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UNITED STATES
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, 1997
[ ] 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 (ss. 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of Registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant as of February 27, 1998 was approximately $186,775,000.
The Registrant had issued and outstanding 8,925,444 shares of its common
stock on February 27, 1998.
DOCUMENTS INCORPORATED BY REFERENCE
Those sections or portions of the Registrant's 1997 Proxy Statement for
its Annual Meeting of Shareholders to be held on May 21, 1998 are incorporated
by reference into Part III hereof.
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FORM 10-K
PART I
ITEM 1. BUSINESS
GENERAL
Evans & Sutherland Computer Corporation (Evans & Sutherland, E&S(R), or
the Company) was founded by Drs. David C. Evans and Ivan E. Sutherland and
incorporated under the laws of the State of Utah on May 10, 1968. E&S became a
publicly owned company in 1978. The Company has its principal executive and
operations facilities in Salt Lake City, Utah, on a 36-acre campus in the
University of Utah Research Park. The Company also has offices in Boston,
Massachusetts; Dallas, Texas; Orlando, Florida; Beijing, China; Dubai, United
Arab Emirates; Horsham, England; and Munich, Germany.
A leader in computer graphics since 1968, E&S develops and manufactures
hardware and software for visual systems that produce vivid and highly realistic
3D (three-dimensional) graphics and synthetic environments. The Company's
product offerings include a full range of high-performance visual systems for
simulation, training, and virtual reality applications, as well as graphic
accelerator products for personal computer workstations.
RECENT DEVELOPMENTS AND STRATEGIC ACTIVITIES
Evans & Sutherland continues to follow a three-point growth strategy,
consisting of growing existing businesses, developing new businesses internally,
and selectively acquiring businesses. E&S formed the Digital Studio business
unit during 1997, repositioned the Digital Theater business unit (formerly
Education and Entertainment), and announced several new products utilizing the
Company's Symphony(TM) strategy. E&S also made a strategic minority investment
in a technology company. A summary of recent developments and key strategic
activities that occurred in the past year are summarized below.
The Company formed its Digital Studio business unit on January 8, 1997.
The unit provides affordable, state-of-the-art, real-time systems for digital
content production in the television, film, video, corporate training, and
multimedia industries. Digital Studio products are built around an open-systems
architecture and the Windows NT operating environment. The business unit's
MindSet(TM) Virtual Studio System and FuseBox(TM) software is in use at
broadcast and video studios throughout the world.
E&S announced several new products in its Symphony strategy, which is a
full range of hardware and software products based on Intel/NT open systems
architectures. Harmony(TM) is the highest performance system of the Symphony
strategy. It is intended for applications that demand superior image quality and
deterministic real-time control. At the same time, Harmony delivers superior
price/performance, making it the technology of choice for complex training
requirements. The first customer shipment of the Harmony system is planned for
the second quarter of 1998. For low-end applications, E&S shipped its first
Rhythm(TM) system in 1997, a single-channel image generator on a card with
on-board CPU and REALimage(TM) graphics rendering technology. iNTegrator(TM) is
the software suite that creates and controls the synthetic environments
displayed by the hardware.
Continuing with its commitment to invest in innovative, emerging
technologies, on September 26, 1997, E&S invested in Silicon Light Machines
(SLM), a privately held company. The investment provides additional funds to SLM
to further develop and commercialize its patented digital high-resolution
display technology, called Grating Light Valve(TM) (GLV(TM)) technology.
Commercialization of the technology is expected to benefit display systems used
by E&S in government and commercial simulation and in digital theater
applications. James R. Oyler, President and Chief Executive Officer of E&S, was
also appointed to SLM's board of directors.
In December 1997, the Entertainment & Education business unit was
renamed Digital Theater. The change reflects the business unit's increased focus
on hardware, software and content development for digital theater venues
including entertainment centers, planetariums, science centers, and
universities.
Evans & Sutherland's high quality electronics manufacturing and
software development was recognized by earning ISO 9001 certification, which
acknowledges that the Company's processes comply with international quality
standards as defined by the International Standards Organization (ISO). The
Company's operations in Salt Lake City, Utah received certification for its
manufacturing and research and development during 1996, and the ISO 9001
certification was expanded to include all Salt Lake City operations in July
1997. In addition, the Company's operations in Horsham, England earned ISO 9001
certification in February 1998; the Company's operations in Munich, Germany are
expected to earn certification later this year.
On December 31, 1997, the Company wrote-down to fair market value its
investment in Iwerks Entertainment, Inc. The write-down amounted to $1.5 million
and was due to a decline in fair value considered to be other than temporary. In
addition, the Company wrote down its investments in non-marketable securities
$8.1 million.
On February 18, 1998, the Company's Board of Directors authorized the
repurchase of up to 600,000 shares of the Company's common stock, including the
327,000 shares still available from the repurchase authorization approved by the
board on November 11, 1996. Subsequent to February 18, 1998, the Company has
repurchased 189,000 shares of its common stock; thus, 411,000 shares currently
remain available for repurchase. Stock may be acquired in the open market or
through negotiated transactions. Under the program, repurchases may be made from
time to time, depending on market conditions, share price, and other factors.
These repurchases are to be used primarily to meet current and near-term
requirements for the Company's stock-based benefit plans.
BUSINESS UNITS AND STRATEGY
E&S is organized into six business units. Each business unit develops
and markets its products to a worldwide customer base. These business units can
be grouped into two areas: core businesses and new businesses. The core
businesses are the simulation-related units in which E&S has an established
market presence with significant market share and which represent the majority
of the Company's revenues and earnings. The new businesses are in high growth
markets where E&S has superior technology which can be directed to new
applications. The Company's business units are further described below.
Core Businesses
Government Simulation
Government Simulation provides visual systems for flight and ground training and
related services to the U.S. and international armed forces, NASA, and aerospace
companies. E&S remains the industry leader for visual systems sales to the U.S.
and 22 foreign governments for the purpose of training vehicle operators. 1997
marked a record year for sales, profitability, and backlog.
During 1997, the business unit was awarded a $35 million long-term contract to
supply six visual systems for the Medium Support Helicopter Aircrew Training
Facility (MSHATF) being built for the U.K. Royal Air Force. The visual systems
will be based on the Company's new Harmony image generator technology.
Evans & Sutherland anticipates continued growth in this marketplace as
simulation training increases in value as an alternative to other training
methods, and as simulation training technology and cost-effectiveness improve.
Future customer demands will include lower-cost PC-based systems, more open
systems with interoperable databases, and custom display systems, all of which
E&S is well positioned to provide.
Commercial Simulation
Commercial Simulation is the world's leading independent supplier of visual
systems for flight simulators for commercial airlines. The continued strength in
sales of commercial aircraft contributed to a record sales year for this
business unit. It captured approximately 75 percent of the worldwide available
market for visual systems installed in full-flight training simulators for civil
airlines, training centers, simulator manufacturers, and airframe manufacturers.
Commercial Simulation won contracts for multi-unit orders from major airlines
around the world, and sold its first system to the Airbus Beijing Training
Center in China.
The business unit's hardware platform, consisting of an ESIG(R) 3350GT image
generator and ESCP 2000 raster/calligraphic projectors, continues to set the
standard for image quality, reliability, and ease-of-use. Its systems have been
approved by all major aviation regulatory agencies. In the future, the Company
believes it will enhance its industry-leading position by using E&S Harmony
image generators and advanced display products, and by expanding its product
base to include other flight simulator products.
New Businesses
Board Products
Board Products (formerly Display Systems) supplies high-performance, high-margin
board-level products for simulation, avionics, and vehicle displays. Board
Products is transitioning from a project-oriented model to being a product-based
business, with desktop simulation solutions as its principal target.
The Company believes that the Board Product's Rhythm board, a member of the
Company's Symphony line of products, is the highest density image generator in
the world. It combines the Company's powerful REALimage graphics technology with
an onboard processor to create a compact and very cost-effective, low-end
simulation solution. Board Products intends to develop full-capability board
level image generators and advanced display products, and to participate more
fully in the in-vehicle training marketplace.
Desktop Graphics
Desktop Graphics provides REALimage graphics accelerator technology for the
world's leading manufacturers of NT-based personal computer workstations. Since
inaugural shipments in June 1997, REALimage graphics acceleration technology has
been selected by 12 manufacturers of Windows NT-based computers, earning it the
majority of new-system design wins. In March 1998, volume production of the
third-generation REALimage chip design began, thereby keeping pace with
introductions of new, more powerful processors from Intel. The Company plans two
technology upgrades per year.
Real Image Technology(TM) supports the full range of professional OpenGL
graphics applications, including design engineering, simulation, digital content
creation, visualization, animation, and entertainment, among others.
Digital Studio
Digital Studio provides virtual studio products and services for digital content
production in the television, film, video, corporate training, and multimedia
industries at a fraction of the price of traditional proprietary technology.
MindSet Virtual Studio System and FuseBox control software enable the use of
virtual sets with live talent for the video. The MindSet system is in use at
broadcast, production, postproduction, and educational institutions throughout
the world. In December 1997, E&S announced an order from China Central
Television (CCTV).
As the first Windows NT-based virtual set system, MindSet earned immediate
distinction at the 1997 National Association of Broadcasters annual conference
by being cited as one of the ten best "Prime Time" digital products on exhibit.
It also received an "Editors' Choice" Award from AV Video Multimedia Magazine,
and a "1997 Product Innovation Award" from Computer Graphics World Magazine.
The Company is discussing potential alliances with industry-leading providers of
physical studio sets, weather information and data, and virtual set content for
the television broadcast industry. The Company believes that, once signed, these
and similar agreements will improve customer acceptance of its system and
accelerate market penetration.
Digital Theater
Digital Theater focuses on hardware, software, and content development for
digital theater venues, and is the world's leading supplier of digital
planetarium projection systems (Digistar(R) II). Digital Theater is dedicated
entirely to the emerging, large format digital theater marketplace. Efforts are
focused on hardware, software, and content development. That focus is
all-inclusive, from fundamental technology to building a portfolio of content
for digital theater presentations.
Digital Theater's highest performance system, StarRider Digital Theater, is
designed to display full-color, computer-generated 3D images, in either playback
or real-time mode, onto a domed surface. Exploration Place in Wichita, Kansas
was first to select StarRider; followed by Chicago's prestigious Adler
Planetarium; both are scheduled to open in 1999.
NEW PRODUCT STRATEGY
Building upon 30 years of expertise in the computer graphics industry,
Evans & Sutherland's new Symphony family of products is designed to meet the
needs of developers and users of highly realistic synthetic environments. At the
core of its technology is an open architecture based on Intel and Microsoft
hardware and software standards, with front-end computation controlled by the
Windows NT(R) operating system. The product strategy scales easily with
technology improvements, and supports leading and widely available graphics
software.
Industry standard technologies used in the Company's Symphony family of
products include:
1. Windows NT: The operating system for hosting modeling software and
tools, as well as administrative and control functions in the new E&S
products.
2. Pentium(R) Processors: The leading processors used in most NT
workstations are also used for geometry processing in the Company's new
image generators. Future generations of E&S products will track or
mirror the performance improvements of Intel processors, which are
increasing at the fastest rate in the industry. E&S is working with
Intel to deliver its high-performance REALimage graphics technology
when systems based on Intel's Merced processor become available,
currently expected in 1999.
3. OpenGL(R): Image database elements are rendered through the OpenGL
graphics library and Applications Programming Interface (API). However,
new E&S products are structured in a completely modular fashion to
allow future use of Direct3D(R) and other graphics API's as they become
accepted for professional applications.
4. PCI(R) and AGP(R): REALimage is compatible with PCI and Intel's
Accelerated Graphics Port (AGP), offering a full graphics feature set
and OpenGL compatibility to workstation users with either requirement.
PRODUCTS AND MARKETS
Evans & Sutherland provides a broad line of visual system products and
related services for use in simulators and trainers for military, commercial,
and entertainment applications. The Company's product offerings include: (1)
visual system components and technology, such as Harmony and ESIG image
generators and REALimage controller chip technology; (2) fully integrated
systems, such as the StarRider(TM) domed theater system or the MindSet virtual
set; and (3) related services, such as system integration and database creation.
These offerings, described below, are used in a wide variety of applications.
The product and service offerings are all grounded in Evans & Sutherland's
graphics technology. The Company's new products are based on open systems
architecture and the Windows NT operating environment. The goal has been to
continuously improve the core technology and offer it more broadly in existing
markets, as well as extend it into new markets. E&S products are sold worldwide.
Generally, E&S products consist of four major components. These
components are available as subsystems, but are commonly sold as part of a
complete visual system delivered to an operator or prime contractor.
1. Image generators (IG) create a computer-generated image and send this
image to a display device, such as a projector or CRT. Primary E&S IG
offerings include ESIG, Liberty(R), Harmony, and REALimage technology.
REALimage graphics technology is currently manufactured and sold by
Mitsubishi as part of a chipset.
2. Display systems consist of a combination of projectors, display
screens, CRT screens, and specialized optics. These display systems are
offered in a broad range of configurations, from onboard instrument
displays to domes offering 360-degree field of view, depending on the
applications.
3. Databases of the synthetic environment are offered as standard options
or as custom creations. Military databases are commonly customized and
often cover large areas of terrain. E&S provides database development
as well as database tools, such as EaSIEST(R) and iNTegrator. Databases
developed using iNTegrator are a key element of the Symphony product
family. These can be run on a full range of image generators, from
REALimage-powered desktop graphics accelerators to high-end Harmony
systems.
4. System integration, installation, and support services are also key
elements of most all systems and components sold.
These components and subsystems are often integrated and sold as
complete systems solutions. For example, the Digistar II and StarRider systems
consist of E&S developed image generators, databases of synthetic worlds, and
display systems. These are integrated by E&S with components from other
suppliers, such as audience participation systems or the dome itself. E&S
combines and installs all these components into a complete system solution for
the planetarium and science center market.
In the simulation training market, Evans & Sutherland's visual systems
create dynamic, high-quality, out-the-window scenes that represent the view
vehicle operators see when performing tasks under actual operating conditions.
The Company's visual systems are an integral part of full mission simulators,
which incorporate a number of other components, including cockpits or vehicle
cabs and large hydraulic motion systems.
MARKETING
Evans & Sutherland's products are marketed worldwide by the Company or
its agents. The Company's products and services are sold directly to end users
by E&S as a prime contractor, through subcontractors or other prime contractors,
and through system original equipment manufacturers (OEM). E&S continues to
develop and form both domestic and international marketing alliances, which are
proving to be an effective method of reaching specific markets. In addition, the
Company has OEM agreements for its visual system products with companies such as
STN Atlas Elektronik GmbH in Germany, and Mitsubishi Precision Co., Ltd. in
Japan, and a non-exclusive partnership with Mitsubishi Electronics to
manufacture and sell REALimage-based chipsets. In most cases where E&S sells
through OEM suppliers, the sales, marketing, and product support functions are
provided by those OEM suppliers.
SIGNIFICANT CUSTOMERS
Worldwide customers using E&S products include most major airlines,
U.S. and international armed forces, NASA, aerospace companies, film and video
studios, laboratories, museums, planetariums, science centers, and
location-based entertainment centers.
Customers accounting for more than 10% of the Company's net sales in
1997 included the U.S. government and Thomson Training and Simulation, Ltd.
(Thomson). In 1996, the U.S. government, Thomson, Hughes Training, Inc.
(Hughes), recently acquired by Raytheon, and Rikei Corporation (Rikei) each
accounted for more than 10% of the Company's sales, and in 1995, the U.S.
government, Hughes, and Loral Corporation (Loral), now Lockheed Martin
Information Systems, Inc., each accounted for more than 10% of the Company's
sales. Sales to the U.S. government and prime contractors under U.S. government
contracts were $45.5 million in 1997 (29% of total sales), $25.8 million in 1996
(20% of total sales), and $54.7 million in 1995 (48% of total sales). A portion
of these sales is also included in sales to Hughes and Loral. Sales to Thomson
were $19.3 million in 1997 (12% of total sales), $15.8 million in 1996 (12% of
total sales), and $4.0 million in 1995 (4% of total sales). Sales to Hughes were
$14.0 million in 1997 (9% of total sales), $14.9 million in 1996 (11% of total
sales), and $11.0 million in 1995 (10% of total sales). Sales to Rikei were $8.1
million in 1997 (5% of total sales), $14.3 million in 1996 (11% of total sales),
and $8.8 million in 1995 (8% of total sales). Sales to Loral were $6.9 million
in 1996 (5% of total sales) and $34.3 million in 1995 (30% of total sales). See
footnote 13 of "Notes to Consolidated Financial Statements" in Part II of this
report.
COMPETITIVE CONDITIONS
Primary competitive factors for the Company's products are performance,
price, service, and product availability. Because competitors are constantly
striving to improve their products, E&S must ensure that it continues to offer
products with the best performance at a competitive price. Prime contractors,
including CAE Electronics, Ltd. (CAE), Lockheed Martin, and Thomson, offer
competing visual systems in the government simulation market. The Company
believes it is able to compete effectively in this environment and will continue
to be able to do so into the foreseeable future. In 1997, the Commercial
Simulation business unit was awarded several highly competitive orders and
gained market share against CAE and FlightSafety International, Inc., the
principal competitors in the commercial simulation market. In both the
government and commercial simulation markets, competition for graphics computers
also comes from Silicon Graphics, Inc.
The Desktop Graphics business unit competes against companies like
Intergraph, Inc. as a system OEM that uses its own chip design, and 3Dlabs Inc.,
Ltd. that sells chipsets to board manufacturers. Digital Studio competitors
consist primarily of smaller companies. This market is still in its infancy and
may experience significant change. Board Products is also in a highly fragmented
market where consultive engineering is the primary mechanism for winning orders.
In the Digital Theater business, the Company's DIGISTAR II digital planetarium
product competes with traditional optical-mechanical products. Competitors
include Minolta Planetarium Co. Ltd., Goto Optical Mfg. Co., Carl Zeiss Inc.,
and Spitz Inc. See "Competitive Environment" under "Factors That May Affect
Future Results" under Item 7 "Managements Discussion and Analysis of Financial
Condition and Results of Operations" in Part II of this report.
BACKLOG
The Company's backlog was $154.9 million on December 31, 1997, compared
with $127.4 million on December 27, 1996, and $76.8 million on December 29,
1995. The predominant portion of the backlog as of December 31, 1997 was for
visual simulation products. It is anticipated that most of the 1997 backlog will
be converted to revenue in 1998.
INTERNATIONAL SALES
Sales of product known to be ultimately installed outside the U.S. are
considered international sales by the Company and were $94.6 million, $88.4
million, and $44.5 million in 1997, 1996, and 1995, respectively. International
Sales represented 59%, 68%, and 39% of total sales in 1997, 1996, and 1995,
respectively. To take full advantage of this sales pattern, the Company operated
a wholly-owned Foreign Sales Corporation subsidiary through fiscal year 1997,
the use of which resulted in tax benefits in 1997 of approximately $0.2 million.
For additional information, see footnote 13 of "Notes to Consolidated Financial
Statements" in Part II of this report. See "International Business" under
"Factors That May Affect Future Results" under Item 7 "Managements Discussion
and Analysis of Financial Condition and Results of Operations" in Part II of
this report.
DEPENDENCE ON SUPPLIERS
Most parts and assemblies used by E&S are readily available through
multiple sources in the open market; however, a limited number are available
only from a single source. In these instances the Company stocks a substantial
inventory and/or attempts to develop alternative components or sources where
appropriate. See "Period to Period Fluctuations" under "Factors That May Affect
Future Results" under Item 7 "Managements Discussion and Analysis of Financial
Condition and Results of Operations" in Part II of this report.
PATENTS AND TRADEMARKS
E&S owns a number of patents and trademarks and is a licensee under
several others. Several patent applications are presently pending in the United
States, 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 trademark
ownership to maintain its competitive position. In the event any or all patents
and/or trademarks were held to be invalid, management believes the Company would
not suffer significant long-term damage. However, E&S actively pursues patents
on its new technology.
RESEARCH & DEVELOPMENT
The Company's research and development expenses were $25.5 million,
$21.8 million, and $19.4 million in 1997, 1996, and 1995, respectively. As a
percentage of sales, research and development expenses were 16%, 17%, and 17% in
1997, 1996, and 1995, respectively. The Company continues to fund substantially
all research and development efforts internally. It is anticipated that high
levels of research and development will continue in order to ensure that the
Company maintains technical excellence, leadership, and market competitiveness.
See "Research and Development" and "Product Development and Introduction" under
"Factors That May Affect Future Results" under Item 7 "Managements Discussion
and Analysis of Financial Condition and Results of Operations" in Part II of
this report.
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.
EMPLOYEES
As of February 28, 1998, Evans & Sutherland and its subsidiaries
employed a total of 831 persons. The Company believes its relations with its
employees are good. None of the Company's employees are subject to collective
bargaining agreements.
SEASONALITY
E&S believes there is no inherent seasonal pattern to its business.
Sales volume fluctuates quarter-to-quarter due to relatively large and
nonrecurring individual sales and customer-established shipping dates. Although
the Company's volume has been skewed toward the fourth quarter, the Company has
worked diligently to smooth quarter-to-quarter revenues and expects further
success in achieving this goal. See "Period to Period Fluctuations" under
"Factors That May Affect Future Results" under Item 7 "Managements Discussion
and Analysis of Financial Condition and Results of Operations" in Part II of
this report.
ITEM 2. PROPERTIES
Evans & Sutherland's principal executive, manufacturing, engineering,
and operations facilities are located in the University of Utah Research Park,
in Salt Lake City, Utah, where it owns six buildings totaling approximately
440,000 square feet. E&S occupies four buildings and leases out the remaining
two buildings. The buildings are located on land leased from the University of
Utah on 40-year land leases. Two buildings have options to renew the land leases
for an additional 40 years, and four have options to renew the land leases for
10 years. The Company also owns 46 acres of land in North Salt Lake. E&S has no
encumbrance on any of the real property. The Company and its subsidiaries hold
leases on several sales, service, and production facilities located throughout
the United States, Europe, and Asia.
ITEM 3. LEGAL PROCEEDINGS
Neither the Company nor any of its subsidiaries is a party to any
material legal proceeding. However, the Company is involved in ordinary routine
litigation incidental to its business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of fiscal year 1997.
EXECUTIVE OFFICERS
The following sets forth certain information regarding the executive
officers of the Company as of March 31, 1998:
Name Age Position
- ----------- --- ---------------------------------------
Stewart Carrell 64 Chairman of the Board of Directors
James R. Oyler 52 President and Chief Executive Officer
John T. Lemley 54 Vice President and Chief Financial
Officer
Stuart J. Anderson 58 Vice President and General Manager of
Commercial Simulation
Gene R. Chidester 49 Vice President of Manufacturing
Bruce E. Erickson 53 Vice President and General Manager of
Digital Studio
Charles R. Maule 47 Vice President and General Manager of
Desktop Graphics
Mark C. McBride 36 Vice President, Corporate Controller and
Corporate Secretary
C. Grant Schultz 54 Vice President and Treasurer
Ronald R. Sutherland 59 Vice President and General Manager of
Government Simulation
Allen H. Tanner 44 Vice President and General Manager of
Board Products
Stanley E. Walker 44 Vice President and General Manager of
Digital Theater
Mr. Carrell was elected Chairman of the Board of Directors of the Company on
March 7, 1991. He has been a member of the Board for 14 years. He also serves as
the Chairman of Seattle Silicon Corporation, and he is a director of Tripos,
Inc. From mid-1984 until October 1993, Mr. Carrell was Chairman and Chief
Executive Officer of Diasonics, Inc., a medical imaging company. From November
1983 until early 1987, Mr. Carrell was also a General Partner in Hambrecht &
Quist LLC, an investment banking and venture capital firm.
Mr. Oyler was appointed President and Chief Executive Officer of the Company and
a member of the Board of Directors in December 1994. He is also a director of
Ikos Systems, Inc. and Silicon Light Machines. Previously, Mr. Oyler served as
President of AMG, Inc. from mid-1990 through 1994 and as Senior Vice President
of Harris Corporation from 1976 through mid-1990. He has three years of service
with the Company.
Mr. Lemley joined the Company in November 1995 as Vice President and Chief
Financial Officer. Prior to coming to the Company, he was Senior Vice President
and Chief Financial Officer at Megahertz Corporation. Previously, he was with
Medtronic, Inc., where he was Corporate Controller and Acting Chief Financial
Officer. Prior to Medtronic, Mr. Lemley spent 17 years in a variety of financial
management positions with Hewlett Packard Company. He has two years of service
with the Company.
Mr. Anderson has been Vice President and General Manager of Commercial
Simulation since 1994. Prior to joining the Company, he served as General
Manager of Business Development for Hughes Rediffusion Simulation Ltd. from 1992
to 1994, and numerous other positions with Rediffusion Simulation beginning in
1961. He has three years of service with the Company.
Mr. Chidester has been Vice President of Manufacturing since 1994. He previously
served as Director of Graphics Workstation Manufacturing and has nine years of
service with the Company.
Mr. Erickson was appointed Vice President and General Manager of Digital Studio
on January 1, 1997. He previously served as Vice President of New Market
Development in the Government Simulation business unit, Vice President of the
Government Business Group, and in other capacities with E&S. He has 11 years of
service with the Company.
Mr. Maule has been Vice President and General Manager of Desktop Graphics since
February 1996. Prior to joining the Company, he was Vice President of Marketing
and Strategy for Concurrent Computer Corporation from October 1994 to February
1996. Previously, Mr. Maule served as Director of Business Development for
Lockheed Missiles & Space Company from November 1992 to September 1994. He has
two years of service with the Company.
Mr. McBride has been Vice President and Corporate Controller since September
1996 and was appointed Corporate Secretary in March 1998. Prior to joining the
Company, he was Senior Vice President and Chief Financial Officer at
HealthRider, Inc. from September 1993 to September 1996. From August 1985 to
September 1993, he was employed by Price Waterhouse LLP, independent
accountants, in various capacities, ending with Senior Manager. Mr. McBride is a
Certified Public Accountant. He has one year of service with the Company.
Mr. Schultz has been Vice President and Treasurer since 1996. He previously
served as Corporate Controller. He has 22 years of service with the Company.
Mr. Sutherland has been Vice President and General Manager of Government
Simulation since 1994. He previously served as Executive Vice President of the
Government Sector, and Vice President of Simulation Products. He has 16 years of
service with the Company.
Mr. Tanner joined the Company in March 1996 as Vice President and General
Manager of Board Products. Prior to joining the Company, he was President of
Terabit Computer Specialty Company, Inc. between 1979 and 1996. Terabit was
acquired by E&S in March 1996. He has two years of service with the Company.
Mr. Walker joined the Company in July 1997 as Vice President and General Manager
of Digital Theater. Prior to joining E&S, he served seven years with MCA
Universal Studios as Senior Project Director and in a variety of other project
and technical management positions. He has less than one year of service with
the Company.
FORM 10-K
PART II
ITEM 5. MARKET PRICE OF AND DIVIDENDS ON THE 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 NASDAQ. Quotations represent actual transactions in
NASDAQ's quotation system but do not include retail markup, markdown, or
commission.
HIGH LOW
1997:
First Quarter 28 3/8 22
Second Quarter 29 3/4 22 1/8
Third Quarter 33 1/2 26
Fourth Quarter 37 28 1/4
1996:
First Quarter 25 19
Second Quarter 29 21
Third Quarter 23 3/4 19 1/2
Fourth Quarter 26 1/4 20
APPROXIMATE NUMBER OF EQUITY SECURITY HOLDERS
On March 27, 1998, there were 833 shareholders of record of the
Company's common stock. Because many of such shares are held by brokers and
other institutions on behalf of shareholders, the Company is unable to estimate
the total number of shareholders represented by these record holders.
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.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
(In thousands, except per share amounts)
1997 1996 1995 1994 1993
--------- ---------- --------- ---------- -------
FOR THE YEAR
Net sales $159,353 $ 130,564 $113,194 $ 113,090 $ 142,253
Gross profit 75,214 64,629 50,426 52,464 76,575
Operating expenses 60,825 53,110 50,825 68,976 79,811
Gain from sale of business unit - - 23,506 - -
Operating earnings (loss) 14,389 11,519 23,107 (16,512) (3,236)
Earnings (loss) before income
taxes, extraordinary gain,
and accounting change 6,838 16,029 33,580 (11,384) 2,831
Earnings (loss) before
extraordinary gain and
accounting change 5,080 10,352 20,484 (5,559) 1,826
Net earnings (loss) 5,080 10,352 20,811 (3,700) 4,093
Diluted earnings (loss) per
common share:
Earnings (loss) before
extraordinary gain and
accounting change 0.53 1.12 2.33 (0.65) 0.22
Net earnings (loss) 0.53 1.12 2.37 (0.43) 0.49
Diluted weighted average number
of common shares outstanding 9,502 9,222 8,785 8,520 8,287
AT END OF THE YEAR
Current assets $179,698 $159,213 $161,004 $127,051 $161,188
Current liabilities 50,741 32,290 42,593 30,980 40,516
Current ratio 3.5 4.9 3.8 4.1 4.0
Working capital 128,957 126,923 118,411 96,071 120,672
Net fixed assets 44,368 42,671 40,855 44,823 48,247
Total assets 234,390 210,891 211,002 180,764 216,187
Long-term debt 18,015 18,015 18,015 20,375 37,066
Stockholders' equity 165,634 160,472 148,491 127,118 137,030
Stockholders' equity
per outstanding share 18.27 17.72 17.04 14.86 16.41
QUARTERLY FINANCIAL DATA (Unaudited)
(In thousands, except per share amounts)
1997 Quarter Ended
March 28 June 27 Sep. 26 Dec. 31
------------ ------------ ----------- ----------
Net sales $ 33,642 $ 37,907 $ 38,451 $ 49,353
Gross profit 15,128 17,424 19,284 23,378
Operating expenses 13,690 15,378 14,501 17,256
Operating profit 1,438 2,046 4,783 6,122
Other income (expense), net 577 661 319 (9,108)
Earnings (loss) before income taxes 2,015 2,707 5,102 (2,986)
Net earnings (loss) 1,411 1,975 3,825 (2,131)
Diluted earnings (loss) per common share 0.15 0.21 0.40 (0.23)
1996 Quarter Ended
March 29 June 28 Sep. 27 Dec. 27
------------ ------------ ----------- ----------
Net sales $ 26,686 $ 30,907 $ 33,712 $ 39,259
Gross profit 12,494 14,715 16,764 20,656
Operating expenses 12,003 13,379 12,607 15,121
Operating profit 491 1,336 4,157 5,535
Other income, net 726 1,072 1,144 1,568
Earnings before income taxes 1,217 2,408 5,301 7,103
Net earnings 755 1,493 3,286 4,818
Diluted earnings per common share 0.08 0.16 0.35 0.52
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussions should be read in conjunction with the
Company's Consolidated Financial Statements contained herein under Item 8 of
this report.
ITEMS FROM THE CONSOLIDATED STATEMENTS OF OPERATION (as a percent of sales)
Year-Ended Year-Ended Year-Ended
Dec. 31, Dec. 27, Dec. 29,
1997 1996 1995
----------- ----------- ---------
Net sales 100.0 % 100.0 % 100.0 %
Cost of sales 52.8 50.5 55.5
------ ------- ------
Gross profit 47.2 49.5 44.5
Expenses:
Marketing, general and administrative 22.2 24.0 27.1
Research and development 16.0 16.7 17.2
Write-off of acquired research and development - - 0.6
------ ------- ------
Total expenses 38.2 40.7 44.9
------ ------- ------
Gain from sale of business unit - - 20.8
Operating earnings 9.0 8.8 20.4
Other income (expense), net (4.7) 3.5 9.3
-------- ------- ------
Earnings before income taxes and extraordinary gain 4.3 12.3 29.7
Income tax expense 1.1 4.4 11.6
------ ------- ------
Earnings before extraordinary gain 3.2 7.9 18.1
Extraordinary gain from repurchase of convertible
debentures, net of income taxes - - 0.3
------ ------- ------
Net earnings 3.2 % 7.9 % 18.4 %
====== ======= ======
RESULTS OF OPERATIONS
SUMMARY
Evans & Sutherland experienced another good year in 1997. Orders,
sales, and backlog all reached record levels. Net sales increased 22% and
operating earnings increased 25% over the prior year. Net earnings, however,
decreased 51% resulting from a write-down of investments in non-marketable
securities in accordance with Statement of Financial Accounting Standards No.
115.
SALES
In 1997, sales increased 22% ($159.4 million compared to $130.6 million
in 1996). The improvement was primarily due to increased market share and strong
activity in both domestic and international markets. U.S. sales increased 53%
($64.8 million compared to $42.2 million in 1996), primarily due to a 76%
increase in sales to the U.S. government ($45.5 million compared to $25.8
million in 1996). International sales increased 7% ($94.6 million compared to
$88.4 million in 1996), resulting from strong sales growth of 46% in Europe
($59.2 million compared to $40.5 million in 1996), partially offset by a sales
decrease in the Pacific Rim region of 37% ($27.8 million compared to $44.3
million in 1996). Based on currently booked orders, E&S expects continued
worldwide revenue growth in 1998.
In 1996, sales increased 15% ($130.6 million compared to $113.2 million
in 1995). The improvement over 1995 was primarily due to increased market share
and strong international activity. International sales increased 99% ($88.4
million compared to $44.5 million in 1995) and U.S. sales decreased 39% ($42.2
million compared to $68.7 million in 1995). Strong growth in the international
markets was primarily due to a 219% increase in sales in the Pacific Rim region
($44.3 million compared to $13.9 million in 1995) and a 43% sales increase in
Europe ($40.5 million compared to $28.4 million in 1995).
COSTS AND EXPENSES
Cost of Sales, as a percent of sales, were 53%, 51%, and 56%,
respectively, in 1997, 1996, and 1995. In 1997, the increase in the cost of
sales percentage was due primarily to increased competition and lower margin
contracts resulting from contracts in which the Company was functioning as the
prime contractor. As forecast last year, this trend is expected to continue to
reduce overall gross margins in 1998 and beyond. In 1996, the decrease in the
cost of sales percentage was due primarily to product mix and, in part, to the
Company-wide restructuring that occurred in 1994 and 1995 which eliminated
non-profitable product lines and included a write-down of inventory.
Total operating expenses increased 15% in 1997 ($60.8 million compared
to $53.1 million in 1996), but decreased as a percent of sales (38% compared to
41% in 1996), continuing the trend begun in 1996. The trend of operating
expenses increasing in total but being lower as a percent of sales is expected
to continue in 1998. In 1996, total operating expenses increased 6% ($53.1
million compared to $50.1 million in 1995, excluding the write-off of acquired
research and development in 1995), but decreased as a percent of sales (41%
compared to 44% in 1995).
Marketing, general, and administrative expenses increased 13% in 1997
($35.3 million compared to $31.4 million in 1996), but decreased as a percent of
sales (22% compared to 24% in 1996). In 1996, these expenses increased 2% ($31.4
million compared to $30.7 million in 1995), but decreased as a percent of sales
(24% compared to 27% in 1995). The increase in these expenses in both 1997 and
1996 is due primarily to increased marketing costs related to tradeshow activity
and additional marketing and administrative expenses related to the operation of
the new business units.
Research and development expenses increased 17% in 1997 ($25.5 million
compared to $21.8 million in 1996), but decreased as a percent of sales (16.0%
compared to 16.7% in 1996). In 1996, research and development expenses increased
12% ($21.8 million compared to $19.4 million in 1995), but slightly decreased as
a percent of sales (16.7% compared to 17.2% in 1995). The increase in these
expenses in both 1996 and 1997 is due primarily to increased activity related to
the introduction of several new products, and additional expenses related to the
new business units. Management intends to continue to reduce research and
development, as a percent of sales, over the next few years. However, high
levels of research and development will continue in support of essential product
development to ensure that the Company maintains technical excellence and market
competitiveness. The Company continues to fund substantially all research and
development costs internally.
OTHER INCOME (EXPENSE), NET
Other income (expense), net, was $7.6 million of expense in 1997 and
$4.5 million of income in 1996. This change was due primarily to a write-down of
the Company's investments in certain marketable and non-marketable securities of
$9.6 million during 1997. There were no gains from sales of investment
securities in 1997 compared to a $1.9 million gain in 1996. In addition,
interest income decreased 17% ($3.2 million in 1997 compared to $3.9 million in
1996). In 1996, other income, net, decreased 57% ($4.5 million compared to $10.5
million in 1995) due primarily to a lower gain on sale of investment securities
($1.9 million versus $7.1 million in 1995) and a decrease in interest income
($3.9 million versus $4.8 million in 1995). In 1996, cash and marketable
securities balances were lower compared to 1995, primarily as the result of
proceeds received from the sale of CDRS in April 1995.
EXTRAORDINARY GAIN
Evans & Sutherland realized extraordinary gains in 1995 from repurchase
of its 6% Subordinated Convertible Debentures at less than par. There were no
repurchases of debentures by the Company in 1997 or 1996. The current face
amount of debentures outstanding is $18.0 million.
INCOME TAXES
Provision for income taxes was 26%, 35%, and 39% of pre-tax earnings
for 1997, 1996, and 1995 respectively. In 1998, the Company expects the income
tax rate to approximate 1996 levels.
LIQUIDITY AND CAPITAL RESOURCES
Funds to support the Company's operations generally come from net cash
provided by operating activities, sale of marketable securities
available-for-sale, and proceeds from employee stock purchase and option plans.
The Company also has cash equivalents and short-term marketable securities which
can be used as needed.
During 1997, net cash from operating activities provided $14.3 million
and proceeds from employee stock purchases contributed $3.1 million. The major
uses of cash during the year included purchases of capital equipment for $10.8
million, payments for repurchases of common stock of $4.6 million, the purchase
of investment securities of $4.2 million, and net payments under notes payable
to banks of $3.8 million. The net result was a decrease in cash and marketable
securities of $5.9 million to $57.1 million at December 31, 1997 from $63.0
million at December 27, 1996. At December 31, 1997, the Company has unsecured
revolving line of credit agreements with foreign banks totaling $11.1 million of
which approximately $10.3 million was unused and available. At the end of 1997,
there were no material capital commitments. The Company believes that through
internal cash generation, plus its cash equivalents, marketable securities and
available borrowings under its line of credit agreements, it has sufficient
resources to cover its cash needs during fiscal year 1998.
EFFECTS OF INFLATION
The effects of inflation were not considered material during fiscal
years 1997, 1996, and 1995, and are not expected to be material for fiscal year
1998.
THE YEAR 2000 ISSUE
Beginning in 1996, Evans & Sutherland initiated the review and
assessment of all its computerized hardware and internal-use software systems in
order to ensure that such systems will function properly in the year 2000 and
beyond. During the last two years, the Company's computerized information
systems have been substantially replaced and are believed to be Year 2000
compliant. It is possible, however, that software programs acquired from third
parties and incorporated into other applications utilized by the Company may not
be fully Year 2000 compliant. E&S intends to continue testing, replacing, or
enhancing its internal applications through the end of 1999 to ensure that risks
related to such software are minimized. Management does not believe that costs
associated with Year 2000 compliance efforts will have a material impact on the
Company's financial results or operations.
OUTLOOK
Looking forward, the Company expects good revenue and earnings growth
in 1998. The biggest challenge facing the Company is maintaining gross margin
levels, especially in the government business where continuing worldwide
pressure on defense budgets is severe and in contracts in which the Company
functions as the prime contractor. These pressures are expected to be partially
offset by continued profit improvement in the Company's new businesses. New
product startup expenses are expected to continue to depress earnings in the
first quarter of 1998 with anticipated recovery as new products enter volume
production.
An important indicator for the Company is its continued strong
performance in winning new orders. Record bookings in 1997 of over $186 million
resulted in a record year-end backlog of $155 million, most of which is expected
to be converted to revenue in 1998.
The Company's investments in internal infrastructure is also beginning
to produce results, contributing to an increase in productivity of 18% in 1997
as measured by revenue per employee. In addition, order fulfillment time was
reduced, resulting in improvements in on-time deliveries to customers. The
complete reengineering of supply-chain processes contributed to this
improvement, as well as to improved inventory turns and overall product quality.
Corporate development activities, including mergers, acquisitions, and strategic
investments, continue to be an important part of the Company's strategic growth
plan.
The foregoing contains forward-looking statements that involve risks
and uncertainties, including but not limited to quarterly fluctuations in
results, the timely availability and customer acceptance of new products, the
impact of competitive products and pricing, general market trends and
conditions, and other risks detailed below in "Factors That May Affect Future
Results". Actual results may vary materially from projected results.
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 the Company's control. While E&S management is optimistic about the
Company's long-term prospects, the following discussion highlights some risks
and uncertainties that should be considered in evaluating its growth outlook.
Overview
The high-tech nature of the Company's business is subject to both
national and worldwide economic and political influences such as recession,
political instability, the economic strength of governments, and rapid changes
in technology. The Company's operating results are dependent on its ability to
rapidly develop, manufacture, and market innovative products that meet customers
needs. Inherent in this process is a number of risks that the Company must
manage in order to achieve favorable operating results. The process of
developing new high technology products is complex, expensive, and uncertain,
requiring innovative designs and features that anticipate customer needs,
competing solutions, and technological trends. The products, once developed,
must be manufactured and distributed in sufficient volumes and quality at
acceptable costs and competitive prices. Furthermore, portions of the
manufacturing operations are dependent on the ability of suppliers to deliver
high quality components and subassemblies in time to meet critical manufacturing
and distribution schedules. Constraints in these supply lines and insufficient
quality could adversely affect the Company's operating results until alternate
sourcing can be developed. In accordance with the provisions of the Private
Securities Litigation Reform Act of 1995, the cautionary statements set forth
below identify important factors that could cause actual results to differ
materially from those in the forward-looking statements contained in this
report.
Competitive Environment
The computer industry is highly competitive, with rapid technological
advances and constantly improving price/performance. As most areas in which E&S
operates continue to grow, the Company is experiencing increased competition,
and it expects this trend to continue. In recent years, domestic and worldwide
political, economic, and technological developments have strongly affected these
markets, requiring adaptation by market participants. Since 1994, E&S has
followed a three-point growth strategy, consisting of growing existing
businesses, developing new businesses internally, and selectively acquiring
businesses. These strategies have broadened the Company's business portfolio,
creating opportunities for increased efficiency and market competitiveness,
improved access to new markets, and reduced exposure to airline industry and
defense budget reductions. In addition, E&S continues to undertake cost
reduction efforts throughout all business units while monitoring and adjusting
employment levels consistent with changing business requirements.
Evans & Sutherland's executive management and Board of Directors
continue to review and monitor the Company's strategic plans in connection with
its three-point growth strategy. These plans include assessing business
combinations and joint ventures with companies engaged in similar or closely
related businesses, building market share in core businesses, and divesting less
well-positioned and non-core businesses to remain competitive.
Period to Period Fluctuations
The Company's operating results may fluctuate for a number of reasons.
Delivery cycles and contract lengths are typically long for its core
simulation-related businesses, which make up the largest share of the Company's
revenues and earnings. Well over half of each quarter's revenues result from
orders booked in previous quarters. Because the Company plans its operating
expenses, many of which are relatively fixed in the short term, on expected
revenue, even a small revenue shortfall or shift may cause a period's results to
be below expectations. Such a revenue shortfall could arise from any number of
factors, including delays in the availability of products, delays from chip
suppliers, discontinuance of key components from suppliers, other supply
constraints, transit interruptions, overall economic conditions, or natural
disasters. The timing of customer acceptance of certain large-scale commercial
or government contracts may also have a significant effect on periodic operating
results. U.S. and international government defense budgets may require the
Company to delay or even cancel production due to lack of available funding.
Gross margins are heavily influenced by mix considerations, including
the mix of lower-margin prime contracts versus sub-contracts, new products and
markets versus established products and markets, the mix of high-end products
versus low-end products, as well as the mix of configurations within these
product categories.
Future margins may not duplicate historical margins or growth rates.
The Company's stock price, like that of other technology companies, is
subject to significant volatility. If revenues or earnings in any quarter fail
to meet the investment community's expectations, there could be an immediate
impact on the Company's stock price. The stock price may also be affected by
broader market trends unrelated to the Company's performance.
Research and Development
E&S commits a significant investment in long-term research and
development. Developing new products and software is expensive and the
investment in product development often involves a long payback cycle. While the
Company has every reason to believe these investments will ultimately be
rewarded with revenue-generating products, customer acceptance ultimately
dictates the success of development and marketing efforts. The Company plans to
continue significant investments in software research and development and
related product opportunities from which significant revenue is not anticipated
for a number of years. Management expects total spending for research and
development in 1998 to increase over spending in 1997 in absolute dollars, but
not to increase as a percentage of sales.
Product Development and Introduction
The Company's continued success depends on its ability to develop
technologically complex and innovative products. Product transitions are a
recurring part of the Company's business. A number of risks are inherent in this
process. During fiscal 1998, for example, the Company is heavily committed to
meeting delivery schedules for its Harmony and iNTegrator products. While E&S
has every expectation to meet these schedules, the Company has customer
contracts that include liquidated damages if delivery schedules are not met.
The development of new technology and products is increasingly complex
and uncertain, which increases the risk of delays. The introduction of a new
product requires close collaboration and continued technological advancement
involving multiple hardware and software design and manufacturing teams within
the Company as well as teams at outside suppliers of key components, such as
chipsets. The failure of any one of these elements could cause the Company's new
products to fail to meet specifications or to miss the aggressive timetables
that the Company establishes. As the variety and complexity of the Company's
product families increase, the process of planning production and inventory
levels also becomes increasingly complex. In addition, the extent to which a new
product gains rapid acceptance is strongly affected by the availability of key
applications optimized for the new systems. There is no assurance that
acceptance of the Company's new systems will not be affected by delays in this
process.
Product life-cycles place a premium on Evans & Sutherland's ability to
manage the transition from current products to new products. The Company may
announce new products, while the product is in the final stages of development.
The Company's results could be adversely affected by such factors as development
delays, the release of products late to manufacturing, quality or yield problems
experienced by production or suppliers, variations in product costs, delays in
customer purchases of existing products in anticipation of the introduction of
new products, and excess inventories of older products and components.
U.S. Government Contracts
In 1997, 29% of the Company's sales were made to agencies of the U.S.
government, either directly or through prime contractors or subcontractors, for
which there is intense competition. Accordingly, a significant portion of the
Company's sales are subject to inherent risks, including uncertainty of economic
conditions, changes in government policies and requirements that may reflect
rapidly changing military and political developments, and the availability of
funds. These risks also include technological uncertainties and obsolescence,
and dependence on annual Congressional appropriation and allotment of funds. In
the past, some of the Company's programs have been delayed, curtailed, or
terminated. Although E&S cannot predict such uncertainties, in the opinion of
management there are no spending reductions or funding limitations pending that
would impact Company contracts.
Other characteristics of the industry are complexity of designs, the
difficulty of forecasting costs and schedules when bidding on developmental and
highly sophisticated technical work, and the rapidity with which product lines
become obsolete due to technological advances and other factors characteristic
of the industry. 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. Due to
the intense competition for available U.S. government business, maintaining or
expanding government business increasingly requires E&S to commit additional
working capital for long-term programs and additional investments in
Company-funded research and development.
As a U.S. government contractor or sub-contractor, Evans & Sutherland's
contracts and operations are subject to government oversight. The government may
investigate and make inquiries of the Company's business practices and conduct
audits of contract performance and cost accounting. These investigations may
lead to claims against the Company. Under U.S. government procurement
regulations and practices, an indictment of a government contractor could result
in that contractor being fined and/or suspended for a period of time from
eligibility for bidding on, or for award of, new government contracts; a
conviction could result in debarment for a specified period of time. Although
the outcome of such investigations and inquiries cannot be predicted, in the
opinion of management there are no claims, audits, or investigations pending
against E&S that are likely to have a material adverse effect on either the
Company's business or its consolidated financial position or results of
operations.
International Business
Evans & Sutherland's international business accounted for 59% of the
Company's 1997 sales. International business involves additional risks, such as
exposure to currency fluctuations and changes in foreign economic and political
environments, such as those currently affecting Asian markets. International
transactions frequently involve increased financial and legal risks arising from
stringent contractual terms and conditions and widely differing legal systems,
customs, and mores in foreign countries. In addition, international sales often
include sales to various foreign government armed forces, with many of the same
inherent risks associated with U.S. government sales identified above. E&S
expects that international sales will continue to be a significant portion of
the Company's overall business in the foreseeable future.
Commercial Airline Business
The Company's commercial simulation (airline) business has strengthened
since its decision in 1994 to pursue a new strategy of supplying complete
systems instead of just components. Characteristics of the commercial simulation
market include uncertainty of economic conditions, dependence upon the strength
of the commercial airline industry, air pilot training requirements,
competition, timely performance by subcontractors on contracts in which E&S is
the prime contractor, and changes in technology.
New Businesses
As E&S develops and grows its new businesses, there are certain
uncertainties and risks associated with each business unit. These risks include:
(a) developing strong partner relationships with board manufacturers, as well as
intense competitive pressures for the Desktop Graphics business; (b) acceptance
of new technology and increasing market size and demand in a developing new
market for the Digital Theater business; (c) the technical feasibility and
uncertain market acceptance in a developing new market for the Digital Studio
business; and (d) changes in technology and intense competition for the Board
Products business. Risks also include technological uncertainties and
obsolescence, uncertainty of economic conditions, commitment of working capital,
market acceptance, and other risks inherent in new businesses.
Private Finance Initiative
The Private Finance Initiative (PFI) is designed to increase the
involvement of the private sector in the provision of services which have
traditionally been provided by the public sector. PFI requires the private
sector to use its own capital to invest in assets which then are used to provide
a long term service such as simulation training to its public sector customer.
The number of programs being developed as PFIs is increasing worldwide. E&S is
currently involved in proposals to international military customers where it
would be an equity partner of the PFI prime contractor and program manager. PFI
programs, however, are subject to inherent risks, including the commitment of
working capital and fixed assets, long cycles in which to receive a return on
investment, and termination or default of contracts. These risks also include
technological uncertainties and obsolescence, uncertainty of economic
conditions, changes in U.S. and international government policies and
requirements that may reflect rapidly changing military and political
developments, and the availability of funds.
Forward Looking Statements
This annual report contains both historical facts and forward-looking
statements. Any forward-looking statements involve risks and uncertainties,
including but not limited to risk of product demand, market acceptance, economic
conditions, competitive products and pricing, difficulties in product
development, commercialization, technology, and other risks detailed in this
filing. Although the Company believes it has the product offerings and resources
for continuing success, future revenue and margin trends cannot be reliably
predicted. Factors external to the Company can result in volatility of the
Company's common stock price. Because of the foregoing factors, recent trends
are not necessarily reliable indicators of future stock prices or financial
performance.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following constitutes a list of Financial Statements included in Part II of
this report:
Report of Management
Independent Auditors' Report
Consolidated Balance Sheets - December 31, 1997 and December 27,
1996.
Consolidated Statements of Operations - Years ended December 31,
1997, December 27, 1996, and December 29, 1995.
Consolidated Statements of Stockholders' Equity - Years ended
December 31, 1997, December 27, 1996, and December 29, 1995.
Consolidated Statements of Cash Flows - Years ended December 31,
1997, December 27, 1996, and December 29, 1995.
Notes to Consolidated Financial Statements - Years ended December
31, 1997, December 27, 1996, and December 29, 1995.
The following constitutes a list of Financial Statement Schedules included in
Part IV of this report:
Schedule II - Valuation and Qualifying Accounts
Schedules other than those listed above are omitted because of the
absence of conditions under which they are required or because the required
information is presented in the Financial Statements or notes thereto.
REPORT OF MANAGEMENT
Responsibility for the integrity and objectivity of the financial
information presented in this report rests with the management of Evans &
Sutherland. The accompanying financial statements have been prepared in
conformity with generally accepted accounting principles applied on a consistent
basis and, where necessary, include estimates based on management judgment.
Management also prepared other information in this report and is responsible for
its accuracy and consistency with the financial statements.
Evans & Sutherland has established and maintains an effective system of
internal accounting controls. The Company believes this system provides
reasonable assurance that transactions are executed in accordance with
management authorization in order to permit the financial statements to be
prepared with integrity and reliability and to safeguard, verify, and maintain
accountability of assets. In addition, Evans & Sutherland's business ethics
policy requires employees to maintain the highest level of ethical standards in
the conduct of the Company's business.
Evans & Sutherland's financial statements have been audited by KPMG
Peat Marwick LLP, independent public accountants. Management has made available
all the Company's financial records and related data to allow KPMG Peat Marwick
LLP to express an informed professional opinion in their accompanying report.
The Audit Committee of the Board of Directors is composed of the
Chairman of the Board and all outside directors and meets regularly with the
independent accountants, as well as with Evans & Sutherland management and
internal auditing, to review accounting, auditing, internal accounting control,
and financial reporting matters.
James R. Oyler John T. Lemley
President and Vice President and
Chief Executive Officer Chief Financial Officer
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Stockholders
Evans & Sutherland Computer Corporation:
We have audited the consolidated financial statements of Evans &
Sutherland Computer Corporation and subsidiaries as listed in the accompanying
index. In connection with our audits of the consolidated financial statements,
we also have audited the financial statement schedule as listed in the
accompanying index. These consolidated financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Evans &
Sutherland Computer Corporation and subsidiaries as of December 31, 1997 and
December 27, 1996, and the results of their operations and their cash flows for
each of the years in the three-year period ended December 31, 1997, in
conformity with generally accepted accounting principles. Also in our opinion,
the related financial statement schedule, when considered in relation to the
basic consolidated financial statements taken as a whole, presents fairly, in
all material respects, the information set forth therein.
KPMG Peat Marwick LLP
February 11, 1998
Salt Lake City, Utah
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1997 and December 27, 1996
(In thousands, except share amounts)
Assets 1997 1996
------
-------- --------
Current assets:
Cash and cash equivalents $ 8,176 $ 16,521
Marketable securities 48,928 46,454
Accounts receivable, less allowance for doubtful
receivables of $851 in 1997 and $563 in 1996 36,066 34,842
Inventories (note 3) 26,885 20,202
Costs and estimated earnings in excess of
billings on uncompleted contracts (note 4) 51,799 34,166
Deferred income taxes (note 9) 4,224 4,841
Prepaid expenses and deposits 3,620 2,187
-------- --------
Total current assets 179,698 159,213
Property, plant and equipment (note 5) 44,368 42,671
Investment securities (note 2) 5,000 7,057
Deferred income taxes (note 9) 3,802 -
Other assets 1,522 1,950
-------- --------
$234,390 $210,891
======== ========
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Notes payable to banks (note 6) $ 950 $ 5,334
Accounts payable 14,353 6,370
Accrued expenses (note 7) 18,061 13,933
Customer deposits 6,574 2,058
Income taxes payable (note 9) 4,462 -
Billings in excess of costs and estimated
earnings on uncompleted contracts (note 4) 6,341 4,595
-------- --------
Total current liabilities 50,741 32,290
Long-term debt (note 8) 18,015 18,015
Deferred income taxes (note 9) - 114
Commitments and contingencies (notes 11 and 17)
Stockholders' equity (notes 10 and 15):
Preferred stock, no par value; authorized 10,000,000
shares; no shares issued and outstanding - -
Common stock, $.20 par value; authorized 30,000,000 shares; issued
and outstanding 9,066,743 shares in 1997 and 9,056,871 shares in 1996 1,813 1,811
Additional paid-in capital 8,025 8,639
Retained earnings 155,576 150,496
Net unrealized loss on marketable and investment securities (68) (541)
Cumulative translation adjustment 288 67
-------- --------
Total stockholders' equity 165,634 160,472
-------- --------
$234,390 $210,891
======== ========
See accompanying notes to consolidated financial statements.
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended December 31, 1997, December 27, 1996, and
December 29, 1995
(In thousands, except per share amounts)
1997 1996 1995
---------- ---------- ----------
Net sales (notes 12 and 13) $ 159,353 $ 130,564 $ 113,194
Cost of sales 84,139 65,935 62,768
---------- ---------- ----------
Gross profit
75,214 64,629 50,426
---------- ---------- ----------
Expenses:
Marketing, general and administrative 35,333 31,357 30,714
Research and development 25,492 21,753 19,406
Write-off of acquired research and development - - 705
---------- ---------- ----------
60,825 53,110 50,825
Gain from sale of business unit (note 18) - - 23,506
---------- ---------- ----------
Operating earnings 14,389 11,519 23,107
Other income (expense):
Interest income 3,239 3,892 4,752
Interest expense (1,300) (1,434) (1,477)
Loss on write down of investment securities (9,575) - -
Gain on sale of marketable and investment securities - 1,868 7,126
Other 85 184 72
---------- ---------- ----------
(7,551) 4,510 10,473
---------- ---------- ----------
Earnings before income taxes and extraordinary gain 6,838 16,029 33,580
Income tax expense (note 9) 1,758 5,677 13,096
---------- ---------- ----------
Earnings before extraordinary gain 5,080 10,352 20,484
Extraordinary gain from repurchase of convertible debentures,
net of income taxes of $209 in 1995 (note 8) - - 327
---------- ---------- ----------
Net earnings $ 5,080 $ 10,352 $ 20,811
========== ========== ==========
Basic earnings per common share:
Before extraordinary gain $ .56 $ 1.16 $ 2.37
Extraordinary gain from repurchase of convertible debentures - - .04
---------- ---------- ----------
$ .56 $ 1.16 $ 2.41
========== ========== ==========
Diluted earnings per common share:
Before extraordinary gain $ .53 $ 1.12 $ 2.33
Extraordinary gain from repurchase of convertible debentures - - .04
---------- ---------- ----------
$ .53 $ 1.12 $ 2.37
========== ========== ==========
See accompanying notes to consolidated financial statements.
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
Consolidated Statements of Stockholders'
Equity Years ended December 31, 1997, December 27, 1996,
and December 29, 1995
(In thousands, except share amounts)
1997 1996 1995
-------- -------- --------
Common stock:
Beginning of year $ 1,811 $ 1,743 $ 1,710
Par value of shares issued for cash (183,007 shares in
1997, 195,571 shares in 1996, and 181,734 shares in 1995) 37 39 36
Par value of shares issued to acquire Terabit (149,215
shares in 1996) - 30 -
Par value of shares purchased and retired (173,135 shares
in 1997, 3,235 shares in 1996, and 18,520 shares in 1995) (35) (1) (3)
-------- -------- --------
End of year 1,813 1,811 1,743
-------- -------- --------
Additional paid-in capital:
Beginning of year 8,639 5,112 2,850
Proceeds in excess of par value of shares issued for cash 3,104 2,746 2,504
Compensation expense on employee stock purchase plan 102 90 74
Tax benefit from issuance of common stock to employees 770 691 -
Retirement of treasury stock (4,590) (51) (316)
Terabit acquisition - 51 -
-------- -------- --------
End of year 8,025 8,639 5,112
-------- -------- --------
Retained earnings:
Beginning of year 150,496 140,062 119,251
Terabit acquisition - 82 -
Net earnings 5,080 10,352 20,811
-------- -------- --------
End of year 155,576 150,496 140,062
-------- -------- --------
Net unrealized (loss) gain on investment securities:
Beginning of year (541) 1,694 2,847
Fair value adjustment of marketable securities 473 (2,235) (1,153)
-------- -------- --------
End of year (68) (541) 1,694
-------- -------- --------
Cumulative translation adjustment:
Beginning of year 67 (120) 460
Translation adjustment 221 187 (580)
-------- -------- --------
End of year 288 67 (120)
-------- -------- --------
Total stockholders' equity $165,634 $160,472 $148,491
======== ======== ========
See accompanying notes to consolidated financial statements.
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 1997, December 27, 1996, and
December 29, 1995
(In thousands)
1997 1996 1995
--------- --------- ---------
Cash flows from operating activities:
Net earnings $ 5,080 $ 10,352 $ 20,811
Adjustments to reconcile net earnings to net cash provided by (used
in) operating activities:
Depreciation and amortization 10,041 9,120 9,950
Provision for losses on accounts receivable 370 335 158
Provision for write down of inventory 1,009 (535) 7,988
Provision for warranty expense 726 673 470
Deferred income taxes (3,299) 1,283 414
Loss on write down of investment securities 9,575 - -
Gain on sale of marketable and investment securities - (1,868) (7,126)
Gain on repurchase of convertible debentures - - (536)
Gain on sale of business unit - - (23,506)
Other, net 169 69 (93)
Changes in assets and liabilities net of effects of purchase/sale of
businesses:
Accounts receivable (2,935) (7,406) (6,117)
Inventories (8,641) (3,093) (7,695)
Costs and estimated earnings in excess of billings on uncompleted
contracts, net (15,060) (19,036) 8,530
Prepaid expenses and deposits (1,430) (745) (423)
Accounts payable and accrued expenses 9,232 3,790 (3,912)
Customer deposits 4,496 (3,489) (3,472)
Income taxes 4,958 (11,180) 12,169
--------- --------- ---------
Net cash provided by (used in) operating activities 14,291 (21,730) 7,610
--------- --------- ---------
Cash flows from investing activities:
Purchases of marketable securities (80,443) (57,354) (145,047)
Proceeds from sale of marketable securities 77,858 97,262 85,147
Purchase of investment securities (4,208) (1,447) (3,000)
Proceeds from sale of investment securities - 1,886 7,930
Purchases of property, plant, and equipment (10,804) (10,521) (5,846)
Increase in other assets - (1,463) -
Proceeds from sale of business unit - - 31,488
Payment for acquisition, net of cash acquired - - (93)
--------- --------- ---------
Net cash provided by (used in) investing activities (17,597) 28,363 (29,421)
--------- --------- ---------
Cash flows from financing activities:
Net borrowings (payments) under notes payable to banks (3,827) 1,904 1,758
Net proceeds from issuance of common stock 3,141 3,594 2,295
Payments for repurchases of common stock (4,625) - -
Payments for repurchase of convertible debentures - - (1,831)
--------- --------- ---------
Net cash provided by (used in) financing activities (5,311) 5,498 2,222
--------- --------- ---------
Effect of foreign exchange rate changes on cash 272 (633) (601)
--------- --------- ---------
Net change in cash and cash equivalents (8,345) 11,498 (20,190)
Cash and cash equivalents at beginning of year 16,521 5,023 25,213
--------- --------- ---------
Cash and cash equivalents at end of year $ 8,176 $ 16,521 $ 5,023
========= ========= =========
Supplemental Disclosures of Cash Flow Information Cash paid during the year for:
Interest $ 1,351 $ 1,385 $ 1,500
Income taxes 1,915 14,736 1,134
See accompanying notes to consolidated financial statements.
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1997, December 27, 1996, and December
29, 1995
(In thousands, except share and per share amounts)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Evans & Sutherland Computer Corporation (E&S or the Company) is in the
business of developing, marketing, and supporting visual simulation
computer systems. The Company's current products are of four basic types:
(a) visual systems which create and display computer images of stored
digital models of various real-world environments that allow real-time
interaction within databases that replicate specific geographic areas or
imaginary worlds; (b) graphics accelerators which are used as a component
in high-performance, interactive graphics display systems for
workstations; (c) software systems and development tools which are used
with multi-platform interactive graphics systems to produce 3D (three
dimensional) graphics software and hardware solutions to a broad customer
base; and (d) training systems for flight management which are used
within the commercial aviation training market for pilot training.
The Company changed its fiscal year end from the last Friday in December
to a calendar year end in 1997. The fiscal year ends for the years
included in the accompanying consolidated financial statements are the
periods ended December 31, 1997, December 27, 1996, and December 29,
1995. Unless otherwise specified, all references to a year are to the
fiscal year ended in the year stated.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany accounts
and transactions have been eliminated in consolidation.
Revenue Recognition
Net sales include revenue from system and software products, software
license rights, and service contracts. Product revenues are generally
recognized when the product is shipped and the Company has no additional
performance obligations.
Revenue from long-term contracts is recorded using the
percentage-of-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.
Revenue from software license rights is recognized when the product has
been delivered, provided that the Company has no additional performance
obligations. Revenues from service contracts are recognized ratably over
the related contract period.
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Cash and Cash Equivalents
The Company considers all highly liquid financial instruments purchased
with an original maturity to the Company of three months or less to be
cash equivalents. Cash equivalents consist of debt securities of $6,920
and $11,902 at December 31, 1997 and December 27, 1996, respectively.
Inventories
Raw materials and supplies inventories are stated at the lower of
weighted average cost or market. Work-in-process and finished goods are
stated on the basis of accumulated manufacturing costs, but not in excess
of market (net realizable value).
Property, Plant, and Equipment
Property, plant, and equipment are stated at cost. Depreciation and
amortization are computed using the straight-line and double-declining
balance methods based on the estimated useful lives of the related
assets.
Other Assets
Other assets include deferred bond offering costs, goodwill and certain
other intangible assets and are being amortized on the straight-line
basis over the estimated useful lives of the respective assets.
Software Development Costs
Software development costs, if material, are capitalized from the date
technological feasibility is achieved until the product is available for
general release to customers. Such deferrable costs have not been
material during the periods presented.
Marketable and Investment Securities
The Company classifies 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 separate
component of stockholders' equity until realized. A decline in the market
value below cost that is deemed other than temporary is charged to
results of operations resulting in the establishment of a new cost basis
for the security. Dividend income is recognized when earned. Realized
gains and losses from the sale of securities are included in results of
operations and are determined on the specific-identification basis.
Nonmarketable investment securities are recorded at the lower of cost or
net realizable value.
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.
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Stock-Based Compensation
Effective January 1, 1996, the Company adopted the footnote disclosure
provisions of Statement of Financial Accounting Standards (SFAS) No. 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 (APB) Opinion No. 25, Accounting for Stock Issued to Employees (APB
25). The Company has elected to continue to apply the provisions of APB
25 and provide pro forma footnote disclosures required by SFAS No. 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
foreign subsidiaries. Assets and liabilities of foreign operations are
translated to U.S. dollars at the current exchange rates as of the
applicable balance sheet date. Revenues and expenses are translated at
the average exchange rates prevailing during the period. Adjustments
resulting from translation are reported as a separate component of
stockholders' equity. Certain transactions of the foreign subsidiaries
are denominated in currencies other than the functional currency,
including transactions with the parent company. Transaction gains and
losses are included in other income (expense) for the period in which the
transaction occurs.
Earnings Per Common Share
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 128, Earnings per Share
(SFAS 128). SFAS 128 became effective for financial statements with
interim and annual periods ending after December 15, 1997. Accordingly,
the Company has adopted SFAS 128. SFAS 128 establishes a different method
of computing earnings per common share than was previously required under
the provisions of Accounting Principles Board Opinion No. 15. SFAS 128
requires the presentation of basic and diluted earnings per common share.
Basic earnings per common share is the amount of earnings for the period
available to each share of common stock outstanding during the reporting
period. Diluted earnings per common share is the amount of earnings for
the period available to each share of common stock outstanding during the
reporting period and to each share that would have been outstanding
assuming the issuance of common shares for all dilutive potential common
shares outstanding during the period. Prior periods have been restated
for presentation in accordance with SFAS 128.
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Earnings Per Common Share (continued)
In calculating earnings per common share, the earnings were the same for
both the basic and diluted calculation. A reconciliation between the basic
and diluted weighted average number of common shares for 1997, 1996, and
1995, is summarized as follows (in thousands):
1997 1996 1995
--------- --------- ---------
Basic weighted average number of common shares
outstanding during the year 9,060 8,944 8,639
Weighted average number of common stock options
outstanding during the year 442 278 146
========= ========= =========
Diluted weighted average number of common shares
outstanding during the year 9,502 9,222 8,785
========= ========= =========
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
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to
concentrations of credit risk are primarily cash, cash equivalents,
marketable securities, and accounts receivable. The Company's marketable
securities portfolio consists of investment-grade securities diversified
among security types, industries, and issuers. The Company's investments
are managed by recognized financial institutions that follow the
Company's investment policy. The Company's policy limits the amount of
credit exposure in any one issue, and the Company believes no significant
concentration of credit risk exists with respect to these investments.
In the normal course of business, the Company provides unsecured credit
terms to its customers. Accordingly, the Company performs ongoing credit
evaluations of its customers and maintains allowances for possible losses
which, when realized, have been within the range of management's
expectations.
Reclassifications
Certain reclassifications have been made in the 1996 and 1995
consolidated financial statements to conform with classifications adopted
in 1997.
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(2) MARKETABLE AND INVESTMENT SECURITIES
The amortized cost, gross unrealized holding gains, gross unrealized
holding losses, and fair value for securities by major security type and
class of security at 1997 and 1996, are summarized as follows:
Gross Gross
unrealized unrealized
Amortized holding holding Fair
cost gains losses value
--------- ---------- ---------- --------
Year ended 1997:
U.S. government securities:
Maturing in one year or less $ 3,179 $ - $ 3 $ 3,176
Maturing between one and three years 1,509 7 - 1,516
State and municipal securities:
Maturing in one year or less 14,714 17 10 14,721
Maturing between one and three years 9,389 42 14 9,417
Corporate debt securities:
Maturing in one year or less 2,501 1 - 2,502
Maturing between one and three years 16,045 - 149 15,896
Marketable securities 1,700 - - 1,700
--------- ---------- ---------- --------
$ 49,037 $ 67 $ 176 $ 48,928
========= ========== ========== ========
Year ended 1996:
U.S. government securities:
Maturing in one year or less $ 2,081 $ 3 $ - $ 2,084
Maturing between one and three years 16,253 5 80 16,178
State and municipal securities:
Maturing in one year or less 2,005 10 - 2,015
Maturing between one and three years 16,058 47 1 16,104
Corporate debt securities - Maturing between one
and three years 4,004 - - 4,004
Marketable securities 6,051 18 - 6,069
--------- ---------- --------- --------
$ 46,452 $ 83 $ 81 $ 46,454
========= ========== ========== ========
Long-term investment securities are summarized as follows:
Gross Gross
unrealized unrealized
holding holding Market
Cost gains losses value
--------- ---------- ---------- --------
Year ended 1997:
Marketable securities:
Iwerks Entertainment, Inc. $ 500 $ - $ - $ 500
========= ========== ========== ========
Year ended 1996:
Marketable securities:
Iwerks Entertainment, Inc. $ 2,000 $ - $ 868 $ 1,132
========= ========== ========== ========
The Company has investments in nonmarketable securities of four companies
in 1997 and three companies in 1996. These investments are recorded at
cost, adjusted for declines in fair value that are considered other than
temporary, and total $4,500 and $5,925 at December 31, 1997 and December
27, 1996, respectively. Each of the investments in nonmarketable
securities represent less than 20 percent of the outstanding voting
shares of the respective companies.
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(3) INVENTORIES
Inventories are summarized as follows:
1997 1996
--------- ---------
Raw materials and supplies $ 13,674 $ 8,117
Work-in-process 10,040 11,211
Finished goods 3,171 874
--------- ---------
$ 26,885 $ 20,202
========= =========
(4) LONG-TERM CONTRACTS
Comparative information with respect to uncompleted contracts are
summarized as follows:
1997 1996
--------- ---------
Accumulated costs and estimated
earnings on uncompleted contracts $ 217,354 $ 160,069
Less billings 171,896 130,498
--------- ---------
$ 45,458 $ 29,571
========= =========
Costs and estimated earnings in excess of
billings on uncompleted contracts $ 51,799 $ 34,166
Billings in excess of costs and estimated
earnings on uncompleted contracts (6,341) (4,595)
========= =========
$ 45,458 $ 29,571
========= =========
(5) PROPERTY, PLANT, AND EQUIPMENT
The cost and estimated useful lives of property, plant, and equipment are
summarized as follows:
Estimated
useful lives 1997 1996
------------ --------- ---------
Land - $ 1,436 $ 1,436
Buildings and improvements 40 years 38,152 35,970
Machinery and equipment 3 to 8 years 79,372 74,005
Office furniture and equipment 8 years 2,178 2,052
Construction-in-process - 2,030 1,895
--------- ---------
123,168 115,358
Less accumulated depreciation and
amortization (78,800) (72,687)
--------- ---------
$ 44,368 $ 42,671
========= =========
All buildings and improvements owned by the Company are constructed on
land leased from an unrelated third party. Such leases extend for a term
of 40 years from 1986, with options to extend two of the leases for an
additional 40 years and the remaining four leases for an additional 10
years. At the end of the lease term, including any extension, the
buildings and improvements revert to the lessor.
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(6) NOTES PAYABLE TO BANKS
The following is a summary of notes payable to banks:
1997 1996
-------- --------
Balance at end of year $ 950 $ 5,334
Weighted average interest rate at end of year 8.0% 7.5%
Maximum balance outstanding during the year $ 3,441 $ 5,553
Average balance outstanding during the year $ 1,845 $ 4,833
Weighted average interest rate during the year 7.6% 7.6%
The average balance outstanding and weighted average interest rate are
computed based on the outstanding balances and interest rates at
month-end during each year.
The Company has unsecured revolving line of credit agreements with
foreign banks totaling $11,107 at December 31, 1997, of which
approximately $10,271 was unused and available. The Company also has a
$5,000 unsecured line for letters of credit with a U.S. bank. Letters of
credit totaling $4,691 were outstanding at December 31, 1997 and no
amounts were outstanding at December 31, 1996.
(7) ACCRUED EXPENSES
Accrued expenses consist of the following:
1997 1996
-------- --------
Pension plan obligation (note 14) $ 5,305 $ 3,781
Compensation and benefits 7,497 5,671
Other 5,259 4,481
-------- --------
$ 18,061 $ 13,933
======== ========
(8) LONG-TERM DEBT
Long-term debt is comprised of six percent convertible subordinated
debentures due in 2012. The six percent convertible subordinated
debentures are convertible at the bondholders option at any time prior to
maturity, subject to adjustment. The debentures are redeemable at the
Company's option, in whole or in part, at par. The debentures are
subordinated to all existing and future superior indebtedness.
During 1995, the Company repurchased $2,360 of convertible debentures on
the open market. These purchases resulted in an extraordinary gain of
approximately $536. This extraordinary gain is shown net of income taxes
in the accompanying consolidated statements of operations.
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(9) INCOME TAXES
Components of income tax expense (benefit) attributable to earnings
before income taxes and extraordinary gain:
Share
and
stock
option
Current Deferred benefit Total
--------- --------- ------- --------
1997:
Federal $ 5,327 $ (4,476) $ 663 $ 1,514
State 858 (721) 107 244
--------- --------- ------- --------
$ 6,185 $ (5,197) $ 770 $ 1,758
========= ========= ======= ========
1996:
Federal $ 3,130 $ 1,200 $ 595 $ 4,925
State 474 182 96 752
--------- -------- ------- --------
$ 3,604 $ 1,382 $ 691 $ 5,677
========= ======== ======= ========
1995:
Federal $ 11,085 $ 202 $ - $ 11,287
State 1,654 31 - 1,685
Foreign 124 - - 124
--------- ------- -------- --------
$ 12,863 $ 233 $ - $ 13,096
========= ========= ======== ========
The actual tax expense differs from the expected tax expense (benefit) as
computed by applying the U.S. federal statutory tax rate of 34 percent
for 1997 and 1996 and 35 percent for 1995 as a result of the following:
1997 1996 1995
-------- -------- --------
Tax at U.S. federal statutory rate $ 2,325 $ 5,450 $11,753
Losses (gains) of foreign subsidiaries (115) (165) 217
Earnings of foreign sales corporation (228) (368) (344)
State taxes (net of federal income tax benefit) 161 496 1,075
Research and development and foreign tax credits - - (124)
Foreign taxes - - 124
Other, net (385) 264 395
======== ======== ========
$ 1,758 $ 5,677 $13,096
======== ======== ========
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(9) INCOME TAXES (continued)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1997 and December 27, 1996, are presented below:
Domestic Foreign
------------------- -------------------
1997 1996 1997 1996
-------- -------- -------- -------
Deferred tax assets:
Warranty, vacation, and other accruals $ 1,740 $ 1,839 $ - $ -
Inventory reserves and other inventory-related
temporary basis differences 944 2,067 - -
Pension accrual 1,626 992 - -
Long-term contract related temporary differences 496 461 - -
Net operating loss carryforwards 111 147 721 2,276
Unrealized loss on marketable equity securities 41 325 - -
Write-down of investment securities 3,591 - - -
Other 342 324 - -
-------- -------- -------- -------
Total gross deferred tax assets 8,891 6,155 721 2,276
Less valuation allowance 153 189 721 2,276
-------- -------- -------- --------
Total deferred tax assets 8,738 5,966 - -
-------- -------- -------- -------
Deferred tax liabilities:
Plant and equipment, principally
due to differences in
depreciation and capitalized interest $ (652) (993) - -
Other (60) (246) - -
-------- -------- -------- -------
Total gross deferred tax liabilities (712) (1,239) - -
-------- -------- -------- -------
Net deferred tax asset $ 8,026 $ 4,727 $ - $ -
======== ======== ======== =======
1997 1996
-------- --------
Net current deferred tax asset $ 4,224 $ 4,841
Net non-current deferred tax asset (liability) 3,802 (114)
-------- --------
Net deferred tax asset $ 8,026 $ 4,727
======== ========
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(9) INCOME TAXES (continued)
Certain reclasses have been made during 1997 between beginning deferred
tax assets and liabilities and the current tax payable accounts. These
reclass entries were made to adjust the beginning deferred tax assets to
the tax return amounts.
Management believes the existing net deductible temporary differences
will reverse during the periods in which the Company generates net
taxable income. The Company has a strong taxable earnings history. A
valuation allowance is provided when it is more likely than not that some
portion of the deferred tax asset may not be realized. The Company has
established a valuation allowance primarily for net operating loss and
tax credit carryforwards from an acquired subsidiary and foreign
subsidiaries as a result of the uncertainty of realization. The Company's
beginning valuation allowance changed during 1997 for domestic and
foreign purposes by $36 and $1,555, respectively. The change in the
foreign valuation allowance is primarily attributable to adjusting the
gross asset to its expected value when it may be utilized.
(10) STOCK OPTION, PURCHASE, AND BONUS PLANS
Stock Option Plans - Under two fixed option plans, the Company grants
options to officers and employees to acquire shares of the Company's
common stock at a purchase price generally equal to the fair market value
on the date of grant. Options generally vest ratably over three to four
years and expire ten years from date of grant. The Company grants options
to its directors under its Director Plan. Option grants are limited to
10,000 shares per director in each fiscal year. Options generally vest
ratably over four years and expire ten years from the date of grant.
Shareholders authorized an additional 450,000, 150,000, and 350,000
shares to be granted under the plans during 1997, 1996, and 1995,
respectively. In addition, 180,000 authorized shares from the stock bonus
plan were transferred to the stock option plan during 1995 and the stock
bonus plan was eliminated. At December 31, 1997, options to purchase
268,000 shares of common stock were authorized and reserved for future
grant. A summary of activity follows (shares in thousands):
1997 1996 1995
--------------------- -------------------- ---------------------
Weighted- Weighted- Weighted-
Number average Number average Number average
of exercise of exercise of exercise
shares price shares price shares price
-------- ---------- -------- --------- -------- ---------
Options outstanding at beginning
of year 1,309 $ 18.14 842 $ 14.45 815 $ 13.22
Options granted 570 24.55 724 21.32 291 16.93
Options exercised (159) 16.21 (169) 13.44 (139) 13.71
Options canceled (80) 21.78 (88) 18.20 (125) 13.00
-------- -------- --------
Options outstanding at end of year 1,640 $ 20.38 1,309 $ 18.14 842 $ 14.45
======== ======== ========
Options exercisable at end of year 597 $ 16.40 271 $ 14.67 312 $ 13.78
======== ======== ========
Weighted-average fair value of
options granted during the year $ 8.81 $ 7.15 $ 5.65
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(10) STOCK OPTION, PURCHASE, AND BONUS PLANS (continued)
The following table summarizes information about fixed stock options
outstanding at December 31, 1997 (options in thousands):
Options outstanding Options exercisable
-------------------------------------------------- --------------------------------
Number Weighted-average
out- remaining Weighted-average Number Weighted-average
Range of standing at contractual exercise exercisable at exercise
exercise December 31, life price December 31, price
prices 1997 1997
-------------- --------------- -------------- -------------- --------------- --------------
$ 12.22 - 15.25 348 7.06 $12.96 297 $12.63
15.39 - 20.75 174 6.06 19.08 129 18.66
20.88 - 20.88 375 8.10 20.88 116 20.88
21.00 - 22.38 348 8.87 22.12 39 21.75
22.50 - 32.88 395 9.30 25.48 16 22.76
--------------- ---------------
12.22 - 32.88 1,640 8.12 20.38 597 16.40
=============== ===============
The Company accounts for these plans under APB 25, under which no
compensation cost has been recognized. Had compensation cost for these
plans been determined consistent with SFAS 123, the Company's net
earnings and earnings per common share would have been changed to the
following pro forma amounts (earnings per common share amounts have been
restated in 1996 and 1995 to reflect the Company's adoption of SFAS 128):
1997 1996 1995
------- ------ -------
Net earnings As reported $ 5,080 $ 10,352 $ 20,811
Pro forma 2,545 8,570 20,319
Basic earnings per common share As reported 0.56 1.16 2.41
Pro forma 0.28 0.96 2.35
Diluted earnings per common share As reported 0.53 1.12 2.37
Pro forma 0.27 0.93 2.31
Pro forma net earnings reflects only options granted subsequent to
December 29, 1994. Therefore, the effect that calculating compensation
cost for stock-based compensation under SFAS 123 has on the pro forma net
earnings as shown above may not be representative of the effects on
reported net earnings for future years.
The fair value of each option grant is estimated on the date of the grant
using the Black-Scholes option pricing model with the following weighted
average assumptions used for grants in 1997, 1996, and 1995,
respectively: risk-free interest rates of 5.7 percent, 6.1 percent, and
5.7 percent, expected average lives of 2.6 years for 1997 and 2.3 years
for both 1996 and 1995; and expected volatility of 47 percent for 1997
and 49 percent for both 1996 and 1995.
Stock Purchase Plan - The Company has an employee stock purchase plan
whereby qualified employees are allowed to purchase limited amounts of
the Company's common stock at 85 percent of the market value of the stock
at the time of the sale. A total of 500,000 shares are authorized under
the plan.
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(11) 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,
1997 were $8,133 and $2,616, respectively. Rental income for all
operating leases for 1997, 1996, and 1995 was $1,144, $770, and $431,
respectively.
The Company occupies real property and uses certain equipment under lease
arrangements which are accounted for primarily as operating leases.
Rental expenses for all operating leases for 1997, 1996, and 1995 were
$1,718, $1,506, and $1,770, respectively.
At December 31, 1997, the future minimum rental income and commitment
under operating leases that have initial or remaining noncancelable lease
terms in excess of one year are as follows:
Rental
Rental commit-
income ment
-------- ---------
Fiscal year(s):
1998 $ 915 $ 1,264
1999 755 1,151
2000 725 1,014
2001 682 867
2002 647 772
Thereafter 2,347 9,343
-------- ---------
$ 6,071 $ 14,411
======== =========
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(12) INDUSTRY SEGMENT AND FOREIGN OPERATIONS
The Company operates in a single industry segment, the visual simulation
and computer graphics marketplace. A summary of operations by geographic
area follows:
1997 1996 1995
--------- --------- ----------
Net sales:
U.S. operations $ 138,910 $ 121,759 $ 110,004
European operations 35,943 16,625 4,618
Eliminations (15,500) (7,820) (1,428)
--------- --------- ---------
Total net sales $ 159,353 $ 130,564 $ 113,194
========= ========= =========
Operating earnings (loss):
U.S. operations $ 7,433 $ 9,943 $ 25,866
European operations 7,702 1,730 (2,953)
Eliminations (746) (154) 194
--------- --------- ---------
Total operating earnings $ 14,389 $ 11,519 $ 23,107
========= ========= =========
Identifiable assets:
U.S. operations $ 138,888 $ 120,466 $ 94,233
European operations 23,741 14,547 3,483
Eliminations (877) (159) -
--------- --------- ---------
Total identifiable assets 161,752 134,854 97,716
Corporate assets 72,638 76,037 113,286
--------- --------- ---------
Total assets $ 234,390 $ 210,891 $ 211,002
========= ========= =========
Transfers between geographic areas are accounted for at market price and
intercompany profit is eliminated in consolidation. Operating earnings
(loss) are total sales less operating expenses. Identifiable assets are
those assets of the Company that are identified with the operations in
each geographic area. Corporate assets are principally cash, marketable
securities, and long-term investments.
(13) SALES TO FOREIGN AND MAJOR CUSTOMERS
Sales to foreign customers are summarized as follows:
1997 1996 1995
-------- -------- --------
Sales to foreign end-users:
Europe (excluding Great Britain) $ 47,168 $ 26,621 $ 16,801
Pacific Rim 27,789 44,262 13,888
Great Britain 12,008 13,913 11,612
Other 7,677 3,572 2,202
-------- -------- --------
Total $ 94,642 $ 88,368 $ 44,503
======== ======== ========
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(13) SALES TO FOREIGN AND MAJOR CUSTOMERS (continued)
Customers comprising 10 percent or greater of the Company's net sales are
summarized as follows:
1997 1996 1995
-------- -------- --------
Thomson Training & Simulation Ltd. 12% 12% 4%
Hughes Training Incorporated 9% 11% 10%
Rikei Corporation 5% 11% 8%
Loral Corporation - 5% 30%
The Company's products are sold to agencies of the United States
Government through prime contractors or subcontractors thereof. The
percentage of net sales to total sales attributed to the U.S. Government
either directly or through prime contractors or subcontractors for 1997,
1996, and 1995 was 29 percent, 20 percent, and 48 percent, respectively,
of which 22 percent, 30 percent, and 34 percent of those sales are also
included as sales to the customers above, respectively.
The outstanding accounts receivable from agencies of the United States
Government either directly or through prime contractors or subcontractors
was $9,478 or 26% of gross receivables at December 31, 1997 and $9,091 or
26% of gross receivables at December 27, 1996. The amount included in
costs and estimated earnings in excess of billings on uncompleted
contracts from agencies of the the United States Government either
directly or through prime contractors or subcontractors was $21,371 or
41% of costs and estimated earnings in excess of billings on uncompleted
contracts at December 31, 1997 and $12,766 or 37% of costs and estimated
earnings in excess of billings on uncompleted contracts at December 27,
1996. The outstanding accounts receivable from another customer was
$5,464 or 15% of gross accounts receivable at December 31, 1997 and
$5,306 or 15% of gross accounts receivable at December 27, 1996.
(14) EMPLOYEE BENEFIT PLANS
Pension Plan (Plan) - The Company has a defined benefit pension plan
covering substantially all employees who have attained age 21 with
service in excess of one year. Benefits at normal retirement age (65) are
based upon the employee's years of service and the employee's highest
compensation for any consecutive five of the last ten years of
employment. The Company's funding policy is to contribute annually the
maximum amount that can be deducted for federal income tax purposes.
Supplemental Executive Retirement Plan (SERP) - Effective July 1, 1995,
the Company introduced a non-qualified SERP which will be phased in over
three years. The SERP, which is unfunded, provides eligible executives
defined pension benefits, outside the Company's pension plan, based on
average earnings, years of service, and age at retirement.
Net annual Plan and SERP expense is summarized as follows:
1997 1996 1995
------------------ ------------------ ------------------
Plan SERP Plan SERP Plan SERP
------- -------- ------- ------- ------- -------
Benefits for services rendered during the
year $ 2,025 $ 327 $ 1,989 $ 265 $ 1,594 $ 91
Interest on projected benefit obligation 2,008 252 1,776 98 1,763 44
Actual return on plan assets (4,848) - (3,546) - (4,978) -
Net amortization and deferral 1,707 221 875 86 2,419 36
------- -------- ------- ------- ------- -------
$ 892 $ 800 $ 1,094 $ 449 $ 798 $ 171
======= ======== ======= ======= ======= =======
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(14) EMPLOYEE BENEFIT PLANS (continued)
The following assumptions were used in accounting for the Plan and SERP
at the end of each year:
1997 1996 1995
------- -------- --------
Discount rates used in determining benefit obligations 7.00% 7.50% 7.00%
Rates of increase in compensation levels 4.50 4.50 4.50
Expected long-term rate of return on plan assets 9.00 9.00 9.00
The following summarizes the funded status and amounts recognized in the
Company's consolidated financial statements:
1997 1996 1995
------------------- ------------------- --------------------
Plan SERP Plan SERP Plan Plan
-------- -------- -------- -------- -------- --------
Actuarial present value of benefit
obligations:
Vested benefits $(21,321) $ (2,315) $(15,033) $ (1,176) $(16,183) $ -
Nonvested benefits (1,064) (73) (610) (580) (732) (900)
-------- -------- -------- -------- -------- --------
Accumulated benefit obligation (22,385) (2,388) (15,643) (1,756) (16,915) (900)
Effect of projected future
salary increases (13,827) (2,875) (10,135) (1,598) (12,548) (503)
-------- -------- -------- -------- -------- --------
Projected benefit obligation (36,212) (5,263) (25,778) (3,354) (29,463) (1,403)
Plan assets at fair value 36,767 - 32,912 - 29,174 -
-------- -------- -------- -------- -------- --------
Projected benefit obligation
below (in excess of) plan assets 555 (5,263) 7,134 (3,354) (289) (1,403)
Unrecognized net (gain) loss (3,954) 2,895 (9,116) 1,726 (1,657) 138
Unrecognized prior service cost 165 948 (440) 1,008 (512) 1,094
Unrecognized net transition
obligation 317 - 397 - 476 -
-------- -------- -------- -------- -------- --------
Accrued pension plan obligation (2,917) (1,420) (2,025) (620) (1,982) (171)
Additional minimum liability - (968) - (1,136) - -
-------- -------- -------- -------- -------- ---------
Total liability $(2,917) $ (2,388) $(2,025) $ (1,756) $(1,982) $ (171)
======== ======== ======== ======== ======== =========
The additional minimum liability is offset by an equal intangible asset
recorded in other assets in the consolidated financial statements.
Deferred Savings Plan - The Company has a deferred savings plan which
qualifies under Section 401(k) of the Internal Revenue Code. The plan
covers all employees of the Company who have at least one year of service
and who are age 18 or older. The Company makes matching contributions of
50 percent of each employee's contribution not to exceed six percent of
the employee's compensation. The Company's contributions to this plan for
1997, 1996, and 1995 were $957, $948 and $836, 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, 1997
and December 27, 1996, the investment in the policies was $1,104 and
$643, respectively, and net life insurance expense was $135, $91, and $57
for 1997, 1996, and 1995, respectively.
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(15) PREFERRED STOCK
The Company has both Class A and Class B Preferred Stock with 5,000,000
shares authorized for each class. The Company has reserved 300,000 shares
of the Class A Preferred Stock as Series A Junior Preferred Stock under a
shareholder rights plan. This preferred stock entitles holders to 100
votes per share and to receive the greater of $2.00 per share or 100
times the common dividend declared. Upon voluntary or involuntary
liquidation, dissolution, or winding up of the Company, holders of the
preferred stock would be entitled to be paid, to the extent assets are
available for distribution, an amount of $100 per share plus any accrued
and unpaid dividends before payment is made to common stockholders.
In connection with this preferred stock, the Company issued one warrant
to each common stockholder that would be exercisable contingent upon
certain conditions and would allow the holder to purchase 1/100th of a
preferred share per warrant. The warrants attached to the shares
outstanding on November 30, 1988 and to all new shares issued after that
date; the warrants outstanding at December 31, 1997 and December 27, 1996
are equal to the shares of common stock outstanding of 9,066,743 and
9,056,871, respectively. At December 31, 1997 and December 27, 1996, the
warrants were not exercisable and no shares of preferred stock have been
issued.
(16) DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash and cash equivalents, receivables, notes
payable to bank, accounts payable, and accrued expenses approximates fair
value because of their short maturity. The fair value of the Company's
long-term debt instruments ($15,673 at December 31, 1997 and $15,498 at
December 27, 1996) is based on quoted market prices.
(17) COMMITMENTS AND CONTINGENCIES
In the normal course of business, the Company has various legal claims
and other contingent matters, including items raised by government
contracting officers and auditors. Although the final outcome of such
matters cannot be predicted, the Company believes the ultimate
disposition of these matters will not have a material adverse effect on
the Company's consolidated financial condition, liquidity, or results of
operations.
In September 1995, the Company reached a settlement agreement with
Thomson Training & Simulation (Thomson). Under the agreement, the Company
received $3,750 from lost revenues for breach of a working agreement by
Thomson. The settled agreement allows the Company and Thomson to pursue
opportunities in the civil pilot market on a nonexclusive basis. The
amount paid to the Company under this settlement is classified as sales
in the Company's consolidated statements of operations.
(18) BUSINESSES SOLD, ACQUIRED, AND SPIN-OFF
On December 27, 1996, the Company contributed all of the issued and
outstanding capital stock of Portable Graphics, Inc., a wholly-owned
subsidiary, and paid $100 cash in exchange for 1,570,667 Class A Shares
of Total Graphics Solution N.V. (TGS) pursuant to Section 351(a) of the
Internal Revenue Code of 1986, whereby the Company immediately thereafter
had control of the TGS Class A Shares. Based upon an independent
valuation of TGS, the Company has recorded its investment in TGS at
$1,250. In addition, the Company paid TGS $250 in exchange for a warrant
to purchase an additional 832,355 Class A Shares at a price of $1.40 per
share. The warrant expires on the earlier of December 27, 2001 or the
effective date of an underwritten public offering of the capital stock of
TGS. The cost of the warrant has been recorded in investment securities
in the consolidated financial statements.
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(18) BUSINESSES SOLD, ACQUIRED, AND SPIN-OFF (continued)
On March 20, 1996, the Company acquired Terabit Computer Specialty
Company, Inc. (Terabit). Terabit, established in 1979, developed,
marketed and supported simulated cockpit instruments and other airborne
electronics displays used in training simulators for military and
commercial aircraft. To effect the acquisition, 149,215 shares of the
Company's common stock were issued in exchange for all of the outstanding
common stock of Terabit. The acquisition was accounted for using the
pooling of interests method. However, due to immateriality, the Company's
financial information has not been restated to include the accounts and
operations of Terabit prior to January 1, 1996.
On April 12, 1995, the Company sold its CDRS business unit to Parametric
Technology Corporation (PTC), a Massachusetts Corporation. The proceeds
from the sale net of direct expenses of $1,591 was approximately $31,488
resulting in a gain of $23,506 summarized as follows:
Proceeds $ 31,488
Assets and liabilities sold:
Accounts receivable $ (961)
Inventory (466)
Net property, plant, and equipment (1,228)
Liabilities 387 (2,268)
-----------
Provision for expenses (2,414)
Write-off of inventory (3,300)
-----------
$ 23,506
===========
On October 3, 1995, the Company acquired all of the outstanding common
stock of Xionix Simulation, Inc. (Xionix) for $1,080. Xionix manufactures
low-cost flight-system trainers. This business combination was accounted
for under the purchase method of accounting. Accordingly, the purchase
price was allocated to assets and liabilities based on their estimated
fair values as of the date of acquisition. Operations of Xionix are
included in the accompanying consolidated financial statements from the
date of acquisition, and are not material in relation to the Company's
consolidated financial statements; pro forma financial information has
therefore not been presented. The Company allocated $705 of the Xionix
purchase price to in-process research and development which has no
alternative future use and this amount was written off during 1995.
(19) RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 130., Reporting Comprehensive Income and Statement of Financial
Accounting Standards No. 131, Disclosures about Segments of an Enterprise
and Related Information. These statements, which are effective for periods
beginning after December 15, 1997 expand or modify disclosures and,
accordingly, will have no impact on the Company's reported financial
position, results of operation, or cash flows.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
"None"
FORM 10-K
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
Information regarding directors of the Company is incorporated by
reference from "Election of Directors" in the Proxy Statement to be delivered to
shareholders in connection with the 1998 Annual Meeting of Shareholders to be
held on May 21, 1998.
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 1998 Annual Meeting of Shareholders to be held on May 21, 1998.
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 1998 Annual Meeting of Shareholders to be held on May 21,
1998.
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 1998 Annual
Meeting of Shareholders to be held on May 21, 1998.
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 1998 Annual
Meeting of Shareholders to be held on May 21, 1998.
FORM 10-K
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K
The following constitutes a list of Financial Statements, Financial
Statement Schedules, and Exhibits required to be included in this report:
1. Financial Statements - Included in Part II, Item 8 of this report:
Report of Management
Report of Independent Auditors
Consolidated Balance Sheets - December 31, 1997 and December 27, 1996.
Consolidated Statements of Operations - Years ended December 31, 1997,
December 27, 1996, and December 29, 1995.
Consolidated Statements of Stockholders' Equity - Years ended December
31, 1997, December 27, 1996, and December 29, 1995.
Consolidated Statements of Cash Flows - Years ended December 31, 1997,
December 27, 1996, and December 29, 1995.
Notes to Consolidated Financial Statements - Years ended December 31,
1997, December 27, 1996, and December 29, 1995.
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
3.1 Articles of Incorporation, as amended, filed as Exhibit 3.1 to
the Company's Annual Report on Form 10-K for the fiscal year
ended December 25, 1987, and incorporated herein by this
reference.
3.1.1 Amendments to Articles of Incorporation filed as Exhibit 3.1.1
to the Company's Annual Report on Form 10-K for the fiscal
year ended December 30, 1988, and incorporated herein by this
reference.
3.2 By-laws, as amended, filed as Exhibit 3.2 to the Company's
Annual Report on Form 10-K for the fiscal year ended December
25, 1987, and incorporated herein by this reference.
10.1 1985 Stock Option Plan, filed as Exhibit 1 to the Company's
Post-effective Amendment No. 1 to Registration Statement on
Form S-8, SEC File No. 2-76027, and incorporated herein
by this reference.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES,
AND REPORTS ON FORM 8-K (Continued)
3. Exhibits (Continued)
10.2 1989 Stock Option Plan for Non-employee Directors, filed as
Exhibit 10.5 to the Company's Annual Report on Form 10-K for
the fiscal year ended December 29, 1989, and incorporated
herein by this reference.
10.3 The Company's 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 Employment Agreement dated November 17, 1994, between the
Company and Mr. Gary E. Meredith, filed as Exhibit 10.9 to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 26, 1994, and incorporated herein by this reference.
10.5 Employment Agreement dated November 29, 1994, between the
Company and Mr. James R. Oyler, filed as Exhibit 10.10 to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 26, 1994, and incorporated herein by this reference.
10.6 The Company's 1995 Long-Term Incentive Equity Plan, filed as
Exhibit 10.11 to the Company's Annual Report on Form 10-K for
the fiscal year ended December 29, 1995, and incorporated
herein by this reference.
10.7 Asset Purchase Agreement dated March 1, 1995, between the
Company and Parametric Technology Corporation as to E&S'
divestiture of its Design Software group (CDRS), filed as
Exhibit 10.12 to the Company's Annual Report on Form 10-K for
the fiscal year ended December 29, 1995, and incorporated
herein by this reference.
10.8 The Company's Executive Savings Plan, filed as Exhibit 10.14
to the Company's Annual Report on Form 10-K for the fiscal
year ended December 29, 1995, and incorporated herein by this
reference.
10.9 The Company's Supplemental Executive Retirement Plan (SERP),
filed as Exhibit 10.15 to the Company's Annual Report on Form
10-K for the fiscal year ended December 29, 1995, and
incorporated herein by this reference.
23.1 Consent of Independent Accountants.
24.1 Powers of Attorney for Messrs. Stewart Carrell, Gerald
Casilli, Henry N. Christiansen, Peter O. Crisp, John T.
Lemley, Gary E. Meredith, James R. Oyler, Ivan E. Sutherland,
and John E. Warnock.
27 Financial Data Schedule (filed as part of electronic filing
only).
No reports on Form 8-K were filed during the fourth quarter of the
year ended December 31, 1997.
TRADEMARKS USED IN THIS FORM 10-K
Digistar, E&S, EaSIEST, ESIG, FuseBox, Harmony, iNTegrator, Liberty,
Melody, MindSet, Real Image Technology, REALimage, Rhythm, StarRider, Symphony,
and Universal 3D Architecture 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.
Schedule II
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
Valuation and Qualifying Accounts
Years ended December 31, 1997, December 27, 1996, and December 29, 1995
(Dollars in thousands)
Allowance for doubtful receivables
- ----------------------------------
Receivables
Additions charged
Balance at charged to (recovered) Balance
beginning of cost and against at end
year expenses allowance of year
-------------- -------------- ------------- ----------
Year ended December 31, 1997 $ 563 $ 370 $ 82 $ 851
============== ============== ============= ==========
Year ended December 27, 1996 $ 172 $ 335 $ (56) $ 563
============== ============== ============= ==========
Year ended December 29, 1995 $ 144 $ 158 $ 130 $ 172
============== ============== ============= ==========
Deferred tax asset valuation allowance
- --------------------------------------
Balance at Charges Balance
beginning of Additions and against at end
year adjustments allowance of year
-------------- -------------- ------------- ----------
Year ended December 31, 1997 Domestic $ 189 $ - $ 36 $ 153
============== ============== ============= ==========
Foreign $ 2,276 $ - $ 1,555 $ 721
============== ============== ============= ==========
Year ended December 27, 1996 Domestic $ 520 $ - $ 331 $ 189
============== ============== ============= ==========
Foreign $ 2,276 $ - $ - $ 2,276
============== ============== ============= ==========
Year ended December 29, 1995 Domestic $ 520 $ - $ - $ 520
============== ============== ============= ==========
Foreign $ 2,276 $ - $ - $ 2,276
============== ============== ============= ==========
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
EVANS & SUTHERLAND COMPUTER CORPORATION
March 31, 1998 By: /S/
-------------------------
JAMES R. OYLER, PRESIDENT
Pursuant to the requirements of the Securities and Exchange Act of
1934, this report signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
/S/ * Chairman of the March 31, 1998
- ----------------------
STEWART CARRELL Board of Directors
/S/ Director and President March 31, 1998
- ----------------------
JAMES R. OYLER (Chief Executive Officer)
/S/ Vice President and Chief March 31, 1998
- ----------------------
JOHN T. LEMLEY Financial Officer
(Principal Financial Officer)
/S/ Vice President and March 31, 1998
- ----------------------
MARK C. MCBRIDE Corporate Controller
(Principal Accounting Officer)
/S/ * Director March 31, 1998
- ----------------------
GERALD S. CASILLI
/S/ * Director March 31, 1998
- ----------------------
PETER O. CRISP
/S/ * Director March 31, 1998
- ----------------------
HENRY N. CHRISTIANSEN
/S/ * Director March 31, 1998
- ----------------------
IVAN E. SUTHERLAND
/S/ * Director March 31, 1998
- ----------------------
JOHN E. WARNOCK
By: /S/ * March 31, 1998
-------------------
JOHN T. LEMLEY
Attorney-in-Fact