credit and certain other
obligations all of which mature or expire within one year.
Inventories
Inventoried costs on programs and long-term contracts include 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 Company periodically reviews inventories for
excess and obsolete amounts and provides a reserve that it considers
sufficient to cover any excess and obsolete inventories.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation and
amortization are computed using the straight-line method based on
the estimated useful lives of the related assets.
Accounting for Impairment of Long-Lived Assets
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. The impairment loss of $9.7 million for the year
ended December 31, 1999, as determined in accordance with Statement
of Financial Accounting Standards No. 121 ("SFAS 121"), Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of, relates to the write-down to fair value of goodwill,
intangibles and other long-lived assets acquired in the acquisition
of AccelGraphics, Inc. ("AGI") and Silicon Reality, Inc. ("SRI").
Fair value was determined utilizing discounted cash flow analyses
and the replacement cost approach. The impairment loss consisted of
the write-off of $4.9 million of goodwill, $4.4 million of
intangible assets and $0.4 million of property, plant and equipment.
43
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In addition to continued losses at AGI, the impairment loss was the
result of the following additional circumstances: (i) delays in
production introductions for the AccelGALAXY, E&S Lightning 1200 and
the multiple-controller graphics subsystems product line; (ii) the
developer of the chip used on the AccelGMX acquired a board company
and entered the graphics accelerator market in direct competition
with the AccelGMX; and (iii) introduction of lower-end products by
competitors which can perform many of the functions of the
higher-end 3D graphics cards. Furthermore, the 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.
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.
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 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 until realized.
Dividend income is recognized when earned. Realized gains and losses
from the sale of securities are included in results of operations
and are determined on the specific-identification basis. A decline
in the market value below cost that is deemed other than temporary
is charged to results of operations resulting in the establishment
of a new cost basis for both marketable and nonmarketable investment
securities.
Nonmarketable investment securities are recorded at the lower of
cost or fair value. Some of the factors that are considered in
determining the fair value of these securities include analyses of
each investee's financial condition and operations, the status of
its technology and strategies in place to achieve its objectives.
The Company's 50% investment in a joint venture is stated at cost,
adjusted for equity in undistributed earnings since acquisition.
Warranty Reserve
The Company provides a warranty reserve for estimated future costs
of servicing products under warranty agreements extending for
periods from 90 days to one year. Anticipated costs for product
warranty are based upon estimates derived from experience factors
and are recorded at the time of sale or over the contract period for
long-term contracts.
44
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Stock-Based Compensation
The Company has adopted the footnote disclosure provisions of
Statement of Financial Accounting Standards No. 123 ("SFAS 123"),
Accounting for Stock Based 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 for Stock Issued to Employees. The Company has elected to
continue to apply the provisions of APB 25 and provide pro forma
footnote disclosures required by SFAS 123.
Income Taxes
The Company uses 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. 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 provides unsecured
credit terms to its customers. Accordingly, the Company performs
ongoing credit evaluations of its customers and maintains allowances
for possible losses which, when realized, have been within the range
of management's expectations.
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 earnings in excess of
billings on uncompleted contracts. At December 31, 2000, $46.0
million of the costs and estimated earnings in excess of billings on
uncompleted contracts pertain to five contracts with five different
customers. The billing of these amounts is contingent upon the
successful completion of contractual milestones related to the
delivery and integration of Harmony image generators. The Company
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 not have a material impact on its financial statements.
(2) BUSINESS 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 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
based in Milpitas, California, and was a provider of
high-performance, cost-effective, three-dimensional graphics
subsystem products for the professional Windows NT and Windows 95
markets. The acquisition was accounted for by the purchase method
and, accordingly, the results of operations of AGI have been
included in the Company's consolidated financial statements from
June 26, 1998 forward.
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 products for the personal computer marketplace. This
acquisition was accounted for by the purchase method and,
accordingly, the results of operations of SRI have been included in
the Company's consolidated financial statements from June 26, 1998
forward.
A modified income approach was used to allocate a portion of the
purchase price to the acquired in-process technology. Under this
method, the fair value for the in-process technology in each
acquisition was based on analysis of the markets, projected cash
flows and risks associated with achieving such projected cash flows.
In developing these cash flow projections, sales were forecasted
based on relevant factors, including aggregate sales growth rates
for the business as a whole, individual product sales,
characteristics of the potential market for the products, the
anticipated life of the technology under development and the stage
of completion of each project. Operating expenses and resulting
profit margins were forecasted based on the characteristics and cash
flow generating potential of the acquired in-process technology, and
included assumptions that certain expenses would decline over time
as operating efficiencies were obtained or support requirements
decreased. Appropriate adjustments were made to operating income to
derive net cash flow, and the estimated net cash flows of the
in-process technologies in each acquisition were then discounted to
present value using rates of return that the Company believes
reflect the specific risk/return characteristics of these research
and development projects.
The projected sales used in the income approach are based upon the
sales likely to be generated upon completion of the projects and the
beginning of commercial sales, as estimated by management. The
projections assume that the product will be successful and that the
product's development and commercialization meet management's
current time schedule.
In determining the operating cash flows related exclusively to
in-process technology, management has considered the contribution of
both prior technologies (as demonstrated by prior products) and core
technology or know-how that is generic among most or all products.
Where appropriate, the operating income estimates for each project
have been apportioned between in-process technology and the
appropriate intangible asset (i.e. various core technologies). The
operating income apportionment factor was determined on the basis of
an analysis of the specific contribution of each element of core
technology to the subject in-process technology, the estimated
effect of this contribution on the profitability of the subject
in-process project, and the relative importance of the core
technology to the product's ultimate customer.
The discount rate applicable to in-process technology projects
reflects the risks inherent in each project. This rate is higher
than the rate applied to AGI's current products, as the current
products have already demonstrated their technological feasibility
product and market acceptance.
The discount rate for in-process technology considers the following
risk elements (in addition to the baseline business and market risks
considered as part of the current product discount rate); risk of
successfully completing the in-process technology project, risk that
market demand will exist in the future for the in-process technology
product, risk that the forecasted cost structure will be possible,
and the risk that as yet unknown competitive products will emerge.
An after-tax rate of 20 to 30 percent was applied to the in-process
technology projects.
The sales earned by the in-process technology products represent the
return on all of the assets acquired under the agreement. The cash
flows generated by the new products must provide a return on each
asset purchased that is consistent with the value and the relative
risk of that asset. To separately value in-process technology, the
value and required rate of return for other identifiable assets must
be determined. The required return on these other assets is charged
to (deducted from) the cash flows generated by the projects shown in
the in-process technology model to determine the incremental cash
flows specifically attributable to the in-process technology
project.
47
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As part of the analysis, management determined individual rates of
return applicable to each asset identified in the allocation table
and estimated the effective capital charge to be applied to the
valuation of in-process technology. Capital charges have been made
for returns related to current assets, fixed assets, workforce and
tradename.
The total purchase price and final allocation among the tangible and
intangible assets and liabilities acquired (including acquired
in-process technology) is summarized as follows (dollars in
thousands):
Total Purchase Price:
Total cash consideration $ 24,688
Total stock consideration 25,695
Value of options assumed 3,400
Transaction costs 1,350
---------
$ 55,133
=========
Amortization
Period
(Months)
------------
Purchase Price Allocation:
Net tangible assets $ 17,329
Intangible assets:
Workforce-in-place 1,019 60
Customer list 250 60
AccelGraphics name 699 36
Current products 5,640 6 - 24
Core technology 1,754 84
Goodwill 7,662 84
In-process technology 20,780 Expensed
---------
$ 55,133
=========
At the time of the acquisition, the estimated costs to complete the
projects related to in-process technology were $1.2 million. As of
December 31, 1999 and 1998, costs incurred on these projects were
$2.6 million and $0.9 million, respectively. All projects were
complete as of December 31, 1999 and no further costs are expected
to be incurred.
The following unaudited pro forma financial information (in
thousands, except per share amounts) presents the combined results
of operations of the Company, AGI and SRI for 1998 as if the
acquisitions had occurred as of the beginning of 1998, after giving
effect to certain adjustments, including, but not limited to,
amortization of goodwill and other intangible assets, decreased
interest income and entries to conform to the Company's accounting
policies. The $20.8 million charge for acquired in-process
technology has been excluded from the pro forma results as it is a
material non-recurring charge.
Net sales $ 208,503
Net loss (4,836)
Loss per share:
Basic (0.46)
Diluted (0.46)
48
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(3) SHORT-TERM INVESTMENTS
At December 31, 1999, the Company had short-term available-for-sale
marketable investments of $0.8 million stated at cost, which
approximates market. Short-term investments consisted of state and
municipal securities maturing in one year or less.
(4) INVENTORIES
Inventories consist of the following (in thousands):
December 31,
2000 1999
------------ ------------
Raw materials $ 26,701 $ 26,803
Work-in-process 9,219 11,479
Finished goods 2,463 2,306
------------ ------------
$ 38,383 $ 40,588
============ ============
During the third quarter of 1999, the Company performed significant
testing of the software relating to its Harmony image generator
product that had been delayed. As a result of the testing, the
Company determined that certain of the inventories previously
purchased for the Harmony image generator had become technologically
obsolete and did not properly function with the updated software. In
connection with this assessment, the Company recorded a charge of
$12.1 million to write-off obsolete, excess and overvalued
inventories. In addition, during the third quarter of 1999, the
Company wrote-off $1.1 million of inventories related to end-of-life
or abandoned product lines in the REALimage Solutions Group.
(5) COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
Comparative information with respect to uncompleted contracts is
summarized as follows (in thousands):
December 31,
2000 1999
------------ ------------
Accumulated costs and estimated
earnings on uncompleted contracts $ 252,012 $ 350,193
Less total billings on uncompleted contracts (211,258) (282,148)
------------ ------------
$ 40,754 $ 68,045
============ ============
Costs and estimated earnings in excess of
billings on uncompleted contracts $ 68,464 $ 80,457
Billings in excess of costs and estimated
earnings on uncompleted contracts (27,710) (12,412)
------------ ------------
$ 40,754 $ 68,045
============ ============
49
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(6) PROPERTY, PLANT AND EQUIPMENT
The cost and estimated useful lives of property, plant and equipment
are summarized as follows (dollars in thousands):
Estimated December 31,
useful lives 2000 1999
------------ ------------ ------------
Land -- $ -- $ 1,436
Buildings and improvements 40 years 41,343 39,983
Manufacturing machinery and equipment 3 to 8 years 80,212 86,433
Office furniture and equipment 8 years 6,308 9,265
Construction-in-process -- 2,779 3,559
------------ ------------
130,642 140,676
Less accumulated depreciation and amortization (81,977) (88,492)
------------ ------------
$ 48,665 $ 52,184
============ ============
All buildings and improvements owned by the Company are constructed
on land leased from an unrelated third party. Such leases extend for
a term of 40 years from 1986, with options to extend two of the
leases for an additional 40 years and the remaining 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) 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 income for all operating leases for 2000, 1999 and 1998 was
$1.8 million, $1.6 million and $1.5 million, respectively.
The Company occupies real property and uses certain equipment under
lease arrangements that are accounted for as operating leases.
Rental expenses for all operating leases for 2000, 1999 and 1998
were $1.6 million, $2.1 million and $2.3 million, respectively.
At December 31, 2000, the future minimum rental income and lease
payments under operating leases that have initial or remaining
noncancelable lease terms in excess of one year are as follows (in
thousands):
Rental Rental
Income Commitment
------------ ------------
Year ending December 31,
2001 $ 2,202 $ 1,816
2002 2,120 1,478
2003 2,097 1,339
2004 1,218 878
2005 1,050 608
Thereafter 1,050 9,155
------------ ------------
$ 9,737 $ 15,274
============ ============
50
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(8) INVESTMENTS
The Company 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,
2000 1999
------------ ------------
Marketable securities:
Cypress Semiconductor, Inc. (Cypress) $ 3,276 $ --
vi[z]rt (formerly RT-SET Real Time
Synthesized Entertainment Technology Ltd.) 358 --
Iwerks Entertainment, Inc. (Iwerks) 9 150
C3-D Digital Inc. (C3-D) 16 525
------------ ------------
3,659 675
------------ ------------
Nonmarketable securities:
Silicon Light Machines, Inc. (SLM) -- 3,276
Quantum Vision, Inc. (Quantum) 500 --
Total Graphics Solutions N.V. (TGS) 500 500
Other 16 16
------------ ------------
1,016 3,792
------------ ------------
Investment in joint venture:
Quest Flight Training Ltd. 754 --
------------ ------------
Total investment securities $ 5,429 $ 4,467
============ ============
Cypress is a global supplier of high-performance integrated
circuits. vi[z]rt develops and markets fully integrated broadcast
graphics solutions using real-time visualization systems. Iwerks
designs, engineers, manufactures, markets and services high-tech
entertainment attractions which employ a variety of projection, show
control, ride simulation and software technologies. C3-D develops
and manufacturers three-dimensional imagery and virtual reality
entertainment for television and the Internet. Quantum is a start-up
company that owns patented technology to improve cathode raytube
(CRT) performance used in large projection systems. TGS develops and
markets portable graphics software tools, which provide hardware
independence for application developers. Each investment in
nonmarketable investment securities was made either to enhance a
current technology of the Company or to complement the Company's
strategic direction.
The Company owns, including total shares purchased or available to
purchase under warrants, less than 15% of the outstanding common
stock and common stock equivalents of Quantum and TGS. The Company
has one of six seats on TGS's board of directors. There are no
intercompany transactions, technological dependencies, related
guarantees, obligations, contingencies, interchange of personnel,
nor ability to exercise significant influence on any of the
companies in which the Company has investments. Accordingly, the
Company accounts for Quantum and TGS utilizing the cost method.
51
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company has a 50% interest in Quest Flight Training Ltd.
(Quest), a joint venture providing aircrew training services for the
United Kingdom Ministry of Defence under a 30 year contract. The
investment is accounted for under the equity method. Equity in
earnings of Quest of $43,000 in 2000 is recorded in other income
(expense). 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, that
the likelihood of a payment pursuant to such guarantee is remote.
During 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
Accrued expenses consist of the following (in thousands):
December 31,
2000 1999
------------ ------------
Pension plan obligation (note 10) $ 13,305 $ 12,124
Compensation and benefits 11,277 13,021
Liquidated damages and late delivery penalties 3,091 8,200
Other 12,159 6,774
------------ ------------
$ 39,832 $ 40,119
============ ============
On October 16, 1997, the Company and CAE Electronics Ltd. ("CAE")
entered into a Sub-Contract (the "Sub-Contract") for the Company to
design, develop and deliver the visual system components and visual
databases required for certain dynamic mission simulators and
tactical control centers, to be integrated with the Company's
Harmony image generation equipment (the "Harmony VSC"). As of
December 31, 1999, the Harmony VSC had not been integrated with the
dynamic mission simulators or tactical control centers. Pursuant to
the terms of the Sub-Contract, the integration was to be completed
during 1999. Consequently, as of December 31, 1999, in accordance
with the liquidated damages provision of the Sub-Contract, the
Company incurred liquidated damages on this Sub-Contract totaling
$6.0 million. The Company and CAE agreed to an interim solution,
which provides for the installation of the Company's ESIG 4530 image
generators to integrate with the dynamic mission simulators and
tactical control centers until the Company's Harmony VSC are able to
support the dynamic mission simulators and tactical control centers.
As of December 31, 2000, integration of a Harmony VSC with a dynamic
mission simulator has been tested. A Harmony VSC is currently being
installed and integrated with a dynamic mission simulator at the
training site. Upon successful completion of the integration, the
ESIG 4530 image generators currently installed at the training site
will be replaced with Harmony VSCs. The Company has agreed to pay
CAE (i) $0.5 million for reimbursement of certain expenses and costs
incurred by CAE relating to the integration and retrofit of the ESIG
4530 to the dynamic mission simulators and tactical control centers
and (ii) $5.5 million as liquidated damages resulting from certain
delays of the Harmony VSC. As of December 31, 2000, the Company 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) EMPLOYEE BENEFIT PLANS
Pension Plan (the "Plan") - The Company has a defined benefit
pension plan covering substantially all employees who have attained
age 21 with service in excess of one year. Benefits at normal
retirement age (65) are based upon the employee's years of service
and the employee's highest compensation for any consecutive five of
the last ten years of employment. The Company's funding policy is to
contribute amounts sufficient to satisfy regulatory funding
standards, based upon independent actuarial valuations.
Supplemental Executive Retirement Plan ("SERP") - The Company has a
non-qualified SERP. The SERP, which is unfunded, provides eligible
executives defined pension benefits, outside the Company's pension
plan, based on average earnings, years of service and age at
retirement.
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
======= ======= ======= ======= ======= =======
Deferred Savings Plan - The Company has a deferred savings plan that
qualifies under Section 401(k) of the Internal Revenue Code. The
plan covers all employees of the Company who have at least one year
of service and who are age 18 or older. The Company makes matching
contributions of 50 percent of each employee's contribution not to
exceed six percent of the employee's compensation. The Company's
contributions to this plan for 2000, 1999 and 1998 were $1.0
million, $1.1 million and $1.0 million respectively.
Life Insurance - The Company purchases company-owned life insurance
policies insuring the lives of certain employees. The policies
accumulate asset values to meet future liabilities including the
payment of employee benefits such as supplemental retirement
benefits. At December 31, 2000 and 1999, the investment in the
policies was $3.2 million and $3.1 million, respectively, and net
life insurance expense was $0.1 million, $0.2 million and $0.5
million for 2000, 1999 and 1998, respectively.
(11) LONG-TERM DEBT
Included in long-term debt is approximately $18.0 million of 6%
Convertible Subordinated Debentures due in 2012 (the "6%
Debentures"). The 6% Debentures are unsecured and are convertible at
each bondholder's option into shares of the Company's common stock
at a conversion price of $42.10 or 428,000 shares of the Company's
common stock subject to adjustment. The 6% Debentures are redeemable
at the Company's option, in whole or in part, at par.
The following is a summary of lines of credit (dollars in
thousands):
2000 1999
---------- ----------
Balance at end of year $ 7,345 $ 2,657
Weighted average interest rate at end of year 12.5% 6.0%
Maximum balance outstanding during the year $ 7,345 $ 4,298
Average balance outstanding during the year $ 1,612 $ 3,320
Weighted average interest rate during the year 9.6% 6.4%
The average balance outstanding and weighted average interest rate
are computed based on the outstanding balances and interest rates at
month-end during each year.
54
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On March 31, 2000, the Company entered into a secured credit
facility (the "Zions Facility") with Zions First National Bank. The
Zions Facility provided for borrowings of up to $15.0 million, which
included a $7.0 million sublimit for the issuance of letters of
credit. In December 2000, the Company entered into a secured credit
facility (the "Foothill Facility") with Foothill Capital Corporation
("Foothill"). In connection with the Foothill Facility, additional
borrowings under the Zions Facility were terminated in December 2000
and outstanding letters of credit were secured through the issuance
of a letter of credit from Wells Fargo Bank, National Association,
the parent of Foothill. The Foothill Facility provides for
borrowings and the issuance of letters of credit up to $30.0
million. 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 Company to maintain
certain financial ratios and covenants, including a minimum tangible
net worth that adjusts each quarter and a limitation of $12.0
million of aggregate capital expenditures in any fiscal year; (ii)
restricts the Company's 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's outstanding shares without the prior consent of the
lender. The Company is currently in compliance with its financial
covenants and ratios, although a continuation of recent negative
trends could impact future compliance with such covenants. Should
the need arise, the Company will negotiate with Foothill to modify
and expand various financial ratios and covenants, however no
assurance can be given that such negotiations will result in
modifications that will allow the Company to continue to be in
compliance or otherwise be acceptable to the Company. As of December
31, 2000, the Company has $7.3 million in outstanding borrowings and
$15.2 million in outstanding letters of credit under the Foothill
Facility.
Evans & Sutherland Computer Limited, a wholly-owned subsidiary of
Evans & Sutherland Computer Corporation, has a $5.0 million
overdraft facility (the "Overdraft Facility") with Lloyds TSB Bank
plc ("Lloyds"). Borrowings under the Overdraft Facility bear
interest at Lloyds' short-term offered rate plus 1.75% per annum. As
of December 31, 2000, there were no borrowings under the Overdraft
Facility. The Overdraft Facility is subject to reduction or demand
repayment for any reason at any time at Lloyds' discretion and
expires on November 30, 2001. 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 $1.5 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) INCOME TAXES
Components of income tax expense (benefit) attributable to earnings
before income taxes (in thousands):
Share
and
stock
option
Current Deferred benefit Total
------------ ------------ ------------ ------------
Year ended December 31, 2000:
Federal $ (1,598) $ 17,750 $ -- $ 16,152
State (230) 2,591 -- 2,361
Foreign 510 -- -- 510
------------ ------------ ------------ ------------
$ (1,318) $ 20,341 $ -- $ 19,023
============ ============ ============ ============
Year ended December 31, 1999:
Federal $ (6,734) $ (6,816) $ 85 $ (13,465)
State (150) (2,056) 14 (2,192)
Foreign 244 -- -- 244
------------ ------------ ------------ ------------
$ (6,640) $ (8,872) $ 99 $ (15,413)
============ ============ ============ ============
Year ended December 31, 1998:
Federal $ 3,520 $ (2,336) $ 330 $ 1,514
State 761 (385) 54 430
Foreign 182 -- -- 182
------------ ------------ ------------ ------------
$ 4,463 $ (2,721) $ 384 $ 2,126
============ ============ ============ ============
The actual tax expense differs from the expected tax expense
(benefit) as computed by applying the U.S. federal statutory tax
rate of 35 percent as a result of the following (in thousands):
2000 1999 1998
------------ ------------ ------------
Tax (benefit) at U.S. federal statutory rate $ (17,692) $ (13,603) $ (4,850)
In-process research and development -- -- 7,245
Losses (gains) of foreign subsidiaries -- -- (101)
Earnings of foreign sales corporation -- (232) (305)
State taxes (net of federal income tax benefit) 1,521 (1,425) 280
Research and development and foreign tax credits (437) (925) (604)
Foreign taxes 510 244 182
Change in federal valuation allowance 35,607 -- --
Other, net (486) 528 279
------------ ------------ ------------
$ 19,023 $ (15,413) $ 2,126
============ ============ ============
56
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 2000 and 1999, are presented below
(in thousands):
2000 1999
------------ ------------
Deferred tax assets:
Warranty, vacation, and other accruals $ 4,481 $ 3,357
Inventory reserves and other inventory-related
temporary basis differences 4,407 4,106
Pension accrual 5,204 4,469
Long-term contract related temporary differences 612 1,000
Net operating loss carryforwards 19,803 2,529
Unrealized loss on marketable equity securities -- 17
Write-down of investment securities 2,350 1,341
Liquidated damages and late delivery penalties 134 3,198
Credit carryforwards 4,987 2,012
Other 332 343
------------ ------------
Total gross deferred tax assets 42,310 22,372
Less valuation allowance 40,866 117
------------ ------------
Total deferred tax assets 1,444 22,255
------------ ------------
Deferred tax liabilities:
Intangible assets (111) (155)
Plant and equipment, principally due to
differences in depreciation (1,108) (1,707)
Other (225) (52)
------------ ------------
Total gross deferred tax liabilities (1,444) (1,914)
------------ ------------
Net deferred tax asset $ -- $ 20,341
============ ============
Net current deferred tax asset $ -- $ 15,923
Net non-current deferred tax asset -- 4,418
------------ ------------
Net deferred tax asset $ -- $ 20,341
============ ============
Worldwide income before income taxes for the years ended December
31, 2000, 1999 and 1998, 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 federal net operating loss carryovers of $51.8
million, of which $44.6 million expire in 2020 and the remainder
expire between 2006 and 2019, and various tax credit carryovers of
$4.0 million that expire between 2003 and 2020. The Company also has
state net operating loss carryovers that expire depending on the
rules of the various states to which the loss is allocated.
During the year ended December 31, 2000, the Company increased the
valuation allowance approximately $40.7 million. The increase
relates primarily to the general valuation allowance established
under the provisions of Statement of Financial Accounting Standards
No. 109, Accounting for Income Taxes, which requires that a
valuation allowance be established when it is more likely than not
that the net deferred tax assets will not be realized.
57
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(13) 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's 6% Debentures ($7.9 million and $13.1 million
as of December 31, 2000 and 1999, respectively) is based on quoted
market prices.
(14) 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 Company entered into a purchase agreement
with a third party that commits the Company to purchase a minimum
$4.5 million of licensed products and support for design development
software. The agreement is effective for a period of three years
with an option to renew the agreement for an additional two-year
term.
On June 3, 1999, the Company sold certain manufacturing capital
assets and inventory for $6.0 million to Sanmina Corporation as part
of the Company's efforts to outsource the production of certain
electronic products and assemblies. In addition, the 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.
Certain of the Company's contracts to deliver Harmony image
generators contain liquidated damage provisions for delays in
delivery. The Company incurred $0.9 million and $8.2 million for
such damages in 2000 and 1999, respectively. If further delays in
the delivery of the Harmony image generator occur, the Company may
incur additional liquidated damages.
(15) LEGAL PROCEEDINGS
On May 23, 2000, Lockheed Martin Corporation (the "Plaintiff")
served the Company with 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 from the Company by the Plaintiff was
paid to 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
Division 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
dismissal 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.
In the normal course of business, the Company 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 believes
the ultimate disposition of these matters will not have a material
adverse effect on the Company's consolidated financial condition,
liquidity or results of operations.
(16) STOCK OPTION AND STOCK PURCHASE PLANS
Stock Option Plans - The Company has stock incentive plans that
provide for the grant of options to officers and employees to
acquire shares of the Company's common stock at a purchase price
generally equal to the fair market value on the date of grant.
Options generally vest ratably over three years and expire ten years
from date of grant. The Company grants options to its directors
under its Director Plan. Option grants are limited to 10,000 shares
per director in each fiscal year. Options generally vest ratably
over four years and expire ten years from the date of grant. 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. As of December 31, 2000, options to purchase 509,000
shares of common stock were authorized and reserved for future
grant.
On September 29, 1998, the Board of Directors approved a stock
option repricing program whereby each eligible stock option could be
amended to have an exercise price equal to $13.56 (the closing price
of the Company stock on September 29, 1998) if the optionee agreed
to reduce the amount of options repriced by 20% and to accept an
amended vesting period. The vesting period for the repriced options
was amended to vest in one year for all options that were vested as
of September 29, 1998 and to vest ratably over three years for all
options that were not yet vested as of September 29, 1998. As a
result, approximately 1,698,000 options were surrendered by
employees for approximately 1,354,000 repriced options and are
included in the table above. The repriced options expire ten years
from the date of the repriced grant.
59
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes information about fixed stock options
outstanding as of December 31, 2000 (options in thousands):
Options outstanding Options exercisable
------------------------------------- -------------------------
Weighted-
Number average Weighted- Number Weighted-
Range of outstanding remaining average exercisable average
exercise as of contractual exercise as of exercise
prices 12/31/00 life price 12/31/00 price
--------------------- ---------- ----------- --------- ----------- ---------
$ 0.73 - $ 10.69 558 9.4 $ 8.19 2 $ 1.08
10.75 - 12.25 484 6.6 11.82 262 12.19
12.36 - 13.25 186 8.0 12.92 114 13.13
13.31 - 13.56 945 7.7 13.56 781 13.56
13.56 - 20.88 464 7.0 16.33 302 17.12
21.25 - 32.87 20 5.6 23.47 19 23.43
---------- -----------
0.73 - 32.87 2,657 7.7 12.63 1,480 14.12
========== ===========
The Company accounts for these plans under APB 25, under which no
compensation cost has been recognized. Had compensation cost for
these plans been determined consistent with SFAS 123, the Company's
net loss and loss per common share would have been changed to the
following pro forma amounts (in thousands, except per share data):
2000 1999 1998
---------- ---------- ----------
Net loss Pro forma $ (71,923) $ (26,995) $ (21,093)
Basic and diluted loss
per common share Pro forma (7.67) (2.84) (2.22)
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,
1999 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 -- -- --
Stock Purchase Plan - The Company has an employee stock purchase
plan whereby qualified employees are allowed to have up to 10% of
their annual earnings withheld to purchase the company's 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, 58,000 and 43,000 were purchased under this
plan in fiscal 2000, 1999 and 1998, and as of December 31, 2000,
113,000 shares were available for future issuance under this plan.
60
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(17) PREFERRED STOCK
Preferred Stock - Class A
The Company has 5,000,000 authorized shares of Class A Preferred
Stock. Prior to 1998, the Company 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 Company for shareholders of
record on November 19, 1998, and for all future issuances of common
stock. The Rights are not currently exercisable or transferable
apart from the common stock and have voting rights or rights to
receive dividends. Each Right entitles the registered holder to
purchase from the Company 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's outstanding
common shares or following the announcement of a tender offer or
exchange offer upon the consummation of which would result in the
beneficial ownership by a person or group of affiliated persons of
15% or more of the outstanding Company's stock. The Rights may be
redeemed by the Company at a price of $0.01 per Right before
November 30, 2008.
In the event that the Company is 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's 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 Company 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's outstanding common shares without triggering the
exercisability of the Rights.
Preferred Stock - Class B
The Company has 5,000,000 authorized shares of Class B Preferred
Stock. On July 22, 1998, Intel Corporation ("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.
(18) 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, 1999 and
1998 excludes common stock issuable pursuant to outstanding stock
options, the 6% Debentures and the Class B-1 Preferred Stock because
to do so would have had an anti-dilutive effect on earnings per
common share.
(19) 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 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.
REALimage
Simulation Solutions Applications Total
------------ ------------ ------------ ------------
Year ended December 31, 2000:
Sales $ 149,909 $ 5,736 $ 11,335 $ 166,980
Operating loss (43,106) ( 3,132) (305) (46,543)
Year ended December 31, 1999:
Sales $ 170,578 $ 21,961 $ 8,346 $ 200,885
Operating loss (8,686) (26,685) (4,595) (39,966)
Year ended December 31, 1998:
Sales $ 167,014 $ 17,453 $ 7,299 $ 191,766
Operating income (loss) 22,094 (30,663) (7,417) (15,986)
The operating loss in 1999 for the simulation segment includes a
write-off of inventories of $12.1 million. The operating loss in
1999 for the REALimage Solutions segment includes an impairment loss
of $9.7 million, a restructuring charge of $1.5 million and a
write-off of inventories of $1.1 million. The operating loss in 1998
for the REALimage Solutions segment includes a write-off of acquired
in-process technology of approximately $20.8 million.
62
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(20) 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):
2000 1999 1998
---------- ---------- ----------
United States $ 106,045 $ 114,190 $ 106,858
United Kingdom 26,584 50,100 41,029
Europe (excluding United Kingdom) 21,723 27,777 25,039
Pacific Rim 8,162 8,324 18,257
Other 4,466 494 583
---------- ---------- ----------
$ 166,980 $ 200,885 $ 191,766
========== ========== ==========
The following table presents property, plant and equipment by
geographic location based on the location of the assets (in
thousands):
2000 1999
--------- ---------
United States $ 47,777 $ 51,715
Europe 888 469
--------- ---------
Total property, plant and equipment, net $ 48,665 $ 52,184
========= =========
(21) SIGNIFICANT CUSTOMERS
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 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
at December 31, 2000 and $7.2 million or 24% of gross accounts
receivable at December 31, 1999. Aggregated accounts receivable from
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 agencies of the United States government
and the UK MOD, either directly or indirectly through prime or
subcontractors was $16.8 million and $20.5 million, or 25% and 30%
of total costs and estimated earnings in excess of billings on
uncompleted contracts, respectively at December 31, 2000. The amount
of costs and estimated earnings in excess of billings on uncompleted
contracts from agencies of the United States government and the UK
MOD, either directly or indirectly through prime or subcontractors,
was $11.1 million and $41.3 million, or 14% and 51% of total costs
and estimated earnings in excess of billings on uncompleted
contracts, respectively, at December 31, 1999.
(22) 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,
including 17 employees in San Jose and 11 employees in Salt Lake
City. The charge was recorded in accordance with Emerging Issues
Task Force Issue 94-03, Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit (Including Certain
Costs Incurred in a Restructuring).
During 2000, after all employee severance costs were incurred, the
Company reversed $0.8 million of the restructuring charge as a
result of certain employees being transferred within the Company
rather than being terminated and estimated severance and related
charges being lower than expected 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
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
"None"
FORM 10-K
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding directors of the Company is incorporated by
reference from "Election of Directors" in the Proxy Statement to be delivered to
shareholders in connection with the 2001 Annual Meeting of Shareholders to be
held on May 24, 2001.
Information required by Item 405 of Regulation S-K is incorporated
by reference from "Compliance with Section 16(a) of the Securities Exchange Act
of 1934" in the Proxy Statement to be delivered to shareholders in connection
with the 2001 Annual Meeting of Shareholders to be held on May 24, 2001.
Information concerning current executive officers of the Company is
incorporated by reference to the section in Part I hereof found under the
caption "Executive Officers of the Registrant."
ITEM 11. EXECUTIVE COMPENSATION
Information regarding this item is incorporated by reference from
"Executive Compensation" in the Proxy Statement to be delivered to shareholders
in connection with the 2001 Annual Meeting of Shareholders to be held on May 24,
2001.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding this item is incorporated by reference from
"Security Ownership of Certain Beneficial Owners and Management" in the Proxy
Statement to be delivered to shareholders in connection with the 2001 Annual
Meeting of Shareholders to be held on May 24, 2001.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding this item is incorporated by reference from
"Executive Compensation - Summary Compensation Table," "Report of the
Compensation and Stock Options Committee of the Board of Directors," and
"Termination of Employment and Change of Control Arrangements," in the Proxy
Statement to be delivered to shareholders in connection with the 2001 Annual
Meeting of Shareholders to be held on May 24, 2001.
65
FORM 10-K
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
The following constitutes a list of Financial Statements, Financial
Statement Schedules, and Exhibits required to be used in this report:
1. Financial Statements - Included in Part II, Item 8 of this report:
Report of Management
Report of Independent Accountants
Consolidated Balance Sheets as of December 31, 2000 and 1999
Consolidated Statements of Operations for each of the years in the
three-year period ended December 31, 2000
Consolidated Statements of Comprehensive Loss for each of the years
in the three-year period ended December 31, 2000
Consolidated Statements of Stockholders' Equity for each of the
years in the three-year period ended December 31, 2000
Consolidated Statements of Cash Flows for each of the years in the
three-year period ended December 31, 2000
Notes to Consolidated Financial Statements for each of the years in
the three-year period ended December 31, 2000
2. Financial Statement Schedules - included in Part IV of this report:
Schedule II - Valuation and Qualifying Accounts
Schedules other than those listed above are omitted because of the
absence of conditions under which they are required or because the
required information is presented in the financial statements or
notes thereto.
3. Exhibits
2.1 Agreement and Plan of Merger, dated April 22, 1998,
among the Company, E&S Merger Corp., and AccelGraphics,
Inc., filed as Annex I to the Company's Registration
Statement on Form S-4, SEC File No. 333-51041, and
incorporated herein by this reference.
3.1 Articles of Incorporation, as amended, filed as Exhibit
3.1 to the Company's Annual Report on Form 10-K, SEC
File No. 000-08771, for the fiscal year ended December
25, 1987, and incorporated herein by this reference.
3.1.1 Amendments to Articles of Incorporation filed as Exhibit
3.1.1 to the Company'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, dated as of November 19, 1998,
between Evans & Sutherland Computer Corporation and
American Stock Transfer Trust Company which includes as
Exhibit A, the form of Certificate of Designation for
the Rights, as Exhibit B, the form of Rights Certificate
and as Exhibit C, a Summary of Rights, filed as Exhibit
1 to the Company'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.
* Management contract for Compensatory plan or arrangement
required to be filed as an exhibit pursuant to Item
14(c) of Form 10-K.
4. Reports on Form 8-K: The Company did not file any reports on Form
8-K during the last quarter of 2000.
TRADEMARKS USED IN THIS FORM 10-K
AccelGALAXY, AccelGMX, Digistar, E&S, E&S Lightning 1200, EaSIEST,
Ensemble, ESIG, Harmony, Integrator, RAPIDsite, REALimage, simFUSION, StarRider,
Symphony and Vanguard are trademarks or registered trademarks of Evans &
Sutherland Computer Corporation. All other product, service, or trade names or
marks are the properties of their respective owners.
71
Schedule II
-----------
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
Years ended December 31, 2000, 1999 and 1998
(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
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
EVANS & SUTHERLAND COMPUTER CORPORATION
March 30, 2001 By: /S/ James R. Oyler
----------------------------------
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