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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, 1999
[ ] 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
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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 3, 2000 was approximately
$91,001,000, based on the closing market price of the Common Stock on such date,
as reported by The Nasdaq Stock Market.
The number of shares of the registrant's Common Stock outstanding at
March 3, 2000 was 9,344,935.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 2000 Annual Meeting of
Shareholders to be held on May 17, 2000 are incorporated by reference into Part
III hereof.
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EVANS & SUTHERLAND COMPUTER CORPORATION
FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1999
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PART I
Item 1. Business.................................................................................. 5
Item 2. Properties................................................................................ 14
Item 3. Legal Proceedings......................................................................... 14
Item 4. Submission of Matters to a Vote of Security Holders....................................... 14
PART II
Item 5. Market For Registrant's Common Equity and
Related Stockholder Matters.............................................................. 16
Item 6. Selected Consolidated Financial Data...................................................... 17
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................................... 19
Item 7A. Quantitative and Qualitative Disclosures About Market Risk................................ 33
Item 8. Financial Statements and Supplementary Data............................................... 34
Report of Management.................................................................... 35
Report of Independent Accountants....................................................... 35
Consolidated Balance Sheets............................................................. 36
Consolidated Statements of Operations................................................... 37
Consolidated Statements of Comprehensive Income.......................................... 38
Consolidated Statements of Stockholders' Equity......................................... 39
Consolidated Statements of Cash Flows................................................... 40
Notes to Consolidated Financial Statements.............................................. 41
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure...... 63
PART III
Item 10. Directors and Executive Officers of the Registrant........................................ 63
Item 11. Executive Compensation.................................................................... 63
Item 12. Security Ownership of Certain Beneficial Owners and Management............................ 63
Item 13. Certain Relationships and Related Transactions............................................ 63
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.......................... 64
Signatures .......................................................................................... 68
</TABLE>
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FORM 10-K
PART I
ITEM 1. BUSINESS
GENERAL
Evans & Sutherland Computer Corporation ("Evans & Sutherland,"
"E&S(R)," or the "Company") was incorporated in the State of Utah on May 10,
1968. The Company is an established high-technology company with outstanding
computer graphics technology and a worldwide presence in high-performance 3D
visual simulation. In addition, E&S is now applying the core technology into
higher-growth personal computer ("PC") products for both simulation and
workstations. During 1999, the Company's core computer graphics technology was
shared among the Company's:
(1) Simulation Group, which produces high performance image generators
for simulation including PC-based visual system products;
(2) Workstation Products Group, which provides original equipment
manufacturers ("OEMs") of personal workstations with high quality
graphics performance; and
(3) Applications Group, which applies the Company's core technologies
to the expanding market of PC-based applications and products.
Unless the context otherwise requires, as used herein, the term
"Company" refers to Evans & Sutherland Computer Corporation and its
subsidiaries. The Company's headquarters are located at 600 Komas Drive, Salt
Lake City, Utah 84108, and its telephone number is (801) 588-1000. The Company's
web page on the world wide web is http://www.es.com.
RECENT DEVELOPMENTS
In February 2000, the Company changed the strategic focus of its
Workstation Products Group to the high-end digital content creation (DCC)
segment. The Company will provide the base graphics and video processing
technology to leading hardware system-solution providers in the high-end DCC
segment. The goal of the group, now called the REALimage(TM) Solutions Group, is
to provide a "studio-on-a-chip" to bring together real-time graphics and video
in a unique and effective way to support all aspects of visual content creation
for broadcasting and netcasting applications.
On October 16, 1997, the Company and CAE Electronics Ltd. ("CAE")
entered into a Sub-Contract (the "Sub-Contract") for the Company to design,
develop and deliver the visual system components and visual databases required
for certain dynamic mission simulators and tactical control centers, to be
integrated with the Company's Harmony image generation equipment (the "Harmony
VSC"). As of December 31, 1999, the Harmony VSC had not been integrated with the
dynamic mission simulators or tactical control centers. Pursuant to the terms of
the Sub-Contract, the integration was to be completed during 1999. Consequently,
as of December 31, 1999, in accordance with the liquidated damages provision of
the Sub-Contract, the Company incurred liquidated damages on this Sub-Contract
totaling $6.0 million. The Company and CAE agreed to an interim solution, which
provides for the installation of the Company's ESIG 4530 image generators to
integrate with the dynamic mission simulators and tactical control centers until
the Company's Harmony VSC are able to support the dynamic mission simulators and
tactical control centers. The Company has agreed to pay CAE (i) $0.5 million for
reimbursement of certain expenses and costs incurred by CAE relating to the
integration and retrofit of the ESIG 4530 to the dynamic mission simulators and
tactical control centers and (ii) $5.5 million as liquidated damages resulting
from certain delays of the Harmony VSC. If further delays in the integration of
the Harmony VSC occur, the Company may be obligated to pay CAE additional
liquidated damages. The Company will also be obligated to pay certain costs
associated with the anticipated switch-over from the ESIG 4530 to the Harmony
VSC. CAE agreed to pay the Company certain advance payments totaling $7.2
million upon the successful completion of specified milestones towards the
integration of the ESIG 4530 image generators.
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On March 28, 2000, the Company sold certain assets of its Applications
Group relating to digital video products to RT-SET Real Time Synthesized
Entertainment Technology Ltd. and its subsidiary, RT-SET America Inc. for $1.4
million cash, common stock of RT-SET Real Time Synthesized Entertainment
Technology Ltd. valued at approximately $1.0 million and the assumption of
certain liabilities. The Company may receive additional common stock of RT-SET
Real Time Synthesized Entertainment Technology Ltd. valued up to $3.0 million in
the event that a product currently being developed and included in the purchased
assets meets certain specified performance criteria within a specified time
period.
FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS
This annual report, including all documents incorporated herein by
reference, includes certain "forward-looking statements" within the meaning of
that term in Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Exchange Act of 1934, as amended, including, among others, those
statements preceded by, followed by or including the words "estimates,"
"believes," "expects," "anticipates," "plans," "projects," and similar
expressions.
These forward-looking statements may include projections of sales and
net income and issues that may affect sales or net income; projections of
capital expenditures; plans for future operations; financing needs or plans;
plans relating to the Company's products and services; and assumptions relating
to the foregoing. Forward-looking statements are inherently subject to risks and
uncertainties, some of which cannot be predicted or quantified. Future events
and actual results could differ materially from those set forth in, contemplated
by, or underlying the forward-looking information. Our actual results could
differ materially from these forward-looking statements. In addition to the
other risks described in the "Factors That May Affect Future Results" discussion
under Item 7 - Management's Discussion and Analysis of Financial Condition and
Results of Operations in Part II of this annual report, important factors to
consider in evaluating such forward-looking statements include risk of product
demand, market acceptance, economic conditions, competitive products and
pricing, difficulties in product development, product delays, 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 the following
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, 1999 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.
In the third quarter of 1999, E&S announced simFUSION(TM), the first
OpenGL(R) PC-based image generator which extends the Company's Symphony(TM)
family of compatible simulation products to the low-cost simulation market. The
Symphony family of products now includes the Harmony(TM) image generator system
on the high end, Ensemble(TM) in the mid-range and simFUSION on the low-end.
simFUSION is bundled with third-party software packages and is sold worldwide
through qualified distributors.
Throughout 1999, the Company continued development of its iNTegrator(R)
software product that provides the real-time control and modeling tools for the
Symphony product family. Performance optimizations and new functionality have
continuously been added with each new software release to meet existing contract
requirements and to increase the product performance. The Company plans to make
further enhancements of iNTegrator throughout 2000 to increase performance and
to support new functionality in the hardware.
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In the fourth quarter of 1999, E&S announced the inauguration of
Encore, an innovative new approach to customer service and support. Encore
combines the latest advancements in manufacturing and interactive communications
technology to offer E&S customers a comprehensive, flexible, and cost-effective
customer service and support program. Encore combines web-based technology with
new physical distribution locations to deliver timely support as efficiently as
possible. Encore customers will have immediate access to service information
through customized, secure, private web sites providing product news and
announcements, documentation, and on-line spares and repairs tracking. In
addition, each customer will have a single-point E&S contact who can be reached
through the web site to ensure continuity throughout the procurement,
installation, operation, and maintenance processes. The status of monthly
service agreements will also be visible, allowing customers to plan and forecast
their budgets accurately and reduce unplanned expenses for spares, repairs and
on-site support.
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.
Generally, the Simulation Group's visual systems products consist of
the following five 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 real-time
images and send these images to display devices, such as
projectors or computer monitors. The group's primary IG offerings
include the ESIG(TM) line and the Symphony family of products from
Harmony on the high end to OpenGL PC-based simFUSION at the low
end. E&S offers a complete, high-to-low family of IGs that can use
the same software and databases. Harmony is the industry's
flagship for highest performance, Ensemble is the first PC-based
true image generator offering deterministic performance and
simulation-specific functionality and simFUSION is the first
OpenGL PC-based image generation system targeted at low-cost
applications. E&S is the only visual system provider offering a
complete line of compatible and scalable products for real-time
simulation and visualization.
(2) Display systems consist of projectors, display screens, computer
monitors, and specialized optics. These display systems are
offered in a broad range of configurations, from onboard
instrument displays to domes offering a 360-degree field of view,
depending on the applications.
(3) Databases of synthetic environments are offered as options or as
custom creations. The group provides database development as well
as database development tools such as EaSIEST(TM) and iNTegrator.
Databases developed using iNTegrator are a key element of the
Symphony product family. These can be run on a full range of image
generators, from the PC-based simFUSION to the high-end Harmony
systems.
(4) The simulation of sensor imagery such as radar, infrared, and
night vision goggles (NVG) is often provided with the visual
systems for high-performance fixed and rotary wing aircraft. E&S
develops and manufactures a variety of hardware and software
products to achieve realistic sensor simulation, including the
Vanguard radar image generator, infrared post processors, and
customized systems for either simulated or stimulated NVG
solutions.
(5) System integration, installation and support services are also
differentiating elements of all systems and components sold.
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The Simulation Group's products are marketed worldwide by the Company
and qualified distributors. Products and services are sold directly to end users
by E&S as a prime contractor, through simulator prime contractors with E&S
acting as a subcontractor, and through system OEMs. E&S continues to 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 a number of major
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 Lockheed Martin, Flight Safety International
("FSI") and CAE Electronics, Ltd. ("CAE"), offer competing visual systems in the
simulation market. The Company believes it is able to compete effectively in
this environment and will continue to be able to do so in the foreseeable
future. In 1999, the group was awarded several highly competitive orders against
FSI and CAE, the principal competitors in the commercial simulation market. In
the military simulation market, the group competes primarily with Silicon
Graphics, Inc. and CAE. In the low-cost, PC-based market, the Company's
simFUSION product competes against companies producing graphics accelerator
cards, such as Quantum 3D.
Backlog
The Simulation Group's backlog was $149.1 million on December 31, 1999,
compared with $146.7 million on December 31, 1998. It is anticipated that most
of the 1999 backlog will be converted to sales in 2000.
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.
Workstations Products Group (Renamed REALimage Solutions Group)
The Workstation Products Group develops and sells graphics chips and
graphics subsystems for the personal workstation marketplace. This group sells
to personal workstation OEMs and to end-users
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 ("ESGC"), acquired all of the outstanding stock of AccelGraphics,
Inc. ESGC is based in San Jose, California, and 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. ("SRI"), a designer and developer of 3D graphics hardware and
software products for the PC workstation marketplace.
In February 2000, the Company changed the strategic focus of its
Workstation Products Group to the high- end DCC segment. The Company will
provide the base graphics and video processing technology to leading hardware
system-solution providers in the high-end DCC segment. The goal of the group,
now called the REALimage(TM) Solutions Group, is to provide a "studio-on-a-chip"
to bring together real-time graphics and video in a unique and effective way to
support all aspects of visual content creation for broadcasting and netcasting
applications.
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Products & Markets
The 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 sales are currently derived from the E&S Tornado
3000(TM) and the E&S Lightning 1200(TM) products. The current product lines are
summarized below:
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Product Line Introduction Date Description
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E&S Tornado 3000 June 1999 Based on the REALimage 3000 chipset, positioned as a
professional card for animation and modeling applications in
the DCC segment and for users of CAD and visualization
simulation applications. It is Pentium III ready and
incorporates E&S's software architecture, DYNAMICgeometry(TM).
Based on the REALimage 1200 chipset, positioned as a
E&S Lightning 1200 March 1999 professional card for price-sensitive users of CAD,
modeling, DCC, and visualization simulation applications, is
Pentium III ready and incorporates E&S's software
architecture, DYNAMICgeometry.
AccelGALAXY(TM) 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 software
architecture, DYNAMICgeometry.
</TABLE>
These 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 has maintained close working relationships with
many 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 and hardware system-solution
providers within the DCC segment is E&S's alliance with Intel Corporation
("Intel"). Intel and the Company have 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 potential advantage in
keeping pace with new chip releases by Intel thereby providing E&S customers,
potentially, with timely and optimal graphics solutions.
The REALimage Solutions 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 currently sold to OEM customers primarily
through direct sales and to end users through the Company's e-commerce web site,
ESDirect. The 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.
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Competitive Conditions
Primary competitive factors for the REALimage Solutions Group's
products are performance, price, product availability and access to customers
and distribution channels. 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 leading hardware system-solution providers into the
high-end DCC segment. The group's current 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 and future 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 REALimage Solutions Group's principal competitors include
Intergraph, Inc., a system OEM that uses its own chip design, 3Dlabs Inc., Ltd.,
a company that sells graphics subsystems based on its own chipsets to system
OEMs, and companies such as S3 Incorporated and ELSA Inc. that utilize graphics
chips of other companies such as IBM and NVIDIA Corporation ("NVIDIA"). 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 historical E&S customers. Competition may also emerge from
companies such as ATI Technologies Inc., NVIDIA and Intel, who currently provide
lower performance graphics products for the consumer PC market.
Backlog
The REALimage Solutions Group's backlog was $0.2 million on December
31, 1999, compared with $3.0 million on December 31, 1998. The group expects
that the 1999 backlog will be converted to sales in 2000. The REALimage
Solutions 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 and
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 capability. 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.
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 worldwide in
production, postproduction, broadcast and educational applications.
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During 1999, the Applications Group introduced E&S RAPIDsite(TM). E&S
RAPIDsite is a photo-realistic visualization tool designed for use by
real-estate developers, consulting engineers, architects and municipal planners
involved with urban, suburban and environmentally sensitive development
projects. E&S RAPIDsite features fast 3D-model construction, accelerated
graphics rendering performance and easy-to-use interactive exploration of a
proposed development on a Windows NT computer with an Open GL graphics
accelerator.
The Applications Group's products are sold directly to end-users by E&S
as a prime contractor, sales representatives or distributors.
Competitive Conditions
Primary competitive factors for the Applications Group's products are
functionality, performance, price and access to customers and distribution
channels. The Company's digital theater products compete with traditional
optical-mechanical products and digital display systems offered by Minolta
Planetarium Co. Ltd., GoTo Optical Mfg. Co., Carl Zeiss Inc., Spitz, Inc.,
Trimension, Inc. and Sky-Skan, Inc. The competitors for the virtual set product
are mostly small companies including Orad Hi-Tec Systems Ltd. and RT-SET Real
Time Synthesized Entertainment Technology Ltd., both Israeli companies. The
competitors of E&S RAPIDsite are MultiGen-Paradigm, Inc. and Discreet, a
division of Autodesk, Inc.
Backlog
The Applications Group's backlog was $7.2 million on December 31, 1999,
compared with $6.0 million on December 31, 1998. It is anticipated that most of
the 1999 backlog will be converted to sales in 2000.
SIGNIFICANT CUSTOMERS
Worldwide customers using E&S products include U.S. and international
armed forces, NASA, aerospace companies, most major airlines, PC manufacturers,
film and video studios, laboratories, museums, planetariums and science centers.
Sales to the U.S. government, either directly or indirectly through
sales to prime contractors or subcontractors, accounted for $84.5 million or 42%
of total sales, $70.8 million or 37% of total sales, and $45.5 million or 29% of
total sales in 1999, 1998 and 1997, respectively. Sales to the United Kingdom
Ministry of Defense ("UK MOD"), either directly or indirectly through sales to
prime contractors or subcontractors, accounted for $33.8 million or 17% of total
sales and $32.1 million or 17% of total sales in 1999 and 1998, respectively.
In 1999, sales to Lockheed Martin Corporation ("Lockheed") were $35.8
million or 18% of total sales, of which 100% related to U.S. government and UK
MOD contracts and sales to The Boeing Company ("Boeing") were $25.4 million or
13% of total sales, of which 100% related to U.S. government and UK MOD
contracts. In 1998, sales to Boeing were approximately $28.1 million or 15% of
total sales, of which approximately 98% related to U.S. government and UK MOD
contracts, and sales to Lockheed were approximately $22.0 million or 11% of
total sales, of which approximately 91% related to U.S. government contracts. In
1997, sales to Thomson Training & Simulation Ltd. ("Thomson") were $19.3 million
or 12% of total sales.
All of the Company's sales to significant customers are within the
Simulation Group.
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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On June 3, 1999, the Company entered into an electronic manufacturing
services agreement with Sanmina Corporation. The agreement commits the Company
to purchase a minimum of $22.0 million of electronic products and assemblies
from Sanmina Corporation each year until June 3, 2002. If the Company fails to
meet these minimum purchase levels, subject to adjustment, the Company may be
required to pay 25 percent of the difference between the $22.0 million and the
amount purchased. As of December 31, 1999, the Company had purchased
approximately $15.0 million of electronic products and assemblies from Sanmina
Corporation since the date of the agreement. Management expects that the Company
will satisfy this minimum purchase commitment.
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 $44.4
million, $31.8 million and $25.5 million in 1999, 1998 and 1997, respectively.
As a percentage of sales, research and development expenses were 22%, 17% and
16% in 1999, 1998 and 1997, respectively. The Company continues to fund
substantially all research and development efforts internally. It is anticipated
that high levels of research and development will be needed to continue to
ensure that the Company maintains technical excellence, leadership, and market
competitiveness.
INTERNATIONAL SALES
Sales of products known to be ultimately installed outside the United
States are considered international sales by the Company and were $86.7 million,
$84.9 million and $94.6 million in 1999, 1998 and 1997, respectively.
International sales represented 43%, 44% and 59% of total sales in 1999, 1998
and 1997, 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 3, 2000, Evans & Sutherland and its subsidiaries employed a
total of 935 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.
12
<PAGE>
STRATEGIC RELATIONSHIP
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 no dividend rights. Intel
has certain contractual rights, including registration rights, a right of first
refusal, and a right to require the Company to repurchase the preferred stock in
the event of any transaction qualifying as a Corporate Event, as defined below.
If Intel fails to exercise its right of first refusal as to a Corporate Event,
Intel shall, upon the Company's entering into an agreement to consummate a
Corporate Event, have the right to sell to the Company any or all of the
preferred stock. The potential mandatory redemption amount is the greater of (i)
the original price per share purchase price paid by Intel or (ii) either the
highest price per share of capital stock (or equivalent) paid in connection with
a Corporate Event or, if the transaction involves the sale of a significant
subsidiary or assets or the licensing of intellectual property, Intel's pro rata
share of the consideration received, directly or indirectly, by the Company in
such transaction based on its then fully-diluted ownership of the Company's
capital stock. A Corporate Event shall mean any of the following, whether
accomplished through one or a series of related transactions: (i) certain
transactions that result in a greater than 33% change in the total outstanding
number of voting securities of the Company immediately after such issuance; (ii)
an acquisition of the Company or any of its significant subsidiaries by
consolidation, merger, share purchase or exchange or other reorganization or
transaction in which the holders of the Company's or such significant
subsidiary's outstanding voting securities immediately prior to such transaction
own, immediately after such transaction, securities representing less than 50%
of the voting power of the Company, any such significant subsidiary or the
person issuing such securities or surviving such transaction, as the case may
be; (iii) the acquisition of all or substantially all the assets of the Company
or any significant subsidiary; (iv) the grant by the Company or any of its
significant subsidiaries of an exclusive license for any material portion of the
Company's or such significant subsidiary's intellectual property to a person
other than Intel or any of its subsidiaries; or (v) any transaction or series of
related transactions that result in the failure of the majority of the members
of the Company's Board of Directors immediately prior to the closing of such
transaction or series of related transactions failing to constitute a majority
of the Board of Directors (or its successor) immediately following such
transaction or series of related transactions. The Company also entered into an
agreement to accelerate development of high-end graphics and video subsystems
for Intel-based workstations.
ACQUISITIONS AND DISPOSITIONS
On June 26, 1998, the Company, through its wholly-owned subsidiary,
Evans & Sutherland Graphics Corporation, acquired all of the outstanding stock
of AccelGraphics, Inc. to expand the Company's workstation graphics development,
integration and distribution within the workstation graphics marketplace. To
acquire AGI the Company paid approximately $23.7 million in cash and 1,109,303
shares of the Company's common stock, which was valued at $25.7 million. In
addition, the Company converted all outstanding AGI options into options to
purchase approximately 351,000 shares of common stock of the Company with a fair
value of $3.4 million and incurred transaction costs of approximately $1.1
million.
To further expand the Company's presence within the workstation
graphics marketplace, on June 26, 1998, the Company acquired the assets and
assumed certain liabilities of Silicon Reality, Inc., a designer and developer
of 3D graphics hardware and software products for the PC workstation
marketplace. The Company paid approximately $1.2 million and incurred
transaction costs of approximately $250,000.
On June 3, 1999, the Company sold certain of its manufacturing capital
assets and inventory for $6.0 million to Sanmina Corporation as part of the
Company's efforts to outsource the production of certain electronic products and
assemblies. In addition, the Company entered into an electronic manufacturing
services agreement with Sanmina Corporation. The electronic manufacturing
services agreement commits the Company to purchase a minimum of $22.0 million of
electronic products and assemblies from Sanmina Corporation each year until June
3, 2002. If the Company fails to meet these minimum purchase levels, subject to
adjustment, the Company may be required to pay 25 percent the difference between
the $22.0 million and the amount purchased.
13
<PAGE>
ITEM 2. PROPERTIES
Evans & Sutherland's principal executive, engineering, and operations
facilities for each of its business segments are located in the University of
Utah Research Park, in Salt Lake City, Utah, where it owns seven buildings
totaling approximately 450,669 square feet. E&S occupies five 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 that
expire in 2026. 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, operations, service and production facilities located
throughout the United States, Europe and Asia, none of which is material to the
Company's manufacturing, engineering or operating facilities. The largest of
these is a 20,000 square foot facility in San Jose, California. 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 1999.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following sets forth certain information regarding the executive
officers of the Company as of March 31, 2000:
<TABLE>
<CAPTION>
Name Age Position
- ------------------------ ----------------------- ---------------------------------------------------------------
<S> <C> <C>
Stewart Carrell 66 Chairman of the Board of Directors
James R. Oyler 54 President and Chief Executive Officer
Robert Ard 46 Vice President - Applications Group
David B. Figgins 51 Vice President - Simulation Group
Richard J. Gaynor 40 Vice President and Chief Financial Officer
Mark C. McBride 38 Vice President, Corporate Controller and Corporate Secretary
George Saul 49 Vice President - REALimage Solutions Group
- ------------------------
</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 16 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.
14
<PAGE>
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 five years of
service with the Company.
Mr. Ard was appointed Vice President of the Applications Group in May 1999. He
joined the Company in June 1998 as Vice President and General Manager.
Previously, he was President of Model Technology, Inc. where he was employed
from July 1996 to May 1998. From June 1989 to July 1996, Mr. Ard was employed by
Mentor Graphics Corporation as Vice President and General Manager of various
divisions. He has one year of service with the Company.
Mr. Figgins was appointed Vice President of the Simulation Group in January
1999. He joined the Company in April 1998 as Vice President of PC Simulation in
the Simulation Group. Previously, he was Vice President of Business Development
and Marketing for Raytheon Training where he was employed from May 1986 to April
1998. He has one year of service with the Company.
Mr. Gaynor joined the Company in January 2000 as Vice President and Chief
Financial Officer. Prior to joining the Company, he was Operations
Controller/Vice President of Finance for Cabletron Systems, Inc. where he was
employed from May 1994 to December 1999. Previously, Mr. Gaynor held various
finance positions at Digital Equipment Corporation and Wang Laboratories. He has
less than one year 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
three years of service with the Company.
Mr. Saul was appointed Vice President of the REALimage Solutions Group in
December 1999. He joined the Company in June 1998 and was appointed Vice
President of Administration in October 1998. From January 1997 to June 1998, he
was President and Chief Executive Officer of Silicon Reality, Inc., a graphics
technology start-up company E&S acquired in June 1998. Previously, Mr. Saul was
Vice President of Hitachi Semiconductor America where he was employed from
January 1991 to January 1997. He also held various management positions at
Fairchild Semiconductor Corporation and National Semiconductor Corporation. He
has one year of service with the Company.
15
<PAGE>
FORM 10-K
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
PRICE RANGE OF COMMON STOCK
The Company's common stock trades on The Nasdaq Stock Market under the
symbol "ESCC." The following table sets forth the range of the high and low
sales prices per share of the Company's common stock for the fiscal quarters
indicated, as reported by The Nasdaq Stock Market. Quotations represent actual
transactions in Nasdaq's quotation system but do not include retail markup,
markdown or commission.
HIGH LOW
-------------- --------------
1999
First Quarter $ 18 3/16 $ 12
Second Quarter $ 19 $ 12 3/8
Third Quarter $ 15 $ 12 1/16
Fourth Quarter $ 14 1/8 $ 10 7/16
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
APPROXIMATE NUMBER OF EQUITY SECURITY HOLDERS
On March 3, 2000, there were 744 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.
16
<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected financial data for the five fiscal years ended December
31, 1999 are derived from the Company's Consolidated Financial Statements. The
selected financial data should be read in conjunction with the Company's
Consolidated Financial Statements and related notes included elsewhere in this
annual report. See also "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
<TABLE>
<CAPTION>
(In thousands, except per share amounts)
1999(1) 1998(2) 1997 1996 1995(3)
----------- ------------ ----------- ----------- ------------
FOR THE YEAR
<S> <C> <C> <C> <C> <C>
Sales $ 200,885 $ 191,766 $ 159,353 $ 130,564 $ 113,194
Net income (loss) before
extraordinary gain and
accretion of preferred stock (23,454) (15,983) 5,080 10,352 20,484
Net income (loss) per common share
before extraordinary gain:
Basic (2.49) (1.70) 0.56 1.16 2.37
Diluted (2.49) (1.70) 0.53 1.12 2.33
Average weighted number of common
Shares outstanding
Basic 9,501 9,461 9,060 8,944 8,639
Diluted 9,501 9,461 9,502 9,222 8,785
AT END OF YEAR
Total assets $ 258,464 $ 275,668 $ 234,390 $ 210,891 $ 211,002
Long-term debt, less current portion 18,015 18,062 18,015 18,015 18,015
Redeemable preferred stock 23,772 23,544 - - -
Stockholders' equity 137,194 165,083 165,634 160,472 148,491
</TABLE>
.........
(1) During 1999, the Company incurred a write-off of inventories of $13.2
million, an impairment loss of $9.7 million and a restructuring charge
of $1.5 million. See notes 1, 4 and 22 of the Notes to Consolidated
Financial Statements included in Part II of this annual report.
(2) During 1998, the Company incurred a $20.8 million charge to expense
acquired in-process technology in connection with the acquisitions of
AccelGraphics, Inc. and Silicon Reality, Inc. See note 2 of the Notes
to Consolidated Financial Statements included in Part II of this annual
report.
(3) 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.
17
<PAGE>
QUARTERLY FINANCIAL DATA (Unaudited)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Quarter Ended
April 2 July 2 Oct. 1(1) Dec. 31
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
1999
Sales $49,746 $44,023 $48,704 $58,412
Gross profit 22,378 17,603 7,477 12,641
Net income (loss) before income taxes 379 (4,980) (28,020) (6,246)
Net income (loss) applicable to common stock 204 (3,493) (18,033) (2,360)
Net income (loss) per common share(3):
Basic 0.02 (0.36) (1.91) (0.25)
Diluted 0.02 (0.36) (1.91) (0.25)
Quarter Ended
March 27 June 26(2) Sept. 25 Dec. 31
------------ ------------ ------------ ------------
1998
Sales $ 42,421 $ 43,638 $ 47,262 $ 58,445
Gross profit 17,125 19,279 20,637 24,405
Net income (loss) before income 2,353 (17,063) (1,219) 2,072
Net income (loss) applicable to common stock 1,589 (18,271) (794) 1,398
Net income (loss) per common share(3):
Basic 0.18 (2.04) (0.08) 0.14
Diluted 0.17 (2.04) (0.08) 0.13
- ----------
</TABLE>
(1) During the third quarter of 1999, the Company incurred a write-off of
inventories of $13.2 million, an impairment loss of $9.7 million and a
restructuring charge of $1.5 million. See notes 1, 4 and 22 of the
Notes to Consolidated Financial Statements included in Part II of this
annual report.
(2) 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.
(3) Earnings per share are computed independently for each of the quarters
presented and therefore may not sum to the total for the year.
18
<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 annual report.
<TABLE>
<CAPTION>
Year ended December 31,
1999 1998 1997
----------- ---------- -----------
<S> <C> <C> <C>
Sales 100.0% 100.0% 100.0%
Cost of sales 63.5% 57.5% 52.8%
Write-off of inventories 6.6% - -
----------- ---------- -----------
Gross profit 29.9% 42.5% 47.2%
----------- ---------- -----------
Operating expenses:
Selling, general and administrative 21.4% 20.9% 22.2%
Research and development 22.1% 16.6% 16.0%
Amortization of goodwill and other intangible assets 0.8% 2.5% -
Impairment loss 4.8% - -
Restructuring charge 0.7% - -
Write-off of acquired in-process technology - 10.8% -
----------- ---------- -----------
Operating expenses 49.8% 50.8% 38.2%
----------- ---------- -----------
Operating income (loss) (19.9)% (8.3)% 9.0%
Other income (expense) 0.6% 1.1% (4.7)%
----------- ---------- -----------
Pretax income (loss) (19.3)% (7.2)% 4.3%
Income tax expense (benefit) (7.6)% 1.1% 1.1%
----------- ---------- -----------
Net income (loss) (11.7)% (8.3)% 3.2%
Accretion of preferred stock 0.1% 0.1% -
----------- ---------- -----------
Net income (loss) applicable to common stock (11.8)% (8.4)% 3.2%
=========== ========== ===========
</TABLE>
RESULTS OF OPERATIONS
1999 vs. 1998
Sales
In 1999, the Company's total sales increased $9.1 million, or 5%
($200.9 million in 1999 compared to $191.8 million in 1998). Sales for
simulation products increased $3.6 million, or 2% ($170.6 million in 1999
compared to $167.0 million in 1998). The increase in sales of simulation
products is primarily due to increased sales volumes due to stronger demand by
U.S. and European government customers that offset a decline in sales to
commercial airline customers. Sales of workstation products increased $4.5
million, or 26% ($22.0 million in 1999 compared to $17.5 million in 1998). The
increase in sales in workstation products is primarily due to the effect of
having a full year of sales in 1999 relating to the acquisition of
AccelGraphics, Inc. which was purchased at the end of the second quarter of
1998. See "Item 1 Business - Acquisitions and Dispositions." Sales of
applications products increased $1.0 million, or 14% ($8.3 million in 1999
compared to $7.3 million in 1998). The increase in sales of application products
is primarily due to increased sales volumes of planetarium systems and
large-format entertainment products.
19
<PAGE>
Write-off of Inventories
During the third quarter of 1999, the Company performed significant
testing of the software relating to its Harmony image generator product that had
been delayed. As a result of the testing, the Company determined that certain of
the inventories previously purchased for the Harmony image generator had become
technologically obsolete and did not properly function with the updated
software. In connection with this assessment, the Company recorded a charge of
$12.1 million to write-off obsolete, excess and overvalued inventories. In
addition, during the third quarter of 1999, the Company wrote-off $1.1 million
of Workstation Products Group inventories related to end-of-life or abandoned
product lines.
Gross Profit
Gross profit decreased $21.3 million, or 26% ($60.1 million in 1999
compared to $81.4 million in 1998). As a percent of sales, gross margin
decreased to 29.9% in 1999 from 42.5% in 1998. The decrease in gross profit was
impacted by the write-off of $13.2 million of obsolete, excess and overvalued
inventories. Gross profit was also affected by technical issues causing product
delays, which caused some contract milestones to be missed in the Company's
international simulation business. The Company accrued $8.2 million against cost
of sales in 1999 for liquidated damages and late delivery penalties as a result
of these product delays. Excluding the impact of these two charges, gross
margins were 40.6% in 1999, as compared to 42.5% in 1998. The decrease in gross
margin was due to higher than expected costs on certain contracts to government
customers which include the Harmony and Ensemble image generators. In addition,
gross margin for the Company's workstation products decreased in 1999 as it has
changed its business model from one based on royalty income to one based on
sales of graphic subsystems which has product costs consistent with a
manufacturing operation. Gross profit for the Company's workstation products
also decreased due to a decrease in the number of units sold and decreased
selling prices of existing products and the delay in introduction of new
products.
Selling, General and Administrative
Selling, general and administrative expenses increased $2.9 million, or
7% ($43.0 million in 1999 compared to $40.1 million in 1998) and increased as a
percent of sales to 21.4% in 1999 from 20.9% in 1998. The increase in these
expenses was due to the impact of having a full year of costs associated with
ESGC (formerly AccelGraphics, Inc.) in 1999 compared to a half year in 1998, and
higher costs due to increased headcount related to the Company's recruiting
efforts, new business development and launch of E&S RAPIDsite.
Research and Development
Research and development expenses increased $12.6 million, or 40%
($44.4 million in 1999 compared to $31.8 million in 1998) and increased as a
percent of sales to 22.1% in 1999 from 16.6% in 1998. The increase in these
costs was due to increased development efforts of the Company's iNTegrator
software. This software provides the real-time control and modeling tools for
the Symphony product family, which includes Harmony, Ensemble and simFUSION. In
addition, the increase in these expenses was due to the impact of having a full
year of ESGC costs in 1999 compared to a half year in 1998.
Amortization of Goodwill and Other Intangible Assets
Amortization of goodwill and other intangible assets declined $3.3
million, or 68% ($1.5 million in 1999 compared to $4.8 million in 1998). The
decrease in these expenses was due to the write-off of $9.3 million of goodwill
and other intangible assets during the third quarter of 1999. The goodwill is
being amortized using the straight-line method over an estimated useful life of
seven years. The other intangible assets are being amortized using the
straight-line method over estimated useful lives ranging from six months to
seven years.
20
<PAGE>
Impairment Loss
In the third quarter of 1999, the Company recorded an impairment loss
of $9.7 million, as determined in accordance with Statement of Financial
Accounting Standards No. 121 (SFAS 121) "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of," relating to the
write-down to fair value of goodwill, intangibles and other long-lived assets
acquired in the acquisitions of AGI and SRI. The impairment loss consisted of
the write-off of $4.9 million of goodwill, $4.4 million of intangible assets and
$0.4 million of property, plant and equipment. No such loss was incurred in
1998.
In addition to continued losses at AGI, the impairment loss was the
result of the following additional circumstances: (i) delays in product
introductions for the AccelGALAXY, E&S Lightning 1200 and the
multiple-controller graphics subsystems product line; (ii) the developer of the
chip used on the AccelGMX acquired a board company and entered the graphics
accelerator market in direct competition with the AccelGMX; and (iii)
introduction of lower-end products by competitors which can perform many of the
functions of the higher-end 3D graphics cards. Furthermore, the Company
determined that a manufacturer of a chip to be used in various new board
products was unable to manufacture a designed chip with agreed upon
specifications.
Restructuring Charge
In the third quarter of 1999, the Company initiated a restructuring
plan focused on reducing the operating cost structure of its Workstation
Products Group. As part of the plan, the Company recorded a charge of $1.5
million relating to 28 employee terminations. As of December 31, 1999, the
Company had paid $354,000 in employee severance benefits. The remaining benefits
will be paid out over the next two years. No such charge was incurred in 1998.
Acquired In-Process Technology
In the second quarter of 1998, the Company recognized $20.8 million of
expense to write-off acquired in-process technology related to the acquisitions
of AGI and SRI. No such expense was recognized in 1999.
Other Income (Expense), Net
Other income (expense), net decreased $1.0 million, or 48% ($1.1
million in 1999 compared to $2.1 million in 1998). Interest income was $1.9
million and $2.7 million in 1999 and 1998, respectively. The decrease in
interest income is primarily due to the decrease in the average cash and cash
equivalents and short-term investment balances in 1999 as compared to 1998.
During 1998, the Company recognized a gain of $2.5 million as a result of the
sale of its investment in Sense8 Corporation. The Company recognized a loss due
to the write-down of its investment securities of $0.4 million and $1.1 million
in 1999 and 1998, respectively. The write-downs were necessary as management
believed that the decline in market value of these investments below cost were
other than temporary. Other was $0.9 million income in 1999 and $0.6 million
expense in 1998. Increase in other income is due to foreign currency transaction
gains and other miscellaneous items in 1999 compared to foreign currency
transaction losses in 1998 and other miscellaneous items.
Income Taxes
The effective tax rate was 39.7% of pre-tax loss in 1999 and was 30.7%
of pre-tax income excluding the write-off of acquired in-process technology in
1998. The change in the effective tax rate is due to the Company incurring a
pre-tax loss in 1999 and the benefit of research and other tax credits. The
Company expects the effective income tax rate in 2000 to approximate the rate in
1998.
21
<PAGE>
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
AGI. 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 Profit
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 sales 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, sales related to workstation products were
derived primarily from royalties which had minimal associated cost of sales. Due
to the acquisition of AGI, sales in the second half of 1998 related to sales of
graphics subsystems which had product costs consistent with a manufacturing
operation.
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 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 the second quarter of 1998, the Company recognized $20.8 million of
expense to write-off acquired in-process technology related to the acquisitions
of AGI and SRI. No such expense was recognized in 1997.
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.
22
<PAGE>
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.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1999, the Company had working capital of $116.9
million, including cash, cash equivalents and short-term investments of $22.9
million, compared to working capital of $134.4 million at December 31, 1998,
including cash, cash equivalents and short-term investments of $27.7 million.
During 1999, the Company generated $10.4 million and $15.9 million of cash from
its operating activities and investing activities, respectively, and used $5.2
million of cash in its financing activities.
The uses of cash from operating activities included a net loss of $23.5
million, an increase in net costs and estimated earnings in excess of billings
on uncompleted contracts of $16.4 million, an increase in deferred income taxes
of $8.5 million, an increase in inventories of $6.1 million and a decrease in
accounts payable of $5.0 million. These uses of cash were more than offset by a
decrease in accounts receivable of $17.5 million, depreciation and amortization
of $15.5 million, write-off of inventories of $13.2 million, an increase in
accrued liabilities of $11.0 million and an impairment loss of $9.7 million. The
increase in net costs and estimated earnings in excess of billings on
uncompleted contracts was due to timing of revenue and delay in meeting certain
billing milestones. Certain billing milestones have not been achieved due to
product delays related to the delivery and integration of Harmony image
generators. The increase in inventories was due to an increase in inventories
related to the Harmony image generator. The decrease in accounts receivable was
due to less billings due to product delays related to the delivery and
integration of the Harmony image generator and an increased effort on cash
collections.
The Company's investing activities during 1999 included proceeds from
the sale of short-term investments of $39.8 million offset by purchases of
short-term investments of $14.7 million in funds. Proceeds from the sale of
certain manufacturing assets generated $6.0 million of cash and purchases of
property, plant and equipment used $14.5 million of cash.
Financing activities during 1999 included proceeds received from the
issuance of common stock relating to stock option exercise of $1.4 million and
net repayments under line of credit agreements of $1.1 million. In addition, the
Company used $5.5 million of cash to repurchase shares of its common stock.
During 1999, the Company maintained an unsecured revolving line of
credit with U.S. Bank, N.A. that expired on February 10, 2000. The revolving
line of credit provided for borrowings by the Company of up to $20.0 million.
Borrowings bore interest at the prevailing prime rate minus 1.0% or the LIBOR
rate plus 1.0%. The unsecured, revolving line of credit, among other things, (i)
required the Company to maintain certain financial ratios; (ii) restricted the
Company's ability to incur debt or liens; sell, assign, pledge or lease assets;
or merge with another company; and (iii) restricted the payment of dividends and
repurchase of any of the Company's outstanding shares without prior consent of
the lender. The Company made no borrowings under this line of credit. The
Company also has an unsecured revolving line of credit with a foreign bank
totaling approximately $4.6 million, of which approximately $1.9 million was
unused and available at December 31, 1999.
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The Company has received a commitment letter from a lender to provide
the Company a revolving line of credit for borrowings by the Company of up to
$15.0 million. The Company expects to close on the line of credit on or before
April 30, 2000. In the event the Company is not successful in closing this or a
comparable credit facility, the Company's operations could be severely impaired.
There can be no assurance that the Company will be successful in negotiating
additional debt financing.
The Company has a $12.5 million unsecured Letter of Credit line with
U.S. Bank, N.A. for which there was $11.8 million outstanding as of December 31,
1999. In addition, the Company has a $4.6 million Letter of Credit outstanding
with Bank One, N.A. In March 2000, the Company added a $5.0 million unsecured
Letter of Credit line with First Security Bank, N.A. Also in March 2000, the
Company established a $10.0 million unsecured surety line with American
International Companies and its affiliates.
At December 31, 1999 the Company had approximately $18.0 million of 6%
Convertible Subordinated Debentures, due 2012, which are unsecured and are
convertible at the holder'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. These securities 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
repurchased 1,136,500 shares of its common stock, leaving 463,500 shares
available for repurchase as of March 30, 2000. Stock may be acquired in the open
market or through negotiated transactions. Under the program, repurchases may be
made from time to time, depending on market conditions, share price, and other
factors.
Management believes that existing cash, cash equivalents and short-term
investment balances, borrowings that will be available under its line of credit
agreements, assuming the Company secures up to a $15.0 million line of credit on
or before April 30, 2000, 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 line of credit
agreements are not sufficient to meet the Company's cash requirements, the
Company may be required to seek additional financing from the issuance of debt
or equity securities. There can be no assurances that the Company will be
successful in renegotiating its existing line of credit agreements or obtaining
additional debt or equity financing.
ACQUIRED IN-PROCESS TECHNOLOGY
In connection with the acquisitions of AGI and SRI, the Company made
allocations of the purchase price to various acquired in-process technology
projects. These amounts were expensed as non-recurring charges in the quarter
ended June 26, 1998 because the acquired in-process technology had not yet
reached technological feasibility and had no future alternative uses.
Failure to complete the development of these projects in their
entirety, or in a timely manner, has had a material adverse impact on the
Company's results of operations. During the third quarter of 1999, the Company
recorded an impairment loss of $9.7 million consisting of a write-off of $4.9
million of goodwill, $4.4 million of intangible assets and $0.4 million of
property, plant and equipment. Actual sales, operating profits and cash flows
attributable to acquired in-process technology have been significantly lower
than the original projections used to value such technology in connection with
each of the respective acquisitions. On-going operations and financial results
for the acquired technology and the Company as a whole are subject to a variety
of factors which may not have been known or estimable at the date of such
acquisitions, and the estimates discussed below should not be considered the
Company's current projections for operating results for the acquired businesses
or the Company as a whole. Following is a description of the acquired in-process
technology and the estimates made by the Company for each of the technologies.
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Mid-range Professional Graphics Subsystem (2100). This technology is a
graphics subsystem with built in VGA core and integral DMA engines.
This technology provides superior graphics performance over previous
technologies, and includes features such as stereo and dual monitor
support and various texture memory configurations. The technology is
used in the AccelGALAXY product, which was completed and began shipping
to customers in late third quarter of 1998. The cost to complete this
project subsequent to the acquisition of AGI was $0.3 million, $0.1
million over the budgeted amount and was funded by working capital. The
project was also completed a month later than scheduled. The assigned
value for this acquired in-process technology was $6.1 million.
CAD-focused Professional Graphics Subsystem (1200). This technology is
a graphics subsystem with lower costs compared to the mid-range
technology, resulting in a more cost-effective graphics solution for
the end-user. It provides the cost sensitive user with adequate
graphics performance, with few features and a single texture
configuration option. The technology is used in the E&S Lightning 1200
product, which was completed in March 1999 and began shipping to
customers in April 1999. The cost to complete this project subsequent
to the acquisition of AGI was $0.5 million, $0.2 million over the
budgeted amount and was funded by working capital. This project was
completed five months later than originally projected. The assigned
value for this acquired in-process technology was $6.2 million.
Multiple-Controller Graphics Subsystems (2200). This technology is a
high-end graphics subsystem involving the parallel use of two or four
controllers. This technology is aimed at super users in the graphics
area who need significant increases in performance and features to
accomplish their tasks and are willing to pay the increased price
necessary to support those requirements. During the third quarter of
1999, the Company determined the technology and graphics subsystem, as
originally designed, would not be a viable product in the workstation
marketplace. The cost to complete this project subsequent to the
acquisition of AGI was $1.7 million. The project was completed in the
fourth quarter of 1999, approximately 9 months later than planned. This
project was funded by working capital. The assigned value for this
acquired in-process technology was $2.7 million.
On-board Geometry Engine Graphics Subsystem (AccelGMX(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 cost
to complete this project subsequent to the acquisition of AGI was $0.1
million and was funded by working capital. The assigned value for this
acquired in-process technology was $5.3 million.
The AccelGALAXY has performed below sales estimates due to the delay in
product introduction by the Company and a delayed design win at one major OEM.
These delays, in addition to increased competition, caused an erosion of
approximately 50% of the projected average selling price for the AccelGALAXY and
a loss of projected unit sales. Subsequent to the Company's acquisition of AGI,
the developer of the chip used on the AccelGMX also acquired a board company and
entered the graphics accelerator market in direct competition with the AccelGMX.
Due to the advantage of producing the chip, the competitor can produce a
comparable product at a lower cost; thus, the AccelGMX has performed below sales
estimates and the Company no longer expects to generate significant sales from
this product. The E&S Lightning 1200 has performed below sales estimates due to
the delay in product introduction by the Company. As a result of the delay in
product introduction, most OEMs selected a competing product. The expected sales
volume and average selling price of the E&S Lightning 1200 have been
significantly reduced.
The Company periodically reviews the value assigned to the separate
components of goodwill, intangibles and other long-lived assets through
comparison to anticipated, undiscounted cash flows from the underlying assets to
assess recoverability. The assets are considered to be impaired when the
expected future undiscounted cash flows from these assets do not exceed the
carrying balances of the related assets. Based on the events described above and
in accordance with Statement of Financial Accounting Standards No. 121 (SFAS
121) "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
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Assets to be Disposed of," during the third quarter of 1999 the Company recorded
an impairment loss of $9.7 million related to the acquisition of AGI and SRI.
The impairment loss consisted of the write-off of $4.9 million of goodwill, $4.4
million of intangible assets and $0.4 million of property, plant and equipment.
YEAR 2000 ISSUE
The Company began preparation for the Year 2000 date transition in
1996. In connection with this effort, the Company completed an inventory of all
mission critical systems with Year 2000 implications, assessed the readiness of
those systems, and replaced, retired or upgraded those systems that were not
Year 2000 ready. During the Year 2000 date transition, the Company did not
experience any failure of mission critical systems nor has it experienced any
significant problem with regard to third party suppliers. The Company does not
anticipate any material adverse effect to its business in the future as a result
of Year 2000 related problems; however, it is possible that such problems might
still arise.
The Company primarily used internal resources to implement its
readiness plan and to upgrade or replace and test systems and products affected
by the Year 2000 issue. 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 also does not expect
to incur any material costs in the future associated with any Year 2000 issues.
EFFECTS OF INFLATION
The effects of inflation were not considered material during fiscal
years 1999, 1998 and 1997, and are not expected to be material for fiscal year
2000.
OUTLOOK
Looking forward, the Company expects sales to decline slightly in 2000.
The decline in expected sales is due primarily to lower anticipated sales in the
workstation products business, which the Company restructured in the third
quarter of 1999. This business is now refocused on providing
application-specific solutions requiring high-performance graphics together with
value-added features for simulation, video and digital content creation. Sales
in the simulation and applications businesses are expected to increase in 2000
as compared to 1999 as orders and backlog continue to grow in those businesses.
As of December 31, 1999 the Company's orders backlog was $156.5 million.
The Company's main challenges result from managing the introduction of
new products into its business and developing new products into markets where
the Company is a relatively new entrant. These risks increase if the Company
fails to make these product introductions on schedule and on budget or if the
Company is beaten to market by its competitors.
The Company is in the process of completing certain contracts, which
include the Harmony image generator. Certain of these contracts were to be
completed and integrated during 1999. Consequently, as of December 31, 1999, in
accordance with original contractual provisions, the Company incurred liquidated
damages and late delivery penalties totaling $8.2 million. The Company expects
to pay most of this amount in 2000. The Company is also developing new content
to enhance its StarRider interactive planetarium product, is developing
workstation products to provide application specific solutions requiring
high-performance graphics for simulation, video and digital content creation,
and is expanding the product features and marketing distribution of its
RAPIDsite digital real-estate planning product. 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.
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The foregoing contains "forward-looking statements" within the meaning
of that term in Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Exchange Act of 1934, as amended, including, among others,
those statements preceded by, followed by or including the words "estimates,"
"believes," "expects," "anticipates," "plans," "projects," and similar
expressions.
These forward-looking statements may include projections of sales and
net income and issues that may affect sales or net income; projections of
capital expenditures; plans for future operations; financing needs or plans;
plans relating to the Company's products and services; and assumptions relating
to the foregoing. Forward-looking statements are inherently subject to risks and
uncertainties, some of which cannot be predicted or quantified. Future events
and actual results could differ materially from those set forth in, contemplated
by, or underlying the forward-looking information. Our actual results could
differ materially from these forward-looking statements. In addition to the
other risks described below in the "Factors That May Affect Future Results,"
important factors to consider in evaluating such forward-looking statements
include risk of product demand, market acceptance, economic conditions,
competitive products and pricing, difficulties in product development, product
delays, commercialization and technology. In light of these risks and
uncertainties, there can be no assurance that the events contemplated by the
forward-looking statements contained in this annual report will, in fact, occur.
FACTORS THAT MAY AFFECT FUTURE RESULTS
Evans & Sutherland's domestic and international businesses operate in
highly competitive markets that involve a number of risks, some of which are
beyond our control. While we are optimistic about our long-term prospects, the
following discussion highlights some risks and uncertainties that should be
considered in evaluating its growth outlook.
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 Sales or Earnings Fail to
Meet Expectations
Our stock price is subject to significant volatility and will likely be
adversely affected if sales or earnings in any quarter fail to meet the
investment community's expectations. Our sales and earnings may fail to meet
expectations because they fluctuate and are difficult to predict. Our earnings
during 1998 and 1999 fluctuated significantly from quarter to quarter. One of
the reasons we experience such fluctuations is that the largest share of our
sales and earnings is from our Simulation Group, which typically has long
delivery cycles and contract lengths. The timing of customer acceptance of
certain large-scale commercial or government contracts may affect the timing and
amount of sales that can be recognized; thus, causing our periodic operating
results to fluctuate. Our results may further fluctuate if United States and
international governments delay or even cancel production on large-scale
contracts due to lack of available funding.
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Our earnings may not meet either investor or internal expectations
because our budgeted operating expenses are relatively fixed in the short term
and even a small sales shortfall may cause a period's results to be below
expectations. Such a sales shortfall could arise from any number of factors,
including:
o delays in the availability of products,
o delays from chip suppliers,
o discontinuance of key components from suppliers,
o other supply constraints,
o transit interruptions,
o overall economic conditions, and
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.
In the Event E&S is Not Successful in Securing Acceptable Credit Facilities, Our
Business, Financial Condition, and Results of Operations Will be Severely
Impaired.
Our business requires significant levels of capital to finance accounts
receivable, research and development of our products, and product inventory that
is not financed by trade creditors. We have financed our growth and cash needs
to date primarily through working capital financing facilities, bank credit
lines, equity offerings, and cash generated from our operations.
Our $20.0 million revolving line of credit agreement with U.S. Bank,
N.A. expired on February 10, 2000. We are currently in need of a credit facility
to provide liquidity and resources to fund our current level of operations
through the year 2000. Although we have received a commitment letter from a
lender to provide a revolving line of credit with terms acceptable to us, we
cannot assure you that we will be successful in closing this line of credit. In
the event we are not successful in closing this or a comparable credit facility,
or a significant portion of our credit facilities become unavailable, our
business, financial condition, and results of operations could be severely
impaired. Such an event could render us unable to pay our obligations as they
become due.
Delays in the Timely Delivery of Our Products May Prevent Us From Invoicing Our
Costs and Estimated Earnings in Excess of Billings on Uncompleted Contracts.
In accordance with accounting for long-term contracts, we record an
asset for our costs and estimated earnings that exceed the amount we are able to
bill our customers on uncompleted contracts. At December 31, 1999, $50.1 million
of our costs and estimated earnings that exceeded our billings on uncompleted
contracts related to five contracts with four different customers. We are not
able to bill these amounts unless we meet certain contractual milestones related
to the delivery and integration of our Harmony image generators. Our failure to
achieve these contractual milestones by timely delivering and integrating our
Harmony image generators may significantly impact our ability to recover our
costs and estimated earnings that exceeded our billings on uncompleted
contracts, which could severely impact our cash flow.
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Failure to Protect Our Intellectual Property Could Harm Our Name Recognition
Efforts and Ability to Compete Effectively
Currently, we rely on a combination of patents, trademarks, copyrights
and common law safeguards including trade secret protection. To protect our
intellectual property rights in the future, we intend to continue to rely on a
combination of patents, trademarks, copyrights and common law safeguards,
including trade secret protection. We also rely on restrictions on use,
confidentiality and nondisclosure agreements and other contractual arrangements
with our employees, affiliates, customers, alliance partners and others. The
protective steps we have taken may be inadequate to deter misappropriation of
our intellectual property and proprietary information. A third party could
obtain our proprietary information or develop products or technology competitive
with ours. We may be unable to detect the unauthorized use of, or take
appropriate steps to enforce our intellectual property rights. Effective patent,
trademark, copyright and trade secret protection may not be available in every
country in which we offer or intend to offer our products and services to the
same extent as in the United States. Failure to adequately protect our
intellectual property could harm or even destroy our brands and impair our
ability to compete effectively. Further, enforcing our intellectual property
rights could result in the expenditure of significant financial and managerial
resources and may not prove successful.
We Could Incur Substantial Costs Defending Our Intellectual Property from Claims
of Infringement
The industry is characterized by frequent litigation regarding
copyright, patent and other intellectual property rights. We may be subject to
future litigation based on claims that our products infringe the intellectual
property rights of others or that our own intellectual property rights are
invalid. Claims of infringement could require us to reengineer or rename our
products or seek to obtain licenses from third parties in order to continue
offering our products. Licensing or royalty agreements, if required, may not be
available on terms acceptable to us or at all. Even if successfully defended,
claims of infringement could also result in significant expense to us and the
diversion of our management and technical resources.
E&S's Significant Investment in Research and Development May Not Payoff
We have no assurance that our significant investment in research and
development will generate future sales or benefits. We currently make and plan
to continue to make a significant investment in research and development. Total
spending for research and development was $44.4 million or 22% of sales in 1999
as compared to $31.8 million or 17% of sales in 1998. This investment is
necessary for us to be able to compete in the graphics simulation industry.
Developing new products and software is expensive and often involves a long
payback cycle. While we have every reason to believe these investments will be
rewarded with sales-generating products, customer acceptance ultimately dictates
the success of development and marketing efforts.
E&S May Not Continue to be Successful if 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.
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Product transitions are a recurring part of our business. Our short
product life cycles require our ability to successfully manage the timely
transition from current products to new products. In fact, it is not unusual for
us to announce a new product while its predecessor is still in the final stages
of its development.
Our transition results could be adversely affected by such factors as:
o development delays,
o late release of products to manufacturing,
o quality or yield problems experienced by production or suppliers,
o variations in product costs,
o excess inventories of older products and components, and
o delays in customer purchases of existing products in
anticipation of the introduction of new products.
In the Event E&S Suffers Further Product Delays, E&S May Be Required to Pay
Certain Customers Substantial Liquidated Damages
The variety and complexity of our high technology product lines require
us to deal with suppliers and subcontractors supplying highly specialized parts,
operating highly sophisticated and narrow tolerance equipment in performing
highly technical calculations. The processes of planning and managing
production, inventory levels and delivery schedules are also highly complex and
specialized. Many of our products must be custom designed and manufactured,
which is not only complicated and expensive, but can also require a number of
months to accomplish. Slight errors in either the design, planning and managing
production, inventory levels, delivery schedules, or manufacturing can result in
unsatisfactory products that may not be correctable. If we are unable to meet
our delivery schedules, we may be subject to penalties, including liquidated
damages that are included in some of our customer contracts. During the fourth
quarter of 1999, we accrued $8.2 million for payments of liquidated damages and
penalties due to product delays. As of March 30, 2000, we have paid $3.3 million
to one customer in connection with liquidated damages. There is no assurance
that we may not incur substantial liquidated damages in the future in connection
with further product delays that could exceed $8.2 million that we have already
accrued.
E&S May Not Maintain a Significant Portion of its Sales if it Fails to Maintain
its United States Government Contracts
In 1999, 42% 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.
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.
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Our dependence on government contracts may lead to other perils as well
because as a United States government contractor or sub-contractor, our
contracts and operations are subject to government oversight. The government may
investigate and make inquiries of our business practices and conduct audits of
our contract performance and cost accounting. These investigations may lead to
claims against E&S. Under United States government procurement regulations and
practices, an indictment of a government contractor could result in that
contractor being fined and/or suspended for a period of time from eligibility
for bidding on, or for award of, new government contracts; a conviction could
result in debarment for a specified period of time.
E&S's Sales May Suffer if it Loses Certain Significant Customers
We currently derive a significant portion of our sales from a limited
number of non-U.S. government customers. The loss of any one or more of these
customers could have a material adverse effect on our business, financial
condition and results of operations. In 1999 we were dependent on three of our
customers for approximately 24% of our consolidated sales. In 1998 we were
dependent on three of our customers for approximately 27% of our consolidated
sales. We expect that sales to a limited number of customers will continue to
account for a substantial portion of our sales in the foreseeable future. We
have no assurance that sales from this limited number of customers will continue
to reach or exceed historical levels in the future. We do not have supply
contracts with any of our significant customers.
E&S's Sales Will Decrease if it Fails to Maintain its International Business
Any reduction of our international business could significantly affect
our sales. Our international business accounted for 43% of our 1999 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.
If E&S's Commercial Simulation Business Fails, E&S's Sales will Decrease
We have no assurance that our commercial simulation (airline) business
will continue to succeed. Our commercial simulation business currently accounts
for approximately 10% to 20% of our sales. This business is subject to many of
the risks related to the commercial simulation market that may adversely affect
our business.
The following risks are characteristic of the commercial simulation market:
o uncertainty of economic conditions,
o dependence upon the strength of the commercial airline industry,
o air pilot training requirements,
o competition,
o changes in technology, and
o timely performance by subcontractors on contracts in which E&S is
the prime contractor.
31
<PAGE>
E&S May Not Meet its Sales 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 sales in the aggregate; however, we project sales of these businesses to
decline in 2000 but then grow approximately 15% to 25% of sales in subsequent
years. These businesses will not survive and we will not meet our sales
projections if we are unable to:
o develop strong partner relationships with manufacturers of
computer chips and hardware system-solution providers in the
digital content creation segment,
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 of E&S RAPIDsite.
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.
Future Losses Could Impair our Ability to Raise Capital or Borrow Money and
Consequently Affect our Stock Price
Although we recorded net sales of $200.9 million for the twelve months
ended December 31, 1999, we incurred a net loss of $23.5 million in 1999,
compared to a net loss of $16.0 million in 1998. We cannot assure you that we
will be profitable in future periods. Losses in future periods could impair our
ability to raise additional capital or borrow money as needed, and could
decrease our stock price.
We May Make Acquisitions that are Unsuccessful or Strain or Divert Our Resources
from More Profitable Operations
We intend to consider acquisitions, alliances, and transactions
involving other companies that could complement our existing business. However,
we may not be able to identify suitable acquisition parties, joint venture
candidates, or transaction counterparties. Also, even if we can identify
suitable parties, we may not be able to obtain the financing necessary to
complete any such transaction or consummate these transactions on terms that we
find favorable.
We may also not be able to successfully integrate any businesses that
we acquire into our existing operations. If we cannot successfully integrate
acquisitions, our operating expenses may increase. This increase would affect
our net earnings, which could adversely affect the value of our outstanding
securities. Moreover, these types of transactions may result in potentially
dilutive issuances of equity securities, the incurrence of additional debt, and
amortization of expenses related to goodwill and intangible assets, all of which
could adversely affect our profitability. These transactions involve numerous
other risks as well, including the diversion of management attention from other
business concerns, entry into markets in which we have had no or only limited
experience, and the potential loss of key employees of acquired companies.
Occurrence of any of these risks could have a material adverse effect on us.
Year 2000 Compliance -- Undiscovered Year 2000-Related Computer Problems Could
Disrupt Our Operations.
Many currently installed computer systems and software were written to
accept and process only two digit entry codes for the year when storing dates.
Beginning with the year 2000, these entry codes will need to accept four digit
entries to distinguish 21st century dates from 20th century dates. As a result,
computer systems and products may need to be upgraded to solve this problem to
avoid incorrect or lost data. We utilize a significant number of computer
software programs and operating systems across our entire organization,
including applications used in sales, shipping, product design, product
operation, financial business systems, and various administrative functions.
When the century changed, we experienced no disruption to our business
operations and no product failures as a result of year 2000 compliance issues or
otherwise. If our suppliers, vendors or distributors fail to timely and
completely correct their own year 2000 software, firmware and hardware problems,
or if any of them convert to a system that is incompatible with our systems, our
ability to deliver our products and services could be disrupted.
32
<PAGE>
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 43% of the Company's total sales in
1999 are concentrated in the United Kingdom, continental Europe and Asia.
Foreign currency purchase and sale contracts are entered into for periods
consistent with related underlying exposures and do not constitute positions
independent of those exposures. The Company does not enter into contracts for
trading purposes and does not use leveraged contracts. As of December 31, 1999,
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, 1999, 88% of the Company's total debt was in fixed-rate
instruments. Had the Company drawn on its $20 million revolving line of credit
with U.S. Bank National Association and the remainder of its foreign line of
credit, 58% 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, 1999, all but $500,000 in investments had maturities within 90
days.
The information below summarizes the Company's market risks associated
with debt obligations and short-term investments as of December 31, 1999. 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 2000 2001 2002 2003 2004 There- Total Fair
After Value
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
-------- --------- --------- ------ ------ ------ --------- --------- ---------
Debt
Bank borrowings in
Deutsche Marks 6.4% $ 2,559 - - - - - $ 2,559 $ 2,559
Other Various 50 - - - - - 50 50
--------- --------- ------ ------ ------ --------- --------- ---------
Total Notes Payable $ 2,609 - - - - - $ 2,609 2,609
========= ========= ====== ====== ====== ========= ========= =========
Convertible
subordinated
Debentures 6.0% - - - - - $ 18,015 $ 18,015 $ 13,061
--------- --------- ------ ------ ------ --------- --------- ---------
Total long-term debt - - - - - $ 18,015 $ 18,015 $ 13,061
========= ========= ====== ====== ====== ========= ========= =========
Short-term Investments 5.9% $ 748 - - - - - 748 748
========= ========= ====== ====== ====== ========= ========= =========
</TABLE>
33
<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, 1999 and 1998
Consolidated Statements of Operations for the three years ended December
31, 1999
Consolidated Statements of Comprehensive Income for the three years ended
December 31, 1999
Consolidated Statements of Stockholders' Equity for the three years ended
December 31, 1999
Consolidated Statements of Cash Flows for the three years ended December
31, 1999
Notes to Consolidated Financial Statements for the three years ended
December 31, 1999
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, 1999, 1998 and 1997
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.
34
<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 three
independent directors and meets regularly with the independent accountants, as
well as with Evans & Sutherland management, to review accounting, auditing,
internal accounting control and financial reporting matters.
James R. Oyler Richard J. Gaynor
President and Vice President and
Chief Executive Officer Chief Financial Officer
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Stockholders
Evans & Sutherland Computer Corporation:
We have audited the consolidated financial statements of Evans &
Sutherland Computer Corporation and subsidiaries as listed in the accompanying
index. In connection with our audits of the consolidated financial statements,
we have also audited the financial statement schedule as listed in the
accompanying index. These consolidated financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and financial statement schedule based on our audits.
We conducted our audits in accordance with 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, 1999 and
1998, and the results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 1999, 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
Salt Lake City, Utah
February 14, 2000, except as to Note 24,
which is as of March 28, 2000
35
<PAGE>
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
<TABLE>
<CAPTION>
December 31,
------------------------------------
1999 1998
------------- -------------
<S> <C> <C>
Assets:
Cash and cash equivalents $ 22,110 $ 1,834
Short-term investments 748 25,907
Accounts receivable, less allowances for doubtful
receivables of $1,322 in 1999 and $1,616 in 1998 28,743 46,866
Inventories 40,588 53,319
Costs and estimated earnings in excess of billings
on uncompleted contracts 80,457 58,682
Deferred income taxes 15,923 9,450
Prepaid expenses and deposits 7,844 7,278
------------- -------------
Total current assets 196,413 203,336
Property, plant and equipment, net 52,184 53,693
Investment securities 4,467 3,380
Deferred income taxes 4,418 2,487
Goodwill and other intangible assets, net 552 11,351
Other assets 430 1,421
------------- -------------
Total assets $ 258,464 $ 275,668
============= =============
Liabilities and stockholders' equity:
Line of credit agreements $ 2,657 $ 4,298
Accounts payable 19,575 24,667
Accrued expenses 39,057 27,147
Customer deposits 4,720 3,339
Income taxes payable 1,062 2,436
Billings in excess of costs and estimated earnings on
Uncompleted contracts 12,412 7,092
------------- -------------
Total current liabilities 79,483 68,979
------------- -------------
Long-term debt 18,015 18,062
------------- -------------
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 23,772 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 9,678,938 shares in 1999 and 9,597,660
Shares in 1998 1,936 1,920
Additional paid-in capital 24,086 23,420
Common stock in treasury, at cost; 352,500 shares (4,709) -
Retained earnings 115,816 139,498
Accumulated other comprehensive income 65 245
------------- -------------
Total stockholders' equity 137,194 165,083
------------- -------------
Total liabilities and stockholders' equity $ 258,464 $ 275,668
============= =============
</TABLE>
See accompanying notes to consolidated financial statements
36
<PAGE>
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Year ended December 31,
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
Sales $ 200,885 $ 191,766 $ 159,353
Cost of sales 127,556 110,320 84,139
Write-off of inventories 13,230 - -
------------- ------------- -------------
Gross profit 60,099 81,446 75,214
------------- ------------- -------------
Expenses:
Selling, general and administrative 43,039 40,088 35,304
Research and development 44,358 31,797 25,492
Amortization of goodwill and other intangible assets 1,515 4,767 29
Impairment loss 9,693 - -
Restructuring charge 1,460 - -
Write-off of acquired in-process technology - 20,780 -
------------- ------------- -------------
100,065 97,432 60,825
------------- ------------- -------------
Operating income (loss) (39,966) (15,986) 14,389
------------- ------------- -------------
Other income (expense):
Interest income 1,849 2,659 3,239
Interest expense (1,333) (1,335) (1,300)
Loss on write down of investment securities (350) (1,075) (9,575)
Gain on sale of investment securities - 2,493 -
Other 933 (613) 85
------------- ------------- -------------
1,099 2,129 (7,551)
------------- ------------- -------------
Income (loss) before income taxes (38,867) (13,857) 6,838
Income tax expense (benefit) (15,413) 2,126 1,758
------------- ------------- -------------
Net income (loss) (23,454) (15,983) 5,080
Accretion of redeemable preferred stock 228 95 -
------------- ------------- -------------
Net income (loss) applicable to common stock $ (23,682) $ (16,078) $ 5,080
============= ============= =============
Net income (loss) per common share:
Basic $ (2.49) $ (1.70) $ 0.56
============= ============= =============
Diluted $ (2.49) $ (1.70) $ 0.53
============= ============= =============
</TABLE>
See accompanying notes to consolidated financial statements
37
<PAGE>
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
<TABLE>
<CAPTION>
Year ended December 31,
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Net income (loss) $ (23,454) $ (15,983) $ 5,080
Other comprehensive income (loss):
Foreign currency translation adjustments (337) 126 297
Unrealized gains (losses) on securities (48) (89) 1,505
Reclassification adjustment for losses included
in net income (loss) 275 - (868)
------------ ------------ ------------
Other comprehensive income (loss)before income taxes (110) 37 934
Income tax expense (benefit) related
to items of other comprehensive income (loss) 70 12 240
------------ ------------ ------------
Other comprehensive income (loss), net of income taxes (180) 25 694
------------ ------------ ------------
Comprehensive income (loss) $ (23,634) $ (15,958) $ 5,774
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements
38
<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 Treasury Retained Comprehensive
Shares Amount Capital Stock Earnings Income Total
--------- --------- ---------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
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 redeemable
preferred stock - - - - (95) - (95)
--------- --------- ---------- --------- ---------- ---------- ----------
Balance at December 31, 1998 9,598 1,920 23,420 - 139,498 245 165,083
Issuance of common stock for cash 142 28 1,361 - - - 1,389
Repurchase of 413,500 common
shares (61) (12) (911) (4,709) - - (5,632)
Compensation expense on
employee stock purchase plan - - 117 - - - 117
Tax benefit from issuance of
common stock to employees - - 99 - - - 99
Other comprehensive income - - - - - (180) (180)
Net loss - - - - (23,454) - (23,454)
Accretion of redeemable
preferred stock - - - - (228) - (228)
--------- --------- ---------- --------- ---------- ---------- ----------
Balance at December 31, 1999 9,679 $ 1,936 $ 24,086 $ (4,709) $ 115,816 $ 65 $ 137,194
========= ========= ========== ========= ========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements
39
<PAGE>
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Year ended December 31,
1999 1998 1997
------------ ----------- ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (23,454) $ (15,983) $ 5,080
Adjustments to reconcile net income (loss) to net cash Provided by (used in)
operating activities:
Write-off of inventories 13,230 - -
Impairment loss 9,693 - -
Depreciation and amortization 15,499 15,934 10,041
Provision for losses on accounts receivable 558 496 370
Provision for obsolete and excess inventories 910 1,987 1,009
Provision for warranty expense 958 872 726
Deferred income taxes (8,475) (2,919) (3,299)
Loss on write-down of investment securities 350 1,075 9,575
Gain on sale of investment securities - (2,493) -
Write-off of acquired in-process technology - 20,780 -
Other, net 732 868 169
Changes in assets and liabilities, net of effect of purchase/sale of
business:
Accounts receivable 17,474 (3,613) (2,935)
Inventories (6,104) (28,867) (8,641)
Costs and estimated earnings in excess of billings on uncompleted
contracts, net (16,446) (6,110) (15,060)
Prepaid expenses and deposits (565) (3,533) (1,430)
Accounts payable (5,041) 5,699 8,071
Accrued expenses 10,970 (266) 1,161
Customer deposits 1,381 (3,235) 4,496
Income taxes (1,275) (1,473) 4,958
------------ ----------- ------------
Net cash provided by (used in) operating activities 10,395 (20,781) 14,291
------------ ----------- ------------
Cash flows from investing activities:
Purchases of short-term investments (14,700) (22,217) (80,443)
Proceeds from sale of short-term investments 39,767 47,691 77,858
Purchase of investment securities (636) (541) (4,208)
Proceeds from sale of investment securities - 3,304 -
Purchases of property, plant and equipment (14,530) (18,516) (10,804)
Proceeds from sale of certain manufacturing assets 6,010 - -
Payments for business acquisitions, net of cash acquired - (7,603) -
------------ ----------- ------------
Net cash provided by (used in) investing activities 15,911 2,118 (17,597)
------------ ----------- ------------
Cash flows from financing activities:
Borrowings under line of credit agreements 716 3,915 -
Payments under line of credit agreements (1,869) (1,575) (3,827)
Net proceeds from issuance of common stock 1,389 2,022 3,141
Net proceeds from issuance of preferred stock - 23,544 -
Payments for repurchases of common stock (5,478) (15,685) (4,625)
------------ ----------- ------------
Net cash provided by (used in) financing activities (5,242) 12,221 (5,311)
------------ ----------- ------------
Effect of foreign exchange rates on cash and cash equivalents (788) 100 272
------------ ----------- ------------
Net change in cash and cash equivalents 20,276 (6,342) (8,345)
Cash and cash equivalents at beginning of year 1,834 8,176 16,521
------------ ----------- ------------
Cash and cash equivalents at end of year $ 22,110 $ 1,834 $ 8,176
============ =========== ============
Supplemental Disclosures of Cash Flow Information Cash paid (received) during
the year for:
Interest $ 1,321 $ 1,309 $ 1,351
Income taxes (5,846) 7,130 1,915
Accretion of redeemable preferred stock 228 95 -
</TABLE>
See accompanying notes to consolidated financial statements
40
<PAGE>
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, December 31, 1998 and December 31, 1997
(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.
Basis of Presentation
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All intercompany accounts
and transactions have been eliminated in consolidation. Certain
reclassifications have been made in the 1998 and 1997 consolidated
financial statements to conform to the 1999 presentation.
Revenue Recognition
Sales includes 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.
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 1999 and 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 that
is specific to the vendor. The revenue allocated to software products
is generally recognized upon delivery of the products. The revenue
allocated to post contract customer support is generally recognized
over the support period.
The Company recognizes revenues from product sales that do not require
significant production, modification, or customization when the
following criteria are met: the Company has signed a noncancelable
agreement; the Company has delivered the product; there are no
uncertainties surrounding product acceptance; the fees are fixed and
determinable; and collection is considered probable.
Revenue from long-term contracts which require significant production,
modification or customization is recorded using the
percentage-of-completion method, determined by the units-delivered
method, or when there is significant nonrecurring engineering, the
ratio of costs incurred to management's estimate of total anticipated
costs. If estimated total costs on any contract indicate a loss, the
Company provides currently for the total anticipated loss on the
contract. Billings on uncompleted long-term contracts may be greater
than or less than incurred costs and estimated earnings and are
recorded as an asset or liability in the accompanying consolidated
balance sheets.
41
<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 $15.5 million and $1.8 million as of December 31, 1999
and 1998, respectively.
Inventories
Inventoried costs on programs and long-term contracts include direct
engineering and production costs and applicable overhead, not in excess
of estimated realizable value. In accordance with industry practice,
inventoried costs include amounts relating to programs and contracts
with long production cycles, a portion of which is not expected to be
realized within one year. Inventories are stated at standard cost,
which approximates average cost. Spare parts and general stock
materials are stated at cost not in excess of realizable value. The
Company periodically reviews inventories for excess and obsolete
amounts and provides a reserve that it considers sufficient to cover
any excess and obsolete inventories.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation and
amortization are computed using the straight-line method based on the
estimated useful lives of the related assets.
Accounting for Impairment of Long-Lived Assets
The Company periodically reviews the value assigned to the separate
components of goodwill, intangibles and other long-lived assets through
comparison to anticipated, undiscounted cash flows from the underlying
assets to assess recoverability. The assets are considered to be
impaired when the expected future undiscounted cash flows from these
assets do not exceed the carrying balances of the related assets. The
impairment loss of $9.7 million, as determined in accordance with
Statement of Financial Accounting Standards No. 121 (SFAS 121)
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of," relates to the write-down to fair value of
goodwill, intangibles and other long-lived assets acquired in the
acquisition of AccelGraphics, Inc. ("AGI") and Silicon Reality, Inc.
("SRI"). Fair value was determined utilizing discounted cash flow
analyses and the replacement cost approach. The impairment loss
consisted of the write-off of $4.9 million of goodwill, $4.4 million of
intangible assets and $0.4 million of property, plant and equipment.
In addition to continued losses at AGI, the impairment loss was the
result of the following additional circumstances: (i) delays in
production introductions for the AccelGALAXY, E&S Lightning 1200 and
the multiple-controller graphics subsystems product line; (ii) the
developer of the chip used on the AccelGMX acquired a board company and
entered the graphics accelerator market in direct competition with the
AccelGMX; and (iii) introduction of lower-end products by competitors
which can perform many of the functions of the higher-end 3D graphics
cards. Furthermore, the Company determined that a manufacturer of a
chip to be used in various new board products was unable to manufacture
a designed chip with agreed upon specifications.
Goodwill and Other Intangible Assets
Goodwill and other intangible assets consist primarily of goodwill and
other intangible assets recorded in connection with the acquisitions of
AccelGraphics, Inc. and Silicon Reality, Inc. on June 26, 1998. The
other intangible assets are being amortized using the straight-line
method over six months to seven years. As of December 31, 1999 and
1998, accumulated amortization of goodwill and other intangible assets
was $15.7 million and $4.9 million, respectively.
42
<PAGE>
Software Development Costs
Software development costs, if material, are capitalized from the date
technological feasibility is achieved until the product is available
for general release to customers. Such deferrable costs have not been
material during the periods presented.
Investments
The Company classifies its marketable debt and equity securities as
available-for-sale. Available-for-sale securities are recorded at fair
value. Unrealized holding gains and losses, net of the related tax
effect, are excluded from earnings and are reported as a component of
accumulated other comprehensive income until realized. Dividend income
is recognized when earned. Realized gains and losses from the sale of
securities are included in results of operations and are determined on
the specific-identification basis.
Nonmarketable investment securities are recorded at the lower of cost
or fair value. Some of the factors that are considered in determining
the fair value of these securities include analyses of each investee's
financial condition and operations, the status of its technology and
strategies in place to achieve its objectives. 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.
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.
43
<PAGE>
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. Sales and expenses are translated at the
average exchange rates prevailing during the period. Adjustments
resulting from translation are reported as a separate component of
stockholders' equity. Certain transactions of the 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 affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of sales and
expenses during the reporting period. Actual results could differ from
those estimates.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to
concentrations of credit risk are primarily cash, cash equivalents,
short-term investments and accounts receivable. The Company's
short-term investment portfolio consists of investment-grade securities
diversified among security types, industries and issuers. The Company's
investments are managed by recognized financial institutions that
follow the Company's investment policy. The Company's policy limits the
amount of credit exposure in any one issue, and the Company believes no
significant concentration of credit risk exists with respect to these
investments.
In the normal course of business, the Company provides unsecured credit
terms to its customers. Accordingly, the Company performs ongoing
credit evaluations of its customers and maintains allowances for
possible losses which, when realized, have been within the range of
management's expectations.
In accordance with accounting for long-term contracts, the Company
records an asset for costs and estimated earnings in excess of billings
on uncompleted contracts. At December 31, 1999, $50.1 million of the
costs and estimated earnings in excess of billings on uncompleted
contracts pertain to five contracts with four different customers. The
billing of these amounts is contingent upon the successful completion
of contractual milestones related to the delivery and integration of
Harmony image generators. The Company expects to achieve these billing
milestones during 2000. The Company's inability to achieve these
contractual milestones may significantly impact the realization of such
amounts.
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.
44
<PAGE>
(2) BUSINESS ACQUISITIONS
On June 26, 1998, the Company acquired all of the outstanding stock of
AccelGraphics, Inc. for approximately $23.7 million in cash and
1,109,303 shares of the Company's common stock, which was valued at
$25.7 million. In addition, the Company converted all outstanding AGI
options into options to purchase approximately 351,000 shares of common
stock of the Company with a fair value of $3.4 million and incurred
transaction costs of approximately $1.1 million. AGI was based in
Milpitas, California, and was a provider of high-performance,
cost-effective, three-dimensional graphics subsystem products for the
professional Windows NT and Windows 95 markets. The acquisition was
accounted for by the purchase method and, accordingly, the results of
operations of AGI have been included in the Company's consolidated
financial statements from June 26, 1998 forward.
Also on June 26, 1998, the Company acquired the assets and assumed
certain liabilities of Silicon Reality, Inc. for a purchase price of
approximately $1.2 million, including transaction costs of
approximately $250,000. SRI is based in Federal Way, Washington, and
designs and produces three-dimensional graphics hardware and software
products for the personal computer marketplace. This acquisition was
accounted for by the purchase method and, accordingly, the results of
operations of SRI have been included in the Company's consolidated
financial statements from June 26, 1998 forward.
A modified income approach was used to allocate a portion of the
purchase price to the acquired in-process technology. Under this
method, the fair value for the in-process technology in each
acquisition was based on analysis of the markets, projected cash flows
and risks associated with achieving such projected cash flows. In
developing these cash flow projections, sales were forecasted based on
relevant factors, including aggregate sales growth rates for the
business as a whole, individual product sales, characteristics of the
potential market for the products, the anticipated life of the
technology under development and the stage of completion of each
project. Operating expenses and resulting profit margins were
forecasted based on the characteristics and cash flow generating
potential of the acquired in-process technology, and included
assumptions that certain expenses would decline over time as operating
efficiencies were obtained or support requirements decreased.
Appropriate adjustments were made to operating income to derive net
cash flow, and the estimated net cash flows of the in-process
technologies in each acquisition were then discounted to present value
using rates of return that the Company believes reflect the specific
risk/return characteristics of these research and development projects.
The projected sales used in the income approach are based upon the
sales likely to be generated upon completion of the projects and the
beginning of commercial sales, as estimated by management. The
projections assume that the product will be successful and that the
product's development and commercialization meet management's current
time schedule.
In determining the operating cash flows related exclusively to
in-process technology, management has considered the contribution of
both prior technologies (as demonstrated by prior products) and core
technology or know-how that is generic among most or all products.
Where appropriate, the operating income estimates for each project have
been apportioned between in-process technology and the appropriate
intangible asset (i.e. various core technologies). The operating income
apportionment factor was determined on the basis of an analysis of the
specific contribution of each element of core technology to the subject
in-process technology, the estimated effect of this contribution on the
profitability of the subject in-process project, and the relative
importance of the core technology to the product's ultimate customer.
The discount rate applicable to in-process technology projects reflects
the risks inherent in each project. This rate is higher than the rate
applied to AGI's current products, as the current products have already
demonstrated their technological feasibility product and market
acceptance.
45
<PAGE>
The discount rate for in-process technology considers the following
risk elements (in addition to the baseline business and market risks
considered as part of the current product discount rate); risk of
successfully completing the in-process technology project, risk that
market demand will exist in the future for the in-process technology
product, risk that the forecasted cost structure will be possible, and
the risk that as yet unknown competitive products will emerge. An
after-tax rate of 20 to 30 percent was applied to the in-process
technology projects.
The sales earned by the in-process technology products represent the
return on all of the assets acquired under the agreement. The cash
flows generated by the new products must provide a return on each asset
purchased that is consistent with the value and the relative risk of
that asset. To separately value in-process technology, the value and
required rate of return for other identifiable assets must be
determined. The required return on these other assets is charged to
(deducted from) the cash flows generated by the projects shown in the
in-process technology model to determine the incremental cash flows
specifically attributable to the in-process technology project.
As part of the analysis, management determined individual rates of
return applicable to each asset identified in the allocation table and
estimated the effective capital charge to be applied to the valuation
of in-process technology. Capital charges have been made for returns
related to current assets, fixed assets, workforce and tradename.
The total purchase price and final allocation among the tangible and
intangible assets and liabilities acquired (including acquired
in-process technology) is summarized as follows (dollars in thousands):
Total Purchase Price:
Total cash consideration $ 24,688
Total stock consideration 25,695
Value of options assumed 3,400
Transaction costs 1,350
-------------
$ 55,133
=============
Amortization
Period
(Months)
---------------
Purchase Price Allocation:
Net tangible assets $ 17,329
Intangible assets:
Workforce-in-place 1,019 60
Customer list 250 60
AccelGraphics name 699 36
Current products 5,640 6 - 24
Core technology 1,754 84
Goodwill 7,662 84
In-process technology 20,780 Expensed
------------
$ 55,133
============
46
<PAGE>
At the time of the acquisition, the estimated costs to complete the
projects related to in-process technology was $1.2 million. As of
December 31, 1999 and 1998, costs incurred on these projects were $2.6
million and $0.9 million, respectively. All projects were complete as
of December 31, 1999 and no further costs are expected to be incurred.
The following unaudited pro forma financial information (in thousands,
except per share amounts) presents the combined results of operations
of the Company, AGI and SRI for 1998 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 $ 208,503
Net loss (4,836) (4,836)
Loss per share:
Basic (0.46) (0.46)
Diluted (0.46) (0.46)
(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, 1999:
State and municipal securities:
Maturing in one year or less $ 752 - (4) 748
Maturing between one and two years - - - -
------------ ------------ ------------ -------------
$ 752 $ - $ (4) $ 748
============ ============ ============ =============
Amortized Gross Gross Fair
cost unrealized unrealized value
holding holding
gains losses
------------ ------------ ------------ -------------
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
============ ============ ============ =============
</TABLE>
47
<PAGE>
(4) INVENTORIES
Inventories consist of the following (in thousands):
December 31,
1999 1998
------------- -------------
Raw materials $ 26,803 $ 26,084
Work-in-process 11,479 23,511
Finished goods 2,306 3,724
------------- -------------
$ 40,588 $ 53,319
============= =============
During the third quarter of 1999, the Company performed significant
testing of the software relating to its Harmony image generator product
that had been delayed. As a result of the testing, the Company
determined that certain of the inventories previously purchased for the
Harmony image generator had become technologically obsolete and did not
properly function with the updated software. In connection with this
assessment, the Company recorded a charge of $12.1 million to write-off
obsolete, excess and overvalued inventories. In addition, during the
third quarter of 1999, the Company wrote-off $1.1 million of Workstation
Products Group inventories related to end-of-life or abandoned product
lines.
(5) LONG-TERM CONTRACTS
Comparative information with respect to uncompleted long-term contracts
are summarized as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
1999 1998
-------------- --------------
<S> <C> <C>
Accumulated costs and estimated
earnings on uncompleted contracts $ 350,193 $ 236,757
Less total billings on uncompleted contracts (282,148) (185,167)
-------------- --------------
$ 68,045 $ 51,590
============== ==============
Costs and estimated earnings in excess of
billings on uncompleted contracts
Billings in excess of costs and estimated $ 80,457 $ 58,682
earnings on uncompleted contracts (12,412) (7,092)
-------------- -------------
$ 68,045 $ 51,590
============== ==============
</TABLE>
48
<PAGE>
(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
1999 1998
-------------- ------------- -------------
<S> <C> <C> <C>
Land - $ 1,436 $ 1,436
Buildings and improvements 40 years 39,983 37,378
Manufacturing machinery and equipment 3 to 8 years 86,433 86,730
Office furniture and equipment 8 years 9,265 10,500
Construction-in-process - 3,559 3,330
------------- -------------
140,676 139,374
Less accumulated depreciation and amortization
(88,492) (85,681)
------------- -------------
$ 52,184 $ 53,693
============= =============
</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, 1999 were $8.9 million and $3.3 million, respectively.
Rental income for all operating leases for 1999, 1998 and 1997 was $1.6
million, $1.5 million and $1.1 million, respectively.
The Company occupies real property and uses certain equipment under
lease arrangements that are accounted for as operating leases. Rental
expenses for all operating leases for 1999, 1998 and 1997 were $2.1
million, $2.3 million and $1.7 million, respectively.
At December 31, 1999, 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,
2000 $ 1,295 $ 2,961
2001 1,125 2,475
2002 1,034 1,975
2003 1,034 1,789
2004 673 1,477
Thereafter 477 10,631
------------ ---------------
$ 5,638 $ 21,308
============ ===============
49
<PAGE>
(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):
December 31,
1999 1998
----------- -----------
Marketable securities:
Iwerks Entertainment, Inc. (Iwerks) $ 150 $ 225
C-3D Digital Inc. (C3-D) 525 -
----------- -----------
675 225
----------- -----------
Nonmarketable securities:
Silicon Light Machines (SLM) 3,276 2,655
Total Graphics Solutions N.V. (TGS) 500 500
Other 16 -
----------- -----------
3,792 3,155
----------- -----------
Total investment securities $ 4,467 $ 3,380
=========== ===========
Iwerks designs, engineers, manufactures, markets and services high-tech
entertainment attractions which employ a variety of projection, show
control, ride simulation and software technologies. C3-D develops and
manufacturers three-dimensional imagery and virtual reality
entertainment for television and the Internet. There were unrealized
gains on the marketable securities of $44,000 and unrealized losses on
marketable securities of $0.3 million as of December 31, 1999 and 1998,
respectively. SLM is a development-stage company engaged in research
and development of high-resolution displays. TGS develops and markets
portable graphics software tools, which provide hardware independence
for application developers. Each investment in nonmarketable investment
securities was made either to enhance a current technology of the
Company or to complement the Company's strategic direction.
The Company owns, including total shares purchased or available to
purchase under warrants, less than 15% of the outstanding common stock
and common stock equivalents of SLM and TGS. The Company has one of 11
seats on SLM's board of directors and one of six seats on TGS's board
of directors. There are no intercompany transactions, technological
dependencies, related guarantees, obligations, contingencies,
interchange of personnel, nor ability to exercise significant influence
on any of the companies in which the Company has investments.
Accordingly, the Company accounts for SLM and TGS utilizing the cost
method.
During 1999 and 1997, the Company wrote down its investment in Iwerks
by $0.4 million and $1.5 million, respectively, due to an
other-than-temporary decline in market value. During 1998, the Company
sold all of its holdings in Sense8 Corporation for net proceeds of $3.3
million, recognizing a $2.5 million gain. The Company had an investment
in nonmarketable equity securities 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.
50
<PAGE>
(9) ACCRUED EXPENSES
Accrued expenses consist of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
1999 1998
----------- -----------
<S> <C> <C>
Pension plan obligation (note 10) $ 12,124 $ 8,611
Compensation and benefits 13,021 11,256
Liquidated damages and late delivery penalties 8,200 -
Other 5,712 7,280
----------- -----------
$ 39,057 $ 27,147
=========== ===========
</TABLE>
On October 16, 1997, the Company and CAE Electronics Ltd. ("CAE")
entered into a Sub-Contract (the "Sub-Contract") for the Company to
design, develop and deliver the visual system components and visual
databases required for certain dynamic mission simulators and tactical
control centers, to be integrated with the Company's Harmony image
generation equipment (the "Harmony VSC"). As of December 31, 1999, the
Harmony VSC had not been integrated with the dynamic mission
simulators or tactical control centers. Pursuant to the terms of the
Sub-Contract, the integration was to be completed during 1999.
Consequently, as of December 31, 1999, in accordance with the
liquidated damages provision of the Sub-Contract, the Company incurred
liquidated damages on this Sub-Contract totaling $6.0 million. The
Company and CAE agreed to an interim solution, which provides for the
installation of the Company's ESIG 4530 image generators to integrate
with the dynamic mission simulators and tactical control centers until
the Company's Harmony VSC are able to support the dynamic mission
simulators and tactical control centers. The Company has agreed to pay
CAE (i) $0.5 million for reimbursement of certain expenses and costs
incurred by CAE relating to the integration and retrofit of the ESIG
4530 to the dynamic mission simulators and tactical control centers
and (ii) $5.5 million as liquidated damages resulting from certain
delays of the Harmony VSC. If further delays in the integration of the
Harmony VSC occur, the Company may be obligated to pay CAE additional
liquidated damages. The Company will also be obligated to pay certain
costs associated with the anticipated switch-over from the ESIG 4530
to the Harmony VSC. In addition, the Company incurred late delivery
penalties related to two other sub-contracts of $2.2 million in 1999.
(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.
51
<PAGE>
The following provides a reconciliation of benefit obligations, plan
assets, and funded assets of the Plan and SERP (in thousands):
<TABLE>
<CAPTION>
Pension Plan SERP
---------------------------- ---------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Change in benefit obligation:
Beginning of year $ 42,637 $ 36,212 $ 5,431 $ 5,262
Service cost 3,252 2,601 739 828
Interest cost 2,892 2,501 418 355
Actuarial (gain) loss (8,780) 2,344 216 (1,014)
Benefits paid (3,097) (1,021) (92) -
Curtailment - - (963) -
------------ ------------ ------------ ------------
End of year $ 36,904 $ 42,637 $ 5,749 $ 5,431
============ ============ ============ ============
Change in plan assets:
Fair value at beginning of year $ 40,221 $ 36,768
Actual return on plan assets 6,597 4,475
Benefits paid (3,097) (1,022)
------------ ------------
Fair value at end of year $ 43,721 $ 40,221
============ ============
Reconciliation of funded status:
Funded status $ 6,817 $ (2,416) $ (5,749) $ (5,431)
Unrecognized actuarial (gain) loss (15,254) (2,805) 590 1,391
Unrecognized prior service cost 771 161 543 874
Unrecognized transition obligation 158 238 - -
------------ ------------ ------------ ------------
Net amount recognized $ (7,508) $ (4,822) $ (4,616) $ (3,166)
============ ============ ============ ============
Amounts recognized in the consolidated balance sheets:
Accrued benefit liability $ (7,508) $ (4,822) $ (4,616) $ (3,166)
Additional minimum liability - - - (623)
------------ ------------ ------------ ------------
Net amount recognized $ (7,508) $ (4,822) $ (4,616) $ (3,789)
============ ============ ============ ============
Assumptions (weighted average):
Discount rate 6.8% 6.8% 7.8% 6.8%
Expected return on plan assets 9.0% 9.0% N/A N/A
</TABLE>
52
<PAGE>
Net periodic pension and other postretirement benefit costs include
the following components (in thousands):
<TABLE>
<CAPTION>
Pension Plan SERP
------------------------------- --------------------------------
1999 1998 1997 1999 1998 1997
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Components of net periodic benefit cost:
Service cost $3,252 $2,601 $2,025 $ 739 $ 828 $ 327
Interest cost 2,892 2,501 2,007 418 355 252
Expected return on assets (3,575) (3,264) (2,924) - - -
Amortization of actuarial(gain)
loss - (15) (300) 53 143 115
Amortization of prior year
service cost 37 4 5 73 73 106
Amortization of transition 79 79 79 - - -
-------- -------- -------- -------- -------- --------
Net periodic benefit cost $2,685 $1,906 $ 892 $ 1,283 $ 1,399 $ 800
======== ======== ======== ======== ======== ========
</TABLE>
Deferred Savings Plan - The Company has a deferred savings plan that
qualifies under Section 401(k) of the Internal Revenue Code. The plan
covers all employees of the Company who have at least one year of
service and who are age 18 or older. The Company makes matching
contributions of 50 percent of each employee's contribution not to
exceed six percent of the employee's compensation. The Company's
contributions to this plan for 1999, 1998 and 1997 were $1.1 million,
$1.0 million and $1.0 million, respectively.
Life Insurance - The Company purchases company-owned life insurance
policies insuring the lives of certain employees. The policies
accumulate asset values to meet future liabilities including the
payment of employee benefits such as supplemental retirement benefits.
At December 31, 1999 and 1998, the investment in the policies was $ 3.1
million and $2.6 million, respectively, and net life insurance expense
was $0.2 million, $0.5 million and $0.1 million for 1999, 1998 and
1997, respectively.
(11) LINES OF CREDIT
The following is a summary of lines of credit (dollars in thousands):
<TABLE>
<CAPTION>
1999 1998
------------ -----------
<S> <C> <C>
Balance at end of year $ 2,657 $ 4,298
Weighted average interest rate at end of year 6.0% 6.9%
Maximum balance outstanding during the year $ 4,298 $ 4,298
Average balance outstanding during the year $ 3,320 $ 4,239
Weighted average interest rate during the year 6.4% 7.4%
</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.
In November 1998, the Company entered into a revolving line of credit
agreement with U.S. Bank National Association. The revolving line of
credit provided for borrowings by the Company of up to $20.0 million.
Borrowings bore interest at the prevailing prime rate minus 1.0% or the
LIBOR rate plus 1.0%. The revolving line of credit expired on February
10, 2000. The unsecured, revolving line of credit, among other things,
(i) required the Company to maintain certain financial ratios; (ii)
restricted the Company's ability to incur debt or liens; sell, assign,
pledge or lease assets; merge with another company; and (iii)
restricted the payment of dividends and repurchase of any of the
Company's outstanding shares without prior consent of the lender. There
were no borrowings under this agreement outstanding as of December 31,
1999. The Company also has an unsecured revolving line of credit
agreement with a foreign bank totaling approximately $4.6 million as of
December 31, 1999, of which approximately $1.9 million was unused and
available.
53
<PAGE>
The Company has a $12.5 million unsecured Letter of Credit line with
U.S. Bank, N.A. for which there was $11.8 million and $6.6 million
outstanding as of December 31, 1999 and 1998, respectively. In
addition, the Company has a $4.6 million Letter of Credit outstanding
with Bank One, N.A.
(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>
Year ended December 31, 1999:
Federal $ (6,734) $ (6,816) $ 85 $ (13,465)
State (150) (2,056) 14 (2,192)
Foreign 244 - - 244
---------- ----------- ---------- -----------
$ (6,640) $ (8,872) $ 99 $(15,413)
========== =========== ========== ===========
Year ended December 31, 1998:
Federal $ 3,520 $ (2,336) $ 330 $ 1,514
State 761 (385) 54 430
Foreign 182 - - 182
---------- ----------- ---------- -----------
$ 4,463 $ (2,721) $ 384 $ 2,126
========== =========== ========== ===========
Year ended December 31, 1997:
Federal $ 5,327 $ (4,476) $ 663 $ 1,514
State 858 (721) 107 244
---------- ----------- ---------- -----------
$ 6,185 $ (5,197) $ 770 $ 1,758
========== =========== ========== ===========
</TABLE>
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 1999 and 1998 and 34 percent for 1997 as a result of the
following (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ -----------
<S> <C> <C> <C>
Tax (benefit) at U.S. federal statutory rate $(13,603) $ (4,850) $ 2,325
In-process research and development - 7,245 -
Losses (gains) of foreign subsidiaries - (101) (115)
Earnings of foreign sales corporation (232) (305) (228)
State taxes (net of federal income tax benefit) (1,425) 280 161
Research and development and foreign tax credits (925) (604) -
Foreign taxes 244 182 -
Other, net 528 279 (385)
------------ ------------ -----------
$(15,413) $ 2,126 $ 1,758
============ ============ ===========
</TABLE>
54
<PAGE>
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, 1999 and 1998, are presented below (in thousands):
<TABLE>
<CAPTION>
1999 1998
------------ ----------
<S> <C> <C>
Deferred tax assets:
Warranty, vacation, and other accruals $ 3,357 $ 3,619
Inventory reserves and other inventory-related
temporary basis differences 4,106 3,478
Pension accrual 4,469 2,866
Long-term contract related temporary differences 1,000 537
Net operating loss carryforwards 2,529 1,997
Unrealized loss on marketable equity securities 17 89
Write-down of investment securities 1,341 1,341
Liquidated damages and late delivery penalties 3,198 -
Credit carryforwards 2,012 587
Other 343 373
------------ ----------
Total gross deferred tax assets 22,372 14,887
Less valuation allowance 117 117
------------ ----------
Total deferred tax assets 22,255 14,770
------------ ----------
Deferred tax liabilities:
Intangible assets (155) (1,893)
Plant and equipment, principally due to
differences in depreciation (1,707) (853)
Other (52) (87)
------------ ----------
Total gross deferred tax liabilities (1,914) (2,833)
------------ ----------
Net deferred tax asset $ 20,341 $ 11,937
============ ==========
Net current deferred tax asset $ 15,923 $ 9,450
Net non-current deferred tax asset 4,418 2,487
------------ ----------
Net deferred tax asset $ 20,341 $ 11,937
============ ==========
</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.
Certain reclassifications were made during 1999 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 $50 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 valuation allowance did not
change in 1999 and changed by $36,000 in 1998.
55
<PAGE>
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.
The Company has federal and state research credit carryovers of
approximately $1.1 million and $0.5 million, respectively. The credits
will expire in 2019 and 2013, respectively. The Company also has a
state net operating loss carryforward that expires depending on the
rules of the various states to which the loss is allocated.
(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 ($13.1 million and $16.3 million
as of December 31, 1999 and 1998, 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.
On June 3, 1999, the Company sold certain manufacturing capital assets
and inventory for $6.0 million to Sanmina Corporation as part of the
Company's efforts to outsource the production of certain electronic
products and assemblies. In addition, the Company entered into an
electronic manufacturing services agreement with Sanmina Corporation.
The agreement commits the Company to purchase a minimum of $22.0
million of electronic products and assemblies from Sanmina Corporation
each year until June 3, 2002. If the Company fails to meet these
minimum purchase levels, subject to adjustment, the Company may be
required to pay 25 percent of the difference between the $22.0 million
and the amount purchased. As of December 31, 1999, the Company had
purchased approximately $15.0 million of electronic products and
assemblies from Sanmina Corporation since the date of the agreement.
Management expects that the Company will satisfy this minimum purchase
commitment.
Certain of the Company's contracts to deliver the Harmony image
generator contain liquidated damage provisions for delays in delivery.
At December 31, 1999, the Company had incurred $8.2 million for such
damages. If further delays in the delivery of the Harmony image
generator occur, the Company may incur additional liquidated damages.
56
<PAGE>
(16) STOCK OPTION AND STOCK PURCHASE PLANS
Stock Option Plans - The Company has stock incentive plans that provide
for the grant of options to officers and employees to acquire shares of
the Company's common stock at a purchase price generally equal to the
fair market value on the date of grant. Options generally vest ratably
over three years and expire ten years from date of grant. The Company
grants options to its directors under its Director Plan. Option grants
are limited to 10,000 shares per director in each fiscal year. Options
generally vest ratably over four years and expire ten years from the
date of grant. A summary of activity follows (shares in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
--------------------- -------------------- ---------------------
Weighted-average Weighted-average Weighted-average
exercise exercise exercise
Number price Number price Number price
of of of
shares shares shares
-------- ---------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 2,084 $ 13.80 1,640 $ 20.38 1,309 $ 18.14
Granted 472 14.25 2,105 16.80 570 24.55
Assumed in acquisitions - - 351 9.69 - -
Exercised (84) 7.72 (116) 10.70 (159) 16.21
Canceled (385) 14.32 (1,896) 22.15 (80) 21.78
-------- -------- -------
Outstanding at end of year 2,087 14.05 2,084 13.80 1,640 20.38
======== ======== ========
Exercisable at end of year 1,219 14.16 532 13.74 597 16.40
======== ======== ========
Weighted-average fair value of
options granted during the
year 5.32 5.82 8.81
</TABLE>
Shareholders authorized an additional 450,000, 400,000 and 450,000
shares to be granted under the plans during 1999, 1998 and 1997,
respectively. As of December 31, 1999, options to purchase 759,000
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 and are included in the table above. 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, 1999 (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
12/31/99 contractual price 12/31/99 price
life
-------------------------- -------------- ------------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C>
$ 0.48 - $ 12.12 58 8.4 $ 9.79 23 $ 6.76
12.19 - 13.25 408 7.0 12.60 269 12.47
13.31 - 13.56 1,088 8.6 13.56 685 13.56
13.56 - 16.69 360 8.5 14.68 103 14.84
17.00 - 22.70 165 6.7 20.37 134 20.89
24.25 - 32.87 8 7.6 25.82 5 25.82
-------------- -------------
0.48 - 32.87 2,087 8.1 14.05 1,219 14.16
============== =============
</TABLE>
57
<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
income (loss) and income (loss) per common share would have been
changed to the following pro forma amounts (in thousands, except per
share data):
<TABLE>
<CAPTION>
1999 1998 1997
------------- ------------ ------------
<S> <C> <C> <C> <C>
Net earnings (loss) Pro forma $ (26,995) $ (21,093) $ 2,545
Basic earnings (loss) per common share Pro forma (2.84) (2.22) 0.28
Diluted earnings (loss) per common share Pro forma (2.84) (2.22) 0.27
</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 1999, 1998 and
1997:
1999 1998 1997
------------ ------------ -------------
Expected life (in years) 2.6 2.3 2.6
Risk-free interest rate 6.3% 4.6% 5.7%
Expected volatility 52% 49% 47%
Dividend yield - - -
Stock Purchase Plan - The Company has an employee stock purchase plan
whereby qualified employees are allowed to have up to 10% of their
annual earnings withheld to purchase the company's common stock at 85
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
58,000, 43,000 and 26,000 were purchased under this plan in fiscal
1999, 1998 and 1997, and as of December 31, 1999, 197,000 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.
58
<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, 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 Corporation ("Intel"). The Class B-1 Preferred Stock has no
dividend rights. Intel has certain contractual rights, including
registration rights, a right of first refusal, and a right to require
the Company to repurchase the 901,408 shares of Class B-1 Preferred
Stock, 378,462 shares underlying the warrant, and shares of common
stock of the Company issuable upon conversion of the Class B-1
Preferred Stock (the "Intel Shares") in the event of any transaction
qualifying as a Corporate Event, as defined below. If Intel fails to
exercise its right of first refusal as to a Corporate Event, Intel
shall, upon the Company's entering into an agreement to consummate a
Corporate Event, have the right to sell to the Company any or all of
the Intel Shares. The potential mandatory redemption amount is the
greater of (i) the original price per share purchase price paid by
Intel or (ii) either the highest price per share of capital stock (or
equivalent) paid in connection with a Corporate Event or, if the
transaction involves the sale of a significant subsidiary or assets or
the licensing of intellectual property, Intel's pro rata share of the
consideration received, directly or indirectly, by the Company in such
transaction based on its then fully-diluted ownership of the Company's
capital stock. A Corporate Event shall mean any of the following,
whether accomplished through one or a series of related transactions:
(i) certain transactions that result in a greater than 33% change in
the total outstanding number of voting securities of the Company
immediately after such issuance; (ii) an acquisition of the Company or
any of its significant subsidiaries by consolidation, merger, share
purchase or exchange or other reorganization or transaction in which
the holders of the Company's or such significant subsidiary's
outstanding voting securities immediately prior to such transaction
own, immediately after such transaction, securities representing less
than 50% of the voting power of the Company, any such significant
subsidiary or the person issuing such securities or surviving such
transaction, as the case may be; (iii) the acquisition of all or
substantially all the assets of the Company or any significant
subsidiary; (iv) the grant by the Company or any of its significant
subsidiaries of an exclusive license for any material portion of the
Company's or such significant subsidiary's intellectual property to a
person other than Intel or any of its subsidiaries; or (v) any
transaction or series of related transactions that result in the
failure of the majority of the members of the Company's Board of
Directors immediately prior to the closing of such transaction or
series of related transactions failing to constitute a majority of the
Board of Directors (or its successor) immediately following such
transaction or series of related transactions.
(18) NET INCOME (LOSS) PER COMMON SHARE
Net income (loss) per common share is computed based on the
weighted-average number of common shares and, as appropriate, dilutive
common stock equivalents outstanding during the period. Stock options
are considered to be common stock equivalents.
59
<PAGE>
Basic net income (loss) per common share is the amount of net income
(loss) for the period available to each share of common stock
outstanding during the reporting period. Diluted net income (loss) per
share is the amount of net income (loss) for the period available to
each share of common stock outstanding during the reporting period and
to each share that would have been outstanding assuming the issuance of
common shares for all dilutive potential common shares outstanding
during the period.
In calculating net income per common share, the net income (loss) was
the same for both the basic and diluted calculation. The diluted
weighted average number of common shares outstanding during 1999 and
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):
1999 1998 1997
--------- -------- --------
Basic weighted average number of common shares
outstanding during the year 9,501 9,461 9,060
Weighted average number of dilutive common
stock options outstanding during the year - - 442
--------- -------- --------
Diluted weighted average number of common
shares outstanding during the year 9,501 9,461 9,502
========= ======== ========
(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, workstation 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 income (loss) from operations
before income taxes, interest income and expense, other income and
expense and foreign exchange gains and losses. The Company's assets are
not identifiable by segment.
<TABLE>
<CAPTION>
Simulation Workstation Applications Total
Products
----------- ------------ ------------ ----------
<S> <C> <C> <C> <C>
Year ended December 31, 1999:
Sales $ 170,578 $ 21,961 $ 8,346 $ 200,885
Operating income (loss) (8,686) (26,685) (4,595) (39,966)
Year ended December 31, 1998:
Sales 167,014 17,453 7,299 191,766
Operating income (loss) 22,094 (30,663) (7,417) (15,986)
Year ended December 31, 1997:
Sales 146,014 5,847 7,492 159,353
Operating income (loss) 23,263 (717) (8,157) 14,389
</TABLE>
60
<PAGE>
The operating loss in 1999 for the Simulation segment includes a
write-off of inventories of $12.1 million. The operating loss in 1999
for the Workstation Products segment includes an impairment loss of
$9.7 million, a restructuring charge of $1.5 million and a write-off of
inventories of $1.1 million. The operating loss in 1998 for the
Workstation Products segment includes a write-off of acquired
in-process technology of approximately $20.8 million.
(20) GEOGRAPHIC INFORMATION
The following table presents sales by geographic location based on the
location of the use of the product or services. Sales within individual
countries greater than 10% of consolidated sales are shown separately
(in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
United States $ 114,190 $ 106,858 $ 64,711
United Kingdom 50,100 41,029 12,008
Europe (excluding United Kingdom) 27,777 25,039 47,168
Pacific Rim 8,324 18,257 27,789
Other 494 583 7,677
------------- ------------- -------------
$ 200,885 $ 191,766 $ 159,353
============= ============= =============
</TABLE>
The following table presents property, plant and equipment by
geographic location based on the location of the assets (in thousands):
1999 1998
----------- -------------
United States $ 51,715 $ 52,876
Europe 469 817
----------- -------------
Total property, plant and
equipment, net $ 52,184 $ 53,693
=========== =============
(21) SIGNIFICANT CUSTOMERS
Sales to the U.S. government, either directly or indirectly through
sales to prime contractors or subcontractors, accounted for $84.5
million or 42% of total sales, $70.8 million or 37% of total sales, and
$45.5 million or 29% of total sales in 1999, 1998 and 1997,
respectively. Sales to the United Kingdom Ministry of Defense ("UK
MOD"), either directly or indirectly through sales to prime contractors
or subcontractors, accounted for $33.8 million or 17% of total sales
and $32.1 million or 17% of total sales in 1999 and 1998, respectively.
In 1999, sales to Lockheed Martin Corporation ("Lockheed") were $35.8
million or 18 % of total sales, of which 100% related to U.S.
government and UK MOD contracts, and sales to The Boeing Company
("Boeing") were $25.4 million or 13% of total sales, of which 100%
related to U.S. government and UK MOD contracts. In 1998, sales to
Boeing were approximately $28.1 million or 15% of total sales, of which
approximately 98% related to U.S. government and UK MOD contracts, and
sales to Lockheed were approximately $22.0 million or 11% of total
sales, of which approximately 91% related to U.S. government contracts.
In 1997, sales to Thomson Training & Simulation Ltd. ("Thomson") were
$19.3 million or 12% of total sales. All sales to significant customers
are within the simulation segment.
61
<PAGE>
Aggregated accounts receivable from agencies of the United States
government, either directly or indirectly through prime or
subcontractors, was $7.2 million or 24% of gross accounts receivable at
December 31, 1999 and $14.0 million or 29% of gross accounts receivable
at December 31, 1998. Aggregated accounts receivable from the UK MOD,
either directly or indirectly through prime or subcontractors, was $5.6
million or 19% of gross accounts receivable at December 31, 1999.
Aggregated accounts receivable from the Federal Department of Defense
of the Federal Republic of Germany, either directly or indirectly
through prime or subcontractors, was $3.2 million or 11% of gross
accounts receivable at December 31, 1999.
The amount of costs and estimated earnings in excess of billings on
uncompleted contracts from agencies of the United States government and
the UK MOD, either directly or indirectly through prime or
subcontractors, was $11.1 million and $41.3 million, or 14% and 51% of
total costs and estimated earnings in excess of billings on uncompleted
contracts, respectively, at December 31, 1999. 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, respectively,
at December 31, 1998. The amount of costs and estimated earnings in
excess of billings on uncompleted contracts from agencies of the United
States government was $21.4 million, or 41% of total costs and
estimated earnings in excess of billings on uncompleted contracts, at
December 31, 1997.
(22) RESTRUCTURING CHARGE
In the third quarter of 1999, the Company initiated a restructuring
plan focused on reducing the operating cost structure of its
Workstation Products Group. As part of the plan, the Company recorded a
charge of $1.5 million relating to 28 employee terminations, including
17 employees in San Jose and 11 employees in Salt Lake City. As of
December 31, 1999, the Company had paid $354,000 in employee severance
benefits. The remaining benefits will be paid out over the next two
years. The charge was recorded in accordance with Emerging Issues Task
Force Issue 94-03 "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit (Including Certain Costs
Incurred in a Restructuring)."
(23) RELATED PARTY TRANSACTIONS
The Company had purchases of $0.4 million, $1.4 million and $0.6
million during 1999, 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 zero and $0.4 million at December 31,
1999 and 1998, respectively.
(24) SUBSEQUENT EVENTS
On March 28, 2000, the Company sold certain assets of its Applications
Group relating to digital video products to RT-SET Real Time
Synthesized Entertainment Technology Ltd. and its subsidiary, RT-SET
America Inc. for $1.4 million cash, common stock of RT-SET Real Time
Synthesized Entertainment Technology Ltd. valued at approximately $1.0
million and the assumption of certain liabilities. The Company may
receive additional common stock of RT-SET Real Time Synthesized
Entertainment Technology Ltd. valued up to $3.0 million in the event
that a product currently being developed and included in the purchased
assets meets certain specified performance criteria within a specified
time period.
On March 28, 2000, the Company received a commitment letter from a
lender to provide the Company a revolving line of credit for borrowings
by the Company of up to $15.0 million. The Company expects to close on
the line of credit on or before April 30, 2000. In March 2000, the
Company added a $5.0 million unsecured Letter of Credit line with First
Security Bank, N.A. and a $10.0 million unsecured surety line with
American International Companies and its affiliates.
62
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
"None"
FORM 10-K
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding directors of the Company is incorporated by
reference from "Election of Directors" in the Proxy Statement to be delivered to
shareholders in connection with the 2000 Annual Meeting of Shareholders to be
held on May 17, 2000.
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 2000 Annual Meeting of Shareholders to be held on May 17, 2000.
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 2000 Annual Meeting of Shareholders to be held on May 17,
2000.
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 2000 Annual
Meeting of Shareholders to be held on May 17, 2000.
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 2000 Annual
Meeting of Shareholders to be held on May 17, 2000.
63
<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, 1999 and 1998
Consolidated Statements of Operations for the three years ended
December 31, 1999
Consolidated Statements of Comprehensive Income for the three years
ended December 31, 1999
Consolidated Statements of Stockholders' Equity for the three years
ended December 31, 1999
Consolidated Statements of Cash Flows for the three years ended
December 31, 1999
Notesto Consolidated Financial Statements for the three years ended
December 31, 1999
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.
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.
64
<PAGE>
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.
65
<PAGE>
10.14 Master Agreement for Electronic Manufacturing Services, dated as
of June 3, 1999, between Evans & Sutherland Computer Corporation
and Sanmina Corporation, filed as Exhibit 10.1 to the Company's
Form 10-Q for the quarter ended July 2, 1999, and incorporated
herein by this reference.
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 S.
Casilli, Peter O. Crisp, Richard J. Gaynor, 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
AccelGALAXY, AccelGMX, Digistar, DYNAMICgeometry, E&S, E&S Lightning
1200, EaSIEST, Ensemble, ESIG, FuseBox, Harmony, iNTegrator, MindSet, REALimage,
simFUSION, 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.
66
<PAGE>
Schedule II
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
Years ended December 31,1999, December 31,1998 and December 31, 1997
(in thousands)
<TABLE>
<CAPTION>
Balance at Additions Deductions Balance
beginning of Charged to Through Charged at end of
year cost and business (recovered) year
expenses acquisitions against
allowance
------------- ------------ ------------- ------------- -----------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful
receivables
December 31, 1999 $ 1,616 $ 558 $ - $ 852 $ 1,322
December 31, 1998 851 496 1,013 744 1,616
December 31, 1997 563 370 - 82 851
Inventory Reserves
December 31, 1999 $ 6,963 $ 910 $ - $ 1,826 $ 6,047
December 31, 1998 7,635 1,987 1,350 4,009 6,963
December 31, 1997 7,137 1,009 - 511 7,635
Warranty Reserves
December 31, 1999 $ 1,436 $ 958 $ - $ 1,018 $ 1,376
December 31, 1998 880 872 494 810 1,436
December 31, 1997 808 726 - 654 880
</TABLE>
67
<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 30, 2000 By: /S/ James R. Oyler
-----------------------------------------
JAMES R. OYLER, PRESIDENT
Pursuant to the requirements of the Securities and Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
<TABLE>
<S> <C> <C>
* Chairman of the March 30, 2000
STEWART CARRELL Board of Directors
/S/ James R. Oyler Director and President March 30, 2000
- --------------------------------------------
JAMES R. OYLER (Chief Executive Officer)
/S/ Richard J. Gaynor Vice President and Chief March 30, 2000
- --------------------------------------------
RICHARD J. GAYNOR Financial Officer
(Principal Financial Officer)
/S/ Mark C. McBride Vice President and March 30, 2000
- --------------------------------------------
MARK C. MCBRIDE Corporate Controller
(Principal Accounting Officer)
* Director March 30, 2000
- --------------------------------------------
GERALD S. CASILLI
* Director March 30, 2000
- --------------------------------------------
PETER O. CRISP
* Director March 30, 2000
- --------------------------------------------
IVAN E. SUTHERLAND
By: /S/ Mark C. McBride March 30, 2000
-----------------------------------------
MARK C. MCBRIDE
*Attorney-in-Fact
</TABLE>
68
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
E&S Partners, Inc. Utah E&S Partners, Inc.
</TABLE>
69
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 14, 2000, except as
to Note 24, which is as of March 28, 2000 relating to the consolidated balance
sheets of Evans & Sutherland Computer Corporation and subsidiaries as of
December 31, 1999 and December 31, 1998, 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, 1999 and related
schedule, which report appears in the December 31, 1999 Annual Report on Form
10-K of Evans & Sutherland Computer Corporation.
KPMG LLP
Salt Lake City, Utah
March 30, 2000
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, Richard J. Gaynor, 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 30, 1999, 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 8th day of March, 2000.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/S/ Stewart Carrell
- ------------------------------------
Stewart Carrell Chairman of the Board of Directors March 8, 2000
/S/ James R. Oyler
- ------------------------------------
James R. Oyler President and Chief Executive Officer March 8, 2000
(Principal Executive Officer) and
Director
/S/ Richard J. Gaynor
- ------------------------------------
Richard J. Gaynor Vice President and Chief Financial March 8, 2000
Officer (Principal Financial Officer)
/S/ Mark C. McBride
- ------------------------------------
Mark C. McBride Vice President, Corporate Controller March 8, 2000
and Secretary (Principal Accounting
Officer)
/S/ Gerald S. Casilli
- ------------------------------------
Gerald S. Casilli Director March 8, 2000
/S/ Peter O. Crisp
- ------------------------------------
Peter O. Crisp Director March 8, 2000
/S/ Ivan E. Sutherland
- ------------------------------------
Ivan E. Sutherland Director March 8, 2000
</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-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 22,110
<SECURITIES> 748
<RECEIVABLES> 30,065
<ALLOWANCES> 1,322
<INVENTORY> 40,588
<CURRENT-ASSETS> 196,413
<PP&E> 140,676
<DEPRECIATION> 88,492
<TOTAL-ASSETS> 258,464
<CURRENT-LIABILITIES> 79,483
<BONDS> 18,015
23,772
0
<COMMON> 1,936
<OTHER-SE> 135,258
<TOTAL-LIABILITY-AND-EQUITY> 258,464
<SALES> 200,885
<TOTAL-REVENUES> 200,885
<CGS> 127,556
<TOTAL-COSTS> 140,786
<OTHER-EXPENSES> 100,065
<LOSS-PROVISION> 558
<INTEREST-EXPENSE> 1,333
<INCOME-PRETAX> (38,867)
<INCOME-TAX> (15,413)
<INCOME-CONTINUING> (23,454)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (23,682)
<EPS-BASIC> (2.49)
<EPS-DILUTED> (2.49)
</TABLE>
