UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the Fiscal Year ended December 31, 1998
[ ] 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
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EVANS & SUTHERLAND
COMPUTER CORPORATION
(Exact name of registrant as specified in its charter)
Utah 87-0278175
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
600 Komas Drive, Salt Lake City, Utah 84108
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (801) 588-1000
Securities Registered Pursuant to Section 12(b) of the Act:
"None"
Securities Registered Pursuant to Section 12(g) of the Act:
Title of Class
--------------------------------------------
Common Stock, $.20 par value
6% Convertible Debentures Due 2012
Preferred Stock Purchase Rights
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ______
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]
The aggregate market value of the voting and non-voting common stock
held by non-affiliates of the Registrant as of March 5, 1999 was approximately
$105,050,000
The Registrant had issued and outstanding 9,586,463 shares of its
common stock on March 5, 1999.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates information by reference from the Registrant's
1999 Proxy Statement for its Annual Meeting of Shareholders to be held on May
20, 1999.
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EVANS & SUTHERLAND COMPUTER CORPORATION
FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1998
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<S> <C> <C> <C>
PART I
Item 1. Business.................................................................................. 5
Item 2. Properties................................................................................12
Item 3. Legal Proceedings.........................................................................12
Item 4. Submission of Matters to a Vote of Security Holders.......................................12
PART II
Item 5. Market Price of and Dividends on the Registrant's Common Equity and
Related Stockholder Matters..............................................................14
Item 6. Selected Consolidated Financial Data......................................................15
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations....................................................................17
Item 7A. Quantitative and Qualitative Disclosures About Market Risk................................28
Item 8. Financial Statements and Supplementary Data...............................................30
Report of Management....................................................................31
Report of Independent Accountants.......................................................31
Consolidated Balance Sheets.............................................................32
Consolidated Statements of Operations...................................................33
Consolidated Statements of Comprehensive Income.........................................34
Consolidated Statements of Stockholders' Equity.........................................35
Consolidated Statements of Cash Flows...................................................36
Notes to Consolidated Financial Statements..............................................37
Item 9. Disagreements on Accounting and Financial Disclosure......................................56
PART III
Item 10. Directors and Executive Officers of the Company...........................................56
Item 11. Executive Compensation....................................................................56
Item 12. Security Ownership of Certain Beneficial Owners and Management............................56
Item 13. Certain Relationships and Related Transactions............................................56
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K..........................57
Signatures ..........................................................................................61
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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"), incorporated in the State of Utah on May 10, 1968,
is an established high-technology company with outstanding computer graphics
technology and a worldwide presence in high-performance 3D visual simulation. In
addition, E&S is now applying this core technology into higher-growth personal
computer ("PC") products for both simulation and workstations. The Company's
core computer graphics technology is shared among the Company's:
(1) Simulation business to produce high performance image generators
for simulation including PC-based visual system products;
(2) Workstation Products business to provide original equipment
manufacturers ("OEM") of personal workstations with high quality
graphics performance; and
(3) Applications business to apply the Company's core technologies to
the expanding market of PC-based applications and products.
RECENT DEVELOPMENTS
On June 26, 1998, the Company, through its wholly-owned subsidiary,
Evans & Sutherland Graphics Corporation ("ESGC"), acquired all of the
outstanding stock of AccelGraphics, Inc. ("AGI") to expand the Company's
workstation graphics development, integration and distribution within the
workstation graphics marketplace. ESGC is based in Milpitas, California, and is
a provider of high-performance, cost-effective, three-dimensional graphics
subsystem products for the Windows NT(R)-based PC workstation market. To further
expand the Company's presence within the workstation graphics marketplace, on
June 26, 1998, the Company acquired the assets and assumed certain liabilities
of Silicon Reality, Inc. ("SRI"), a designer and developer of 3D graphics
hardware and software products for the PC workstation marketplace.
On July 22, 1998, Intel Corporation purchased 901,408 shares of the
Company's preferred stock plus a warrant to purchase an additional 378,462
shares of the preferred stock at an exercise price of $33.28125 per share for
approximately $24 million. These preferred shares have certain liquidation and
conversion rights in addition to other rights and preferences. The Company also
entered into an agreement to accelerate development of high-end graphics and
video subsystems for Intel-based workstations.
In the third quarter of 1998, E&S began shipping its Harmony(TM) image
generator system. Harmony is the highest performance member of the Company's
Symphony(TM) family of simulation products. It is selected by customers
demanding superior image quality, deterministic real-time control and superior
price/performance. In the fourth quarter of 1998, E&S introduced and
demonstrated its PC-based simulation solution called Ensemble(TM) which is at
the lower end of the Symphony line. Ensemble is the first true PC-based image
generation simulation system with the scalability, flexibility and affordability
to create new markets and applications for real-time simulation and
visualization. Harmony and Ensemble complete the Company's transition to the new
Symphony product suite offering complete compatibility across the product range.
On February 18, 1998, the Company's Board of Directors authorized the
repurchase of up to 600,000 shares of the Company's common stock, including the
327,000 shares still available from the repurchase authorization approved by the
Board of Directors on November 11, 1996. On September 8, 1998, the Company's
Board of Directors authorized the repurchase of an additional 1,000,000 shares
of the Company's common stock. Subsequent to February 18, 1998, the Company has
repurchased 784,000 shares of its common stock; thus, 816,000 shares currently
<PAGE>
remain available for repurchase as of March 31, 1999. 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.
FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS
This annual report, including all documents incorporated herein by
reference, includes certain "forward-looking statements" within the meaning of
that term in Section 27A of the Securities Act of 1933, and Section 21E of the
Exchange Act, including, among others, those statements preceded by, followed by
or including the words "believes," "expects," "anticipates" or similar
expressions.
These forward-looking statements are based largely on our current
expectations and are subject to a number of risks and uncertainties. Our actual
results could differ materially from these forward-looking statements. In
addition to the other risks described in the "Factors That May Affect Future
Results" discussion under Item 7, Management's Discussion and Analysis of
Financial Condition and Results of Operations in Part II of this annual report,
important factors to consider in evaluating such forward-looking statements
include risk of product demand, market acceptance, economic conditions,
competitive products and pricing, difficulties in product development,
commercialization and technology. In light of these risks and uncertainties,
there can be no assurance that the events contemplated by the forward-looking
statements contained in this annual report will, in fact, occur.
REPORTABLE SEGMENTS
The Company's business units have been aggregated into three reportable
segments: the Simulation Group, the Workstation Products Group, and the
Applications Group. The three groups benefit from shared core graphics
technology and each group's new products are based on open Intel and Microsoft
hardware and software standards. Each reportable segment markets its products to
a worldwide customer base. Financial information by reportable segment for each
of the three years ended December 31, 1998 is included in note 19 of the Notes
to Consolidated Financial Statements included in Part II of this annual report.
Simulation Group
E&S is an industry leader in providing visual systems to both
government and commercial simulation customers. The Simulation Group provides
more than 50 percent of the worldwide market for government and military
applications and commercial airline training simulators. The group anticipates
continued growth in these marketplaces as simulation training increases in value
as an alternative to other training methods, and as simulation training
technology and cost-effectiveness improve.
Products & Markets
The Simulation Group provides a broad line of visual systems for flight
and ground training and related services to the United States and international
armed forces, NASA, and aerospace companies. E&S remains an industry leader for
visual systems sales to various United States government agencies and more than
20 foreign governments for the primary purpose of training military vehicle
operators. The Simulation Group is also a leading independent supplier of visual
systems for flight simulators for commercial airlines. This group provides over
50 percent of the visual systems installed in full-flight training simulators
for civil airlines, training centers, simulator manufacturers, and aircraft
manufacturers.
The group's visual systems create dynamic, high quality, out-the-window
scenes that simulate the view vehicle operators see when performing tasks under
actual operating conditions. The visual systems are an integral part of full
mission simulators, which incorporate a number of other components, including
cockpits or vehicle cabs and large hydraulic motion systems.
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Generally, the Simulation Group's visual systems products consist of
the following four major components. These components are available as
sub-systems, but are typically sold together as a complete visual system
solution delivered to an operator or prime contractor.
(1) Image generators ("IG"s) create computer-generated images and send
these images to display devices, such as projectors or computer
monitors. The group's primary IG offerings include ESIG(TM) and
the Symphony family of products from Harmony on the high end to
PC-based Ensemble IGs at the low end. E&S is unique in offering a
complete, high-to-low family of IGs that can use the same software
and databases. While Harmony is the industry's flagship for
highest performance, Ensemble is the first true PC-based image
generation simulation system with the scalability, flexibility and
affordability to create new markets and applications for real-time
simulation and visualization.
(2) Display systems consist of projectors, display screens, computer
monitors, and specialized optics. These display systems are
offered in a broad range of configurations, from onboard
instrument displays to domes offering a 360-degree field of view,
depending on the applications.
(3) Databases of synthetic environments are offered as options or as
custom creations. The group provides database development as well
as database development tools such as INTegrator(R). Databases
developed using INTegrator are a key element of the Symphony
product family. These can be run on a full range of image
generators, from the PC-based Ensemble IG to the high-end Harmony
systems.
(4) System integration, installation and support services are also
differentiating elements of all systems and components sold.
The Simulation Group's products are marketed worldwide by the Company
or its agents. Products and services are sold directly to end users by E&S as a
prime contractor, through simulator prime contractors with E&S acting as a
subcontractor, and through system OEMs. E&S continues to 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.
Competitive Conditions
Primary competitive factors for the Simulation Group's products are
performance, price, service, and product availability. Because competitors are
constantly striving to improve their products, the group must ensure that it
continues to offer products with the best performance at a competitive price.
Prime contractors, including CAE Electronics, Ltd. ("CAE"), Thomson Training and
Simulation, Ltd. ("Thomson"), and Lockheed Martin offer competing visual systems
in the simulation market. The Company believes it is able to compete effectively
in this environment and will continue to be able to do so in the foreseeable
future. In 1998, the group was awarded several highly competitive orders against
CAE and Flight Safety International, Inc., the principal competitors in the
commercial simulation market. In both the government and commercial simulation
markets, the group competes for the graphics computers market with Silicon
Graphics, Inc.
Backlog
The Simulation Group's backlog was $146.7 million on December 31, 1998,
compared with $151.0 million on December 31, 1997. It is anticipated that most
of the 1998 backlog will be converted to revenue in 1999.
Business Subject to Government Contract Renegotiation
A significant portion of the Simulation Group's business is dependent
on contracts and subcontracts associated with government business. In the normal
course of this business, the government may renegotiate profits or terminate
contracts or subcontracts. Management does not believe, however, that such
renegotiations or terminations would have a material adverse effect on the
Company's consolidated financial condition, liquidity, or results of operations.
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Workstation Products Group
The Workstation Products Group develops and sells graphics chips and
graphics subsystems for the personal workstation marketplace. This group sells
to most personal workstation OEMs and is gaining market share in the
professional graphics market. The group anticipates continued growth in the
Windows NT workstation marketplace with the market's transition from proprietary
UNIX architecture systems to Microsoft and Intel-based open architecture
systems.
To expand the Company's workstation graphics development, integration
and distribution within the workstation graphics marketplace, the Company, on
June 26, 1998, through its wholly-owned subsidiary, Evans & Sutherland Graphics
Corporation, acquired all of the outstanding stock of AccelGraphics, Inc. ESGC
is a provider of high-performance, cost-effective, three-dimensional graphics
subsystem products for the Windows NT(R)-based personal workstation market. To
further expand the Company's presence within the workstation graphics
marketplace, on June 26, 1998, the Company acquired the assets and assumed
certain liabilities of Silicon Reality, Inc., a designer and developer of 3D
graphics hardware and software products for the PC workstation marketplace.
Products & Markets
The Workstation Products Group provides a family of REALimage(TM)
chip-based, 3D graphics subsystems and their associated software to personal
workstation OEMs. A majority of the group's revenues are currently derived from
the AccelGALAXY(TM) product. The group's principal product lines are summarized
below:
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Product Line Introduction Date Description
<S> <C> <C>
E&S Lightning 1200(TM) March 1999 Based on the REALimage 1200 chipset, positioned as a
professional card for price-sensitive users of CAD,
modeling, DCC, and visualization simulation applications, is
Pentium III ready and incorporates E&S's newest software
architecture, DYNAMICgeometry(TM).
AccelGALAXY July 1998 Based on the REALimage 2100 chipset, positioned as a
mid-range card for a variety of professional applications
and was upgraded with new driver software in March 1999 to
be Pentium III ready, incorporating E&S's newest software
architecture, DYNAMICgeometry.
AccelECLIPSE II(TM) November 1997 Based on the REALimage 1000 chipset and positioned for
mid-level applications with advanced texture and overlay and
anti-aliasing support.
</TABLE>
These families of workstation products support a wide range of professional
OpenGL(R) graphics applications, including mechanical computer automated design,
engineering analysis, digital content creation, visualization, simulation,
animation, entertainment and architectural, engineering and construction. To
optimize its position in these markets, E&S maintains close working
relationships with more than 40 independent software vendors that provide
products into these markets. Consequently, E&S is certified and/or tested on
most of the popular PC workstation applications.
Another partnership important to the group's ability to deliver
competitive products to personal workstation OEMs is E&S's alliance with Intel
Corporation ("Intel"). This alliance was strengthened in July 1998, with Intel's
purchase of 901,408 shares of the Company's preferred stock. At the same time,
Intel and the Company also entered into an agreement to accelerate development
of high end graphics and video subsystems for Intel-based workstations. This
coordinated development effort with Intel gives E&S a distinct advantage in
keeping pace with new chip releases by Intel thereby providing personal
workstation OEMs with timely and optimal graphics solutions.
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The Workstation Products Group also benefits from the advanced
technology developed in the Company's Simulation Group, and then in turn flows
technology back to the simulation business, particularly for PC-based visual
systems.
This group's products are sold to key OEM customers primarily through
direct sales. The Workstation Group also utilizes sales representatives to
support sales to distributors around the world and has a non-exclusive
partnership with Mitsubishi Electronics to manufacture and sell certain specific
REALimage-based chipsets.
Competitive Conditions
The group's future success will depend in large part on achieving
design wins and having current and future products chosen as the graphics
subsystem by the personal workstation OEMs. The group's major OEM customers
typically introduce new system configurations as often as twice a year, usually
based on spring and fall design cycles. Accordingly, the group's existing
products must have competitive performance levels or the group must introduce
timely new products with such performance characteristics in order to be
included in new system configurations.
The Workstation Products Group's principal competitors include
Intergraph, Inc., a system OEM that uses its own chip design, 3Dlabs Inc., Ltd.,
that sells graphics subsystems based on their own chipsets to system OEMs and
companies such as Diamond Multimedia Systems, Inc. and ELSA Inc. that utilize
other companies' graphics chips. The group also competes indirectly with Silicon
Graphics, Inc. because Silicon Graphics, Inc. employs a vertical system sales
strategy that competes directly with Dell Computer Corporation, Hewlett-Packard
Company, Compaq Computer Corporation and other E&S customers. Competition may
also emerge from companies such as ATI Technologies Inc., Intel and nVidia
Corporation, who currently provide lower performance graphics products for the
consumer PC market.
Backlog
The Workstation Products Group's backlog was $3.0 million on December
31, 1998, compared with $0.2 million on December 31, 1997. The group expects
that most of the 1998 backlog will be converted to revenue in 1999. The
Workstation Products Group's business operates off very short lead times as is
typical in the PC industry. Sales of the group's products are primarily made
pursuant to standard purchase orders that are cancelable without significant
penalties.
Applications Group
The Applications Group is composed of new and synergistic businesses
that use E&S core technology in growth markets. The group's products are
applications that leverage the technology of the Company's Simulation or
Workstation Products Groups and apply them to other growth markets.
Products & Markets
The Applications Group's digital theater products include hardware,
software, and content for both the entertainment and educational marketplaces.
Digital theater focuses on immersive all-dome theater applications combining
colorful digitally-produced imagery, full-spectrum audio, and
audience-participation hardware. The group provides turnkey solutions
incorporating visual systems and sub-systems from the Simulation and Workstation
Products Groups. E&S integrates these systems with projection equipment, audio
components, and audience-participation systems from other suppliers. Products
include Digistar(R), a calligraphic projection system designed to compete with
analog star projectors in planetariums, and StarRider(R), a full-color,
interactive, domed theater experience. The group is a leading supplier of
digital display systems in the planetarium marketplace. In December of 1998 the
group debuted "Journey to Infinity" the first interactive StarRider(R) system
and show at the Adler Planetarium and Astronomy Museum in Chicago.
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The digital video products provide Windows NT, open system, standard
platform based virtual studio systems for digital content production in the
television broadcast, film, video, corporate training and multimedia industries.
The E&S solution offers significant improvement in cost, ease of use and
flexibility compared with the traditional, proprietary UNIX-based systems common
in this developing market. The group's products are all-inclusive system
solutions that incorporate visual system components and subsystems from the
Simulation and Workstation Products Groups. E&S MindSet(TM), Virtual Studio
System(TM) and the FuseBox(TM) control software with real-time frame accurate
camera tracking and enable live talent to perform in real time on a virtual set
generated using E&S 3D computer technology. The video output of the set meets
today's digital broadcast video standards. Systems are installed world-wide in
production, postproduction, broadcast and educational applications. The
Applications Group's products are sold directly to end users by E&S as a prime
contractor or selectively through dealers.
Competitive Conditions
The Company's digital theater products compete with traditional
optical-mechanical products and digital display systems offered by Minolta
Planetarium Co. Ltd., GoTo Optical Mfg. Co., Carl Zeiss Inc., Spitz, Inc.,
Trimension, Inc. and Sky-Skan, Inc. The competitors for the virtual set product
are mostly small companies including Orad and RT-Set, both Israeli companies,
Brainstorm, a Spanish corporation, and Peak Systems GmbH, a German company.
Discreet Logic of Montreal, Canada has installed a small number of high-end
systems.
Backlog
The Applications Group's backlog was $6.0 million on December 31, 1998,
compared with $3.7 million on December 31, 1997. It is anticipated that most of
the 1998 backlog will be converted to revenue in 1999.
SIGNIFICANT CUSTOMERS
Worldwide customers using E&S products include U.S. and international
armed forces, NASA, aerospace companies, most major airlines, PC manufacturers,
film and video studios, laboratories, museums, planetariums and science centers.
In 1998, sales to the U.S. government and the United Kingdom Ministry
of Defense ("UK MOD"), either directly or indirectly through sales to prime
contractors or subcontractors, accounted for $70.8 million, or 37% of total net
sales, and $32.1 million, or 17% of total net sales, respectively. In 1997 and
1996, sales to the U.S. government, either directly or indirectly through sales
to prime contractors or subcontractors, accounted for $45.5 million, or 29% of
total net sales, and $25.8 million, or 20% of total net sales, respectively.
In 1998, sales to The Boeing Company ("Boeing") were approximately
$28.1 million, or 15% of total net sales, of which approximately 98% related to
U.S. government and UK MOD contracts, and sales to Lockheed Corporation
("Lockheed") were approximately $22.0 million, or 11% of total net sales, of
which approximately 91% related to U.S. government contracts. In 1997, sales to
Thomson Training & Simulation Ltd. ("Thomson") were $19.3 million, or 12% of
total net sales. In 1996, sales to Thomson were $15.8 million, or 12% of total
net sales, sales to Hughes Training Incorporated ("Hughes") were $14.9 million,
or 11% of total net sales, and sales to Rikei Corporation were $14.3 million, or
11% of total net sales. A portion of the Company's sales to Hughes was for U.S.
government contracts.
DEPENDENCE ON SUPPLIERS
Most of the Company's parts and assemblies are readily available
through multiple sources in the open market; however, a limited number are
available only from a single source. In these cases, the Company stocks a
substantial inventory, or obtains the agreement of the vendor to maintain
adequate stock for future demands, and/or attempts to develop alternative
components or sources where appropriate.
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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.
INTELLECTUAL PROPERTY
E&S owns a number of patents and trademarks and is a licensee under
several others. In the U.S., the Company holds active patents that cover many
aspects of the Company's graphics technology. Several patent applications are
presently pending in the U.S., Japan and several European countries. E&S
copyrights chip masks designed by the Company and has instituted copyright
procedures for these masks in Japan. E&S does not rely on, and is not dependent
on, patent and/or trademarks ownership to maintain its competitive position. In
the event any or all patents are held to be invalid, management believes the
Company would not suffer significant long-term damage. However, E&S actively
pursues patents on its new technology.
RESEARCH & DEVELOPMENT
E&S considers the timely development and introduction of new products
to be essential to maintaining its competitive position and capitalizing on
market opportunities. The Company's research and development expenses were $31.8
million, $25.5 million and $21.8 million in 1998, 1997 and 1996, respectively.
As a percentage of sales, research and development expenses were 16.6%, 16.0%
and 16.7% in 1998, 1997 and 1996, 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 to ensure that the
Company maintains technical excellence, leadership, and market competitiveness.
INTERNATIONAL SALES
Sales of product known to be ultimately installed outside the United
States are considered international sales by the Company and were $84.9 million,
$94.6 million and $88.4 million in 1998, 1997 and 1996, respectively.
International sales represented 44%, 59% and 68% of total sales in 1998, 1997
and 1996, respectively. For additional information, see note 20 of Notes to
Consolidated Financial Statements included in Part II of this annual report.
EMPLOYEES
As of March 5, 1999, Evans & Sutherland and its subsidiaries employed a
total of 951 persons. The Company believes its relations with its employees are
good. None of the Company's employees are subject to collective bargaining
agreements.
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.
<PAGE>
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 the remaining two
buildings to other businesses. 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. The largest of these is
a 20,000 square foot facility in Milpitas, CA. E&S believes that these
properties are suitable for its immediate needs and it does not currently plan
to expand its facilities or relocate.
ITEM 3. LEGAL PROCEEDINGS
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 1998.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following sets forth certain information regarding the executive
officers of the Company as of March 31, 1999:
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<CAPTION>
Name Age Position
- - ------------------------ ----------------------- ---------------------------------------------------------------
<S> <C> <C>
Stewart Carrell 65 Chairman of the Board of Directors
James R. Oyler 53 President and Chief Executive Officer
John T. Lemley 55 Vice President and Chief Financial Officer
David B. Figgins 50 Vice President - Simulation Group
William C. Gibbs 41 Vice President of Corporate Development
Charles R. Maule 48 Vice President - Workstation Group
Mark C. McBride 37 Vice President, Corporate Controller and Corporate Secretary
</TABLE>
- - ------------------------
Mr. Carrell was elected Chairman of the Board of Directors of the Company in
March 1991. He has been a member of the Board for 15 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 December 1994 and as Senior Vice
President of Harris Corporation from 1976 through mid-1990. He has four years of
service with the Company.
<PAGE>
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 Holding Corporation. Previously, he was
with Medtronic, Inc., where he was Vice President, 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
three years of service with the Company.
Mr. Figgins was appointed Vice President of the Simulation Group in January
1999. He joined the Company in April 1998 as Vice President of PC Simulation in
the Government Simulation business unit. Previously, he was Vice President of
Business Development and Marketing for Raytheon Training where he was employed
from May 1986 to April 1998. He has less than one year of service with the
Company.
Mr. Gibbs joined the Company in December 1998 as Vice President of Corporate
Development. Previously, he was a partner at the law firm of Snell & Wilmer, LLP
from December 1990 to December 1998. He has less than one year of service with
the Company.
Mr. Maule was appointed Vice President of the Workstation Group in January 1999.
He joined the Company in February 1996 as Vice President and General Manager of
Desktop Graphics. 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 three 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 in various capacities,
ending with Senior Manager. Mr. McBride is a Certified Public Accountant. He has
two years of service with the Company.
<PAGE>
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
-------------- --------------
1998
First Quarter $ 31 1/4 $ 26 1/2
Second Quarter 30 22 1/2
Third Quarter 29 13 3/4
Fourth Quarter 22 1/2 12
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
APPROXIMATE NUMBER OF EQUITY SECURITY HOLDERS
On March 5, 1999, there were 790 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.
<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
1998(1) 1997 1996 1995(2) 1994(3)
----------- ------------ ----------- ------------ ------------
FOR THE YEAR
<S> <C> <C> <C> <C> <C>
Net sales $ 191,766 $ 159,353 $ 130,564 $ 113,194 $ 113,090
Earnings (loss) before extraordinary gain
and accretion of preferred stock (15,983) 5,080 10,352 20,484 (5,559)
Earnings (loss) per common share before
extraordinary gain:
Basic (1.70) 0.56 1.16 2.37 (0.65)
Diluted (1.70) 0.53 1.12 2.33 (0.65)
Average weighted number of common shares
outstanding:
Basic 9,461 9,060 8,944 8,639 8,520
Diluted 9,461 9,502 9,222 8,785 8,520
AT END OF YEAR
Total assets $ 275,668 $ 234,390 $ 210,891 $ 211,002 $ 180,764
Long-term debt, less current portion 18,062 18,015 18,015 18,015 20,375
Redeemable preferred stock 23,544 - - - -
Stockholders' equity 165,083 165,634 160,472 148,491 127,118
</TABLE>
- - --------------------
(1) During 1998, the Company incurred a $20.8 million charge to expense
acquired in-process technology in connection with the acquisitions of
AccelGraphics, Inc. and Silicon Reality, Inc. See note 2 of the Notes
to Consolidated Financial Statements included in Part II of this annual
report
(2) During 1995, the Company repurchased $2.4 million of 6% Convertible
Subordinated Debentures ("6% Debentures") on the open market. These
purchases resulted in an extraordinary gain, net of income taxes, of
approximately $0.3 million in 1995.
(3) During 1994, the Company repurchased $16.7 million of 6% Debentures on
the open market. These purchases resulted in an extraordinary gain, net
of income taxes, of approximately $1.9 million in 1994. The Company
incurred a restructuring charge of $8.2 million. The restructuring was
undertaken to remove the Company's divisional structure, reengineer
research and development, consolidate manufacturing, finance,
administration and field service operations, and to modify product
lines.
<PAGE>
QUARTERLY FINANCIAL DATA (Unaudited)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Quarter Ended
--------------------------------------------------------
March 27 June 26(1) Sept. 25 Dec. 31
------------- ------------ ------------ ------------
1998
<S> <C> <C> <C> <C>
Net sales $ 42,421 $ 43,638 $ 47,262 $ 58,445
Gross profit 17,125 19,279 20,637 24,405
Earnings (loss) before income taxes 2,353 (17,063) (1,219) 2,072
Net earnings (loss) applicable to common stock 1,589 (18,271) (794) 1,398
Earnings (loss) per common share(2):
Basic 0.18 (2.04) (0.08) 0.14
Diluted 0.17 (2.04) (0.08) 0.13
Quarter Ended
--------------------------------------------------------
March 28 June 27 Sept. 26 Dec. 31
------------- ------------ ------------ ------------
1997
Net sales $ 33,642 $ 37,907 $ 38,450 $ 49,353
Gross profit 15,128 17,424 19,284 23,378
Earnings (loss) before income taxes 2,015 2,707 5,102 (2,986)
Net earnings (loss) applicable to common stock 1,411 1,975 3,825 (2,131)
Earnings (loss) per common share(2):
Basic 0.16 0.22 0.42 (0.23)
Diluted 0.15 0.21 0.40 (0.23)
</TABLE>
(1) The second quarter of 1998 includes a $20.8 million charge to expense
acquired in-process technology in connection with the acquisitions of
AccelGraphics, Inc. and Silicon Reality, Inc. See note 2 of the Notes
to Consolidated Financial Statements included in Part II of this annual
report.
(2) Earnings per share are computed independently for each of the quarters
presented and therefore may not sum to the totals for the year.
<PAGE>
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.
<TABLE>
<CAPTION>
Year Year Year
Ended Ended Ended
Dec. 31, Dec. 31, Dec. 27,
1998 1997 1996
----------- ---------- -----------
<S> <C> <C> <C>
Net sales 100.0% 100.0% 100.0%
Cost of sales 57.5 52.8 50.5
----------- ---------- -----------
Gross profit 42.5 47.2 49.5
Operating expenses
Selling, general and administrative 20.9 22.2 24.0
Research and development 16.6 16.0 16.7
Write-off of acquired in-process technology 10.8 - -
Amortization of goodwill and other intangible assets 2.5 - -
----------- ---------- -----------
Total operating expenses 50.8 38.2 40.7
----------- ---------- -----------
Operating earnings (loss) (8.3) 9.0 8.8
Other income (expense), net 1.1 (4.7) 3.5
----------- ---------- -----------
Earnings (loss) before income taxes (7.2) 4.3 12.3
Income tax expense 1.1 1.1 4.4
----------- ---------- -----------
Net earnings (loss) (8.3) 3.2 7.9
Accretion of preferred stock 0.1 - -
----------- ---------- -----------
Net earnings (loss) applicable to common stock (8.4)% 3.2% 7.9%
=========== ========== ===========
</TABLE>
RESULTS OF OPERATIONS
1998 vs. 1997
Sales
In 1998, sales increased $32.4 million, or 20% ($191.8 million compared
to $159.4 million in 1997). Sales for simulation products increased $21.0
million, or 14% ($167.0 million in 1998 compared to $146.0 million in 1997). The
increase in sales of simulation products is primarily due to increased sales
volumes due to strong demand by U.S. and European government customers and
commercial airline customers. Sales of workstation products increased $11.6
million, or 199% ($17.5 million in 1998 compared to $5.8 million in 1997). The
increase in sales of workstation products is primarily due to the acquisition of
AccelGraphics, Inc. at the end of the second quarter of 1998. Sales of
application products declined $0.2 million, or 3% ($7.3 million in 1998 compared
to $7.5 million in 1997). The decrease in sales of application products is
primarily due to decreased sales volumes of location-based entertainment
products partially offset by increased sales volumes of virtual studio systems.
Gross Margin
Gross margin decreased to 42.5% in 1998 from 47.2% in 1997. The
decrease in gross margin is primarily due to the increased sales volumes related
to contracts in which the Company functions as the prime contractor, increased
competition and the change in the nature of the revenues derived from
workstation products. Contracts in which the Company functions as the prime
contractor include costs related to work performed by subcontractors which have
significantly lower gross margins than work performed by the Company. During
1997 and the first half of 1998, revenues related to workstation products were
derived primarily from royalties which had minimal associated cost of sales. Due
to the acquisition of AccelGraphics, Inc., revenues in the second half of 1998
related to sales of graphics subsystems which had product costs consistent with
a manufacturing operation.
<PAGE>
Selling, General and Administrative
Selling, general and administrative expenses increased $4.8 million, or
14% ($40.1 million in 1998 compared to $35.3 million in 1997) but decreased as a
percent of sales (20.9% in 1998 compared to 22.2% in 1997). The increase in
these expenses is primarily due to increased selling, marketing and
administrative expenses related to the operations of ESGC (formerly
AccelGraphics, Inc.) during the second half of 1998, increased labor costs due
to increased headcount and increased selling and marketing costs related to
tradeshows, travel and commissions. These increases were partially offset by a
decrease in incentive bonus expense.
Research and Development
Research and development expenses increased $6.3 million, or 25% ($31.8
million in 1998 compared to $25.5 million in 1997) and increased slightly as a
percent of sales (16.6% in 1998 compared to 16.0% in 1997). The increase in
these expenses is primarily due to increased research and development expenses
related to the operations of ESCG during the second half of 1998 and increased
labor, materials and design costs to support increased research and development
activity in both the Simulation and Workstation Products Groups.
Acquired In-Process Technology
In connection with the purchases of AGI and SRI, the Company made
allocations of the purchase price to acquired in-process technology. These
amounts were expensed as non-recurring charges in the quarter ended June 26,
1998 because the acquired in-process technology had not yet reached
technological feasibility and had no future alternative uses.
Calculations of the value of the acquired in-process technology are
based on adjusted after-tax cash flows that give explicit consideration to the
SEC's views on acquired in-process technology as set forth in its September 15,
1998 letter to the American Institute of Certified Public Accountants. The fair
value for the in-process technology in each acquisition was based on analysis of
the markets, projected cash flows and risks associated with achieving such
projected cash flows. In developing these cash flow projections, revenues were
forecasted based on relevant factors, including aggregate revenue growth rates
for the business as a whole, individual product revenues, characteristics of the
potential market for the products, the anticipated life of the technology under
development and the stage of completion of each project. Operating expenses and
resulting profit margins were forecasted based on the characteristics and cash
flow generating potential of the acquired in-process technology, and included
assumptions that certain expenses would decline over time as operating
efficiencies were obtained or support requirements decreased. Appropriate
adjustments were made to operating income to derive net cash flow, and the
estimated net cash flows of the in-process technologies in each acquisition were
then discounted to present value using rates of return that the Company believes
reflect the specific risk/return characteristics of these research and
development projects. As a result of the valuations, the amount of purchase
price allocated to in-process technology was $20.8 million.
Since the date of acquisitions, the Company has used the acquired
in-process technology to develop new graphics subsystem products which have or
will become an extension of the Company's chip products when completed. These
products increase the vertical reach of the Company's product offerings into the
mid-range and high-end graphics marketplace. Products using the acquired
in-process technology have been introduced at various times following the
acquisition date of AGI and SRI, and the Company currently expects to complete
the development of the remaining projects at various dates during 1999. Upon
completion, the Company will offer the related products to its customers.
The nature of the efforts required to develop the acquired in-process
technology into commercially viable products principally relate to the
completion of all planning, designing and testing activities that are necessary
to establish that the products can be produced to meet its design requirements,
including functions, features and technical performance requirements. The
Company currently expects that the acquired in-process technology projects will
be successfully developed, but there can be no assurance that commercial
viability of these projects will be achieved. Furthermore, the graphics industry
continues to undergo tremendous changes in competition and rapid development of
competing technologies. Changes in graphics technology or other developments may
cause the Company to alter or abandon these development plans. The in-process
technologies will be used in future products and the linear successors to those
<PAGE>
products and will not be used as the foundation for alternative or future
technologies.
Failure to complete the development of these projects in their
entirety, or in a timely manner, could have a material adverse impact on the
Company's operating results, financial condition and results of operations. No
assurance can be given that actual revenues and operating profit attributable to
acquired in-process technology will not deviate from the projections used to
value such technology in connection with each of the respective acquisitions.
On-going operations and financial results for the acquired technology and the
Company as a whole are subject to a variety of factors which may not have been
known or estimable at the date of such acquisition, and the estimates discussed
below should not be considered the Company's current projections for operating
results for the acquired businesses or the Company as a whole. A description of
the acquired in-process technology and the estimates made by the Company for
each of the technologies is discussed below.
Mid-range Professional Graphics Subsystem (2100). This technology is a
graphics subsystem with built in VGA core and integral DMA engines.
This technology provides superior graphics performance over previous
technologies, and includes features such as stereo and dual monitor
support and various texture memory configurations. The technology is
used in the AccelGALAXY product, which was completed and began shipping
to customers in late third quarter of 1998. The assigned value to this
technology is $5.8 million.
CAD-focused Professional Graphics Subsystem (1200). This technology is
a graphic subsystem with lower costs compared to the mid-range
technology, resulting in a more cost-effective graphics solution for
the end-user. It provides the cost sensitive user with adequate
graphics performance, with few features, and a single texture
configuration option. This technology and a product based on this
technology are still in development with introduction planned in 1999.
The assigned value for this technology is $6.0 million.
Multiple-Controller Graphics Subsystems (2200). This technology is a
high-end graphics subsystem involving the parallel use of two or four
controllers. This technology is aimed at super users in the graphics
area who need significant increases in performance and features to
accomplish their tasks and are willing to pay the increased price
necessary to support those requirements. This technology is in
development with its introduction date under review. The assigned value
for this technology is $2.5 million.
On-board Geometry Engine Graphics Subsystem (AccelGMX(TM)). This
technology is a mid-range graphics subsystem with a geometry engine on
board. This technology is aimed at the performance intensive graphics
end-user. It has fewer features than the mid-range professional
technology, but faster geometry performance compared to the mid-range
professional technology on Pentium II processors. This technology was
completed in the third quarter of 1998 and the AccelGMX product that
uses this technology began shipping to customers at that time. The
assigned value of this technology was $5.1 million.
At the time of the valuation, the cost to complete all the projects was
$1.2 million. As of December 31, 1998, approximately $0.9 million had been
incurred for these projects. Costs to complete the projects are expected to be
approximately $0.4 million.
As of December, the AccelGALAXY, using the Mid-range Professional
Graphics technology, was completed a month later than scheduled, with a cost
overrun due to extra work required to successfully achieve certification on all
required professional applications and the AccelGMX, using the On-board Geometry
Engine Graphics technology, was completed on time and on budget. The AccelGMX
and AccelGALAXY products started shipping in late third quarter of 1998. The
CAD-focused Professional Graphics Subsystem was on schedule with a small cost
overrun due to board layout and cost issues. The Multiple-Controller Graphics
Subsystems was recently reevaluated due to changes in the marketplace. The
introduction of a product using this technology has been delayed further into
1999.
The AccelGALAXY has performed below revenue estimates due to the delay
in product introduction by the Company and a delayed design win at one major
OEM. Since revenue for this product was only recognized in the fourth quarter of
1998, management is unable to predict the long-term effect of this one-month
delay. Subsequent to the Company's acquisition of AGI, the developer of the chip
<PAGE>
used on the AccelGMX also acquired a board company, Dynamic Pictures, and
entered the graphics accelerator market in direct competition with the AccelGMX.
As a result, the AccelGMX has performed below revenue estimates.
Amortization of Goodwill and Other Intangible Assets
Amortization of goodwill and other intangible assets increased $4.7
million ($4.8 million in 1998 compared to $29,000 in 1997). The increase in
these expenses is due to the amortization of goodwill and other intangible
assets related to the acquisitions of AGI and SRI during the second quarter of
1998. The goodwill is being amortized using the straight-line method over an
estimated useful life of seven years. The other intangible assets are being
amortized using the straight-line method over estimated useful lives ranging
from six months to seven years. Amortization of goodwill and other intangible
assets is estimated to be $2.9 million and $2.3 million in fiscal years 1999 and
2000, respectively.
Other Income (Expense), Net
Other income (expense), net was $2.1 million of income in 1998 and $7.6
million of expense in 1997. Interest income was $2.7 million and $3.2 million in
1998 and 1997, respectively. The decrease in interest income is primarily due to
the decrease in the average cash and cash equivalents and short-term investments
balances in 1998 as compared to 1997. During 1998, the Company recognized a gain
of $2.5 million as a result of the sale of its investment in Sense8 Corporation.
The Company recognized a loss due to the write down of its investment securities
of $1.1 million and $9.6 million in 1998 and 1997, respectively. These write
downs were necessary as management believed that the decline in market value of
these investments below cost were other than temporary. During 1998 the Company
liquidated one of its investment securities that it had written down to zero in
1997 and recognized no gain or loss.
Income Taxes
The effective tax rate, excluding the write-off acquired in-process
technology, was 30.7% and 25.7% of pre-tax earnings in 1998 and 1997,
respectively. The Company expects the effective income tax rate in 1999 to
approximate the rate in 1998.
1997 vs. 1996
Sales
In 1997, sales increased 22% ($159.4 million compared to $130.6 million
in 1996). Sales for simulation products increased $27.3 million, or 23% ($146.0
million in 1997 compared to $118.8 million in 1996). The increase in sales of
simulation products is primarily due to increased sales volumes due to strong
demand by U.S. government customers and commercial airline customers. Sales of
workstation products increased $5.8 million ($5.8 million in 1997 compared to
none in 1996). The increase in sales of workstation products is due to
commencement of this business in 1997. During 1997, revenues related to
workstation products were derived primarily from royalties based on the sale of
chip sets by a third party to graphics subsystem manufacturers. Sales of
application products increased $0.5 million, or 7% ($7.5 million in 1997
compared to $7.0 million in 1996). The increase in sales of application products
is primarily due to the introduction of virtual studio systems partially offset
by a decrease in sales volumes of digital theater products.
Gross Margin
Gross margin decreased to 47.2% in 1997 from 49.5% in 1996. The
decrease in gross margin is primarily due to the increased sales volumes related
to contracts in which the Company functions as the prime contractor and
increased competition. Contracts in which the Company functions as the prime
contractor include costs related to work performed by subcontractors which have
significantly lower gross margins than work performed by the Company.
<PAGE>
Selling, General and Administrative
Selling, general, and administrative expenses increased $4.0 million,
or 13% ($35.3 million in 1997 compared to $31.3 million in 1996), but decreased
as a percent of sales (22.2% in 1997 compared to 24.0% in 1996). The increase in
these expenses in 1997 is due primarily to increased selling and marketing costs
related to tradeshow activity and additional selling and administrative expenses
related to the operation of the new businesses.
Research and Development
Research and development expenses increased $3.7 million, or 17% ($25.5
million in 1997 compared to $21.8 million in 1996), but decreased as a percent
of sales (16.0% in 1997 compared to 16.7% in 1996). The increase in these
expenses in 1997 is due primarily to increased activity related to the
introduction of several new products, and additional expenses related to the new
businesses.
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 investment 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
$0.7 million, or 17% ($3.2 million in 1997 compared to $3.9 million in 1996) due
to the decrease in the average cash and cash equivalents and short-term
investments balances in 1997 as compared to 1996.
Income Taxes
Provision for income taxes was 25.7% and 35.4% of pre-tax earnings for
1997 and 1996, respectively.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1998, the Company had working capital of $134.4
million, including cash, cash equivalents and short-term investments of $27.7
million, compared to working capital of $129.0 million at December 31, 1997,
including cash, cash equivalents and short-term investments of $57.1 million.
During 1998, the Company used $20.8 million of cash in its operating activities
and generated $2.1 million and $12.2 million of cash from its investing and
financing activities, respectively.
The primary uses of cash from its operating activities included a net
loss of $16.0 million, an increase in inventories of $28.9 million and an
increase in net costs and estimated earnings in excess of billings on
uncompleted contracts of $6.1 million. These primary uses of cash were partially
offset by $15.9 million of depreciation and amortization expense and write-off
of acquired in-process technology of $20.8 million. The increase in inventories
is attributed to the Company's transition to new products that required the need
to carry inventories of old and new products simultaneously and the Company's
initial transition efforts to outsource certain aspects of its manufacturing
assemblies which resulted in temporary duplications of certain inventories. The
increases in accounts receivable and costs and estimated earnings in excess of
billings on uncompleted contracts was due to the Company's overall revenue
growth in addition to the timing of revenue and billing milestones.
The Company's investing activities during 1998 included capital
expenditures of $18.5 million and payments for the acquisition of AGI and SRI of
$7.6 million, net of cash acquired. Proceeds from the sale of short-term
investments totaled $47.7 million in 1998 while purchases of short-term
investments used $22.2 million in funds.
In July 1998, the Company obtained approximately $24.0 million, less
transaction costs of approximately $0.5 million, of financing through the sale
of 901,408 shares of the Company's Class B-1 Preferred Stock, no par value, and
issued warrants to purchase 378,462 additional shares of the Company's Class B-1
Preferred Stock at an exercise price of $33.28125 per share to Intel. In the
event of a default, Intel has the right to sell to the Company any or all of the
shares associated with the preferred stock. The preferred shares have certain
<PAGE>
liquidation and conversion rights, in addition to other rights and preferences.
Additional financing activities included proceeds from the issuance of common
stock relating to the exercise of stock options of $2.0 million and borrowings
under line of credit agreements of $5.0 million. In addition, the Company used
$15.7 million for the repurchases of common stock and $2.7 million for
repayments under line of credit agreements.
In November 1998, the Company entered into a revolving line of credit
agreement with U.S. Bank National Association. The revolving line of credit
provides for borrowings by the Company of up to $20.0 million. Borrowings bear
interest at the prevailing prime rate minus 1.0% or the LIBOR rate plus 1.0%.
The revolving line of credit expires on November 10, 1999. The revolving line of
credit, among other things, (i) requires the Company to maintain certain
financial ratios; (ii) restricts the Company's ability to incur debt or liens;
sell, assign, pledge or lease assets; merge with another company; and (iii)
restricts the payment of dividends and repurchase of any of the Company's
outstanding shares without prior consent of the lender. The revolving line of
credit is unsecured. There were no borrowings under this agreement outstanding
as of March 31, 1999. In addition, the Company has a $7.5 million unsecured line
for letters of credit with U.S. Bank National Association for which there were
approximately $6.6 million outstanding at December 31, 1998.
At December 31, 1998, the Company had revolving line of credit
agreements with foreign banks totaling approximately $7.1 million, of which
approximately $2.8 million was unused and available.
At December 31, 1998, the Company had approximately $18.0 million of 6%
Convertible Subordinated Debentures due in 2012 (the "6% Debentures"). The 6%
Debentures are unsecured and are convertible at each bondholder's option into
shares of the Company's common stock at a conversion price of $42.10 or 428,000
shares of the Company's common stock subject to adjustment. The 6% Debentures
are redeemable at the Company's option, in whole or in part, at par.
On February 18, 1998, the Company's Board of Directors authorized the
repurchase of up to 600,000 shares of the Company's common stock, including the
327,000 shares still available from the repurchase authorization approved by the
Board of Directors on November 11, 1996. On September 8, 1998, the Company's
Board of Directors authorized the repurchase of an additional 1,000,000 shares
of the Company's common stock. Subsequent to February 18, 1998, the Company has
repurchased 784,000 shares of its common stock; thus, 816,000 shares currently
remain available for repurchase as of March 31, 1999. 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.
Management believes that existing cash, cash equivalents and short-term
investment balances, borrowings available under its line of credit agreements
and cash from future operations will be sufficient to meet the Company's
anticipated working capital needs, routine capital expenditures and current debt
service obligations for the next twelve months. The Company's cash, cash
equivalents and short-term investments are available for working capital needs,
capital expenditures, strategic investments, mergers and acquisitions, stock
repurchases and other potential cash needs as they may arise. On a longer-term
basis, if future cash from operations and existing line of credit agreements are
not sufficient to meet the Company's cash requirements, the Company may be
required to renegotiate its existing line of credit agreements or seek
additional financing from the issuance of debt or equity securities. There can
be no assurances that the Company would be successful in renegotiating its
existing line of credit agreements or obtaining additional debt or equity
financing.
YEAR 2000 ISSUE
The Year 2000 issue is the result of potential problems with computer
systems or any equipment with computer chips that store the year portion of the
date as just two digits (for example, 98 for 1998). Systems using this two-digit
approach will not be able to determine whether "00" represents the year 2000 or
1900. The problem, if not corrected, will make those systems fail altogether or,
even worse, allow them to generate incorrect calculations causing a disruption
of normal operations.
The Company has created a company-wide Year 2000 team to identify and
resolve Year 2000 issues associated either with the Company's internal systems
or the products and services sold by the Company. As part of this effort, the
Company is communicating with its main suppliers of technology products and
<PAGE>
services regarding the Year 2000 status of such products or services. The
Company has identified and is testing its main internal systems and expects to
complete testing in early 1999. Throughout 1999 the Company expects to complete
implementation of any needed Year 2000-related modifications to its information
systems. The Company is also currently assessing its internal non-information
technology systems, and expects to complete testing and any needed modifications
to these systems in early 1999.
The Company's total cost relating to these activities has not been and
is not expected to be material to the Company's financial position, results of
operations, or cash flows. The Company believes that necessary modifications
will be made on a timely basis. However, there can be no assurance that there
will not be a delay in, or increased costs associated with, the implementation
of such modifications, or that the Company's suppliers will adequately prepare
for the Year 2000 issue. It is possible that any such delays, increased costs,
or supplier failures could have a material adverse impact on the Company's
operations and financial results, by, for example, impacting the Company's
ability to deliver products or services to its customers. The Company expects in
mid-1999 to finalize its assessment of and contingency planning for potential
operational or performance problems related to Year 2000 issues with its
information systems.
The Company's Year 2000 effort has included testing products currently
or recently on the Company's price list for Year 2000 issues. Generally, for
products that were identified as needing updates to address Year 2000 issues,
the Company has prepared or is preparing updates, or has removed or is removing
the product from its price list. Some of the Company's customers are using
product versions that the Company will not support for Year 2000 issues; the
Company is encouraging these customers to migrate to current product versions
that are Year 2000 ready.
For third party products which the Company distributes with its
products, the Company has sought information from the product manufacturers
regarding the products' Year 2000 readiness status. Customers who use the
third-party products are directed to the product manufacturer for detailed Year
2000 status information. On its Year 2000 web site at
www.es.com/investor/y2k_corp.html, the Company provides information regarding
which of its products are Year 2000 ready and other general information related
to the Company's Year 2000 efforts. The Company's total costs relating to these
activities has not been and is not expected to be material to the Company's
financial position or results of operations. Additionally, there can be no
guarantee that one or more of the Company's current products do not contain Year
2000 date issues that may result in material costs to the Company.
EFFECTS OF INFLATION
The effects of inflation were not considered material during fiscal
years 1998, 1997 and 1996, and are not expected to be material for fiscal year
1999.
OUTLOOK
Looking forward, the Company expects revenue to continue to grow in
1999 as it has during the previous three fiscal years. One good predictor of
future revenue in the Company's simulation business is its backlog amount. As of
December 31, 1998 the Company's orders backlog was $155.7 million. Products
within the Workstation Products and Applications Groups have much shorter lead
times between order and delivery, therefore the backlog amount is much less
useful as a predictor for these businesses.
The Company's main challenges result from managing the introduction of
new products into its existing business lines and developing new products into
markets where the Company is a relatively recent entrant. The Company believes
it will be successful if it can make these product introductions on schedule,
while keeping costs down and avoiding being beaten to the market by competitors.
As 1999 began, the Company was in the process of ramping up production
of its Harmony image generator, finishing the installation its first StarRider
interactive planetarium system, developing several new graphic subsystems for
use in personal workstations as well as developing other new hardware and
software start-up businesses. The Company is investing considerable resources in
capital equipment, human resources and other research and development expenses
to develop these new products. The near-term success of the Company is dependent
in large part in the successful execution of these programs.
<PAGE>
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.
See "Forward-Looking Statements and Risks" in Part I of this annual report.
E&S's Business May Suffer if its Competitive Strategy is Not Successful
Our continued success depends on our ability to compete in an industry
that is highly competitive, with rapid technological advances and constantly
improving products in both price and performance. As most market areas in which
we operate continue to grow, we are experiencing increased competition, and we
expect this trend to continue. In recent years, we have been forced to adapt to
domestic and worldwide political, economic, and technological developments that
have strongly affected our markets. Under our current competitive strategy, we
endeavor to remain competitive by growing existing businesses, developing new
businesses internally, selectively acquiring businesses, increasing efficiency,
improving access to new markets, and reducing costs. Although our executive
management team and Board of Directors continue to review and monitor our
strategic plans, we have no assurance that we will be able to continue to follow
our current strategy or that this strategy will be successful.
E&S's Stock Price May be Adversely Impacted if its Revenues or Earnings Fail to
Meet Expectations
Our stock price is subject to significant volatility and will likely be
adversely affected if revenues or earnings in any quarter fail to meet the
investment community's expectations. Our revenues and earnings may fail to meet
expectations because they fluctuate and are difficult to predict. Our earnings
during 1997 and 1998 fluctuated significantly from quarter to quarter. One of
the reasons we experience such fluctuations is that the largest share of our
revenues and earnings is from our core simulation-related business, which
typically has long delivery cycles and contract lengths. The timing of customer
acceptance of certain large-scale commercial or government contracts may affect
the timing and amount of revenue that can be recognized; thus, causing our
periodic operating results to fluctuate. Our results may further fluctuate if
United States and international governments delay or even cancel production on
large-scale contracts due to lack of available funding.
Our earnings may not meet either investor or internal expectations
because our budgeted operating expenses are relatively fixed in the short term
and even a small revenue shortfall may cause a period's results to be below
expectations. Such a revenue shortfall could arise from any number of factors,
including:
o delays in the availability of products,
o delays from chip suppliers,
o discontinuance of key components from suppliers,
o other supply constraints,
o transit interruptions,
o overall economic conditions, and
customer demand.
Another reason our earnings may not meet expectations is that our gross
margins are heavily influenced by mix considerations. These mix considerations
include the mix of lower-margin prime contracts versus sub-contracts, the mix of
new products and markets versus established products and markets, the mix of
high-end products versus low-end products, as well as the mix of configurations
within these product categories. Future margins may not duplicate historical
margins or growth rates.
<PAGE>
E&S's Significant Investment in Research and Development May Not Payoff
We have no assurance that our significant investment in research and
development will generate future revenues or benefits. We currently make and
plan to continue to make a significant investment in research and development.
Total spending for research and development was $31.8 million or 16.6% of sales
in 1998 as compared to $25.5 million or 16.0% of sales in 1997. This investment
is necessary for us to be able to compete in the graphics simulation industry.
Developing new products and software is expensive and often involves a long
payback cycle. While we have every reason to believe these investments will be
rewarded with revenue-generating products, customer acceptance ultimately
dictates the success of development and marketing efforts.
E&S May Not Continue to be Successful if it is Unable to Develop, Produce and
Transition New Products
Our continued success depends on our ability to develop, produce and
transition technologically complex and innovative products that meet customer
needs. We have no assurance that we will be able to successfully continue such
development, production and transition.
The development of new technologies and products is increasingly
complex and expensive, which among other risks, increases the risk of product
introduction delays. The introduction of a new product requires close
collaboration and continued technological advancement involving multiple
hardware and software design and manufacturing teams within E&S as well as teams
at outside suppliers of key components. The failure of any one of these elements
could cause our new products to fail to meet specifications or to miss the
aggressive timetables that we establish and the market demands.
As the variety and complexity of our product families increase, the
process of planning and managing production, inventory levels, and delivery
schedules also becomes increasingly complex. There is no assurance that
acceptance of and demand for our new products will not be affected by delays in
this process. Additionally, if we are unable to meet our delivery schedules, we
may be subject to the penalties, including liquidated damages, that are included
in some of our customer contracts.
Product transitions are a recurring part of our business. Our short
product life cycles require our ability to successfully manage the timely
transition from current products to new products. In fact, it is not unusual for
us to announce a new product while its predecessor is still in the final stages
of its development.
Our transition results could be adversely affected by such factors as:
o development delays,
o late release of products to manufacturing,
o quality or yield problems experienced by production or suppliers,
o variations in product costs,
o excess inventories of older products and components, and
o delays in customer purchases of existing products in
anticipation of the introduction of new products.
E&S May Not Maintain a Significant Portion of its Sales if it Fails to Maintain
its United States Government Contracts
In 1998, 37% of our sales were to agencies of the United States
government, either directly or through prime contractors or subcontractors, for
which there is intense competition. Accordingly, we have no assurance that we
will be able to maintain a significant portion of our sales. These sales are
subject to the inherent risks related to government contracts, including
uncertainty of economic conditions, changes in government policies and
requirements that may reflect rapidly changing military and political
developments, and unavailability of funds. These risks also include
technological uncertainties and obsolescence, and dependence on annual
Congressional appropriation and allotment of funds. In the past, some of our
programs have been delayed, curtailed, or terminated. Although we cannot predict
such uncertainties, in our opinion there are no spending reductions or funding
limitations pending that would impact our contracts.
<PAGE>
Other characteristics of the government contract market that may affect
our operating results include the complexity of designs, the difficulty of
forecasting costs and schedules when bidding on developmental and highly
sophisticated technical work, and the speed with which product lines become
obsolete due to technological advances and other factors characteristic of the
market. Our earnings may vary materially on some contracts depending upon the
types of government long-term contracts undertaken, the costs incurred in their
performance, and the achievement of other performance objectives. Furthermore,
due to the intense competition for available United States government business,
maintaining or expanding government business increasingly requires us to commit
additional working capital for long-term programs and additional investments in
company-funded research and development.
Our dependence on government contracts may lead to other perils as well
because as a United States government contractor or sub-contractor, our
contracts and operations are subject to government oversight. The government may
investigate and make inquiries of our business practices and conduct audits of
our contract performance and cost accounting. These investigations may lead to
claims against E&S. Under United States government procurement regulations and
practices, an indictment of a government contractor could result in that
contractor being fined and/or suspended for a period of time from eligibility
for bidding on, or for award of, new government contracts; a conviction could
result in debarment for a specified period of time.
E&S's Revenues May Suffer if it Loses Certain Significant Customers
We currently derive a significant portion of our revenues from a
limited number of non U.S. government customers. The loss of any one or more of
these customers could have a material adverse effect on our business, financial
condition and results of operations. In 1998 we were dependent on three of our
customers for approximately 27% of our consolidated revenues. In 1997 we were
dependent on three of our customers for approximately 26% of our consolidated
revenues. We expect that sales to a limited number of customers will continue to
account for a substantial portion of our revenues in the foreseeable future. We
have no assurance that revenues from this limited number of customers will
continue to reach or exceed historical levels in the future. We do not have
supply contracts with any of our significant customers.
E&S's Revenues Will Decrease if it Fails to Maintain its International Business
Any reduction of our international business could significantly affect
our revenues. Our international business accounted for 44% of our 1998 sales. We
expect that international sales will continue to be a significant portion of our
overall business in the foreseeable future.
Our international business experiences many of the same risks our
domestic business encounters as well as additional risks such as exposure to
currency fluctuations and changes in foreign economic and political
environments. Despite our exposure to currency fluctuations, we are not engaged
in any hedging activities to offset the risk of exchange rate fluctuations. The
recent economic crisis affecting the Asian markets is an example of a change in
a foreign economic environment that could affect our international business. Any
similar economic downturns may also decrease the number of orders we receive and
our receivable collections.
Our international transactions frequently involve increased financial
and legal risks arising from stringent contractual terms and conditions and
widely differing legal systems, customs, and standards in foreign countries. In
addition, our international sales often include sales to various foreign
government armed forces, with many of the same inherent risks associated with
United States government sales identified above.
<PAGE>
If E&S's Commercial Simulation Business Fails, E&S's Revenues will Decrease
We have no assurance that our commercial simulation (airline) business
will continue to succeed. Our commercial simulation business currently accounts
for approximately 15% to 20% of our revenues. This business is subject to many
of the risks related to the commercial simulation market that may adversely
affect our business.
The following risks are characteristic of the commercial simulation market:
o uncertainty of economic conditions,
o dependence upon the strength of the commercial airline industry,
o air pilot training requirements,
o competition,
o changes in technology, and
o timely performance by subcontractors on contracts in which E&S is
the prime contractor.
E&S May Not Meet its Revenue Projections if its New Businesses Fail
We have no assurance that our new businesses will gain market
acceptance or survive the intense competitive pressures of their respective
markets. Our new businesses currently account for approximately 12% to 15% of
our revenues in the aggregate; however, we project these businesses to grow to
approximately 25% to 30% of revenues for 1999. These businesses will not survive
and we will not meet our revenue projections if we are unable to:
o develop strong partner relationships with manufacturers of
computer chips and personal computers in our workstation products
group,
o gain market acceptance of new technology and increase market size
and demand in a developing new market in our digital theater
business, and
o gain market acceptance in a developing new market in our digital
video business.
Other factors that may also affect the success of our new businesses
include technological uncertainties and obsolescence, uncertainty of economic
conditions, unavailability of working capital, and other risks inherent in new
businesses.
E&S's Operations Will be Significantly Impaired if it Fails to be Year 2000
Compliant
We have no assurance that all of our internal systems, products and
services, and suppliers will be Year 2000 compliant and that the lack of
compliance will not significantly impact our operations and financial results
including our ability to continue as a going concern. The Year 2000 issue is the
result of potential problems with computer systems or any equipment with
computer chips that store the year portion of the date as just two digits (e.g.
98 for 1998). Systems using this two-digit approach will not be able to
determine whether "00" represents the year 2000 or 1900. The problem, if not
corrected, will make those systems fail altogether or, even worse, allow them to
generate incorrect calculations causing a disruption of normal operations.
Although we have created a company-wide Year 2000 team to identify and
resolve Year 2000 issues associated with our information and non-information
technology systems and our products and services, we have no assurance that we
will address all potential problems. There can be no assurance that there will
not be a delay in, or increased costs associated with, the implementation of
Year 2000 modifications, or that our suppliers will adequately prepare for the
Year 2000 issue. It is possible that any such delays, increased costs, or
supplier failures could have a material adverse impact on our operations and
financial results, by, for example, impacting our ability to deliver products or
services to our customers. In mid-1999 we expect to finalize a contingency plan
to cope with potential Year 2000 problems.
<PAGE>
For third-party products that we distribute with our products, we have
sought information from the product manufacturers regarding the products' Year
2000 readiness status. We direct customers who use the third-party products to
the product manufacturer for detailed Year 2000 status information. On our Year
2000 web site at www.es.com/investor/y2k_corp.html, we provide information
regarding which of our products is Year 2000 ready and other general information
related to our Year 2000 efforts. We have no assurance that the third-party
products will be Year 2000 ready or that a lack of readiness by such third
parties will not materially adversely impact our operations and financial
results.
E&S's Shareholders May Not Realize Certain Opportunities Because of the
Anti-Takeover Effect of State Law
We are subject to the Utah Control Shares Acquisition Act which
provides that any person who acquires 20% or more of the outstanding voting
shares of a publicly held Utah corporation will not have voting rights with
respect to the acquired shares unless a majority of the disinterested
shareholders of the corporation votes to grant such rights. This could deprive
shareholders of opportunities to realize takeover premiums for their shares or
other advantages that large accumulations of stock would provide because anyone
interested in acquiring E&S could only do so with the cooperation of the board.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The principal market risks to which the Company is exposed are changes
in foreign currency exchange rates and changes in interest rates. The Company's
international sales, which accounted for 44% of the Company's total sales in
1998 are concentrated in the United Kingdom, continental Europe and Asia. The
Company manages its exposure to changes in foreign currency exchange rates by
entering into most of its sales and purchase contracts for products and
materials in U.S. dollars. Occasionally, the Company enters into sales and
purchase contracts for products and materials denominated in currencies other
than U.S. dollars and in those cases the Company enters into foreign exchange
forward sales or purchase contracts to offset those exposures. Foreign currency
purchase and sale contracts are entered into for periods consistent with related
underlying exposures and do not constitute positions independent of those
exposures. The Company does not enter into contracts for trading purposes and
does not use leveraged contracts. As of December 31, 1998, the Company had no
material sales or purchase contracts in currencies other than U.S. dollars and
had no foreign currency sales or purchase contracts.
The Company reduces its exposure to changes in interest rates by
maintaining a high proportion of its debt in fixed-rate instruments. As of
December 31, 1998, 81% of the Company's total debt was in fixed-rate
instruments; however, the Company has a revolving line of credit that provides
for borrowings by the Company of up to $20.0 million. The borrowings bear
interest at a variable rate at the prevailing prime rate minus 1.0% or the LIBOR
rate plus 1.0%. If the Company were to borrow all of the $20.0 million of the
revolving line of credit and the $7.1 million of foreign lines of credit, 40% of
the Company's total debt would be in fixed-rate instruments. In addition, the
Company maintains an average maturity of its short-term investment portfolio
under twelve months to avoid large changes in its market value. As of December
31, 1998, the average maturity of the Company's short-term investments was
approximately eleven months.
<PAGE>
The information below summarizes the Company's market risks associated
with debt obligations and short-term investments as of December 31, 1998. Fair
values have been determined by quoted market prices. For debt obligations, the
table below presents the principal cash flows and related interest rates at year
end by fiscal year of maturity. Bank borrowings bear variable rates of interest
and the convertible subordinated debentures bear a fixed rate of interest. For
short-term investments, the interest rate disclosed presents the weighted
average rate of the portfolio at year end. The information below should be read
in conjunction with notes 3, 11 and 12 of Notes to the Consolidated Financial
Statements in Part II of this annual report.
<TABLE>
<CAPTION>
Rate 1999 2000 2001 2002 2003 There- Total Fair
after Value
--------- -------- --------- ------ ------ ------ --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Debt
Bank borrowings in
Deutsche Marks 6.9% $ 4,195 - - - - - $ 4,195 $ 4,195
Other Various 103 - - - - - 103 103
-------- --------- ------ ------ ------ --------- --------- ---------
Total Notes Payable $ 4,298 - - - - - $ 4,298 $ 4,298
======== ========= ====== ====== ====== ========= ========= =========
Convertible subordinated
debentures 6.0% - - - - - $ 18,015 $18,015 $ 16,214
Other Various - - - - - 47 47 47
-------- --------- ------ ------ ------ --------- --------- ---------
Total long-term debt - - - - - $ 18,062 $ 18,062 $ 16,261
======== ========= ====== ====== ====== ========= ========= =========
Short-term Investments 5.9% $15,216 $ 10,691 - - - - $ 25,907 $ 25,907
======== ========= ====== ====== ====== ========= ========= =========
</TABLE>
<PAGE>
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
Report of Independent Accountants
Consolidated Balance Sheets as of December 31, 1998 and December
31, 1997.
Consolidated Statements of Operations for the years ended
December 31, 1998, December 31, 1997, and December 27, 1996.
Consolidated Statements of Comprehensive Income for the years
ended December 31, 1998, December 31, 1997 and December 27, 1996.
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1998, December 31, 1997, and December 27,
1996.
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, December 31, 1997, and December 27, 1996.
Notes to Consolidated Financial Statements.
The following consists of a list of Financial Statement Schedules
included in Part IV of this report:
Schedule II - Valuation and Qualifying Accounts for the years
ended December 31, 1998, December 31, 1997, and December 27, 1996.
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.
<PAGE>
REPORT OF MANAGEMENT
Responsibility for the integrity and objectivity of the financial
information presented in this report rests with the management of Evans &
Sutherland. The accompanying financial statements have been prepared in
conformity with generally accepted accounting principles applied on a consistent
basis and, where necessary, include estimates based on management judgment.
Management also prepared other information in this report and is responsible for
its accuracy and consistency with the financial statements.
Evans & Sutherland has established and maintains an effective system of
internal accounting controls. The Company believes this system provides
reasonable assurance that transactions are executed in accordance with
management authorization in order to permit the financial statements to be
prepared with integrity and reliability and to safeguard, verify, and maintain
accountability of assets. In addition, Evans & Sutherland's business ethics
policy requires employees to maintain the highest level of ethical standards in
the conduct of the Company's business.
Evans & Sutherland's financial statements have been audited by KPMG
LLP, independent public accountants. Management has made available all the
Company's financial records and related data to allow KPMG LLP to express an
informed professional opinion in their accompanying report.
The Audit Committee of the Board of Directors is composed of the
Chairman of the Board and all outside directors and meets regularly with the
independent accountants, as well as with Evans & Sutherland management, to
review accounting, auditing, internal accounting control, and financial
reporting matters.
/s/ James R. Oyler /s/ John T. Lemley
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, 1998 and
1997, and the results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 1998, 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 LLP
February 12, 1999
Salt Lake City, Utah
<PAGE>
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
<TABLE>
<CAPTION>
December 31,
-------------------------------
1998 1997
------------- --------------
<S> <C> <C>
Assets:
Cash and cash equivalents $ 1,834 $ 8,176
Short-term investments 25,907 48,928
Accounts receivable, less allowances for doubtful
receivables of $1,616 in 1998 and $851 in 1997 46,866 36,066
Inventories 53,319 26,885
Costs and estimated earnings in excess of billings
on uncompleted contracts 58,682 51,799
Deferred income taxes 9,450 4,224
Prepaid expenses and deposits 7,278 3,620
---------- -----------
Total current assets 203,336 179,698
Property, plant and equipment, net 53,693 44,368
Investment securities 3,380 5,000
Deferred income taxes 2,487 3,802
Goodwill and other intangible assets, net 11,351 101
Other assets 1,421 1,421
---------- -----------
Total assets $275,668 $234,390
========== ===========
Liabilities and stockholders' equity:
Line of credit agreements $ 4,298 $ 950
Accounts payable 24,667 14,353
Accrued expenses 27,147 18,061
Customer deposits 3,339 6,574
Income taxes payable 2,436 4,462
Billings in excess of costs and estimated earnings on
uncompleted contracts 7,092 6,341
---------- -----------
Total current liabilities 68,979 50,741
---------- -----------
Long-term debt 18,062 18,015
---------- -----------
Commitments and contingencies (notes 7, 10 and 15)
Redeemable preferred stock, class B-1, no par value; authorized
1,500,000 shares; issued and outstanding 901,408 shares at
December 31, 1998 and no shares at December 31, 1997 23,544 -
---------- -----------
Stockholders' equity:
Preferred stock, no par value; authorized 8,500,000 shares; - -
no shares issued and outstanding
Common stock, $.20 par value; authorized 30,000,000 shares;
issued and outstanding 9,597,660 shares in 1998 and 9,066,743
shares in 1997 1,920 1,813
Additional paid-in capital 23,420 8,025
Retained earnings 139,498 155,576
Accumulated other comprehensive income 245 220
---------- -----------
Total stockholders' equity 165,083 165,634
---------- -----------
Total liabilities and stockholders' equity $275,668 $234,390
========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE>
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Year ended
---------------------------------------
Dec. 31, Dec. 31, Dec. 27,
1998 1997 1996
------------- ------------ ------------
<S> <C> <C> <C>
Net sales $ 191,766 $ 159,353 $ 130,564
Cost of sales 110,320 84,139 65,935
------------- ------------ ------------
Gross profit 81,446 75,214 64,629
------------- ------------ ------------
Expenses:
Selling, general and administrative
40,088 35,304 31,328
Research and development
31,797 25,492 21,753
Write-off of acquired in-process technology
20,780 - -
Amortization of goodwill and other intangible assets
4,767 29 29
------------- ------------ ------------
97,432 60,825 53,110
------------- ------------ ------------
Operating earnings (loss) (15,986) 14,389 11,519
------------- ------------ ------------
Other income (expense):
Interest income 2,659 3,239 3,892
Interest expense (1,335) (1,300) (1,434)
Loss on write down of investment securities (1,075) (9,575) -
Gain on sale of investment securities 2,493 - 1,868
Other (613) 85 184
------------- ------------ -----------
2,129 (7,551) 4,510
------------- ------------ ------------
Earnings (loss) before income taxes (13,857) 6,838 16,029
Income tax expense 2,126 1,758 5,677
------------- ------------ ------------
Net earnings (loss) (15,983) 5,080 10,352
Accretion of preferred stock 95 - -
------------- ------------ ------------
Net earnings (loss) applicable to common stock $ (16,078) $ 5,080 $ 10,352
============= ============ ============
Earnings (loss) per common share:
Basic $ (1.70) $ 0.56 $ 1.16
============= ============ ============
Diluted $ (1.70) $ 0.53 $ 1.12
============= ============ ============
</TABLE>
<PAGE>
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
<TABLE>
<CAPTION>
Year ended
------------------------------------------
Dec. 31, Dec. 31, Dec. 27,
1998 1997 1996
------------- ------------- ------------
<S> <C> <C> <C>
Net earnings (loss) $ (15,983) $ 5,080 $ 10,352
Other comprehensive income (loss):
Foreign currency translation adjustments 126 297 289
Unrealized gains (losses) on securities (89) 1,505 (3,460)
Reclassification adjustment for losses included
in net earnings (loss) - (868) -
------------- ------------- ------------
Other comprehensive income (loss) before income taxes 37 934 (3,171)
Income tax expense (benefit) related
to items of other comprehensive income (loss) 12 240 (1,123)
------------- ------------- ------------
Other comprehensive income (loss), net of income taxes 25 694 (2,048)
------------- ------------- ------------
Comprehensive income (loss) $ (15,958) $ 5,774 $ 8,304
============= ============= ============
</TABLE>
<PAGE>
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except share amounts)
<TABLE>
<CAPTION>
Accumulated
Additional Other
Common Stock Paid-In Retained Comprehensive
-----------------------
Shares Amount Capital Earnings Income Total
------------ --------- ----------- ----------- ---------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 25, 1995 8,715 $ 1,743 $ 5,112 $ 140,062 $ 1,574 $ 148,491
Issuance of common stock for cash 196 39 2,746 - - 2,785
Common stock issued in
connection with acquisitions 149 30 51 82 - 163
Common stock repurchased
and retired (3) (1) (51) - - (52)
Compensation expense on
employee stock purchase plan - - 90 - - 90
Tax benefit from issuance of
common stock to employees - - 691 - - 691
Other comprehensive loss - - - - (2,048) (2,048)
Net earnings - - - 10,352 - 10,352
------------ --------- ----------- ----------- ---------------- ------------
Balance at December 27, 1996 9,057 1,811 8,639 150,496 (474) 160,472
------------ --------- ----------- ----------- ---------------- ------------
Issuance of common stock for cash 183 37 3,104 - - 3,141
Common stock repurchased
and retired (173) (35) (4,590) - - (4,625)
Compensation expense on
employee stock purchase plan - - 102 - - 102
Tax benefit from issuance of
common stock to employees - - 770 - - 770
Other comprehensive income - - - - 694 694
Net earnings - - - 5,080 - 5,080
------------ --------- ----------- ----------- ---------------- ------------
Balance at December 31, 1997
9,067 1,813 8,025 155,576 220 165,634
------------ --------- ----------- ----------- ---------------- ------------
Issuance of common stock for cash 156 32 1,990 - - 2,022
Common stock issued in
connection with acquisitions 1,109 222 28,373 - - 28,595
Common stock repurchased
and retired (734) (147) (15,538) - - (15,685)
Compensation expense on
employee stock purchase plan - - 186 - - 186
Tax benefit from issuance of
common stock to employees - - 384 - - 384
Other comprehensive income - - - - 25 25
Net loss - - - (15,983) - (15,983)
Accretion of preferred stock - - - (95) - (95)
------------ --------- ----------- ----------- ---------------- ------------
Balance at December 31, 1998 9,598 $ 1,920 $ 23,420 $ 139,498 245 $ 165,083
============ ========= =========== =========== ================ ============
</TABLE>
<PAGE>
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Year ended
-----------------------------------------------
Dec. 31, Dec. 31, Dec. 27,
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $ (15,983) $ 5,080 $ 10,352
Adjustments to reconcile net earnings (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 15,934 10,041 9,120
Provision for losses on accounts receivable 496 370 335
Provision for write down of inventories 1,987 1,009 1,077
Provision for warranty expense 872 726 673
Deferred income taxes (2,919) (3,299) 1,283
Loss on write down of investment securities 1,075 9,575 -
Gain on sale of investment securities (2,493) - (1,868)
Write-off of acquired in-process technology 20,780 - -
Other, net 868 169 159
Changes in assets and liabilities net of effects of
purchase/sale of business:
Accounts receivable (3,613) (2,935) (7,406)
Inventories (28,867) (8,641) (4,705)
Costs and estimated earnings in excess of billings on
uncompleted contracts, net (6,110) (15,060) (19,036)
Prepaid expenses and deposits (3,533) (1,430) (745)
Accounts payable 5,699 8,071 3,502
Accrued expenses (266) 1,161 288
Customer deposits (3,235) 4,496 (3,489)
Income taxes (1,473) 4,958 (10,461)
---------- ---------- ----------
Net cash provided by (used in) operating activities (20,781) 14,291 (20,921)
---------- ---------- ----------
Cash flows from investing activities:
Purchases of short-term investments (22,217) (80,443) (57,354)
Proceeds from sale of short-term investments 47,691 77,858 97,262
Purchases of investment securities (541) (4,208) (1,447)
Proceeds from sale of investment securities 3,304 - 1,886
Purchases of property, plant and equipment (18,516) (10,804) (10,521)
Increase in other assets - - (1,463)
Payments for business acquisitions, net of cash acquired (7,603) - -
---------- ---------- ----------
Net cash provided by (used in) investing activities 2,118 (17,597) 28,363
---------- ---------- ----------
Cash flows from financing activities:
Borrowings under line of credit agreements 3,915 - 1,940
Payments under line of credit agreements (1,575) (3,827) (36)
Net proceeds from issuance of common stock 2,022 3,141 2,785
Net proceeds from issuance of preferred stock 23,544 - -
Payments for repurchases of common stock (15,685) (4,625) -
---------- ---------- ----------
Net cash provided by (used in) financing activities 12,221 (5,311) 4,689
---------- ---------- ----------
Effect of foreign exchange rate on cash and cash equivalents 100 272 (633)
---------- ---------- ----------
Net change in cash and cash equivalents (6,342) (8,345) 11,498
Cash and cash equivalents at beginning of year 8,176 16,521 5,023
---------- ---------- ----------
Cash and cash equivalents at end of year $ 1,834 $ 8,176 $ 16,521
========== ========== ==========
Supplemental Disclosures of Cash Flow Information Cash paid
during the year for:
Interest $ 1,309 $ 1,351 $ 1,385
Income taxes 7,130 1,915 14,736
Accretion of preferred stock
95 - -
</TABLE>
<PAGE>
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, December 31, 1997, and December 27, 1996
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Evans & Sutherland Computer Corporation ("E&S" or the "Company") is an
established high-technology company with outstanding computer graphics
technology and a worldwide presence in high-performance 3D visual
simulation. In addition, E&S is now applying this core technology into
higher-growth personal computer ("PC") products for both simulation and
workstations. The Company's core computer graphics technology is used
to produce high performance image generators for simulation including
PC-based visual system products, to provide original equipment
manufacturers of personal workstations with high quality graphics
performance, and to apply the Company's core technologies to the
expanding market of PC-based applications and products.
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, 1998, December 31, 1997, and
December 27, 1996.
Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All intercompany accounts
and transactions have been eliminated in consolidation.
Revenue Recognition
Net sales include revenue from system and software products, software
license rights, and service contracts.
In October 1997, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") 97-2, Software Revenue
Recognition, which supersedes SOP 91-1, Software Revenue Recognition.
Additionally, in 1998 the AICPA issued SOP 98-9 Modification of SOP
97-2 with Respect to Certain Transactions. Effective January 1, 1998,
the Company adopted the provisions of SOP 97-2 as modified by SOP 98-9.
Revenue was recognized in accordance with SOP 97-2 in 1998, and SOP
91-1 in prior years.
SOP 97-2 generally requires revenue earned on software arrangements
involving multiple elements such as software products, enhancements,
post-contract customer support, installation and training to be
allocated to each element based on the relative fair values of the
elements. The fair value of an element must be based on evidence which
is specific to the vendor. The revenue allocated to software products
is generally recognized upon delivery of the products. The revenue
allocated to unspecified upgrades and updates and post contract
customer support is generally recognized as the services are performed.
The Company recognizes revenues from product sales that do not require
significant production, modification, or customization when the
following criteria are met: the Company has signed a noncancelable
agreement; the Company has shipped the product; there are no
uncertainties surrounding product acceptance; the fees are fixed and
determinable; and collection is considered probable.
Revenue from long-term contracts which require significant production,
modification or customization is recorded using the
percentage-of-completion method, determined by the units-delivered
method, or when there is significant nonrecurring engineering, the
ratio of costs incurred to management's estimate of total anticipated
costs. If estimated total costs on any contract indicate a loss, the
Company provides currently for the total anticipated loss on the
contract. Billings on uncompleted long-term contracts may be greater
than or less than incurred costs and estimated earnings and are
recorded as an asset or liability in the accompanying consolidated
balance sheets.
<PAGE>
Cash and Cash Equivalents
The Company considers all highly liquid financial instruments purchased
with an original maturity to the Company of 90 days or less to be cash
equivalents. Cash equivalents consist of debt securities and money
market funds of $1.8 million and $6.9 million as of December 31, 1998
and 1997, 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). The Company periodically
reviews inventories for obsolescence and provides a reserve that it
considers sufficient to cover any impaired inventories.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation and
amortization are computed using the straight-line methods based on the
estimated useful lives of the related assets.
Goodwill and Other Intangible Assets
Goodwill and other intangible assets consist primarily of goodwill and
other intangible assets recorded in connection with the acquisitions of
AccelGraphics, Inc. and Silicon Reality, Inc. on June 26, 1998. The
goodwill is being amortized using the straight-line method over seven
years. The other intangible assets are being amortized using the
straight-line method over six months to seven years. As of December 31,
1998 and 1997, accumulated amortization of goodwill and other
intangible assets was $4.9 million and $0.1 million, respectively.
The Company assesses whether its goodwill and other intangible assets
are impaired based on a periodic evaluation of undiscounted projected
cash flows through the remaining amortization period. If an impairment
exists, the amount of such impairment is calculated and recorded based
on the estimated fair value of the asset.
Software Development Costs
Software development costs, if material, are capitalized from the date
technological feasibility is achieved until the product is available
for general release to customers. Such deferrable costs have not been
material during the periods presented.
Investments
The Company classifies its marketable debt and equity securities as
available-for-sale. Available-for-sale securities are recorded at fair
value. Unrealized holding gains and losses, net of the related tax
effect, are excluded from earnings and are reported as a separate
component of stockholders' equity until realized. Dividend income is
recognized when earned. Realized gains and losses from the sale of
securities are included in results of operations and are determined on
the specific-identification basis.
Nonmarketable investment securities are recorded at the lower of cost
or fair value. Some of the factors which are considered in determining
the fair value of these securities include analyses of each investee's
financial condition and operations, the status of its technology and
strategies in place to achieve its objectives. A decline in the market
value below cost that is deemed other than temporary is charged to
results of operations resulting in the establishment of a new cost
basis for both available-for-sale and nonmarketable investment
securities.
<PAGE>
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.
Stock-Based Compensation
The Company has 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 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.
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that effect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of 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,
short-term investments, and accounts receivable. The Company's
short-term investment portfolio consists of investment-grade
securities diversified among security types, industries, and issuers.
The Company's investments are managed by recognized financial
institutions that follow the Company's investment policy. The Company's
policy limits the amount of credit exposure in any one issue, and the
Company believes no significant concentration of credit risk exists
with respect to these investments.
<PAGE>
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.
Recent Accounting Pronouncements
In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities", was issued. The statement requires derivatives to
be recorded on the balance sheet as assets or liabilities, measured at
fair value. Gains or losses resulting from changes in fair value of the
derivatives are recorded depending upon whether the instruments meet
the criteria for hedge accounting. The impact of adopting this
statement is not anticipated to be material to the financial
statements. This statement is effective for fiscal years beginning
after June 15, 1999.
In March 1998, American Institute of Certified Public Accountants
issued Statement of Position ("SOP") No. 98-1, "Software for Internal
Use," which provides guidance on accounting for the cost of computer
software developed or obtained for internal use. SOP No. 98-1 is
effective for fiscal years beginning after December 15, 1998. The
Company does not expect that the adoption of SOP No. 98-1 will have a
material impact on its consolidated financial statements.
Reclassifications
Certain reclassifications have been made in the 1997 and 1996
consolidated financial statements to conform to the 1998 presentation.
(2) BUSINESS ACQUISITIONS
On June 26, 1998, the Company acquired all of the outstanding stock of
AccelGraphics, Inc. ("AGI") for approximately $23.7 million in cash and
1,109,303 shares of the Company's common stock which was valued at
$25.7 million. In addition, the Company converted all outstanding AGI
options into options to purchase approximately 351,000 shares of common
stock of the Company with a fair value of $3.4 million and incurred
transaction costs of approximately $1.1 million. AGI is based in
Milpitas, California, and is a provider of high-performance,
cost-effective, three-dimensional graphics subsystem products for the
professional Windows NT and Windows 95 markets. The acquisition was
accounted for by the purchase method and, accordingly, the results of
operations of AGI have been included in the Company's consolidated
financial statements from June 26, 1998 forward.
Also on June 26, 1998, the Company acquired the assets and assumed
certain liabilities of Silicon Reality, Inc. ("SRI") for a purchase
price of approximately $1.2 million, including transaction costs of
approximately $250,000. SRI is based in Federal Way, Washington, and
designs and produces three-dimensional graphics hardware and software
products for the personal computer marketplace. This acquisition was
accounted for by the purchase method and, accordingly, the results of
operations of SRI have been included in the Company's consolidated
financial statements from June 26, 1998 forward.
A modified income approach was used to allocate a portion of the
purchase price to the acquired in-process technology. Under this
method, the fair value for the in-process technology in each
acquisition was based on analysis of the markets, projected cash flows
and risks associated with achieving such projected cash flows. In
developing these cash flow projections, revenues were forecasted based
on relevant factors, including aggregate revenue growth rates for the
business as a whole, individual product revenues, characteristics of
the potential market for the products, the anticipated life of the
technology under development and the stage of completion of each
project. Operating expenses and resulting profit margins were
forecasted based on the characteristics and cash flow generating
potential of the acquired in-process technology, and included
assumptions that certain expenses would decline over time as operating
efficiencies were obtained or support requirements decreased.
Appropriate adjustments were made to operating income to derive net
cash flow, and the estimated net cash flows of the in-process
technologies in each acquisition were then discounted to present value
<PAGE>
using rates of return that the Company believes reflect the specific
risk/return characteristics of these research and development projects.
The projected revenues used in the income approach are based upon the
revenues likely to be generated upon completion of the projects and the
beginning of commercial sales, as estimated by management. The
projections assume that the product will be successful and that the
product's development and commercialization meet management's current
time schedule.
In determining the operating cash flows related exclusively to
in-process technology, management has considered the contribution of
both prior technologies (as demonstrated by prior products) and core
technology or know-how that is generic among most or all products.
Where appropriate, the operating income estimates for each project have
been apportioned between in-process technology and the appropriate
intangible asset (i.e. various core technologies). The operating income
apportionment factor was determined on the basis of an analysis of the
specific contribution of each element of core technology to the subject
in-process technology, the estimated effect of this contribution on the
profitability of the subject in-process project, and the relative
importance of the core technology to the product's ultimate customer.
The discount rate applicable to in-process technology projects reflects
the risks inherent in each project. This rate is higher than the rate
applied to AGI's current products, as the current products have already
demonstrated their technological feasibility product and market
acceptance.
The discount rate for in-process technology considers the following
risk elements (in addition to the baseline business and market risks
considered as part of the current product discount rate); risk of
successfully completing the in-process technology project, risk that
market demand will exist in the future for the in-process technology
product, risk that the forecasted cost structure will be possible, and
the risk that as yet unknown competitive products will emerge. An
after-tax rate of 20 to 30 percent was applied to the in-process
technology projects.
The revenues earned by the in-process technology products represent the
return on all of the assets acquired under the agreement. The cash
flows generated by the new products must provide a return on each asset
purchased that is consistent with the value and the relative risk of
that asset. To separately value in-process technology, the value and
required rate of return for other identifiable assets must be
determined. The required return on these other assets is charged to
(deducted from) the cash flows generated by the projects shown in the
in-process technology model to determine the incremental cash flows
specifically attributable to the in-process technology project.
As part of the analysis, management determined individual rates of
return applicable to each asset identified in the allocation table and
estimated the effective capital charge to be applied to the valuation
of in-process technology. Capital charges have been made for returns
related to current assets, fixed assets, workforce and tradename.
The total purchase price and final allocation among the tangible and
intangible assets and liabilities acquired (including acquired
in-process technology) is summarized as follows (dollars in thousands):
<PAGE>
Total Purchase Price:
Total cash consideration $ 24,688
Total stock consideration 25,695
Value of options assumed 3,400
Transaction costs 1,350
----------------
$ 55,133
===============
Amortization
Period
(Months)
----------------
Purchase Price Allocation:
Net tangible assets $ 17,329
Intangible assets:
Workforce-in 1,019 60
Customer list 250 60
AccelGraphics name 699 36
Current products 5,640 6 - 24
Core technology 1,754 84
Goodwill 7,662 84
In-process technology 20,780 Expensed
----------------
$ 55,133
================
The following unaudited pro forma financial information (in thousands,
except per share amounts) presents the combined results of operations
of the Company, AGI, and SRI for 1998 and 1997 as if the acquisitions
had occurred as of the beginning of 1997, after giving effect to
certain adjustments, including, but not limited to, amortization of
goodwill and other intangible assets, decreased interest income and
entries to conform to the Company's accounting policies. The $20.8
million charge for acquired in-process technology has been excluded
from the pro forma results as it is a material non-recurring charge.
1998 1997
---------------- ----------------
Net sales $ 208,503 $ 194,146
Net loss (4,836) (1,545)
Loss per share:
Basic (0.46) (0.15)
Diluted (0.46) (0.15)
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, 149,000 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.
<PAGE>
(3) SHORT-TERM INVESTMENTS
The amortized cost, gross unrealized holding gains and losses, and fair
value of short-term available-for-sale marketable investments were as
follows (in thousands):
<TABLE>
<CAPTION>
Amortized Gross Gross Fair
cost unrealized unrealized value
holding holding
gains losses
------------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
At December 31, 1998:
State and municipal securities:
Maturing in one year or less $ 6,370 $ 202 $ - $ 6,572
Maturing between one and two years 2,212 - (140) 2,072
Corporate debt securities:
Maturing in one year or less 8,634 10 - 8,644
Maturing between one and two years 8,603 35 (19) 8,619
------------ ------------ ------------ -------------
$ 25,819 $ 247 $ (159) $ 25,907
============ ============ ============ =============
At December 31, 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
Other 1,700 - - 1,700
------------ ------------ ------------ -------------
$ 49,037 $ 67 $ 176 $ 48,928
============ ============ ============ =============
</TABLE>
(4) INVENTORIES
Inventories consist of the following (in thousands):
December 31,
1998 1997
------------- -------------
Raw materials $ 26,084 $ 13,674
Work-in-process 23,511 10,040
Finished goods 3,724 3,171
------------- -------------
$ 53,319 $ 26,885
============= =============
<PAGE>
(5) LONG-TERM CONTRACTS
Comparative information with respect to uncompleted contracts are
summarized as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
1998 1997
-------------- -------------
<S> <C> <C>
Accumulated costs and estimated $236,757 $217,354
earnings on uncompleted contracts
Less total billings on uncompleted contracts (185,167) (171,896)
------------ -----------
$ 51,590 $ 45,458
============ ===========
Costs and estimated earnings in excess of
billings on uncompleted contracts $ 58,682 $ 51,799
Billings in excess of costs and estimated
earnings on uncompleted contracts (7,092) (6,341)
------------ -----------
$ 51,590 $ 45,458
============ ===========
</TABLE>
(6) PROPERTY, PLANT AND EQUIPMENT
The cost and estimated useful lives of property, plant, and equipment
are summarized as follows (dollars in thousands):
<TABLE>
<CAPTION>
Estimated December 31,
useful lives 1998 1997
--------------- ------------ -----------
<S> <C> <C> <C>
Land - $ 1,436 $ 1,436
Buildings and improvements 40 years 37,378 38,152
Machinery and equipment 3 to 8 years 94,614 79,372
Office furniture and equipment 8 years 2,616 2,178
Construction-in-process - 3,330 2,030
------------ -----------
139,374 123,168
Less accumulated depreciation and amortization (85,681) (78,800)
------------ -----------
$ 53,693 $ 44,368
============ ===========
</TABLE>
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 ten years. At the end of the lease term, including any
extension, the buildings and improvements revert to the lessor.
(7) LEASES
The Company leases certain of its buildings and related improvements to
third parties under noncancelable operating leases. Cost and
accumulated depreciation of the leased buildings and improvements at
December 31, 1998 were $8.2 million and $2.9 million, respectively.
Rental income for all operating leases for 1998, 1997 and 1996 was $1.5
million, $1.1 million and $0.8 million, 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 1998, 1997 and
1996 were $2.3 million, $1.7 million and $1.5 million, respectively.
<PAGE>
At December 31, 1998, the future minimum rental income and lease
payments under operating leases that have initial or remaining
noncancelable lease terms in excess of one year are as follows (in
thousands):
Rental Rental
income Commitment
------------ ---------------
Year Ending December 31,
1999 $ 816 $ 2,438
2000 725 2,250
2001 682 1,825
2002 647 1,530
2003 647 1,547
Thereafter 1,940 10,123
------------ ---------------
$ 5,457 $ 19,713
============ ===============
(8) INVESTMENT SECURITIES
The Company had the following investments in marketable equity
securities, adjusted for unrealized holding gains and losses and other
than temporary declines in fair value, and nonmarketable equity
securities, adjusted for other than temporary declines in fair value
(in thousands):
<TABLE>
<CAPTION>
December 31,
1998 1997
---------- -------------
<S> <C> <C>
Marketable securities:
Iwerks Entertainment, Inc. (Iwerks) $ 225 $ 500
----------- -------------
Nonmarketable securities:
Silicon Light Machines (SLM) 2,655 3,500
Sense8 Corporation (Sense8) - 500
Total Graphics Solutions N.V. (TGS) 500 500
----------- -------------
3,155 4,500
----------- -------------
Total investment securities $ 3,380 $ 5,000
=========== =============
</TABLE>
Iwerks designs, engineers, manufactures, markets and services high-tech
entertainment attractions which employ a variety of projection, show
control, ride simulation and software technologies. SLM is a
development-stage company engaged in research and development of
high-resolution displays. Sense8 designs and markets software
development tools for multimedia producers. TGS develops and markets
portable graphics software tools which provide hardware independence
for application developers. Each investment in non-marketable
investment securities was made either to enhance a current technology
of the Company or to complement the Company's strategic direction.
The Company owns, including total shares purchased or available to
purchase under warrants, less than 15% of the outstanding common stock
and common stock equivalents of each company. The Company has one of
six seats on both SLM's and TGS's board of directors. There are no
intercompany transactions, technological dependencies, related
guarantees, obligations, contingencies, interchange of personnel, nor
ability to exercise significant influence on any of the companies in
which the Company has investments. Accordingly, the Company accounts
for each investment under the cost method.
<PAGE>
The Company had an additional investment of $3.0 million, made in 1995,
that was deemed to be permanently impaired and written down to zero in
1997. This investment was disposed of during 1998 resulting in no gain
or loss. During 1998, the Company made an additional net investment of
$0.3 million in Sense8 and then sold all of its holdings in Sense8 for
net proceeds of $3.3 million, recognizing a $2.5 million gain.
(9) ACCRUED EXPENSES
Accrued expenses consist of the following (in thousands):
December 31,
1998 1997
----------- ----------
Pension plan obligation (note 10) $ 8,611 $ 5,305
Compensation and benefits 11,256 7,497
Other 7,280 5,259
----------- ----------
$ 27,147 $ 18,061
=========== ==========
(10) EMPLOYEE BENEFIT PLANS
Pension Plan (the "Plan") - The Company has a defined benefit pension
plan covering substantially all employees who have attained age 21 with
service in excess of one year. Benefits at normal retirement age (65)
are based upon the employee's years of service and the employee's
highest compensation for any consecutive five of the last ten years of
employment. The Company's funding policy is to contribute amounts
sufficient to satisfy regulatory funding standards, based upon
independent actuarial valuations.
Supplemental Executive Retirement Plan ("SERP") - The Company has a
non-qualified SERP. The SERP, which is unfunded, provides eligible
executives defined pension benefits, outside the Company's pension
plan, based on average earnings, years of service, and age at
retirement.
The following provides a reconciliation of benefit obligations, plan
assets, and funded assets of the Plan and SERP (dollars in thousands):
<TABLE>
<CAPTION>
Pension Plan SERP
------------------------------ -----------------------------
1998 1997 1998 1997
-------------- ------------ ------------- -----------
<S> <C> <C> <C> <C>
Change in benefit obligation:
Beginning of year $ 36,212 $25,778 $ 5,262 $ 3,354
Service cost 2,601 2,025 828 497
Interest cost 2,501 2,007 355 234
Actuarial (gain) loss 2,344 7,394 (1,014) 1,177
Benefits paid (1,021) (992) - -
----------- --------- ---------- ----------
End of year 42,637 36,212 5,431 5,262
----------- --------- ---------- ----------
Change in plan assets:
Fair value at beginning of year 36,768 32,912
Actual return on plan assets 4,475 4,848
Benefits paid (1,022) (992)
----------- ---------
Fair value at end of year 40,221 36,768
----------- ---------
Reconciliation of funded status:
Funded status (2,416) 555 (5,431) (5,262)
Unrecognized actuarial (gain) loss (2,805) (3,954) 1,391 2,548
Unrecognized prior service cost 161 165 874 1,294
Unrecognized transition obligation 238 317 - -
----------- --------- ---------- ----------
Net amount recognized $ (4,822) $(2,917) $(3,166) $(1,420)
=========== ========= ========== ==========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Pension Plan SERP
------------------------------ -----------------------------
1998 1997 1998 1997
-------------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
Amounts recognized in the consolidated
balance sheets:
Accrued benefit liability $ (4,822) $ (2,917) $ (3,166) $ (1,420)
Additional minimum liability - - (623) (968)
----------- --------- ---------- ----------
Net amount recognized $ (4,822) $ (2,917) $(3,789) $(2,388)
=========== ========= ========== ==========
Assumptions (weighted average):
Discount rate 6.8% 7.0% 6.8% 7.0%
Expected return on plan assets 9.0% 9.0% N/A N/A
</TABLE>
Net periodic pension and other postretirement benefit costs include
the following components (in thousands):
<TABLE>
<CAPTION>
Pension Plan SERP
-------------------------------- -------------------------------
1998 1997 1996 1998 1997 1996
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Components of net periodic benefit
cost:
Service cost $2,601 $2,025 $1,989 $ 828 $ 327 $ 265
Interest cost 2,501 2,007 1,776 355 252 98
Expected return on assets (3,264) (2,924) (2,584) - - -
Amortization of actuarial
(gain) loss (15) (300) (133) 143 115 46
Amortization of prior year
service cost 4 5 (33) 73 106 40
Amortization of transition 79 79 79 - - -
-------- -------- -------- -------- -------- --------
Net periodic benefit cost $1,906 $ 892 $1,094 $ 1,399 $ 800 $ 449
======== ======== ======== ======== ======== ========
</TABLE>
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 1998, 1997 and 1996 were $1.0 million,
$1.0 million and $0.9 million respectively.
Life Insurance - The Company purchases company-owned life insurance
policies insuring the lives of certain employees. The policies
accumulate asset values to meet future liabilities including the
payment of employee benefits such as supplemental retirement benefits.
At December 31, 1998 and 1997, the investment in the policies was $2.6
million and $1.1 million, respectively, and net life insurance expense
was $0.5 million, $0.1 million and $0.1 million for 1998, 1997 and
1996, respectively.
(11) LINES OF CREDIT
The following is a summary of lines of credit (dollars in thousands):
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Balance at end of year $ 4,298 $ 950
Weighted average interest rate at end of year 6.9% 8.0%
Maximum balance outstanding during the year $ 4,298 $ 3,441
Average balance outstanding during the year $ 4,239 $ 1,845
Weighted average interest rate during the year 7.4% 7.6%
</TABLE>
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.
<PAGE>
In November 1998, the Company entered into a revolving line of credit
agreement with U.S. Bank National Association. The revolving line of
credit provides for borrowings by the Company of up to $20.0 million.
Borrowings bear interest at the prevailing prime rate minus 1.0% or
the LIBOR rate plus 1.0%. The revolving line of credit expires on
November 10, 1999. The revolving line of credit, among other things,
(i) requires the Company to maintain certain financial ratios; (ii)
restricts the Company's ability to incur debt or liens; sell, assign,
pledge or lease assets; merge with another company; and (iii)
restricts the payment of dividends and repurchase of any of the
Company's outstanding shares without prior consent of the lender. The
revolving line of credit is unsecured. There were no borrowings
outstanding under this agreement as of December 31, 1998. In addition,
the Company has a $7.5 million unsecured line for letters of credit
with U.S. Bank National Association for which there were $6.6 million
and $4.7 million outstanding as of December 31, 1998 and 1997,
respectively.
The Company also has unsecured revolving line of credit agreements with
foreign banks totaling approximately $7.1 million as of December 31,
1998, of which approximately $2.8 million was unused and available.
(12) LONG-TERM DEBT
Long-term debt is comprised of approximately $18.0 million of 6%
Convertible Subordinated Debentures due in 2012 (the "6% Debentures").
The 6% Debentures are unsecured and are convertible at each
bondholder's option into shares of the Company's common stock at a
conversion price of $42.10 or 428,000 shares of the Company's common
stock subject to adjustment. The 6% Debentures are redeemable at the
Company's option, in whole or in part, at par.
(13) INCOME TAXES
Components of income tax expense (benefit) attributable to earnings
before income taxes (in thousands):
<TABLE>
<CAPTION>
Share
and
stock
option
Current Deferred benefit Total
---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
At December 31, 1998:
Federal $ 3,520 $ (2,336) $ 330 $ 1,514
State 761 (385) 54 430
Foreign 182 - - 182
---------- ----------- ---------- -----------
$ 4,463 $ (2,721) $ 384 $ 2,126
========== =========== ========== ===========
At December 31, 1997:
Federal $ 5,327 $ (4,476) $ 663 $ 1,514
State 858 (721) 107 244
---------- ----------- ---------- -----------
$ 6,185 $ (5,197) $ 770 $ 1,758
========== =========== ========== ===========
At December 27, 1996:
Federal $ 3,130 $ 1,200 $ 595 $ 4,925
State 474 182 96 752
---------- ----------- ---------- -----------
$ 3,604 $ 1,382 $ 691 $ 5,677
========== =========== ========== ===========
</TABLE>
<PAGE>
The actual tax expense differs from the expected tax expense (benefit)
as computed by applying the U.S. federal statutory tax rate of 35
percent for 1998 and 34 percent for 1997 and 1996 as a result of the
following (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Tax (benefit) at U.S. federal statutory rate $ (4,850) $ 2,325 $ 5,450
In-process research and development 7,245 - -
Losses (gains) of foreign subsidiaries (101) (115) (165)
Earnings of foreign sales corporation (305) (228) (368)
State taxes (net of federal income tax benefit) 280 161 496
Research and development and foreign tax credits (604) - -
Foreign taxes 182 - -
Other, net 279 (385) 264
----------- ----------- -----------
$ 2,126 $ 1,758 $ 5,677
=========== =========== ===========
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities as of
December 31, 1998 and 1997, are presented below (in thousands):
<TABLE>
<CAPTION>
Domestic Foreign
----------------------- --------------------
1998 1997 1998 1997
----------- ---------- -------- --------
<S> <C> <C> <C> <C>
Deferred tax assets:
Warranty, vacation, and other accruals $ 3,619 $ 1,740 $ - $ -
Inventory reserves and other inventory-related
temporary basis differences 3,478 944 - -
Pension accrual 2,866 1,626 - -
Long-term contract related temporary differences 537 496 - -
Net operating loss carryforwards 1,997 111 - 721
Unrealized loss on marketable equity securities 89 41 - -
Write-down of investment securities 1,341 3,591 - -
Other 960 342 - -
----------- ---------- -------- --------
Total gross deferred tax assets 14,887 8,891 - 721
Less valuation allowance 117 153 - 721
----------- ---------- -------- --------
Total deferred tax assets 14,770 8,738 - -
----------- ---------- -------- --------
Deferred tax liabilities:
Intangible assets (1,893) - - -
Plant and equipment, principally due to - -
differences in depreciation (853) (652) - -
Other (87) (60) - -
----------- ---------- -------- --------
Total gross deferred tax liabilities (2,833) (712) - -
----------- ---------- -------- --------
Net deferred tax asset $ 11,937 $ 8,026 $ - $ -
=========== ========== ======== ========
Net current deferred tax asset $ 9,450 $ 4,224
Net non-current deferred tax asset 2,487 3,802
----------- ----------
Net deferred tax asset $ 11,937 $ 8,026
=========== ==========
</TABLE>
The 1998 domestic net deferred tax asset includes the deferred tax
assets and liabilities resulting from the Company's acquisition of
AccelGraphics, Inc. as described in note 2. The net tax effect of
acquiring these deferred tax assets and liabilities of $1.0 million was
credited against goodwill.
<PAGE>
Certain reclassifications have been made during 1998 between beginning
deferred tax assets and liabilities and the current tax payable
accounts. These reclassification 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. To
utilize 100% of the deferred tax assets, the Company and its
subsidiaries will need to recognize approximately $18 million of future
taxable income, net of loss carryback potential. 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 as a result of the
uncertainty of realization. The Company's beginning valuation allowance
changed during 1998 for domestic purposes by $36,000. The change in the
foreign valuation allowance is primarily attributable to the loss being
eliminated as part of a recapitalization plan of the Company's foreign
operations.
The Company has a net operating loss and research credits carryover
from its acquisition of AccelGraphics, Inc. of $5.0 million and $0.4
million respectively. These carryover credits begin to expire in 2010.
(14) DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash and cash equivalents, receivables, line of
credit agreements, accounts payable, and accrued expenses approximates
fair value because of their short maturity. The fair value of the
Company's long-term debt instruments ($16.3 million and $15.7 million
as of December 31, 1998 and 1997, respectively) is based on quoted
market prices.
(15) 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.
<PAGE>
(16) STOCK OPTION AND STOCK PURCHASE PLANS
Stock Option Plans - The Company has stock incentive plans which
provide for the grant of options to officers and employees to acquire
shares of the Company's common stock at a purchase price generally
equal to the fair market value on the date of grant. Options generally
vest ratably over three years and expire ten years from date of grant.
The Company grants options to its directors under its Director Plan.
Option grants are limited to 10,000 shares per director in each fiscal
year. Options generally vest ratably over four years and expire ten
years from the date of grant. A summary of activity follows (shares in
thousands):
<TABLE>
<CAPTION>
1998 1997 1996
--------------------- -------------------- ---------------------
Weighted- Weighted- Weighted-
Number average Number average Number average
of exercise of exercise of exercise
shares price shares price shares price
-------- ---------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year 1,640 $ 20.38 1,309 $ 18.14 842 $ 14.45
Granted 2,105 16.80 570 24.55 724 21.32
Assumed in acquisitions 351 9.69 - - - -
Exercised (116) 10.70 (159) 16.21 (169) 13.44
Canceled (1,896) 22.15 (80) 21.78 (88) 18.20
-------- -------- --------
Outstanding at end of year 2,084 13.80 1,640 20.38 1,309 18.14
======== ======== ========
Exercisable at end of year 532 13.74 597 16.40 271 14.67
======== ======== ========
Weighted-average fair value of
options granted during the 5.82 8.81 7.15
year
</TABLE>
Shareholders authorized an additional 400,000, 450,000 and 150,000
shares to be granted under the plans during 1998, 1997 and 1996,
respectively. As of December 31, 1998, options to purchase 528,000
shares of common stock were authorized and reserved for future grant.
On September 29, 1998, the Board of Directors approved a stock option
repricing program whereby each eligible stock option could be amended
to have an exercise price equal to $13.56 (the September 29, 1998
closing price of the Company stock) if the optionee agreed to reduce
the amount of options repriced by 20% and to accept an amended vesting
period. The vesting period for the repriced options was amended to vest
in one year for all options that were vested as of September 29, 1998
and to vest ratably over three years for all options that were not yet
vested as of September 29, 1998. As a result, approximately 1,698,000
options were surrendered by employees for approximately 1,354,000
repriced options. The repriced options expire ten years from the date
of the repriced grant.
The following table summarizes information about fixed stock options
outstanding as of December 31, 1998 (options in thousands):
<TABLE>
<CAPTION>
Options outstanding Options Exercisable
--------------------------------------------- ----------------------------
Range of Number Weighted- Weighted- Number Weighted-
Exercise Outstanding average average Exercisable average
prices as of remaining exercise as of exercise
12/31/98 contractual price 12/31/98 price
life
------------------------- ------------- ------------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
$ 0.48 - $ 2.82 55 7.1 $ 1.03 40 $ 0.99
12.12 - 13.25 351 7.3 12.50 252 12.36
13.56 - 13.56 1,358 9.6 13.56 10 13.56
14.00 - 16.69 144 6.9 15.02 136 14.96
18.06 - 22.79 165 7.5 20.84 91 20.93
23.19 - 32.88 11 8.7 25.99 3 25.45
------------- ------------
0.48 - 32.88 2,084 8.8 13.80 532 13.74
============= ============
</TABLE>
<PAGE>
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 (loss) and earnings (loss) per common share would have been
changed to the following pro forma amounts (in thousands, except per
share data):
<TABLE>
<CAPTION>
1998 1997 1996
----------- ---------- ----------
<S> <C> <C> <C>
Net earnings (loss) Pro forma $(21,093) $ 2,545 $ 8,570
Basic earnings (loss) per common share Pro forma (2.22) 0.28 0.96
Diluted earnings (loss) per commn share Pro forma (2.22) 0.27 0.93
</TABLE>
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 during 1998, 1997, and
1996:
<TABLE>
<CAPTION>
1998 1997 1996
------------ ---------- -----------
<S> <C> <C> <C>
Expected life (in years) 2.3 2.6 2.3
Risk-free interest rate 4.6% 5.7% 6.1%
Expected volatility 49% 47% 49%
Dividend yield - - -
</TABLE>
Stock Purchase Plan - The Company has an employee stock purchase plan
whereby qualified employees are allowed to have up to 10% of their
annual earnings withheld to purchase the company's common stock at 85
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. Shares totaling
43,000, 26,000 and 31,000 were purchased under this plan in fiscal
1998, 1997 and 1996, and as of December 31, 1998, 255,000 shares were
available for future issuance under this plan.
(17) PREFERRED STOCK
Preferred Stock - Class A
The Company has 5,000,000 authorized shares of Class A Preferred Stock.
Prior to 1998, the Company had reserved 300,000 shares of Class A
Preferred Stock as Series A Junior Preferred Stock under a shareholder
rights plan which expired in November 1998. In November 1998, the Board
of Directors declared a dividend of one preferred stock purchase right
("Right") for each outstanding share of common stock, par value $0.20
per share of the Company for shareholders of record on November 19,
1998, and for all future issuances of common stock. The Rights are not
currently exercisable or transferable apart from the common stock and
have voting rights or rights to receive dividends. Each Right entitles
the registered holder to purchase from the Company one thousandth of a
share of Preferred Stock at a price per share of $60.00, subject to
adjustment. The Rights will be exercisable ten business days following
a public announcement of a person or group of affiliated persons
acquiring beneficial ownership of 15% or more of the Company's
outstanding common shares or following the announcement of a tender
offer or exchange offer upon the consummation of which would result in
the beneficial ownership by a person or group of affiliated persons of
15% or more of the outstanding Company's stock. The Rights may be
redeemed by the Company at a price of $0.01 per Right before November
30, 2008.
<PAGE>
In the event that the Company is acquired in a merger or other business
combination transaction, provision shall be made so that each holder of
a Right, excluding the Rights beneficially owned by the acquiring
persons, will have the right to receive, upon exercise thereof at the
then current exercise price, that number of shares of common shares of
the surviving company which at the time of such transaction will have a
market value of two times the exercise price of the Right. In the event
that a person or group of affiliated persons acquires beneficial
ownership of 15% or more of the Company's outstanding common shares,
provision shall be made so that each holder of a Right, excluding the
Rights beneficially owned by the acquiring persons, shall have the
right to receive, upon exercise thereof, a share of common stock at a
purchase price equal to 50% of the then current exercise price.
Preferred Stock - Class B
The Company has 5,000,000 authorized shares of Class B Preferred Stock.
During July 1998, the Company designated 1,500,000 of the 5,000,000
authorized shares as Class B-1 Preferred Stock. On July 22, 1998, Intel
Corporation purchased 901,408 shares of this Class B-1 Preferred Stock,
no par value, plus a warrant to purchase an additional 378,462 shares
of Class B-1 Preferred Stock at an exercise price of $33.28125 per
share for approximately $24.0 million, less transaction costs of
approximately $0.5 million. These preferred shares have certain
liquidation and conversion rights, in addition to other rights and
preferences. Upon the occurrence of certain events, Intel has the right
to sell to the Company any or all of the shares associated with the
preferred stock.
(18) EARNINGS (LOSS) PER COMMON SHARE
Earnings (loss) per common share is computed based on the
weighted-average number of common shares and, as appropriate, dilutive
common stock equivalents outstanding during the period. Stock options
are considered to be common stock equivalents.
Basic earnings (loss) per common share is the amount of earnings (loss)
for the period available to each share of common stock outstanding
during the reporting period. Diluted earnings (loss) per share is the
amount of earnings (loss) for the period available to each share of
common stock outstanding during the reporting period and to each share
that would have been outstanding assuming the issuance of common shares
for all dilutive potential common shares outstanding during the period.
In calculating earnings per common share, the earnings were the same
for both the basic and diluted calculation. The diluted weighted
average number of common shares outstanding during 1998 excludes common
stock issuable pursuant to outstanding stock options, the 6%
Convertible Debentures and the Class B-1 Preferred Stock because to do
so would have had an anti-dilutive effect on earnings per common share.
A reconciliation between the basic and diluted weighted average number
of common shares is summarized as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
--------- -------- --------
<S> <C> <C> <C>
Basic weighted average number of common shares 9,461 9,060 8,944
outstanding during the year
Weighted average number of dilutive common - 442 278
stock options outstanding during the year
--------- -------- --------
Diluted weighted average number of common
shares outstanding during the year 9,461 9,502 9,222
========= ======== ========
</TABLE>
<PAGE>
(19) SEGMENT AND RELATED INFORMATION
During 1998, the Company adopted SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information" which changed the
way the Company reports information about its operating segments.
The Company's business units have been aggregated into three reportable
segments: simulation, workstations products, and applications. These
reportable segments offer different products and services and are
managed and evaluated separately because each segment uses different
technologies and requires different marketing strategies. The
simulation segment provides a broad line of visual systems for flight
and ground simulators for training purposes to government, aerospace
and commercial airline customers. The workstations products segment
provides graphics accelerator products, including graphics chips and
subsystems, to the personal PC workstation marketplace. The
applications segment provides digital video applications for
entertainment, educational and multimedia industries.
The accounting policies of the segments are the same as those described
in the summary of significant accounting policies (Note 1). The Company
evaluates segment performance based on earnings (loss) from operations
before income taxes, interest income and expense, other income and
expense and foreign exchange gains and losses. The Company's assets are
not identifiable by segment.
<TABLE>
<CAPTION>
Simulation Workstation Applications Other Total
Products
----------- ------------ ------------ --------- ----------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1998:
Net sales $ 167,014 $ 17,453 $ 7,299 $ - $ 191,766
Operating earnings (loss) 22,094 (30,663) (7,417) - (15,986)
Year ended December 31, 1997:
Net sales 146,014 5,847 7,492 - 159,353
Operating earnings (loss) 23,263 (717) (8,157) - 14,389
Year ended December 27, 1996:
Net sales 118,757 - 7,002 4,805 130,564
Operating earnings (loss) 17,955 - (1,676) (4,760) 11,519
</TABLE>
The Workstation Products segment operating loss in 1998 includes a
write-off of acquired in-process technology of approximately $20.8
million.
(20) GEOGRAPHIC INFORMATION
The following table presents revenues by geographic location based on
the location of the use of the product or services. Sales to individual
countries greater than 10% of consolidated net sales are shown
separately (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
United States $ 106,858 $ 64,711 $ 42,196
United Kingdom 41,029 12,008 13,913
Europe (excluding United Kingdom) 25,039 47,168 26,621
Pacific Rim 18,257 27,789 44,262
Other 583 7,677 3,572
------------- ------------- -------------
$ 191,766 $ 159,353 $ 130,564
============= ============= =============
</TABLE>
<PAGE>
The following table presents property, plant and equipment by
geographic location based on the location of the assets (in thousands):
1998 1997
----------- -------------
United States $ 52,876 $ 43,501
Europe 817 867
----------- -------------
Total property, plant and
equipment, net $ 53,693 $ 44,368
=========== =============
(21) SIGNIFICANT CUSTOMERS
In 1998, sales to the U.S. government and the United Kingdom Ministry
of Defense ("UK MOD"), either directly or indirectly through sales to
prime contractors or subcontractors, accounted for $70.8 million, or
37% of total net sales, and $32.1 million, or 17% of total net sales,
respectively. In 1997 and 1996, sales to the U.S. government, either
directly or indirectly through sales to prime contractors or
subcontractors, accounted for $45.5 million, or 29% of total net sales,
and $25.8 million, or 20% of total net sales, respectively.
In 1998, sales to The Boeing Company ("Boeing") were approximately
$28.1 million, or 15% of total net sales, of which approximately 98%
related to U.S. government and UK MOD contracts, and sales to Lockheed
Corporation ("Lockheed") were approximately $22.0 million, or 11% of
total net sales, of which approximately 91% related to U.S. government
contracts. In 1997, sales to Thomson Training & Simulation Ltd.
("Thomson") were $19.3 million, or 12% of total net sales. In 1996,
sales to Thomson were $15.8 million, or 12% of total net sales, sales
to Hughes Training Incorporated ("Hughes") were $14.9 million, or 11%
of total net sales, and sales to Rikei Corporation equaled $14.3
million, or 11% of total net sales. A portion of the Company's sales to
Hughes was for U.S. government contracts. All sales to significant
customers are within the simulation segment.
Aggregated accounts receivable from agencies of the United States
government, either directly or indirectly through prime or
sub-contractors, was $14.0 million, or 29% of gross accounts
receivable, at December 31, 1998 and $9.5 million, or 26% of gross
accounts receivable, at December 31, 1997. Additionally, accounts
receivable from Thomson was $3.5 million, or 7% of gross accounts
receivable, at December 31, 1998 and $5.5 million, or 15% of gross
accounts receivable, at December 31, 1997.
The amount of costs and estimated earnings in excess of billings on
uncompleted contracts from agencies of the United States government and
the UK MOD, either directly or indirectly through prime or
sub-contractors, was $9.4 million and $22.7 million, or 16% and 39%, of
total costs and estimated earnings in excess of billings on uncompleted
contracts, at December 31, 1998, respectively. The amount to the U.S.
government was $21.4 million, or 41% of costs and estimated earnings in
excess of billings on uncompleted contracts, at December 31, 1997.
(22) RELATED PARTY TRANSACTIONS
The Company had purchases of $1.4 million and $0.6 million during 1998
and 1997, respectively, from a supplier for which the Company's Chief
Executive Officer serves as a director. Trade payables to the supplier
were $0.4 million and $0.2 million at December 31, 1998 and 1997,
respectively.
<PAGE>
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 1999 Annual Meeting of Shareholders to be
held on May 20, 1999.
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 1999 Annual Meeting of Shareholders to be held on May 20, 1999.
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 1999 Annual Meeting of Shareholders to be held on May 20,
1999.
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 1999 Annual
Meeting of Shareholders to be held on May 20, 1999.
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 1999 Annual
Meeting of Shareholders to be held on May 20, 1999.
<PAGE>
FORM 10-K
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
The following constitutes a list of Financial Statements, Financial
Statement Schedules, and Exhibits required to be used in this report:
1. Financial Statements - Included in Part II, Item 8 of this report:
Report of Management
Report of Independent Accountants
Consolidated Balance Sheets as of December 31, 1998 and December 31,
1997
Consolidated Statements of Operations for the years ended December 31,
1998, December 31, 1997, and December 27, 1996
Consolidated Statements of Comprehensive Income for the years ended
December 31, 1998, December 31, 1997 and December 27, 1996.
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1998, December 31, 1997, and December 27, 1996
Consolidated Statements of Cash Flows for the years ended December 31,
1998, December 31, 1997, and December 27, 1996
Notes to Consolidated Financial Statements for the years ended December
31, 1998, December 31, 1997, and December 27, 1996
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.
Exhibits
2.1 Agreement and Plan of Merger, dated April 22, 1998, among the
Company, E&S Merger Corp., and AccelGraphics, Inc., filed as
Annex I to the Company's Registration Statement on Form S-4,
SEC File No. 333-51041, and incorporated herein by this
reference.
3.1 Articles of Incorporation, as amended, filed as Exhibit 3.1 to
the Company's Annual Report on Form 10-K 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.
3.1.2 Certificate of Designation, Preferences and Other Rights of
the Class B-1 Preferred Stock of the Company, filed as Exhibit
3.1 to the Company's Form 10-Q for the quarter ended September
25, 1998, and incorporated herein by this reference.
<PAGE>
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.
4.1 Form of Rights Agreement, dated as of November 19, 1998,
between Evans & Sutherland Computer Corporation and American
Stock Transfer Trust Company which includes as Exhibit A, the
form of Certificate of Designation for the Rights, as Exhibit
B, the form of Rights Certificate and as Exhibit C, a Summary
of Rights, filed as Exhibit 1 to the Company's Registration
Statement on Form 8-A filed December 8, 1998, and incorporated
herein by this reference.
10.1 1985 Stock Option Plan, filed as Exhibit 1 to the
Company's Post-Effective Amendment No. 1 to Registration
Statement on Form S-8, SEC File No. 2-76027, and
incorporated herein by this reference.
10.2 1989 Stock Option Plan for Non-employee Directors, filed as
Exhibit 10.5 to the Company's Annual Report on Form 10-K for
the fiscal year ended December 29, 1989, and incorporated
herein by this reference.
10.3 The Company's 1991 Employee Stock Purchase Plan, filed as
Exhibit 4.1 to the Company's Registration Statement on Form
S-8, SEC File No. 33-39632, and incorporated herein by this
reference.
10.4 1998 Stock Option Plan, filed as Appendix A to the Company's
Definitive Proxy Statement filed April 20, 1998, incorporated
herein by this reference.
10.5 The Company's 1995 Long-Term Incentive Equity Plan, filed as
Exhibit 10.11 to the Company's Annual Report on Form 10-K for
the fiscal year ended December 29, 1995, and incorporated
herein by this reference.
10.6 The Company's Executive Savings Plan, filed as Exhibit 10.14
to the Company's Annual Report on Form 10-K for the fiscal
year ended December 29, 1995, and incorporated herein by this
reference.
10.7 The Company's Supplemental Executive Retirement Plan (SERP),
filed as Exhibit 10.15 to the Company's Annual Report on Form
10-K for the fiscal year ended December 29, 1995, and
incorporated herein by this reference.
10.8 Business Loan Agreement by and between U.S. Bank National
Association and Evans & Sutherland Computer Corporation as of
November 13, 1998, and filed herein.
10.9 Addendum to Business Loan Agreement by and between U.S. Bank
National Association and Evans & Sutherland Computer
Corporation ("Borrower") as of February 5, 1999, and filed
herein.
10.10 Form of Severance Agreement dated December 11, 1998, by and
between Evans & Sutherland Computer Corporation and James R.
Oyler, William C. Gibbs and John T. Lemley, and filed herein.
10.11 Severance Agreement dated December 11, 1998, by and between
Evans & Sutherland Computer Corporation and Mark C. McBride,
and filed herein.
10.12 Series B Preferred Stock and Warrant Purchase Agreement dated
as of July 20, 1998, between the Company and Intel
Corporation, filed as Exhibit 4.2 to the Company's Form 10-Q
for the quarter ended September 25, 1998, and incorporated
herein by this reference.
10.13 Warrant to Purchase Series B Preferred Stock dated as of July
22, 1998, between the Company and Intel Corporation, filed as
Exhibit 4.3 to the Company's Form 10-Q for the quarter ended
September 25, 1998, and incorporated herein by this reference.
<PAGE>
21.1 Subsidiaries of Registrant, filed herein.
23.1 Consent of Independent Accountants, filed herein.
24.1 Powers of Attorney for Messrs. Stewart Carrell, Gerald
Casilli, Peter O. Crisp, John T. Lemley, Mark C. McBride,
James R. Oyler and Ivan E. Sutherland, filed herein.
27 Financial Data Schedule, filed herein.
4. Reports on 8-K: None
TRADEMARKS USED IN THIS FORM 10-K
AccelECLIPSE II, AccelGALAXY, AccelGMX, Digistar, DYNAMICgeometry, E&S,
E&S Lightning 1200, Ensemble, ESIG, FuseBox, Harmony, iNTegrator, MindSet,
REALimage, StarRider, Symphony and Virtual Studio System 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.
<PAGE>
Schedule II
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
Years ended December 31, 1998, December 31, 1997, and December 27, 1996
(in thousands)
<TABLE>
<CAPTION>
Additions Deductions
------------------------------ charged
Balance at Charged to Through (recovered) Balance
beginning of cost and business against at end of
year expenses acquisitions allowance year
------------- ------------ ------------- ------------- -----------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful
receivables
- - ----------------------------------
December 31, 1998 $ 851 $ 496 $ 1,013 $ 744 $ 1,616
December 31, 1997 563 370 - 82 851
December 27, 1996 172 335 - (56) 563
Inventory Reserves
- - ----------------------------------
December 31, 1998 $ 7,635 $ 1,987 $ 1,350 $ 4,009 $ 6,963
December 31, 1997 7,137 1,009 - 511 7,635
December 27, 1996 6,277 1,077 - 217 7,137
Warranty Reserves
- - ---------------------------------
December 31, 1998 $ 880 $ 872 $ 494 $ 810 $ 1,436
December 31, 1997 808 726 - 654 880
December 27, 1996 848 673 - 713 808
</TABLE>
<PAGE>
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, 1999 By: /S/ James R. Oyler
-----------------------------------------
JAMES R. OYLER, PRESIDENT
Pursuant to the requirements of the Securities and Exchange Act of
1934, this report signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<S> <C> <C>
* Chairman of the March 31, 1999
STEWART CARRELL Board of Directors
/S/ James R. Oyler Director and President March 31, 1999
- - --------------------------------------------
JAMES R. OYLER (Chief Executive Officer)
/S/ John T. Lemley Vice President and Chief March 31, 1999
- - --------------------------------------------
JOHN T. LEMLEY Financial Officer
(Principal Financial Officer)
/S/ Mark C. McBride Vice President and March 31, 1999
- - --------------------------------------------
MARK C. MCBRIDE Corporate Controller
(Principal Accounting Officer)
* Director March 31, 1999
GERALD S. CASILLI
* Director March 31, 1999
PETER O. CRISP
* Director March 31, 1999
IVAN E. SUTHERLAND
By: /S/ Mark C. McBride March 31, 1999
-----------------------------------------
MARK C. MCBRIDE
*Attorney-in-Fact
</TABLE>
BUSINESS LOAN AGREEMENT
<TABLE>
<CAPTION>
- - ------------------- ------------------ ------------ ------------ ------- ------------- ---------------- ---------- ----------
Principal Loan Date Maturity Loan No Call Collateral Account Officer Initials
<S> <C> <C> <C>
$20,000,000.00 11-13-1998 2690431846 73644
-----------------------------------------------------------------------------------------------------------------------------
References in the shaded area are for Lender's use only and do not limit
the applicability of this document to any particular loan or item
-----------------------------------------------------------------------------------------------------------------------------
</TABLE>
Borrower: EVANS & SUTHERLAND COMPUTER CORPORATION Lender: U.S. Bank National
Association
600 KOMAS DRIVE International Banking
SALT LAKE CITY, UT 84108 107 South Main Street
Salt Lake City, UT 84111
================================================================================
THIS BUSINESS LOAN AGREEMENT between EVANS & SUTHERLAND COMPUTER CORPORATION
("Borrower") and U.S. Bank National Association ("Lender") is made and executed
on the following terms and conditions. Borrower has received prior commercial
loans from Lender or has applied to Lender for a commercial loan or loans and
other financial accommodations, including those which may be described on any
exhibit or schedule attached to this Agreement. All such loans and financial
accommodations, together with all future loans and financial accommodations from
Lender to Borrower, are referred to in this Agreement individually as the "Loan"
and collectively as the "Loans." Borrower understands and agrees that : (a) in
granting, renewing, or extending any Loan, Lender is relying upon Borrower's
representations, warranties, and agreements, as set forth in this Agreement; (b)
the granting, renewing, or extending of any Loan by Lender at all times shall be
subject to Lender's sole judgment and discretion; and (c) all such Loans shall
be and shall remain subject to the following terms and conditions of this
Agreement.
TERM. This Agreement shall be effective as of November 13, 1998, and shall
continue thereafter until all Indebtedness of Borrower to Lender has been
performed in full and the parties terminate this Agreement in writing.
DEFINITIONS. The following words shall have the following meanings when used in
this Agreement. Terms not otherwise defined in this Agreement shall have the
meanings attributed to such terms in the Uniform Commercial Code. All references
to dollar amounts shall mean amounts in lawful money of the United States of
America.
Agreement. The word "Agreement" means this Business Loan Agreement, as
this Business Loan Agreement may be amended or modified from time to
time, together with all exhibits and schedules attached to this
Business Loan Agreement from time to time.
Borrower. The word "Borrower" means EVANS & SUTHERLAND COMPUTER
CORPORATION. The word "Borrower" also includes, as applicable, all
subsidiaries and affiliates of Borrower as provided below in the
paragraph titled "Subsidiaries and Affiliates."
CERCLA. The word "CERCLA" means the Comprehensive Environmental
Response, Compensation, and Liability Act of 1980, as amended.
Cash Flow. The words "Cash Flow" mean net income after taxes, and
exclusive of extraordinary gains and income, plus depreciation and
amortization.
Collateral. The word "Collateral" means and includes without
limitation all property and assets granted as collateral security for
a Loan, whether real or personal property, whether granted directly or
indirectly, whether granted now or in the future, and whether granted
in the form of a security interest, mortgage, deed of trust,
assignment, pledge, chattel mortgage, chattel trust, factor's lien,
equipment trust, conditional sale, trust receipt, lien, charge, lien
or title retention contract, lease or consignment intended as a
security device, or any other security or lien interest whatsoever,
whether created by law, contract, or otherwise.
<PAGE>
Debt. The word "Debt" means all of Borrower's liabilities excluding
Subordinated Debt.
ERISA. The word "ERISA" means the Employee Retirement Income Security
Act of 1974, as amended.
Event of Default. The words "Event of Default" mean and include
without limitation any of the Events of Default set forth below in the
section titled "EVENTS OF DEFAULT."
Grantor. The word "Grantor" means and includes without limitation each
and all of the persons or entities granting a Security Interest in any
Collateral for the Indebtedness, including without limitation all
Borrowers granting such a Security Interest.
Guarantor. The word "Guarantor" means and includes without limitation
each and all of the guarantors, sureties, and accommodation parties in
connection with any Indebtedness.
Indebtedness. The word "Indebtedness" means and includes without
limitation all Loans, together with all other obligations, debts and
liabilities of Borrower to Lender, or any one or more of them, as well
as all claims by Lender against Borrower, or any one or more of them;
whether now or hereafter existing, voluntary or involuntary, due or
not due, absolute or contingent, liquidated or unliquidated; whether
Borrower may be liable individually or jointly with others; whether
Borrower may be obligated as a guarantor, surety, or otherwise;
whether recovery upon such Indebtedness may be or hereafter may become
barred by any statute of limitations; and whether such Indebtedness
may be or hereafter may become otherwise unenforceable.
Lender. The word "Lender" means U.S. Bank National Association, its
successors and assigns.
Liquid Assets. The words "Liquid Assets" mean Borrower's cash on hand
plus Borrower's readily marketable securities.
Loan. The word "Loan" or "Loans" means and includes without limitation
any and all commercial loans and financial accommodations from Lender
to Borrower, whether now or hereafter existing, and however evidenced,
including without limitation those loans and financial accommodations
described herein or described on any exhibit or schedule attached to
this Agreement from time to time.
Note. The word "Note" means and includes without limitation Borrower's
promissory note or notes, if any, evidencing Borrower's Loan
obligations in favor of Lender, as well as any substitute, replacement
or refinancing note or notes therefor.
Permitted Liens. The words "Permitted Liens" means: (a) liens and
security interests securing Indebtedness owned by Borrower to Lender;
(b) liens for taxes, assessments, or similar charges either not yet
due or being contested in good faith; (c) liens of materialmen,
mechanics, warehousemen, or carriers, or other like liens arising in
the ordinary course of business and securing obligations which are not
yet delinquent; (d) purchase money liens or purchase money security
interests upon or in any property acquired or held by Borrower in the
ordinary course of business to secure indebtedness outstanding on the
date of this Agreement or permitted to be incurred under the paragraph
of this Agreement titled "Indebtedness and Liens"; (e) liens and
security interests which, as of the date of this Agreement, have been
disclosed to and approved by the Lender in writing; and (f) those
liens and security interests which in the aggregate constitute an
immaterial and insignificant monetary amount with respect to the net
value of Borrower's assets.
Related Documents. The words "Related Documents" mean and include
without limitation all promissory notes, credit agreements, loan
agreements, environmental agreements, guaranties, security agreements,
mortgages, deeds of trust, and all other instruments, agreements and
documents, whether now or hereafter existing, executed in connection
with the Indebtedness.
<PAGE>
Security Agreement. The words "Security Agreement" mean and include
without limitation any agreements, promises, covenants, arrangements,
understandings or other agreements, whether created by law, contract,
or otherwise, evidencing, governing, representing, or creating a
Security Interest.
Security Interest. The words "Security Interest" mean and include
without limitation any type of collateral security, whether in the
form of a lien, charge, mortgage, deed of trust, assignment, pledge,
chattel mortgage, chattel trust, factor's lien, equipment trust,
conditional sale, trust receipt, lien or title retention contract,
lease or consignment intended as a security device, or any other
security or lien interest whatsoever, whether created by law,
contract, or otherwise.
SARA. The word "SARA" means the Superfund Amendments and
Reauthorization Act of 1986 as now or hereafter amended.
Subordinated Debt. The words "Subordinated Debt" mean indebtedness and
liabilities of Borrower which have been subordinated by written
agreement to indebtedness owed by Borrower to Lender in form and
substance acceptable to Lender.
Tangible Net Worth. The words "Tangible Net Worth" mean Borrower's
total assets excluding all intangible assets (i.e., goodwill,
trademarks, patents, copyrights, organizational expenses, and similar
intangible items, but including leaseholds and leasehold improvements)
less total Debt.
Working Capital. The words "Working Capital" mean Borrower's current
assets, excluding prepaid expenses, less Borrower's current
liabilities.
CONDITIONS PRECEDENT TO EACH ADVANCE. Lender's obligation to make the initial
Loan Advance and each subsequent Loan Advance under this Agreement shall be
subject to the fulfillment to Lender's satisfaction of all of the conditions set
forth in this Agreement and in the Related Documents.
Loan Documents. Borrower shall provide to Lender in form satisfactory
to Lender the following documents for the Loan: (a) the Note, (b)
Security Agreements granting to Lender security interests in the
Collateral, (c) Financing Statements perfecting Lender's Security
Interests; (d) evidence of insurance as required below; and (e) any
other documents required under this Agreement or by Lender or its
counsel.
Borrower's Authorization. Borrower shall have provided in form and
substance satisfactory to Lender properly certified resolutions, duly
authorizing the execution and delivery of this Agreement, the Note and
the Related Documents, and such other authorizations and other
documents and instruments as Lender or its counsel, in their sole
discretion may require.
Payment of Fees and Expenses. Borrower shall have paid to Lender all
fees, charges, and other expenses which are then due and payable as
specified in this Agreement or any Related Document.
Representations and Warranties. The representations and warranties set
forth in this Agreement, in the Related Documents, and in any document
or certificate delivered to Lender under this Agreement are true and
correct.
No Event of Default. There shall not exist at the time of any advance
a condition which would constitute an Event of Default under this
Agreement.
REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants to Lender, as
of the date of this Agreement, as of the date of each disbursement of Loan
proceeds, as of the date of any renewal, extension or modification of any Loan,
and at all times any Indebtedness exists:
Organization. Borrower is a corporation which is duly organized,
validly existing, and in good standing under the laws of the State of
Utah and is validly existing and in good standing in all states in
which Borrower is doing business. Borrower has the full power and
authority to own its properties and to transact the businesses in
which it is presently engaged or presently proposes to engage.
Borrower is also duly qualified as a foreign corporation and is in
good standing in all states in which the failure to so qualify would
have a material adverse effect on its businesses or financial
condition.
Authorization. The execution, delivery, and performance of this
Agreement and all Related Documents by Borrower, to the extent to be
executed, delivered or performed by Borrower, have been duly
authorized by all necessary action by Borrower; do not require the
consent or approval of any other person, regulatory authority or
governmental body; and do not conflict with, result in a violation of,
or constitute a default under (a) any provision of its articles of
incorporation or organization, or bylaws, or any agreement or other
instrument binding upon Borrower or (b) any law, governmental
regulation, court decree, or order applicable to Borrower.
Financial Information. Each financial statement of Borrower supplied
to Lender truly and completely disclosed Borrower's financial
condition as of the date of the statement, and there has been no
material adverse change in Borrower's financial condition subsequent
to the date of the most recent financial statement supplied to Lender.
Borrower has no material contingent obligations except as disclosed in
such financial statements.
Legal Effect. This Agreement constitutes, and any instrument or
agreement required hereunder to be given by Borrower when delivered
will constitute, legal, valid and binding obligations of Borrower
enforceable against Borrower in accordance with their respective
terms.
Properties. Except as contemplated by this Agreement or as previously
disclosed in Borrower's financial statements or in writing to Lender
and as accepted by Lender, and except for property tax liens for taxes
not presently due and payable, Borrower owns and has good title to all
of Borrower's properties free and clear of all Security Interests, and
has not executed any security documents or financing statements
relating to such properties. All of Borrower's properties are titled
in Borrower's legal name, and Borrower has not used, or filed a
financing statement under, any other name for at least the last five
(5) years.
Hazardous Substances. The terms "hazardous waste," "hazardous
substance," "disposal," "release," and "threatened release," as used
in this Agreement, shall have the same meanings as set forth in the
"CERCLA," "SARA," the Hazardous Materials Transportation Act, 49
U.S.C. Section 1801, et seq., the Resource Conservation and Recovery
Act, 42 U.S.C. Section 6901, et seq., or other applicable state or
Federal laws, rules, or regulations adopted pursuant to any of the
foregoing. Except as disclosed to and acknowledged by Lender in
writing, Borrower represents and warrants that: (a) During the period
of Borrower's ownership of the properties, there has been no use,
generation, manufacture, storage, treatment, disposal, release or
threatened release of any hazardous waste or substance by any person
on, under, about or from any of the properties. (b) Borrower has no
knowledge of, or reason to believe that there has been (i) any use,
generation, manufacture, storage, treatment, disposal, release, or
threatened release of any hazardous waste or substance, on, under,
about or from the properties by any prior owners or occupants of any
of the properties, or (ii) any actual or threatened litigation or
claims of any kind by any person relating to such matters. (c) Neither
Borrower nor any tenant, contractor, agent or other authorized user of
any of the properties shall use, generate, manufacture, store, treat,
dispose of, or release any hazardous waste or substance on, under,
about or from any of the properties; and any such activity shall be
conducted in compliance with all applicable federal, state, and local
laws, regulations, and ordinances, including without limitation those
laws, regulations and ordinances described above. Borrower authorizes
Lender and its agents to enter upon the properties to make such
inspections and tests as Lender may deem appropriate to determine
compliance of the properties with this Section of the Agreement. Any
inspections or tests made by Lender shall be at Borrower's expense and
for Lender's purposes only and shall not be construed to create any
<PAGE>
responsibility or liability on the part of Lender to Borrower or to
any other person. The representations and warranties contained herein
are based on Borrower's due diligence in investigating the properties
for hazardous waste and hazardous substances. Borrower hereby (a)
releases and waives any future claims against Lender for indemnity or
contribution in the event Borrower becomes liable for cleanup or other
costs under any such laws, and (b) agrees to indemnify and hold
harmless Lender against any and all claims, losses, liabilities,
damages, penalties, and expenses which Lender may directly or
indirectly sustain or suffer resulting from a breach of this section
of the Agreement or as a consequence of any use, generation,
manufacture, storage, disposal, release or threatened release of a
hazardous waste or substance on the properties. The provisions of this
section of the Agreement, including the obligation to indemnify, shall
survive the payment of the Indebtedness and the termination or
expiration of this Agreement and shall not be affected by Lender's
acquisition of any interest in any of the properties, whether by
foreclosure or otherwise.
Litigation and Claims. No litigation, claim, investigation,
administrative proceeding or similar action (including those for
unpaid taxes) against Borrower is pending or threatened, and no other
event has occurred which may materially adversely affect Borrower's
financial condition or properties, other than litigation, claims, or
other events, if any, that have been disclosed to and acknowledged by
Lender in writing.
Taxes. To the best of Borrower's knowledge, all tax returns and
reports of Borrower that are or were required to be filed, have been
filed, and all taxes, assessments and other governmental charges have
been paid in full, except those presently being or to be contested by
Borrower in good faith in the ordinary course of business and for
which adequate reserves have been provided.
Lien Priority. Unless otherwise previously disclosed to Lender in
writing, Borrower has not entered into or granted any Security
Agreements, or permitted the filing or attachment of any Security
Interests on or affecting any of the Collateral directly or indirectly
security repayment of Borrower's Loan and Note, that would be prior or
that may in any way be superior to Lender's Security Interests and
rights in and to such Collateral.
Binding Effect. This Agreement, the Note, all Security Agreements
directly or indirectly security repayment of Borrower's Loan and Note
and all of the Related Documents are binding upon Borrower as well as
upon Borrower's successors, representatives and assigns, and are
legally enforceable in accordance with their respective terms.
Commercial Purposes. Borrower intends to use the Loan proceeds solely
for business or commercial related purposes.
Employee Benefit Plans. Each employee benefit plan as to which
Borrower may have any liability complies in all material respects with
all applicable requirements of law and regulations, and (i) no
Reportable Event nor Prohibited Transaction (as defined in ERISA) has
occurred with respect to any such plan, (ii) Borrower has not
withdrawn from any such plan or initiated steps to do so, (iii) no
steps have been taken to terminate any such plan, and (iv) there are
no unfunded liabilities other than those previously disclosed to
Lender in writing.
Location of Borrower's Offices and Records. Borrower's place of
business, or Borrower's Chief executive office, if Borrower has more
than one place of business, is located at 600 KOMAS DRIVE, SALT LAKE
CITY, UT 84108. Unless Borrower has designated otherwise in writing
this location is also the office or offices where Borrower keeps its
records concerning the Collateral.
Information. All information heretofore or contemporaneously herewith
furnished by Borrower to Lender for the purposes of or in connection
with this Agreement or any transaction contemplated hereby is, and all
information hereafter furnished by or on behalf of Borrower to Lender
will be, true and accurate in every material respect on the date as of
which such information is dated or certified; and none of such
information is or will be incomplete by omitting to state any material
fact necessary to make such information not misleading.
<PAGE>
Survival of Representations and Warranties. Borrower understands and
agrees that Lender, without independent investigation, is relying upon
the above representations and warranties in extending Loan Advances to
Borrower. Borrower further agrees that the foregoing representations
and warranties shall be continuing in nature and shall remain in full
force and effect until such time as Borrowers Indebtedness shall be
paid in full, or until this Agreement shall be terminated in the
manner provided above, whichever is the last to occur.
AFFIRMATIVE COVENANTS. Borrower covenants and agrees with Lender that, while
this Agreement is in effect, Borrower will:
Litigation. Promptly inform Lender in writing of (a) all material
adverse changes in Borrower's financial condition, and (b) all
existing and all threatened litigation, claims, investigations,
administrative proceedings or similar actions affecting Borrower or
any Guarantor which could materially affect the financial condition of
Borrower or the financial condition of any Guarantor.
Financial Records. Maintain its books and records in accordance with
generally accepted accounting principles, applied on a consistent
basis, and permitted Lender to examine and audit Borrower's books and
records at all reasonable times.
Financial Statements. Furnish Lender with, as soon as available, but
in no event later than one hundred twenty (120) days after the end of
each fiscal year, Borrower's balance sheet and income statement for
the year ended, audited by a certified public accountant satisfactory
to Lender, and, as soon as available, but in no event later than sixty
(60) days after the end of each fiscal quarter, Borrower's balance
sheet and profit and loss statement for the period ended, prepared and
certified as correct to the best knowledge and belief by Borrower's
chief financial officer or other officer or person acceptable to
Lender. All financial reports required to be provided under this
Agreement shall be prepared in accordance with generally accepted
accounting principles, applied on a consistent basis, and certified by
Borrower as being true and correct.
Additional Information. Furnish such additional information and
statements, lists of assets and liabilities, agings of receivables and
payables, inventory schedules, budgets, forecasts, tax returns, and
other reports with respect to Borrower's financial condition and
business operations as Lender may request from time to time.
Financial Covenants and Ratios. Comply with the following covenants
and ratios:
Tangible Net Worth. Maintain a minimum Tangible Net Worth of not
less than $162,000,000.00.
Cash Flow Requirements. Maintain Cash Flow at not less than the
following level: Debt Service Coverage (DSC) ratio of less than
or equal to 3.50 to 1.00. DSC ratio is defined as earnings before
interest, taxes, depreciation, amortization divided by current
portion long term debt plus interest plus dividends. DSC ratio
will be calculated on a rolling four quarter basis. Additionally,
for calculation of this ratio, the $27,925,000 loss from the
write-of of capitalized R & D expenses will be excluded through
September of 1999.
The following provisions shall apply for purposes of determining
compliance with the foregoing financial covenants and ratios: shall be
measured on a quarterly basis. Except as provided above, all
computations made to determine compliance with the requirements
contained in this paragraph shall be made in accordance with generally
accepted accounting principles, applied on a consistent basis, and
certified by Borrower as being true and correct.
Insurance. Maintain fire and other risk insurance, public liability
insurance, and such other insurance as Lender may require with respect
to Borrower's properties and operations, in form, amounts, coverages
and with insurance companies reasonably acceptable to Lender.
<PAGE>
Borrower, upon request of Lender, will deliver to Lender from time to
time the policies or certificates of insurance in form satisfactory to
Lender, including stipulations that coverages will not be cancelled or
diminished without at least ten (10) days' prior written notice to
Lender. Each insurance policy also shall include an endorsement
providing that coverage in favor of Lender will not be impaired in any
way by any act, omission or default of Borrower or any other person.
In connection with all policies covering assets in which Lender holds
or is offered a security interest for the Loans, Borrower will provide
Lender with such loss payable or other endorsements as Lender may
require.
Insurance Reports. Furnish to Lender, upon request of Lender, reports
on each existing insurance policy showing such information as Lender
may reasonably request, including without limitation the following:
(a) the name of the insurer; (b) the risks insured; (c) the amount of
the policy; (d) the properties insured; (e) the then current property
values on the basis of which insurance has been obtained, and the
manner of determining those values; and (f) the expiration date of the
policy. In addition, upon request of Lender (however not more often
than annually), Borrower will have an independent appraiser
satisfactory to Lender determine, as applicable, the actual cash value
or replacement cost of any Collateral. The cost of such appraisal
shall be paid by Borrower.
Other Agreements. Comply with all terms and conditions of all other
agreements, whether now or hereafter existing, between Borrower and
any other party and notify Lender immediately in writing of any
default in connection with any other such agreements.
Loan Fees and Charges. In addition to all other agreed upon fees and
charges, pay the following: Borrower agrees to pay Lender, prior to or
contemporaneously with the initial advance of Loan proceeds, a
nonrefundable loan fee in the amount of $25,000.00.
Loan Proceeds. Use all Loan proceeds solely for Borrower's business
operations, unless specifically consented to the contrary by Lender in
writing.
Taxes, Charges and Liens. Pay and discharge when due all of its
indebtedness and obligations, including without limitation all
assessments, taxes, governmental charges, levies and liens, of every
kind and nature, imposed upon Borrower or its properties, income, or
profits, prior to the date on which penalties would attach, and all
lawful claims that, if unpaid, might become a lien or charge upon any
of Borrower's properties, income or profits. Provided however,
Borrower will not be required to pay and discharge any such
assessment, tax, charge, levy, lien or claim so long as (a) the
legality of the same shall be contested in good faith by appropriate
proceedings, and (b) Borrower shall have established on its books
adequate reserves with respect to such contested assessment, tax,
charge, levy, lien, or claim in accordance with generally accepted
accounting practices. Borrower, upon demand of Lender, will furnish to
Lender evidence of payment of the assessments, taxes, charges, levies,
liens and claims and will authorize the appropriate governmental
official to deliver to Lender at any time a written statement of any
assessments, taxes, charges, levies, liens and claims against
Borrower's properties, income, or profits.
Performance. Perform and comply with all terms, conditions, and
provisions set forth in this Agreement and in the Related Documents in
a timely manner, and promptly notify Lender if Borrower learns of the
occurrence of any event which constitutes an Event of Default under
this Agreement or under any of the Related Documents.
Operations. Maintain executive and management personnel with
substantially the same qualifications and experience as the present
executive and management personnel; provide written notice to Lender
of any change in executive and management personnel; conduct its
business affairs in a reasonable and prudent manner and in compliance
with all applicable federal, state and municipal laws, ordinances,
rules and regulations respecting its properties, charters, businesses
and operations, including without limitation, compliance with the
Americans With Disabilities Act and with all minimum funding standards
and other requirements of ERISA and other laws applicable to
Borrower's employee benefit plans.
<PAGE>
Inspection. Permit employees or agents of Lender at any reasonable
time to inspect any and all Collateral for the Loan or Loans and
Borrower's other properties and to examine or audit Borrower's books,
accounts, and records and to make copies and memoranda of Borrower's
books, accounts, and records. If Borrower now or at any time hereafter
maintains any records (including without limitation computer generated
records and computer software programs for the generation of such
records) in the possession of a third party, Borrower, upon request of
Lender, shall notify such party to permit Lender free access to such
records at all reasonable times and to provide Lender with copies of
any records it may request, all at Borrower's expense.
Compliance Certificate. Unless waived in writing by Lender, provide
Lender QUARTERLY and at the time of each disbursement of Loan proceeds
with a certificate executed by Borrower's chief financial officer, or
other officer or person acceptable to Lender, certifying that the
representations and warranties set forth in this Agreement are true
and correct as of the date of the certificate and further certifying
that, as of the date of the certificate, no Event of Default exists
under this Agreement.
Environmental Compliance and Reports. Borrower shall comply in all
respects with all environmental protection federal, state and local
laws, statutes, regulations and ordinances; not cause or permit to
exist, as a result of an intentional or unintentional action or
omission on its part or on the part of any third party, on property
owned and/or occupied by Borrower, any environmental activity where
damage may result to the environment, unless such environmental
activity is pursuant to and in compliance with the conditions of a
permit issued by the appropriate federal, state or local governmental
authorities; shall furnish to Lender promptly and in any event within
thirty (30) days after receipt thereof a copy of any notice, summons,
lien, citation, directive, letter or other communication from any
governmental agency or instrumentality concerning any intentional or
unintentional action or omission on Borrower's part in connection with
any environmental activity whether or not there is damage to the
environment and/or other natural resources.
Additional Assurances. Make, execute and deliver to Lender such
promissory notes, mortgages, deeds of trust, security agreements,
financing statements, instruments, documents and other agreements as
Lender or its attorneys may reasonably request to evidence and secure
the Loans and to perfect all Security Interests.
RECOVERY OF ADDITIONAL COSTS. If the imposition of or any change in any law,
rule, regulation or guideline, or the interpretation or application of any
thereof by any court or administrative or governmental authority (including any
request or policy not having the force of law) shall impose, modify or make
applicable any taxes (except U.S. federal, state or local income or franchise
taxes imposed on Lender), reserve requirements, capital adequacy requirements or
other obligations which would (a) increase the cost to Lender for extending or
maintaining the credit facilities to which this Agreement relates, (b) reduce
the amounts payable to Lender under this Agreement or the Related Documents, or
(c) reduce the rate of return on Lender's capital as a consequence of Lender's
obligations with respect to the credit facilities to which this Agreement
relates, then Borrower agrees to pay Lender such additional amounts as will
compensate Lender therefor, within five (5) days after Lender's written demand
for such payment, which demand shall be accompanied by an explanation of such
imposition or charge and a calculation in reasonable detail of the additional
amounts payable by Borrower, which explanation and calculations shall be
conclusive in the absence of manifest error.
NEGATIVE COVENANTS. Borrower covenants and agrees with Lender that while this
Agreement is in effect, Borrower shall not, without the prior written consent of
Lender:
Indebtedness and Liens. (a) Except for trade debt incurred in the
normal course of business and indebtedness to Lender contemplated by
this Agreement, create, incur or assume indebtedness for borrowed
money, including capital leases, (b) except as allowed as a Permitted
Lien, sell, transfer, mortgage, assign, pledge, lease, grant a
security interest in, or encumber any of Borrower's assets, or (c)
sell with recourse any of Borrower's accounts, except to Lender.
<PAGE>
Continuity of Operations. (a) Engage in any business activities
substantially different than those in which Borrower is presently
engaged, (b) cease operations, liquidate, merge, transfer, acquire or
consolidate with any other entity, change ownership, change its name,
dissolve or transfer or sell Collateral out of the ordinary course of
business, (c) pay any dividends on Borrower's stock (other than
dividends payable in its stock), provided, however that
notwithstanding the foregoing, but only so long as no Event of Default
has occurred and is continuing or would result from the payment of
dividends, if Borrower is a "Subchapter S Corporation" (as defined in
the Internal Revenue Code of 1986, as amended), Borrower may pay cash
dividends on its stock to its shareholders from time to time in
amounts necessary to enable the shareholders to pay income taxes and
make estimated income tax payments to satisfy their liabilities under
federal and state law which arise solely from their status as
Shareholders of a Subchapter S Corporation because of their ownership
or shares of stock of Borrower, or (d) purchase or retire any of
Borrower's outstanding shares or alter or amend Borrower's capital
structure.
Loans, Acquisitions and Guaranties. (a) Loan, invest in or advance
money or assets, (b) purchase, create or acquire any interest in any
other enterprise or entity, or (c) incur any obligation as surety or
guarantor other than in the ordinary course of business.
CESSATION OF ADVANCES. If Lender has made any commitment to make any Loan to
Borrower, whether under this Agreement or under any other agreement, Lender
shall have no obligation to make Loan Advances or to disburse Loan proceeds if:
(a) Borrower or any Guarantor is in default under the terms of this Agreement or
any of the Related Documents or any other agreement that Borrower or any
Guarantor has with Lender; (b) Borrower or any Guarantor becomes insolvent,
files a petition in bankruptcy or similar proceedings, or is adjudged a
bankrupt; (c) there occurs a material adverse change in Borrower's financial
condition, in the financial condition of any Guarantor, or in the value of any
Collateral security any Loan; (d) any Guarantor seeks, claims or otherwise
attempts to limit, modify or revoke such Guarantor's guaranty of the Loan or any
other loan with Lender; or (e) Lender in good faith deems itself insecure, even
though no Event of Default shall have occurred.
ACCESS LAWS. Without limiting the generality of any provision of this agreement
requiring Borrower to comply with applicable laws, rules and regulations,
Borrower agrees that it will at all times comply with applicable laws relating
to disabled access including, but not limited to, all applicable titles of the
Americans with Disabilities Act of 1990.
ADDITIONAL FINANCIAL COVENANTS AND RATIOS. NET WORTH RATIO. Maintain a ratio of
Total Liabilities to Tangible Net Worth of less than .50 to 1.00. Net Worth
Ratio is defined as total liabilities minus subordinated debt divided by
tangible net worth plus subordinated debt.
QUICK RATIO. Maintain a Quick ratio greater than or equal to 1.25 to 1.00. Quick
Ratio is defined as current assets minus inventory divided by current
liabilities.
MISCELLANEOUS COVENANTS. If the Line of Credit will be used for the acquisition
of a company, Evans and Sutherland will first demonstrate in proforma financial
statements the impact of the acquisition and projected compliance to the ratio
covenants before the advance is granted.
RIGHT OF SETOFF. Borrower grants to Lender a contractual security interest in,
and hereby assigns, conveys, delivers, pledges, and transfers to Lender all
Borrower's right, title and interest in and to, Borrower's accounts with Lender
(whether checking, savings, or some other account), including without limitation
all accounts held jointly with someone else and all accounts Borrower may open
in the future, excluding however all IRA and Keogh accounts, and all trust
accounts for which the grant of a security interest would be prohibited by law.
Borrower authorizes Lender, to the extent permitted by applicable law, to charge
or setoff all sums owing on the indebtedness against any and all such accounts.
EVENTS OF DEFAULT. Each of the following shall constitute an Event of Default
under this Agreement:
Default on Indebtedness. Failure of Borrower to make any payment when
due on the Loans.
<PAGE>
Other Defaults. Failure of Borrower or any Grantor to comply with or
to perform when due any other term, obligation, covenant or condition
contained in this Agreement or in any of the Related Documents, or
failure of Borrower to comply with or to perform any other term,
obligation, covenant or condition contained in any other agreement
between Lender and Borrower.
False Statements. Any warranty, representation or statement made or
furnished to Lender by or on behalf of Borrower or any Grantor under
this Agreement or the Related Documents is false or misleading in any
material respect at the time made or furnished, or becomes false or
misleading at any time thereafter.
Defective Collateralization. This Agreement or any of the Related
Documents ceases to be in full force and effect (including failure of
any Security Agreement to create a valid and perfected Security
Interest) at any time and for any reason.
Insolvency. The dissolution or termination of Borrower's existence as
a going business, the insolvency of Borrower, the appointment of a
receiver for any part of Borrower's property, any assignment for the
benefit of creditors, any type of creditor workout, or the
commencement of any proceeding under any bankruptcy or insolvency laws
by or against Borrower.
Creditor or Forfeiture Proceedings. Commencement of foreclosure or
forfeiture proceedings, whether by judicial proceeding, self-help,
repossession or any other method, by any creditor of Borrower, any
creditor of any Grantor against any collateral securing the
Indebtedness or by any governmental agency. This includes a
garnishment, attachment, or levy on or of any of Borrower's deposit
accounts with Lender.
Events Affecting Guarantor. Any of the preceding events occurs with
respect to any Guarantor of any of the Indebtedness or any Guarantor
dies or becomes incompetent, or revokes or disputes the validity of,
or liability under, any Guaranty of the Indebtedness.
Change In Ownership. Any change in ownership of twenty-five percent
(25%) or more of the common stock of Borrower.
Adverse Change. A material adverse change occurs in Borrower's
financial condition, or Lender believes the prospect of payment or
performance of the Indebtedness is impaired.
Insecurity. Lender, in good faith, deems itself insecure.
EFFECT OF AN EVENT OF DEFAULT. If any Event of Default shall occur, except where
otherwise provided in this Agreement or the Related Documents, all commitments
and obligations of Lender under this Agreement or the Related Documents or any
other agreement immediately will terminate (including any obligation to make
Loan Advances or disbursements), and, at Lender's option, all Indebtedness
immediately will become due and payable, all without notice of any kind to
Borrower, except that in the case of an Event of Default of the type described
in the "Insolvency" subsection above, such acceleration shall be automatic and
not optional. In addition, Lender shall have all the rights and remedies
provided in the Related Documents or available at law, in equity, or otherwise.
Except as may be prohibited by applicable law, all of Lender's rights and
remedies shall be cumulative and may be exercised singularly or concurrently.
Election by Lender to pursue any remedy shall not exclude pursuit of any other
remedy, and an election to make expenditures or to take action to perform an
obligation of Borrower or of any Grantor shall not affect Lender's right to
declare a default and to exercise its rights and remedies.
MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of
this Agreement:
Amendments. This Agreement, together with any Related Documents,
constitutes the entire understanding and agreement of the parties as
to the matters set forth in this Agreement. No alteration of or
<PAGE>
amendment to this Agreement shall be effective unless given in writing
and signed by the party or parties sought to be charged or bound by
the alteration or amendment.
Applicable Law. This Agreement has been delivered to Lender and
accepted by Lender in the State of Utah. If there is a lawsuit,
Borrower agrees upon Lender's request to submit to the jurisdiction of
the courts of Salt Lake County, the State of Utah. Subject to the
provisions on arbitration, this Agreement shall be governed by and
construed in accordance with the laws of the State of Utah.
Arbitration. Lender and Borrower agree that all disputes, claims and
controversies between them, whether individual, joint, or class in
nature, arising from this Agreement or otherwise, including without
limitation contract and tort disputes, shall be arbitrated pursuant to
the Rules of the American Arbitration Association, upon request of
either party. No act to take or dispose of any Collateral shall
constitute a waiver of this arbitration agreement or be prohibited by
this arbitration agreement. This includes, without limitation,
obtaining injunctive relief or a temporary restraining order; invoking
a power of sale under any deed of trust or mortgage; obtaining a writ
of attachment or imposition of a receiver; or exercising any rights
relating to personal property, including taking or disposing of such
property with or without judicial process pursuant to Article 9 of the
Uniform Commercial Code. Any disputes, claims, or controversies
concerning the lawfulness or reasonableness of any act, or exercise of
any right, concerning any Collateral, including any claim to rescind,
reform, or otherwise modify any agreement relating to the Collateral,
shall also be arbitrated, provided however that no arbitrator shall
have the right or the power to enjoin or restrain any act of any
party. Judgment upon any award rendered by any arbitrator may be
entered in any court having jurisdiction. Nothing in this Agreement
shall preclude any party from seeking equitable relief from a court of
competent jurisdiction. The statute of limitations, estoppel, waiver,
laches, and similar doctrines which would otherwise be applicable in
an action brought by a party shall be applicable in any arbitration
proceeding, and the commencement of an arbitration proceeding shall be
deemed the commencement of an action for these purposes. The Federal
Arbitration Act shall apply to the construction, interpretation, and
enforcement of this arbitration provision.
Caption Headings. Caption headings in this Agreement are for
convenience purposes only and are not to be used to interpret or
define the provisions of this Agreement.
Multiple Parties; Corporate Authority. All obligations of Borrower
under this Agreement shall be joint and several, and all references to
Borrower shall mean each and every Borrower. This means that each of
the persons signing below is responsible for all obligations in this
Agreement.
Consent to Loan Participation. Borrower agrees and consents to
Lender's sale or transfer, whether now or later, of one or more
participation interests in the Loans to one or more purchasers,
whether related or unrelated to Lender. Lender may provide, without
any limitation whatsoever, to any one or more purchasers, or potential
purchasers, any information or knowledge Lender may have about
Borrower or about any other matter relating to the Loan, and Borrower
hereby waives any rights to privacy it may have with respect to such
matters. Borrower additionally waives any and all notices of sale of
participation interests, as well as all notices of any repurchase of
such participation interests. Borrower also agrees that the purchasers
of any such participation interests will be considered as the absolute
owners of such interests in the Loans and will have all the rights
granted under the participation agreement or agreements governing the
sale of such participation interests. Borrower further waives all
rights of offset or counterclaim that it may have now or later against
Lender or against any purchaser or such a participation interest and
unconditionally agrees that either Lender or such purchaser may
enforce Borrower's obligation under the Loans irrespective of the
failure or insolvency of any holder of any interest in the Loans.
Borrower further agrees that the purchaser of any such participation
interests may enforce its interests irrespective of any personal
claims or defenses that Borrower may have against Lender.
Costs and Expenses. Borrower agrees to pay upon demand all of Lender's
expenses, including without limitation reasonable attorneys' fees,
incurred in connection with the preparation, execution, enforcement,
modification and collection of this Agreement or in connection with
<PAGE>
the Loans made pursuant to this Agreement. Lender may pay someone else
to help collect the Loans and to enforce this Agreement, and Borrower
will pay that amount. This includes, subject to any limits under
applicable law, Lender's reasonable attorneys' fees and Lender's legal
expenses, whether or not there is a lawsuit, including reasonable
attorneys' fees for bankruptcy proceedings (including efforts to
modify or vacate any automatic stay or injunction), appeals, and any
anticipated post-judgment collection services. Borrower also will pay
any court costs, in addition to all other sums provided by law.
Notices. All notices required to be given under this Agreement shall
be given in writing, may be sent by telefacsimile (unless otherwise
required by law), and shall be effective when actually delivered or
when deposited with a nationally recognized overnight courier or
deposited in the United States mail, first class, postage prepaid,
addressed to the party to whom the notice is to be given at the
address shown above. Any party may change its address for notices
under this Agreement by giving formal written notice to the other
parties, specifying that the purpose of the notice is to change the
party's address. To the extent permitted by applicable law, if there
is more than one Borrower, notice to any Borrower will constitute
notice to all Borrowers. For notice purposes, Borrower will keep
Lender informed at all times of Borrower's current address(es).
Severability. If a court of competent jurisdiction finds any provision
of this Agreement to be invalid or unenforceable as to any person or
circumstance, such finding shall not render that provision invalid or
unenforceable as to any other persons or circumstances. If feasible,
any such offending provision shall be deemed to be modified to be
within the limits of enforceability or validity; however, if the
offending provision cannot be so modified, it shall be stricken and
all other provisions of this Agreement in all other respects shall
remain valid and enforceable.
Subsidiaries and Affiliates of Borrower. To the extent the context of
any provisions of this Agreement makes it appropriate, including
without limitation any representation, warranty or covenant, the word
"Borrower" as used herein shall include all subsidiaries and
affiliates of Borrower. Notwithstanding the foregoing however, under
no circumstances shall this Agreement be construed to require Lender
to make any Loan or other financial accommodation to any subsidiary or
affiliate of Borrower.
Successors and Assigns. All covenants and agreements contained by or
on behalf of Borrower shall bind its successors and assigns and shall
inure to the benefit of Lender, its successors and assigns. Borrower
shall not, however, have the right to assign its rights under this
Agreement or any interest therein, without the prior written consent
of Lender.
Survival. All warranties, representations, and covenants made by
Borrower in this Agreement or in any certificate or other instrument
delivered by Borrower to Lender under this Agreement shall be
considered to have been relied upon by Lender and will survive the
making of the Loan and delivery to Lender of the Related Documents,
regardless of any investigation made by Lender or on Lender's behalf.
Time Is of the Essence. Time is of the essence in the performance of
this Agreement.
Waiver. Lender shall not be deemed to have waived any rights under
this Agreement unless such waiver is given in writing and signed by
Lender. No delay or omission on the part of Lender in exercising any
right shall operate as a waiver of such right or any other right. A
waiver by Lender of a provision of this Agreement shall not prejudice
or constitute a waiver of Lender's right otherwise to demand strict
compliance with that provision or any other provision of this
Agreement. No prior waiver by Lender, nor any course of dealing
between Lender and Borrower, or between Lender and any Grantor, shall
constitute a waiver of any of Lender's rights or of any obligations of
Borrower or of any Grantor as to any future transactions. Whenever the
consent of Lender is required under this Agreement, the granting of
such consent by Lender in any instance shall not constitute continuing
consent in subsequent instances where such consent is required, and in
all cases such consent may be granted or withheld in the sole
discretion of Lender.
<PAGE>
FINAL AGREEMENT. Borrower understands that this Agreement and the related loan
documents are the final expression of the agreement between Lender and Borrower
and may not be contradicted by evidence of any alleged oral agreement.
BORROWER ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS BUSINESS LOAN
AGREEMENT, AND BORROWER AGREES TO ITS TERMS. THIS AGREEMENT IS DATED AS OF
NOVEMBER 13, 1998.
BORROWER:
EVANS & SUTHERLAND COMPUTER CORPORATION
X ____/S/ GRANT SCHULTZ______________________________
Authorized Officer
LENDER:
U.S. Bank National Association
By: _______________________________________________
Authorized Officer
ADDENDUM TO BUSINESS LOAN AGREEMENT
THIS ADDENDUM TO BUSINESS LOAN AGREEMENT ("Addendum") is made and entered into
effective as of the 5th day of February 1999, by and between U.S. BANK NATIONAL
ASSOCIATION ("Lender"), and EVANS AND SUTHERLAND COMPUTER CORPORATION
("Borrower").
RECITALS:
A. Lender and Borrower entered into a Business Loan Agreement, dated November
13, 1998 (the "Loan Agreement") pursuant to which Lender agreed to advance to
Borrower an unsecured revolving line of credit in the maximum line amount of
$20,000,000.00 (the "Loan"). B. Lender and Borrower desire to amend certain
provisions of the Loan Agreement and to make corresponding changes to the other
documents evidencing Borrower's obligations to Lender under the Loan, as set
forth below in this Addendum. NOW, THEREFORE, in consideration of the mutual
promises contained in this Addendum, and for other good and valuable
consideration. the receipt and legal sufficiency of which are hereby
acknowledged, Lender and Borrower agree as follows:
1. Loan Documents. As used in this Addendum, the term "Loan Documents" refers to
the following documents, dated effective as of November 13, 1998, signed by
Borrower relating to the Loan:
(a) The Loan Agreement;
(b) The Alternative Rate Options Promissory Note (Prime Rate, LIBOR), in
the maximum principal amount of $20,000,000.00;
(c) The Negative Pledge Agreement (the "Negative Pledge Agreement");
(d) The Corporate Resolution to Borrow; and (e) The Loan Checklist.
2. Definition of Borrower. The definition of the term "Borrower" set forth in
the Loan Agreement is deleted in its entirety and replaced by the following:
Borrower. The word "Borrower" means EVANS AND SUTHERLAND COMPUTER
CORPORATION. The foregoing definition shall amend all references to Borrower in
all of the Loan Documents.
3. Actions by Lender. In the Loan Documents, whenever Lender is granted a right
to take action against Borrower as a result of a default, act, or omission by or
on the part of Borrower, or to otherwise exercise its judgment or discretion
under the Loan Documents, unless Lender, under the express terms of the Loan
Documents, is required to act under a higher standard of care, such as "good
faith," Lender shall be required to act reasonably.
4. Materiality. In the event Borrower does not satisfy the requirements of any
affirmative or negative covenant contained in any of the Loan Documents, or in
the event a representation or warranty given by Borrower in any of the Loan
Documents proves to be or to have been incorrect when made, such circumstance
shall not be deemed an event of default under the Loan Documents: (a) so long as
there is no outstanding balance under the Note; or (b) if there is a balance
under the Note (1) so long as Borrower is in compliance with all covenants and
financial ratios contained in the Loan Agreement both before and after giving
effect to such circumstance, or (2) unless the same results in a material
impairment of Borrower's ability to repay the Loan, or would disqualify Borrower
From receiving credit from Lender based on Lender's then current underwriting
standards. Nothing contained in this paragraph shall be deemed a waiver of any
condition precedent to an advance of Loan proceeds as described in the Loan
Agreement.
5. Grace Period. Upon the occurrence of an event of default under any of the
Loan Documents, Lender shall give Borrower notice and an opportunity to cure the
default in accordance with the following:
(a) Monetary Default. Borrower shall not be entitled to any notice
regarding defaults with respect to regularly scheduled payments of
principal and accrued interest under the Note. However, in the event of
any other monetary default, Borrower shall have 15 days following
receipt of written notice from Lender in which to cure such default.
(b) Nonmonetary Default. In the event of a nonmonetary default,
Borrower shall have 30 days after receipt of written notice from Lender
specifying the nonmonetary default in which to effect a cure. However,
if the nonmonetary default cannot reasonably be corrected within such
30-day period, Borrower shall have an additional 30 days to remedy such
nonmonetary default if Borrower notifies Lender of the manner in which
the nonmonetary default shall be cured, and if appropriate corrective
action is instituted within the original 30-day period and is
diligently pursued thereafter.
<PAGE>
Occurrence of an event of default under any of the Loan Documents shall not
entitle Lender to exercise its rights and remedies under the Loan Documents or
applicable law, unless such event is not cured within the applicable notice and
cure period.
6. Financial Covenants and Ratios. Unless otherwise expressly defined in the
Loan Agreement, all financial covenants and ratios described in the Loan
Agreement shall be calculated using Borrower's consolidated financial statements
and the definitions and standards imposed by generally accepted accounting
principles. Borrower's financial reporting requirements shall be satisfied by
Borrower submitting consolidated financial statements and information as set
forth in the Loan Agreement.
7. Cash Flow Requirements. The cash flow requirements covenant contained in the
"Affirmative Covenants" section of the Loan Agreement is deleted in its entirety
and replaced by the following:
Cash Flow Requirements. Maintain Cash Flow at not less than the
following level: Debt Service Coverage (DSC) ratio of greater than or
equal to 3.50 to 1.00. DSC ratio is defined as earnings before
interest, taxes, depreciation, amortization, and all other noncash
expenses divided by current portion long-term debt plus interest plus
dividends. DSC ratio will be calculated on a rolling four-quarter
basis. Additionally, for calculation of this ratio, the $27,925,000
loss from the write-off of capitalized R&D expenses will be excluded
through September of 1999.
8. Indebtedness and Liens. The negative covenant in the Loan Agreement regarding
"Indebtedness and Liens" is deleted in its entirety and replaced by the
following:
Indebtedness and Liens. (a) Except for trade debts and capital leases
incurred or entered into in the normal course of business and
indebtedness to Lender contemplated by this Agreement, create, incur or
assume indebtedness for borrowed money, (b) except as allowed as a
Permitted Lien or otherwise accomplished in the normal course of
business, sell, transfer, mortgage, assign, pledge, lease grant a
security interest in, or encumber any of Borrower's assets, or (c) sell
with recourse any of Borrower's accounts, except to Lender.
9. Net Worth Ratio. The net worth ratio covenant contained in the "Additional
Financial Covenants and Ratios" section of the Loan Agreement is deleted in its
entirety and replaced by the following:
Net Worth Ratio. Maintain a ratio of Total Liabilities to Tangible Net
Worth of less than .65 to 1.00. Net Worth Ratio is defined as total
liabilities minus subordinated debt divided by tangible net worth plus
subordinated debt.
10. Subsidiaries and Affiliates of Borrower. The miscellaneous provision in the
Loan Agreement regarding "Subsidiaries and Affiliates of Borrower" is deleted in
its entirety and replaced by the following:
Subsidiaries and Affiliates of Borrower. Under no circumstances shall
this Agreement be construed to require Lender to make any Loan or other
financial accommodation to any subsidiary or affiliate of Borrower, nor
shall any affirmative or negative covenant or any representation or
warranty contained in the Loan Documents be construed to be separately
applicable to any subsidiary or affiliate of Borrower.
Negative Pledge Agreement. The Negative Pledge Agreement is hereby terminated,
and neither Lender nor Borrower shall have any further duty or obligation under
the Negative Pledge Agreement.
12. Unsecured Line of Credit. Lender and Borrower acknowledge and agree that the
Loan is an unsecured revolving line of credit. All references in the Loan
Documents to collateral, security interests and remedies with respect to
collateral are inapplicable, except to the extent that any advance of credit to
Borrower under the Loan Documents is actually secured by Borrower's grant of a
security interest in favor of Lender.
13. Effect of Addendum. This Addendum amends all of the Loan Documents. In the
event of a conflict in the provisions of this Addendum and any of the Loan
Documents the provisions of this Addendum shall control, and the inconsistent
Loan Document shall be deemed modified to be consistent here with.
14. Reaffirmation. Except as modified by this Addendum, Borrower reaffirms
Borrower's obligations to Lender under the Loan Documents, and agrees to abide
by the terms covenants and conditions thereof.
15. Successors and Assigns. This Addendum shall inure to the benefit of and
shall be binding upon Lender, Borrower and their respective successors and
assigns.
<PAGE>
DATED effective as of the date first above written.
LENDER:
/S/ GEORGE WHITMUR
U.S. BANK NATIONAL ASSOCIATION
BORROWER:
/S/ JOHN T. LEMLEY
EVANS AND SUTHERLAND COMPUTER CORPORATION
SEVERANCE AGREEMENT
THIS SEVERANCE AGREEMENT (the "Agreement") is made and entered into as
of the 11th day of December, 1998, by and between EVANS & SUTHERLAND COMPUTER
CORPORATION, a Utah corporation (the "Company") and ______________________.
W I T N E S S E T H:
WHEREAS, the Company has determined that is appropriate and in the best
interests of the Company to provide to the Executive protection in the event of
certain terminations of the Executive's employment relationship with the Company
in accordance with the terms and conditions contained herein and the Executive
desires to have such protection.
NOW, THEREFORE, in consideration of the foregoing and of the mutual
covenants and agreements hereinafter set forth, the Company and the Executive
hereto mutually covenant and agree as follows:
1. DEFINITIONS.
Whenever used in this Agreement, the following terms shall have the
meanings set forth below:
a. "Accrued Benefits" shall mean the amount payable not later than ten
(10) days following an applicable Termination Date and which shall be equal
to the sum of the following amounts:
(i) All salary earned or accrued through the Termination Date;
(ii) Reimbursement for any and all monies advanced in connection
with the Executive's employment for reasonable and necessary expenses
incurred by the Executive through the Termination Date;
(iii) Any and all other cash benefits previously earned through
the Termination Date and deferred at the election of the Executive or
pursuant to any deferred compensation plans then in effect;
(iv) All other payments and benefits to which the Executive may
be entitled under the terms of any benefit plan of the Company.
b. "Act" shall mean the Securities Exchange Act of 1934;
c. "Affiliate" shall have the same meaning as given to that term in
Rule 12b-2 of Regulation 12B promulgated under the Act;
d. "Base Period Income" shall be an amount equal to the Executive's
"annualized includable compensation" for the "base period" as defined in
Sections 280G(d)(1) and (2) of the Code and the regulations adopted
thereunder;
e. "Beneficial Owner" shall have the same meaning as given to that
term in Rule 13d-3 of the General Rules and Regulations of the Act,
provided that any pledgee of Company voting securities shall not be deemed
to be the Beneficial Owner thereof prior to its disposition of, or
acquisition of voting rights with respect to, such securities;
f. "Board" shall mean the Board of Directors of the Company;
g. "Cause" shall mean any of the following:
(i) The engaging by the Executive in fraudulent conduct, as
evidenced by a determination in a binding and final judgment, order or
decree of a court or administrative agency of competent jurisdiction,
in effect after exhaustion or lapse of all rights of appeal, in an
action, suit or proceeding, whether civil, criminal, administrative or
investigative, which the Board determines, in its sole discretion, has
a significant adverse impact on the Company in the conduct of the
Company's business;
(ii) Conviction of a felony, as evidenced by a binding and final
judgment, order or decree of a court of competent jurisdiction, in
effect after exhaustion or lapse of all rights of appeal, which the
Board determines, in its sole discretion, has a significant adverse
impact on the Company in the conduct of the Company's business;
(iii) Neglect or refusal by the Executive to perform the
Executive's duties or responsibilities (unless significantly changed
without the Executive's consent); or
(iv) A significant violation by the Executive of the Company's
established policies and procedures;
Notwithstanding the foregoing, Cause shall not exist under Sections
1(g)(iii) and (iv) herein unless the Company furnishes written notice to
the Executive of the specific offending conduct and the Executive fails to
correct such offending conduct within the thirty (30) day period commencing
on the receipt of such notice.
h. "Change of Control" shall mean a change in ownership or managerial
control of the stock, assets or business of the Company resulting from one
or more of the following circumstances:
(i) A change of control of the Company, of a nature that would be
required to be reported in response to Item 6(e) of Schedule 14A of
Regulation 14A promulgated under the Act, or any successor regulation
of similar import, regardless of whether the Company is subject to
such reporting requirement;
(ii) A change in ownership of the Company through a transaction
or series of transactions, such that any Person or Persons (other than
any current officer of the Company or member of the Board) is (are) or
become(s), in the aggregate, the Beneficial Owner(s), directly or
indirectly, of securities of the Company representing twenty percent
(20%) or more of the Company's then outstanding securities;
(iii) Any consolidation or merger of the Company in which the
Company is not the continuing or surviving corporation or pursuant to
which shares of the common stock of the Company would be converted
into cash (other than cash attributable to dissenters' rights),
securities or other property provided by a Person or Persons other
than the Company, other than a consolidation or merger of the Company
in which the holders of the common stock of the Company immediately
prior to the consolidation or merger have approximately the same
proportionate ownership of common stock of the surviving corporation
immediately after the consolidation or merger;
(iv) The shareholders of the Company approve a sale, transfer,
liquidation or other disposition of all or substantially all of the
assets of the Company to a Person or Persons;
(v) During any period of two (2) consecutive years, individuals
who, at the beginning of such period, constituted the Board of
Directors of the Company cease, for any reason, to constitute at least
a majority thereof, unless the election or nomination for election of
each new director was approved by the vote of at least two-thirds
(2/3) of the directors then still in office who were directors at the
beginning of the period;
(vi) The filing of a proceeding under Chapter 7 of the Federal
Bankruptcy Code (or any successor or other statute of similar import)
for liquidation with respect to the Company;
(vii) The filing of a proceeding under Chapter 11 of the Federal
Bankruptcy Code (or any successor or other statute of similar import)
for reorganization with respect to the Company if in connection with
any such proceeding, this Agreement is rejected, or a plan of
reorganization is approved an element of which plan entails the
liquidation of all or substantially all the assets of the Company.
A "Change of Control" shall be deemed to occur on the actual date on which
any of the foregoing circumstances shall occur; provided, however, that in
connection with a "Change of Control" specified in Section 1(h)(vii), a
"Change of Control" shall be deemed to occur on the date of the filing of
the relevant proceeding under Chapter 11 of the Federal Bankruptcy Code (or
any successor or other statute of similar import).
i. "Change of Control Period" shall mean the period commencing on the
date a Change of Control occurs and ending on the second anniversary of
such Change of Control;
j. "Code" shall mean the Internal Revenue Code of 1986, as amended
from time to time;
k. "Disability" shall mean a physical or mental condition whereby the
Executive is unable to perform on a full-time basis the customary duties of
the Executive under this Agreement;
l. "Federal Short Term-Rate" shall mean the rate defined in Section
1274(d)(1)(C)(i) of the Code;
m. "Good Reason" shall mean:
(i) The required relocation of the Executive, without the
Executive's consent, to an employment location which is more than
seventy-five (75) miles from the Executive's employment location on
the day preceding the date of this Agreement;
(ii) The removal of the Executive from or any failure to reelect
the Executive to any of the positions held by the Executive as of the
date of this Agreement or any other positions to which the Executive
shall thereafter be elected or assigned except in the event that such
removal or failure to reelect relates to the termination by the
Company of the Executive's employment for Cause or by reason of death,
Disability or voluntary retirement;
(iii) A significant adverse change, without the Executive's
written consent, in the nature or scope of the Executive's authority,
powers, functions, duties or responsibilities, or a material reduction
in the level of support services, staff, secretarial and other
assistance, office space and accoutrements available to a level below
that which was provided to the Executive on the day preceding the date
of this Agreement and that which is necessary to perform any
additional duties assigned to the Executive following the date of this
Agreement, which change or reduction is not generally effective for
all executives employed by the Company (or its successor) in the
Executive's class or category; or
(iv) Breach or violation of any material provision of this
Agreement by the Company;
n. "Gross Income" shall mean the average compensation earned by the
Executive for purposes of Section 61 of the Code for the prior two (2)
taxable years, plus any other compensation payable to the Executive by the
Company, whether taxable or non-taxable.
o. "Notice of Termination" shall mean the notice described in Section
3 herein;
p. "Person" shall mean any individual, partnership, joint venture,
association, trust, corporation or other entity, other than an employee
benefit plan of the Company or an entity organized, appointed or
established pursuant to the terms of any such benefit plan;
q. "Termination Date" shall mean, except as otherwise provided in
Section 3 herein,
(i) The Executive's date of death;
(ii) Thirty (30) days after the delivery of the Notice of
Termination if the Executive's employment is terminated by the
Executive voluntarily; and
(iii) Thirty (30) days after the delivery of the Notice of
Termination if the Executive's employment is terminated by the Company
for any reason other than death or Disability;
r. "Termination Payment" shall mean the payment described in Section 2
herein;
s. "Total Payments" shall mean the sum of the Termination Payment and
any other "payments in the nature of compensation" (as defined in Section
280G of the Code and the regulations adopted thereunder) to or for the
benefit of the Executive, the receipt of which is contingent on a Change of
Control and to which Section 280G of the Code applies.
2. TERMINATION PAYMENT.
a. If during a Change of Control Period, the Executive's employment is
terminated by the Executive for Good Reason or by the Company for any
reason other than death, Disability, or Cause, the Termination Payment
payable to the Executive by the Company or an affiliate of the Company
shall be two and one-half (2.5) times the Executive's Gross Income for the
year preceding the Termination Date.
b. If the Executive's employment is terminated by the Executive within
one hundred eighty (180) days of a Change of Control, which has not been
approved by a majority of the directors in office immediately preceding
such Change of Control, the Termination Payment payable to the Executive by
the Company or an affiliate of the Company shall be two and one-half (2.5)
times the Executive 's Gross Income for the year preceding the Termination
Date.
c. It is the intention of the Company and the Executive that no
portion of the Termination Payment and any other "payments in the nature of
compensation" (as defined in Section 280G of the Code and the regulations
adopted thereunder) to or for the benefit of the Executive under this
Agreement, or under any other agreement, plan or arrangement, be deemed to
be an "excess parachute payment" as defined in Section 280G of the Code. It
is agreed that the present value of the Total Payments shall not exceed an
amount equal to two and ninety-nine hundredths (2.99) times the Executive's
Base Period Income, which is the maximum amount which the Executive may
receive without becoming subject to the tax imposed by Section 4999 of the
Code or which the Company may pay without loss of deduction under Section
280G(a) of the Code. Present value for purposes of this Agreement shall be
calculated in accordance with the regulations issued under Section 280G of
the Code. Within sixty (60) days following delivery of the Notice of
Termination or notice by the Company to the Executive of its belief that
there is a payment or benefit due the Executive which will result in an
excess parachute payment as defined in Section 280G of the Code, the
Executive and the Company shall, at the Company's expense, obtain such
opinions as more fully described hereafter, which need not be unqualified,
of legal counsel and certified public accountants or a firm of recognized
executive compensation consultants. The Executive shall select said legal
counsel, certified public accountants and executive compensation
consultants; provided, however, that if the Company does not accept one (1)
or more of the parties selected by the Executive, the Company shall provide
the Executive with the names of such legal counsel, certified public
accountants and/or executive compensation consultants as the Company may
select; provided, further, however, that if the Executive does not accept
the party or parties selected by the Company, the legal counsel, certified
public accountants and/or executive compensation consultants selected by
the Executive and the Company, respectively, shall select the legal
counsel, certified public accountants and/or executive compensation
consultants, whichever is applicable, who shall provide the opinions
required by this Section 2(d). The opinions required hereunder shall set
forth (a) the amount of the Base Period Income of the Executive, (b) the
present value of Total Payments and (c) the amount and present value of any
excess parachute payments. In the event that such opinions determine that
there would be an excess parachute payment, the Termination Payment or any
other payment determined by such counsel to be includable in Total Payments
shall be reduced or eliminated as specified by the Executive in writing
delivered to the Company within thirty (30) days of his or her receipt of
such opinions or, if the Executive fails to so notify the Company, then as
the Company shall reasonably determine, so that under the bases of
calculation set forth in such opinions there will be no excess parachute
payment. The provisions of this Section 2(d), including the calculations,
notices and opinions provided for herein shall be based upon the conclusive
presumption that the compensation and other benefits, including but not
limited to the Accrued Benefits, earned on or after the date of Change of
Control by the Executive pursuant to the Company's compensation programs if
such payments would have been made in the future in any event, even though
the timing of such payment is triggered by the Change of Control, are
reasonable compensation for services rendered prior to the Change of
Control; provided, however, that in the event legal counsel so requests in
connection with the opinion required by this Section 2(d), a firm of
recognized executive compensation consultants, selected by the Executive
and the Company pursuant to the procedures set forth above, shall provide
an opinion, upon which such legal counsel may rely, as to the
reasonableness of any item of compensation as reasonable compensation for
services rendered prior to the Change of Control by the Executive. In the
event that the provisions of Sections 280G and 4999 of the Code are
repealed without succession, this Section 2(d) shall be of no further force
or effect;
d. The Termination Payment shall be payable in a lump sum not later
than ten (10) days following the Executive's Termination Date. Such lump
sum payment shall not be reduced by any present value or similar factor.
Further, the Executive shall not be required to mitigate the amount of such
payment by securing other employment or otherwise and such payment shall
not be reduced by reason of the Executive securing other employment or for
any other reason.
3. TERMINATION NOTICE AND PROCEDURE.
Any termination by the Company or the Executive of the Executive's
employment during the Employment Period shall be communicated by written Notice
of Termination to the Executive, if such Notice of Termination is delivered by
the Company, and to the Company, if such Notice of Termination is delivered by
the Executive, all in accordance with the following procedures:
a. The Notice of Termination shall indicate the specific termination
provision in this Agreement relied upon and shall set forth in reasonable
detail the facts and circumstances alleged to provide a basis for
termination;
b. Any Notice of Termination by the Company shall be approved by a
resolution duly adopted by a majority of the directors of the Company then
in office;
c. If the Executive shall in good faith furnish a Notice of
Termination for Good Reason and the Company notifies the Executive that a
dispute exists concerning the termination, within the fifteen (15) day
period following the Company's receipt of such notice, the Executive shall
continue the Executive's employment during such dispute. If it is
thereafter determined that (i) Good Reason did exist, the Executive's
Termination Date shall be the earlier of (A) the date on which the dispute
is finally determined, by mutual written agreement of the parties, (B) the
date of the Executive's death or (C) one day prior to the second (2nd)
anniversary of a Change of Control, and the Executive's Termination
Payment, if applicable, shall reflect events occurring after the Executive
delivered the Executive's Notice of Termination; or (ii) Good Reason did
not exist, the employment of the Executive shall continue after such
determination as if the Executive had not delivered the Notice of
Termination asserting Good Reason;
d. If the Executive gives notice to terminate his employment for Good
Reason and a dispute arises as to the validity of such dispute, and the
Executive does not continue his employment during such dispute, and it is
finally determined that the reason for termination set forth in such Notice
of Termination did not exist, if such notice was delivered by the
Executive, the Executive shall be deemed to have voluntarily terminated the
Executive's employment other than for Good Reason.
4. REMEDIES AND JURISDICTION.
a. The Executive hereby acknowledges and agrees that a breach of the
agreements contained in this Agreement will cause irreparable harm and
damage to the Company, that the remedy at law for the breach or threatened
breach of the agreements set forth in this Agreement will be inadequate,
and that, in addition to all other remedies available to the Company for
such breach or threatened breach (including, without limitation, the right
to recover damages), the Company shall be entitled to injunctive relief for
any breach or threatened breach of the agreements contained in this
Agreement;
b. All claims, disputes and other matters in question between the
parties arising under this Agreement, shall, unless otherwise provided
herein, be decided by arbitration in Salt Lake City, Utah, in accordance
with the Model Employment Arbitration Procedures of the American
Arbitration Association (including such procedures governing selection of
the specific arbitrator or arbitrators), unless the parties mutually agree
otherwise. The Company shall pay the costs of any such arbitration. The
award by the arbitrator or arbitrators shall be final, and judgment may be
entered upon it in accordance with applicable law in any state or Federal
court having jurisdiction thereof.
5. ATTORNEYS' FEES.
In the event that either party hereunder institutes any legal
proceedings in connection with its rights or obligations under this Agreement,
the prevailing party in such proceeding shall be entitled to recover from the
other party, all costs incurred in connection with such proceeding, including
reasonable attorneys' fees, together with interest thereon from the date of
demand at the rate of twelve percent (12%) per annum.
6. SUCCESSORS.
This Agreement and all rights of the Executive shall inure to the
benefit of and be enforceable by the Executive's personal or legal
representatives, estates, executors, administrators, heirs and beneficiaries. In
the event of the Executive's death, all amounts payable to the Executive under
this Agreement shall be paid to the Executive's surviving spouse, or the
Executive's estate if the Executive dies without a surviving spouse. This
Agreement shall inure to the benefit of, be binding upon and be enforceable by,
any successor, surviving or resulting corporation or other entity to which all
or substantially all of the business and assets of the Company shall be
transferred whether by merger, consolidation, transfer or sale.
7. ENFORCEMENT.
The provisions of this Agreement shall be regarded as divisible, and if
any of said provisions or any part hereof are declared invalid or unenforceable
by a court of competent jurisdiction, the validity and enforceability of the
remainder of such provisions or parts hereof and the applicability thereof shall
not be affected thereby.
8. AMENDMENT OR TERMINATION.
This Agreement may not be amended or terminated during its term, except
by written instrument executed by the Company and the Executive.
9. ENTIRE AGREEMENT.
This Agreement sets forth the entire agreement between the Executive
and the Company with respect to the subject matter hereof, and supersedes all
prior oral or written agreements, negotiations, commitments and understandings
with respect thereto.
10. VENUE; GOVERNING LAW.
This Agreement and the Executive's and Company's respective rights and
obligations hereunder shall be governed by and construed in accordance with the
laws of the State of Utah without giving effect to the provisions, principles,
or policies thereof relating to choice or conflict laws.
11. NOTICE.
Notices given pursuant to this Agreement shall be in writing and shall
be deemed given when received, and if mailed, shall be mailed by United States
registered or certified mail, return receipt requested, addressee only, postage
prepaid, if to the Company, to:
Company: Evans & Sutherland Computer Corporation
600 Komas Drive
Salt Lake City, Utah 84108
Attn: Chief Financial Officer
Fax: (801) 588-4500
Executive: James R. Oyler
600 Komas Drive
Salt Lake City, Utah 84108
Fax: (801) 588-4500
or to such other address as the Company shall have given to the Executive or, if
to the Executive, to such address as the Executive shall have given to the
Company.
12. NO WAIVER.
No waiver by either party at any time of any breach by the other party
of, or compliance with, any condition or provision of this Agreement to be
performed by the other party shall be deemed a waiver of similar or dissimilar
provisions or conditions at the same time or any prior or subsequent time.
13. HEADINGS.
The headings herein contained are for reference only and shall not
affect the meaning or interpretation of any provision of this Agreement.
14. COUNTERPARTS.
This Agreement may be executed in one or more counterparts, each of
which shall be deemed to be an original but all of which together will
constitute one and the same instrument.
IN WITNESS WHEREOF, the Company has caused this Agreement to be
executed by its duly authorized officer, and the Executive has executed this
Agreement, on the date and year first above written.
"COMPANY"
EVANS & SUTHERLAND COMPUTER
CORPORATION, a Utah corporation
By:___________________________________
Its:___________________________________
"EXECUTIVE"
--------------------------------------
James R. Oyler
SEVERANCE AGREEMENT
THIS SEVERANCE AGREEMENT (the "Agreement") is made and entered into as
of the 11th day of December, 1998, by and between EVANS & SUTHERLAND COMPUTER
CORPORATION, a Utah corporation (the "Company") and MARK McBRIDE (the
"Executive").
W I T N E S S E T H:
WHEREAS, the Company has determined that is appropriate and in the best
interests of the Company to provide to the Executive protection in the event of
certain terminations of the Executive's employment relationship with the Company
in accordance with the terms and conditions contained herein and the Executive
desires to have such protection.
NOW, THEREFORE, in consideration of the foregoing and of the mutual
covenants and agreements hereinafter set forth, the Company and the Executive
hereto mutually covenant and agree as follows:
1. DEFINITIONS.
Whenever used in this Agreement, the following terms shall have the
meanings set forth below:
a. "Accrued Benefits" shall mean the amount payable not later than ten
(10) days following an applicable Termination Date and which shall be equal
to the sum of the following amounts:
(i) All salary earned or accrued through the Termination Date;
(ii) Reimbursement for any and all monies advanced in connection
with the Executive's employment for reasonable and necessary expenses
incurred by the Executive through the Termination Date;
(iii) Any and all other cash benefits previously earned through
the Termination Date and deferred at the election of the Executive or
pursuant to any deferred compensation plans then in effect;
(iv) All other payments and benefits to which the Executive may
be entitled under the terms of any benefit plan of the Company.
b. "Act" shall mean the Securities Exchange Act of 1934;
c. "Affiliate" shall have the same meaning as given to that term in
Rule 12b-2 of Regulation 12B promulgated under the Act;
<PAGE>
d. "Base Period Income" shall be an amount equal to the Executive's
"annualized includable compensation" for the "base period" as defined in
Sections 280G(d)(1) and (2) of the Code and the regulations adopted
thereunder;
e. "Beneficial Owner" shall have the same meaning as given to that
term in Rule 13d-3 of the General Rules and Regulations of the Act,
provided that any pledgee of Company voting securities shall not be deemed
to be the Beneficial Owner thereof prior to its disposition of, or
acquisition of voting rights with respect to, such securities;
f. "Board" shall mean the Board of Directors of the Company;
g. "Cause" shall mean any of the following:
(i) The engaging by the Executive in fraudulent conduct, as
evidenced by a determination in a binding and final judgment, order or
decree of a court or administrative agency of competent jurisdiction,
in effect after exhaustion or lapse of all rights of appeal, in an
action, suit or proceeding, whether civil, criminal, administrative or
investigative, which the Board determines, in its sole discretion, has
a significant adverse impact on the Company in the conduct of the
Company's business;
(ii) Conviction of a felony, as evidenced by a binding and final
judgment, order or decree of a court of competent jurisdiction, in
effect after exhaustion or lapse of all rights of appeal, which the
Board determines, in its sole discretion, has a significant adverse
impact on the Company in the conduct of the Company's business;
(iii) Neglect or refusal by the Executive to perform the
Executive's duties or responsibilities (unless significantly changed
without the Executive's consent); or
(iv) A significant violation by the Executive of the Company's
established policies and procedures;
Notwithstanding the foregoing, Cause shall not exist under Sections
1(g)(iii) and (iv) herein unless the Company furnishes written notice
to the Executive of the specific offending conduct and the Executive
fails to correct such offending conduct within the thirty (30) day
period commencing on the receipt of such notice.
h. "Change of Control" shall mean a change in ownership or managerial
control of the stock, assets or business of the Company resulting from one
or more of the following circumstances:
(i) A change of control of the Company, of a nature that would be
required to be reported in response to Item 6(e) of Schedule 14A of
Regulation 14A promulgated under the Act, or any successor regulation
of similar import, regardless of whether the Company is subject to
such reporting requirement;
<PAGE>
(ii) A change in ownership of the Company through a transaction
or series of transactions, such that any Person or Persons (other than
any current officer of the Company or member of the Board) is (are) or
become(s), in the aggregate, the Beneficial Owner(s), directly or
indirectly, of securities of the Company representing twenty percent
(20%) or more of the Company's then outstanding securities;
(iii) Any consolidation or merger of the Company in which the
Company is not the continuing or surviving corporation or pursuant to
which shares of the common stock of the Company would be converted
into cash (other than cash attributable to dissenters' rights),
securities or other property provided by a Person or Persons other
than the Company, other than a consolidation or merger of the Company
in which the holders of the common stock of the Company immediately
prior to the consolidation or merger have approximately the same
proportionate ownership of common stock of the surviving corporation
immediately after the consolidation or merger;
(iv) The shareholders of the Company approve a sale, transfer,
liquidation or other disposition of all or substantially all of the
assets of the Company to a Person or Persons;
(v) During any period of two (2) consecutive years, individuals
who, at the beginning of such period, constituted the Board of
Directors of the Company cease, for any reason, to constitute at least
a majority thereof, unless the election or nomination for election of
each new director was approved by the vote of at least two-thirds
(2/3) of the directors then still in office who were directors at the
beginning of the period;
(vi) The filing of a proceeding under Chapter 7 of the Federal
Bankruptcy Code (or any successor or other statute of similar import)
for liquidation with respect to the Company;
(vii) The filing of a proceeding under Chapter 11 of the Federal
Bankruptcy Code (or any successor or other statute of similar import)
for reorganization with respect to the Company if in connection with
any such proceeding, this Agreement is rejected, or a plan of
reorganization is approved an element of which plan entails the
liquidation of all or substantially all the assets of the Company.
A "Change of Control" shall be deemed to occur on the actual date on which
any of the foregoing circumstances shall occur; provided, however, that in
connection with a "Change of Control" specified in Section 1(h)(vii), a
"Change of Control" shall be deemed to occur on the date of the filing of
the relevant proceeding under Chapter 11 of the Federal Bankruptcy Code (or
any successor or other statute of similar import).
<PAGE>
i. "Change of Control Period" shall mean the period commencing on the
date a Change of Control occurs and ending on the second anniversary of
such Change of Control;
j. "Code" shall mean the Internal Revenue Code of 1986, as amended
from time to time;
k. "Disability" shall mean a physical or mental condition whereby the
Executive is unable to perform on a full-time basis the customary duties of
the Executive under this Agreement;
l. "Federal Short Term-Rate" shall mean the rate defined in Section
1274(d)(1)(C)(i) of the Code;
m. "Good Reason" shall mean:
(i) The required relocation of the Executive, without the
Executive's consent, to an employment location which is more than
seventy-five (75) miles from the Executive's employment location on
the day preceding the date of this Agreement;
(ii) The removal of the Executive from or any failure to reelect
the Executive to any of the positions held by the Executive as of the
date of this Agreement or any other positions to which the Executive
shall thereafter be elected or assigned except in the event that such
removal or failure to reelect relates to the termination by the
Company of the Executive's employment for Cause or by reason of death,
Disability or voluntary retirement;
(iii) A significant adverse change, without the Executive's
written consent, in the nature or scope of the Executive's authority,
powers, functions, duties or responsibilities, or a material reduction
in the level of support services, staff, secretarial and other
assistance, office space and accoutrements available to a level below
that which was provided to the Executive on the day preceding the date
of this Agreement and that which is necessary to perform any
additional duties assigned to the Executive following the date of this
Agreement, which change or reduction is not generally effective for
all executives employed by the Company (or its successor) in the
Executive's class or category; or
(iv) Breach or violation of any material provision of this
Agreement by the Company;
n. "Gross Income" shall mean the average compensation earned by the
Executive for purposes of Section 61 of the Code for the prior two (2)
taxable years, plus any other compensation payable to the Executive by the
Company, whether taxable or non-taxable.
<PAGE>
o. "Notice of Termination" shall mean the notice described in Section
3 herein;
p. "Person" shall mean any individual, partnership, joint venture,
association, trust, corporation or other entity, other than an employee
benefit plan of the Company or an entity organized, appointed or
established pursuant to the terms of any such benefit plan;
q. "Termination Date" shall mean, except as otherwise provided in
Section 3 herein,
(i) The Executive's date of death;
(ii) Thirty (30) days after the delivery of the Notice of
Termination if the Executive's employment is terminated by the
Executive voluntarily; and
(iii) Thirty (30) days after the delivery of the Notice of
Termination if the Executive's employment is terminated by the Company
for any reason other than death or Disability;
r. "Termination Payment" shall mean the payment described in Section 2
herein;
s. "Total Payments" shall mean the sum of the Termination Payment and
any other "payments in the nature of compensation" (as defined in Section
280G of the Code and the regulations adopted thereunder) to or for the
benefit of the Executive, the receipt of which is contingent on a Change of
Control and to which Section 280G of the Code applies.
2. TERMINATION PAYMENT.
a. If during a Change of Control Period, the Executive's employment is
terminated by the Executive for Good Reason or by the Company for any
reason other than death, Disability, or Cause, the Termination Payment
payable to the Executive by the Company or an affiliate of the Company
shall be two and one-half (2.5) times the Executive's Gross Income for the
year preceding the Termination Date.
b. It is the intention of the Company and the Executive that no
portion of the Termination Payment and any other "payments in the nature of
compensation" (as defined in Section 280G of the Code and the regulations
adopted thereunder) to or for the benefit of the Executive under this
Agreement, or under any other agreement, plan or arrangement, be deemed to
be an "excess parachute payment" as defined in Section 280G of the Code. It
is agreed that the present value of the Total Payments shall not exceed an
amount equal to two and ninety-nine hundredths (2.99) times the Executive's
Base Period Income, which is the maximum amount which the Executive may
receive without becoming subject to the tax imposed by Section 4999 of the
Code or which the Company may pay without loss of deduction under Section
280G(a) of the Code. Present value for purposes of this Agreement shall be
calculated in accordance with the regulations issued under Section 280G of
the Code. Within sixty (60) days following delivery of the Notice of
<PAGE>
Termination or notice by the Company to the Executive of its belief that
there is a payment or benefit due the Executive which will result in an
excess parachute payment as defined in Section 280G of the Code, the
Executive and the Company shall, at the Company's expense, obtain such
opinions as more fully described hereafter, which need not be unqualified,
of legal counsel and certified public accountants or a firm of recognized
executive compensation consultants. The Executive shall select said legal
counsel, certified public accountants and executive compensation
consultants; provided, however, that if the Company does not accept one (1)
or more of the parties selected by the Executive, the Company shall provide
the Executive with the names of such legal counsel, certified public
accountants and/or executive compensation consultants as the Company may
select; provided, further, however, that if the Executive does not accept
the party or parties selected by the Company, the legal counsel, certified
public accountants and/or executive compensation consultants selected by
the Executive and the Company, respectively, shall select the legal
counsel, certified public accountants and/or executive compensation
consultants, whichever is applicable, who shall provide the opinions
required by this Section 2(d). The opinions required hereunder shall set
forth (a) the amount of the Base Period Income of the Executive, (b) the
present value of Total Payments and (c) the amount and present value of any
excess parachute payments. In the event that such opinions determine that
there would be an excess parachute payment, the Termination Payment or any
other payment determined by such counsel to be includable in Total Payments
shall be reduced or eliminated as specified by the Executive in writing
delivered to the Company within thirty (30) days of his or her receipt of
such opinions or, if the Executive fails to so notify the Company, then as
the Company shall reasonably determine, so that under the bases of
calculation set forth in such opinions there will be no excess parachute
payment. The provisions of this Section 2(d), including the calculations,
notices and opinions provided for herein shall be based upon the conclusive
presumption that the compensation and other benefits, including but not
limited to the Accrued Benefits, earned on or after the date of Change of
Control by the Executive pursuant to the Company's compensation programs if
such payments would have been made in the future in any event, even though
the timing of such payment is triggered by the Change of Control, are
reasonable compensation for services rendered prior to the Change of
Control; provided, however, that in the event legal counsel so requests in
connection with the opinion required by this Section 2(d), a firm of
recognized executive compensation consultants, selected by the Executive
and the Company pursuant to the procedures set forth above, shall provide
an opinion, upon which such legal counsel may rely, as to the
reasonableness of any item of compensation as reasonable compensation for
services rendered prior to the Change of Control by the Executive. In the
event that the provisions of Sections 280G and 4999 of the Code are
repealed without succession, this Section 2(d) shall be of no further force
or effect;
c. The Termination Payment shall be payable in a lump sum not later
than ten (10) days following the Executive's Termination Date. Such lump
sum payment shall not be reduced by any present value or similar factor.
Further, the Executive shall not be required to mitigate the amount of such
payment by securing other employment or otherwise and such payment shall
not be reduced by reason of the Executive securing other employment or for
any other reason.
<PAGE>
3. TERMINATION NOTICE AND PROCEDURE.
Any termination by the Company or the Executive of the Executive's
employment during the Employment Period shall be communicated by written Notice
of Termination to the Executive, if such Notice of Termination is delivered by
the Company, and to the Company, if such Notice of Termination is delivered by
the Executive, all in accordance with the following procedures:
a. The Notice of Termination shall indicate the specific termination
provision in this Agreement relied upon and shall set forth in reasonable
detail the facts and circumstances alleged to provide a basis for
termination;
b. Any Notice of Termination by the Company shall be approved by a
resolution duly adopted by a majority of the directors of the Company then
in office;
c. If the Executive shall in good faith furnish a Notice of
Termination for Good Reason and the Company notifies the Executive that a
dispute exists concerning the termination, within the fifteen (15) day
period following the Company's receipt of such notice, the Executive shall
continue the Executive's employment during such dispute. If it is
thereafter determined that (i) Good Reason did exist, the Executive's
Termination Date shall be the earlier of (A) the date on which the dispute
is finally determined, by mutual written agreement of the parties, (B) the
date of the Executive's death or (C) one day prior to the second (2nd)
anniversary of a Change of Control, and the Executive's Termination
Payment, if applicable, shall reflect events occurring after the Executive
delivered the Executive's Notice of Termination; or (ii) Good Reason did
not exist, the employment of the Executive shall continue after such
determination as if the Executive had not delivered the Notice of
Termination asserting Good Reason;
d. If the Executive gives notice to terminate his employment for Good
Reason and a dispute arises as to the validity of such dispute, and the
Executive does not continue his employment during such dispute, and it is
finally determined that the reason for termination set forth in such Notice
of Termination did not exist, if such notice was delivered by the
Executive, the Executive shall be deemed to have voluntarily terminated the
Executive's employment other than for Good Reason.
4. REMEDIES AND JURISDICTION.
a. The Executive hereby acknowledges and agrees that a breach of the
agreements contained in this Agreement will cause irreparable harm and
damage to the Company, that the remedy at law for the breach or threatened
breach of the agreements set forth in this Agreement will be inadequate,
and that, in addition to all other remedies available to the Company for
such breach or threatened breach (including, without limitation, the right
to recover damages), the Company shall be entitled to injunctive relief for
any breach or threatened breach of the agreements contained in this
Agreement;
<PAGE>
b. All claims, disputes and other matters in question between the
parties arising under this Agreement, shall, unless otherwise provided
herein, be decided by arbitration in Salt Lake City, Utah, in accordance
with the Model Employment Arbitration Procedures of the American
Arbitration Association (including such procedures governing selection of
the specific arbitrator or arbitrators), unless the parties mutually agree
otherwise. The Company shall pay the costs of any such arbitration. The
award by the arbitrator or arbitrators shall be final, and judgment may be
entered upon it in accordance with applicable law in any state or Federal
court having jurisdiction thereof.
5. ATTORNEYS' FEES.
In the event that either party hereunder institutes any legal
proceedings in connection with its rights or obligations under this Agreement,
the prevailing party in such proceeding shall be entitled to recover from the
other party, all costs incurred in connection with such proceeding, including
reasonable attorneys' fees, together with interest thereon from the date of
demand at the rate of twelve percent (12%) per annum.
6. SUCCESSORS.
This Agreement and all rights of the Executive shall inure to the
benefit of and be enforceable by the Executive's personal or legal
representatives, estates, executors, administrators, heirs and beneficiaries. In
the event of the Executive's death, all amounts payable to the Executive under
this Agreement shall be paid to the Executive's surviving spouse, or the
Executive's estate if the Executive dies without a surviving spouse. This
Agreement shall inure to the benefit of, be binding upon and be enforceable by,
any successor, surviving or resulting corporation or other entity to which all
or substantially all of the business and assets of the Company shall be
transferred whether by merger, consolidation, transfer or sale.
7. ENFORCEMENT.
The provisions of this Agreement shall be regarded as divisible, and if
any of said provisions or any part hereof are declared invalid or unenforceable
by a court of competent jurisdiction, the validity and enforceability of the
remainder of such provisions or parts hereof and the applicability thereof shall
not be affected thereby.
8. AMENDMENT OR TERMINATION.
This Agreement may not be amended or terminated during its term, except
by written instrument executed by the Company and the Executive.
9. ENTIRE AGREEMENT.
This Agreement sets forth the entire agreement between the Executive
and the Company with respect to the subject matter hereof, and supersedes all
prior oral or written agreements, negotiations, commitments and understandings
with respect thereto.
<PAGE>
10. VENUE; GOVERNING LAW.
This Agreement and the Executive's and Company's respective rights and
obligations hereunder shall be governed by and construed in accordance with the
laws of the State of Utah without giving effect to the provisions, principles,
or policies thereof relating to choice or conflict laws.
11. NOTICE.
Notices given pursuant to this Agreement shall be in writing and shall
be deemed given when received, and if mailed, shall be mailed by United States
registered or certified mail, return receipt requested, addressee only, postage
prepaid, if to the Company, to:
Company: Evans & Sutherland Computer Corporation
600 Komas Drive
Salt Lake City, Utah 84108
Attn: Chief Financial Officer
Fax: (801) 588-4500
Executive: Mark McBride
600 Komas Drive
Salt Lake City, Utah 84108
Fax: (801) 588-4500
or to such other address as the Company shall have given to the Executive or, if
to the Executive, to such address as the Executive shall have given to the
Company.
12. NO WAIVER.
No waiver by either party at any time of any breach by the other party
of, or compliance with, any condition or provision of this Agreement to be
performed by the other party shall be deemed a waiver of similar or dissimilar
provisions or conditions at the same time or any prior or subsequent time.
13. HEADINGS.
The headings herein contained are for reference only and shall not
affect the meaning or interpretation of any provision of this Agreement.
14. COUNTERPARTS.
This Agreement may be executed in one or more counterparts, each of
which shall be deemed to be an original but all of which together will
constitute one and the same instrument.
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Agreement to be
executed by its duly authorized officer, and the Executive has executed this
Agreement, on the date and year first above written.
"COMPANY"
EVANS & SUTHERLAND COMPUTER
CORPORATION, a Utah corporation
By:___/S/ JAMES R. OYLER_______________
Its:__CHIEF OPERATING OFFICER__________
"EXECUTIVE"
/S/ MARK MCBRIDE
--------------------------------------
MARK McBRIDE
Exhibit 21.1
EVANS & SUTHERLAND COMPUTER CORPORATION
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
Subsidiary Name State or Other Names Under Which
Jurisdiction of Each Subsidiary Does Business
Incorporation or
Organization
- - --------------------------------------------- ------------------- ---------------------------------------------
<S> <C> <C>
Evans & Sutherland Graphics Corporation Utah Evans & Sutherland Graphics Corporation
Xionix Simulation, Inc. Texas Xionix Simulation, Inc.
Evans & Sutherland, Ltd. United Kingdom Evans & Sutherland, Ltd.
Evans & Sutherland, GmbH Germany Evans & Sutherland, GmbH
Evans & Sutherland SARL France Evans & Sutherland SARL
E&S Foreign Sales Corporation Virgin Islands E&S Foreign Sales Corporation
</TABLE>
Exhibit 23.1
Accountant's Consent
The Board of Directors
Evans & Sutherland Computer Corporation
We consent to incorporation by reference in the Registration Statements Nos.
33-39632, 2-76027, 333-53305, 333-58735 and 333-58733 on Forms S-8 and
Registration Statements Nos. 333-09657 and 333-67189 on Forms S-3 of Evans &
Sutherland Computer Corporation of our report dated February 12, 1999, relating
to the consolidated balance sheets of Evans & Sutherland Computer Corporation
and subsidiaries as of December 31, 1998 and December 31, 1997, and the related
consolidated statements of operations, comprehensive income, stockholders'
equity, and cash flows for each of the years in the three-year period ended
December 31, 1998 and related schedule, which report appears in the December 31,
1998 Annual Report on Form 10-K of Evans & Sutherland Computer Corporation.
KPMG LLP
Salt Lake City, Utah
March 31, 1999
Exhibit 24.1
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each officer and/or director
of Evans & Sutherland Computer Corporation whose signature appears below
constitutes and appoints James R. Oyler, John T. Lemley, and Mark C. McBride, or
any of them, as his true and lawful attorneys-in-fact and agents, with full
power of substitution and resubstitution, for him and in his name, place and
stead, in any and all capacities, to sign in the name of or on behalf of the
undersigned, as a director and/or officer of said corporation, the Annual Report
on Form 10-K of Evans & Sutherland Computer Corporation for the year ended
December 31, 1998, and any and all amendments to such Annual Report, and to file
the same with all exhibits thereto, and other documents in connection therewith,
with the Securities and Exchange Commission granting unto said attorneys-in-fact
and agents and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in connection therewith,
as fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents, or any of
them, or their or his substitute or substitutes, may lawfully do or cause to be
done by virtue hereof.
IN WITNESS WHEREOF, the undersigned have executed this Power of
Attorney this 24th day of February, 1999.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/S/ Stewart Carrell
- - ------------------------------------
Stewart Carrell Chairman of the Board of Directors February 24, 1999
/S/ James R. Oyler
- - ------------------------------------
James R. Oyler President and Chief Executive Officer February 24, 1999
(Principal Executive Officer) and
Director
/S/ John T. Lemley
- - ------------------------------------
John T. Lemley Vice President and Chief Financial February 24, 1999
Officer (Principal Financial Officer)
/S/ Mark C. McBride
- - ------------------------------------
Mark C. McBride Vice President, Corporate Controller February 24, 1999
and Secretary (Principal Accounting
Officer)
/S/ Gerald S. Casilli
- - ------------------------------------
Gerald S. Casilli Director February 24, 1999
/S/ Peter O. Crisp
- - ------------------------------------
Peter O. Crisp Director February 24, 1999
/S/ Ivan E. Sutherland
- - ------------------------------------
Ivan E. Sutherland Director February 24, 1999
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000276283
<NAME> EVANS & SUTHERLAND COMPUTER CORPORATION
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 1,834
<SECURITIES> 25,907
<RECEIVABLES> 48,482
<ALLOWANCES> (1,616)
<INVENTORY> 53,319
<CURRENT-ASSETS> 203,336
<PP&E> 139,374
<DEPRECIATION> (85,681)
<TOTAL-ASSETS> 275,668
<CURRENT-LIABILITIES> 68,979
<BONDS> 18,062
23,544
0
<COMMON> 1,920
<OTHER-SE> 163,163
<TOTAL-LIABILITY-AND-EQUITY> 275,668
<SALES> 191,766
<TOTAL-REVENUES> 191,766
<CGS> 110,320
<TOTAL-COSTS> 110,320
<OTHER-EXPENSES> 97,432
<LOSS-PROVISION> 496
<INTEREST-EXPENSE> 1,335
<INCOME-PRETAX> (13,857)
<INCOME-TAX> 2,126
<INCOME-CONTINUING> (15,983)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (16,078)
<EPS-PRIMARY> (1.70)
<EPS-DILUTED> (1.70)
</TABLE>
