-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NZGUVHOtUVjLyr+Vy7AvvoNGQbg9qqt/7byCojEUNXGMFNY5F1AKuJ46BZdjYJ4l ZEkbPfvyVyAucCoet1MBhw== 0000912057-02-012975.txt : 20020415 0000912057-02-012975.hdr.sgml : 20020415 ACCESSION NUMBER: 0000912057-02-012975 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020401 FILER: COMPANY DATA: COMPANY CONFORMED NAME: EVANS & SUTHERLAND COMPUTER CORP CENTRAL INDEX KEY: 0000276283 STANDARD INDUSTRIAL CLASSIFICATION: MISCELLANEOUS ELECTRICAL MACHINERY, EQUIPMENT & SUPPLIES [3690] IRS NUMBER: 870278175 STATE OF INCORPORATION: UT FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-14677 FILM NUMBER: 02597074 BUSINESS ADDRESS: STREET 1: 600 KOMAS DR CITY: SALT LAKE CITY STATE: UT ZIP: 84108 BUSINESS PHONE: 8015881815 MAIL ADDRESS: STREET 1: 600 KOMAS DR CITY: SALT LAKE CITY STATE: UT ZIP: 84108 10-K 1 a2075343z10-k.txt 10-K - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------------------------- FORM 10-K (MARK ONE) /X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001 / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________________ TO ________________ COMMISSION FILE NUMBER 0-8771 -------------------------- EVANS & SUTHERLAND COMPUTER CORPORATION (Exact Name of Registrant as Specified in Its Charter) UTAH 87-0278175 (State or Other Jurisdiction of (I.R.S. Employer Identification No.) Incorporation or Organization) 600 KOMAS DRIVE, SALT LAKE CITY, UTAH 84108 (Address of Principal Executive (Zip Code) Offices)
Registrant's telephone number, including area code: (801) 588-1000 Securities registered pursuant to Section 12(b) of the Act: "NONE" Securities registered pursuant to Section 12(g) of the Act: TITLE OF CLASS COMMON STOCK, $.20 PAR VALUE 6% CONVERTIBLE DEBENTURES DUE 2012 PREFERRED STOCK PURCHASE RIGHTS ------------------------------ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No / / Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. / / The aggregate market value of the voting and non-voting Common Stock held by non-affiliates of the registrant as of March 1, 2002 was approximately $33,242,000, 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 1, 2002 was 10,398,314. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Proxy Statement for the 2002 Annual Meeting of Shareholders to be held on May 16, 2002 are incorporated by reference into Part III hereof. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (This page has been left blank intentionally.) 2 EVANS & SUTHERLAND COMPUTER CORPORATION FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2001
PART I Item 1. Business 5 Item 2. Properties 15 Item 3. Legal Proceedings 15 Item 4. Submission of Matters to a Vote of Security Holders 17 PART II Item 5. Market For Registrant's Common Equity and Related Stockholder Matters 19 Item 6. Selected Consolidated Financial Data 20 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 22 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 42 Item 8. Financial Statements and Supplementary Data 43 Report of Management 44 Report of Independent Auditors 44 Consolidated Balance Sheets 45 Consolidated Statements of Operations 46 Consolidated Statements of Comprehensive Loss 47 Consolidated Statements of Stockholders' Equity 48 Consolidated Statements of Cash Flows 49 Notes to Consolidated Financial Statements 50 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 73 PART III Item 10. Directors and Executive Officers of the Registrant 73 Item 11. Executive Compensation 73 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 73 Item 13. Certain Relationships and Related Transactions 73 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 74 Signatures 82
3 (This page has been left blank intentionally.) 4 FORM 10-K PART I ITEM 1. BUSINESS GENERAL Evans & Sutherland Computer Corporation ("Evans & Sutherland," "E&S," "we," "us," or "our") was incorporated in the State of Utah on May 10, 1968. An established high-technology company, E&S is a worldwide leader in providing visual system solutions for simulation. E&S visual systems are used in military and commercial training simulators, planetariums and interactive domed theaters, as well as engineering and other applications. E&S is unique among visual simulation companies in that it offers a complete range of solutions from low cost, PC-based products to the most advanced systems in the world. All E&S products are backed by unrivaled customer service and support, ensuring customers low life-cycle cost and the best value in visual simulation. E&S's principal offices are located at 600 Komas Drive, Salt Lake City, Utah 84108, and its telephone number is (801) 588-1000. E&S's home page on the Internet is www.es.com. You can learn more about E&S by reviewing SEC filings on the E&S web site. The SEC also maintains a web site at www.sec.gov that contains reports, proxy statements and other information regarding SEC registrants, including E&S. E&S makes its web site content available for information purposes only. It should not be relied upon for investment purposes, nor is it incorporated by reference into this Form 10-K. During 2001, our core computer graphics technology was shared among three business groups: (1) Simulation Group, which produces a full range of image generators, software, databases, and display systems for military and commercial simulation; (2) REALimage Solutions Group, which provides graphics acceleration technology for PC-based simulation, the professional digital content creation (DCC) market, and video processing technology for animation, broadcasting, and netcasting applications; and (3) Applications Group, which leverages our core technologies and applies them to other growth markets, such as digital theaters and visualization software for real estate development applications. RESTRUCTURING Early in 2001, we announced our intention to spin out or sell our REALimage Solutions Group. In the third quarter of 2001, E&S sold the REALimage Group to Real Vision, Inc., a Japanese company that has been a partner with E&S in the development of technology for professional video applications. The sale was for a maximum value of $12 million, consisting of cash of $6.3 million plus future royalties, on a when and if earned basis, of up to $6 million for REALimage technology, other assets, and the performance of certain development support during a seven-month transition period leading to closing the transaction in April 2002. Real Vision has indicated it will continue the development of the technology, and E&S is maintaining a technical staff to support Real Vision in Salt Lake City during the transition period. Shortly after the sale of the REALimage Group, E&S closed its offices in Seattle, Washington, and San Jose, California. Throughout 2001, we had been actively seeking sale or spin-off opportunities for our RAPIDsite-TM- visualization solutions business which is part of the Applications Group. The general economic downturn made it difficult to sell this business. In December, we decided to discontinue the RAPIDsite business and incorporate its technology into the core simulation business. In the third quarter of 2001, we initiated a restructuring plan focused on reducing the operating cost structure of E&S. As part of the plan, we recorded a charge of $2.1 million relating to a reduction 5 in force of approximately 80 employees. In the fourth quarter of 2001, we extended the restructuring plan initiated in the third quarter. As part of the plan, we recorded a charge of $0.7 million relating to a reduction in force of approximately 12 employees. We estimate that this restructuring plan will reduce expenses by $8.2 million per year going forward. As of December 31, 2001, we had paid $1.9 million in severance benefits. The majority of the remaining benefits will be paid out over the next two quarters. 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 Cost Incurred in a Restructuring)" and Staff Accounting Bulletin No. 100, "Restructuring and Impairment Charges". In the third quarter of 1999, E&S initiated a restructuring plan focused on reducing the operating cost structure of its REALimage Solutions Group. As part of the plan, E&S recorded a charge of $1.5 million relating to 28 employee terminations, including 17 employees in San Jose and 11 employees in Salt Lake City. The charge was recorded in accordance with Emerging Issues Task Force Issue 94-03, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit (Including Certain Costs Incurred in a Restructuring)." During 2000, after all employee severance costs were incurred, E&S reversed $0.8 million of the restructuring charge as a result of certain employees being transferred within E&S rather than being terminated and estimated severance and related charges being lower than expected for the terminated employees. FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS This annual report, including all documents incorporated herein by reference, includes certain "forward-looking statements" within the meaning of that term in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act of 1934, as amended, including, among others, those statements preceded by, followed by or including the words "estimates," "believes," "expects," "anticipates," "plans," "projects," and similar expressions. These forward-looking statements include, but are not limited to, the following statements: - the successful execution of the Big 6 programs by the end of 2002; - we will generate $5 million of cash per quarter and will be profitable in the second half of 2002; - 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 our products and services; - Simulation Group will experience growth in its markets as simulation training increases in value as an alternative to other training methods, and as simulation training technology and cost-effectiveness improve; - additional enhancements to iNTegrator will expand its functionality and help secure E&S's dominant position in its main target markets, both commercial and military simulation; - E&S is able to compete effectively in the simulation market and will continue to be able to do so in the foreseeable future; - approximately two-third's of Simulation Group's 2001 backlog will be converted to sales in 2002 and replaced with new orders; 6 - the Applications Group's new product will be launched in the first half of 2002; - our properties are suitable for our immediate needs; - total research and development spending will be lower in 2002 than in 2001; - E&S will ultimately prevail in the litigation with Lockheed Martin Corporation; - E&S will not be liable for any further material liquidated damages and late delivery penalties during 2002; - existing cash, cash equivalents, borrowings available under E&S's various borrowing facilities, other asset-related cash sources and expected cash from future operations will be sufficient to meet E&S's anticipated working capital needs, routine capital expenditures and current debt service obligations for the next twelve months; - the guarantees of E&S issued in connection with the services of our joint venture entity, Quest Flight Training Ltd., to the UK Ministry of Defence or other parties will not be called upon for payment or performance; - revenue is expected to contract by 10% from 2001 to 2002; 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 on page 35 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, and E&S's ability to maintain credit facilities to support its operations on favorable and acceptable terms. In light of these risks and uncertainties, there can be no assurance that the events contemplated by the forward-looking statements contained in this annual report will, in fact, occur. REPORTABLE SEGMENTS During 2001, our business units were aggregated into the following three reportable segments: the Simulation Group, the REALimage Solutions Group, and the Applications Group. The three groups benefit from shared core graphics technology, and each group's new products are based on open Intel and Microsoft hardware and software standards. Each reportable segment markets its products to a worldwide customer base. As described above under the heading "Restructuring", we sold the REALimage Solutions Group and discontinued the RAPIDsite business in the Applications Group. Financial information by reportable segment for each of the three years ended December 31, 2001 is included in Note 18 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 30% of the worldwide market for government and military applications and commercial airline training simulators. The group anticipates growth in these markets as simulation training increases in value as an alternative to other training methods, and as simulation training technology and cost-effectiveness improve. 7 Throughout 2001, we continued development of our iNTegrator-Registered Trademark- software product, which provides the real-time control and modeling tools for the Symphony-TM- family of hardware platforms. Performance optimizations and new functionality have continuously been added with each new software release to meet existing contract requirements and to increase the product performance. While the majority of iNTegrator development is complete, some additional enhancements are planned in 2002, which management believes will expand its functionality and help secure our dominant position in our main target markets, both commercial and military. In addition to continued development of iNTegrator software, we completed the major development efforts on our most advanced image generator product, Harmony-Registered Trademark-. All major Harmony programs are now in training or in final stages of completion and acceptance. PRODUCTS & MARKETS The Simulation Group provides a complete line of visual systems for flight and ground training and related services to the United States and international armed forces, NASA, commercial airlines, and aerospace companies. E&S remains an industry leader in visual systems sales to many U.S. government agencies and more than 20 foreign governments for training military vehicle operators. The Simulation Group is also a leading independent supplier of visual systems for commercial airline flight simulators. This group provides over 30% of the visual systems installed in full-flight training simulators for commercial airlines, training centers, simulator manufacturers, and aircraft manufacturers. The group's visual systems create high-quality, interactive, out-the-window scenes that realistically simulate what vehicle operators see 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 six major components listed below. These components are available as subsystems, but are typically sold together as a complete visual system solution delivered to an end user or prime contractor. (1) Image generators (IGs) create computer-generated real-time images and send these images to display devices, such as projectors or computer monitors. The group's primary IG offerings include the Symphony family of products from Harmony on the high end to OpenGL, PC-based simFUSION-TM- at the low end, and its legacy ESIG-Registered Trademark- products, which continue to show strong sales. E&S offers a complete, high-to-low family of IGs that can use the same software and databases. Harmony is our flagship for highest performance, Ensemble-TM- is the first PC-based true image generator offering deterministic performance and simulation-specific functionality, and simFUSION is the first OpenGL PC-based hardware platform 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 depicting synthetic environments are offered as options or as custom solutions. The group provides database development as well as database development tools such as iNTegrator and EaSIEST-Registered Trademark-. Databases developed using iNTegrator are a key element of the Symphony product family. These can be run on a full range of image generators. (4) Simulation of sensor imagery such as radar, infrared, and night vision goggles (NVG) is often provided with the visual systems for high-performance fixed and rotary wing aircraft. E&S develops and manufactures a variety of hardware and software products to achieve realistic 8 sensor simulation, including the Vanguard-Registered Trademark- radar image generator, infrared postprocessors, and customized systems for either simulated or stimulated NVG solutions. (5) System integration and installation services are offered in support of the total simulator system. We have the capability to act as the main prime contractor for large commercial and military contracts requiring total systems integration. (6) A full range of customer support services is offered to prime contractors, system integrators, and military or commercial end users. Service and Support product offerings include customized support packages, called Encore(SM), that provide complete maintenance, spares, and round-the-clock technical support; SimTech Training, which provides training to the customers' simulation technicians and engineers; and Computer-Based Training. E&S also develops complete simulation solutions for specific training applications. In 2001, we announced two new products, the Mission Command Trainer, or MCT-TM-, and the Air Traffic Control Trainer, or ATCT-TM-. The MCT is a low-cost tactics simulator that provides realistic command training, mission planning, and mission rehearsal in a virtual environment against an intelligent virtual enemy, all in the safety and security of a classroom. Developed in a partnership with MicroNav, Ltd., one of the world's leading producers of air traffic control training software, the ATCT is a complete, advanced 3D tower simulator for licensing, refresher training, and conversion training. The Simulation Group's products are marketed worldwide by E&S and qualified distributors. Products and services are sold directly to end users by E&S as a prime contractor, through simulator prime contractors with E&S acting as a subcontractor, and through system OEMs. E&S continues to form both domestic and international alliances with aerospace and simulation companies that dominate their respective market segments. Such strategic alliances have proved to be an effective method for accessing specific markets. In addition, we have OEM and Value Added Reseller agreements with several major distributors in Europe and Asia. 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), Thales Training & Simulation Ltd., and CAE Electronics, Ltd. (CAE), offer competing visual systems in the simulation market. We believe we are able to compete effectively in this environment and will continue to be able to do so in the foreseeable future. In 2001, 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, our simFUSION product competes against companies that focus on PC simulation using graphics accelerator cards, such as Quantum 3D. In February 2001, a team of industry leaders led by Evans & Sutherland was selected by the U.S. Army Simulation, Training, and Instrumentation Command (STRICOM) to receive an Indefinite Delivery/Indefinite Quantity (ID/IQ) contract. Under the terms of the contract, the E&S team is prequalified to bid as a prime contractor on STRICOM contracts valued at up to $4 billion over the next eight years. A team comprised of E&S and others is one of 17 prime contractor teams selected by STRICOM for the Virtual Domain, one of four business domains that include Constructive, Live, and Test-Instrumentation. Core members of the E&S team include Cubic Applications, Inc., CACI, J.F. Taylor, Inc., Raydon, and MTI. The team also includes 13 subcontractors with extensive backgrounds in military simulation. 9 E&S is also a member of two contractor teams selected by STRICOM last fall for the Constructive Domain. These key contract awards position Evans & Sutherland to provide its state-of-the-art visual systems support, including image generation, display systems, and database development, for future STRICOM programs. BACKLOG The Simulation Group's backlog was $104.2 million on December 31, 2001, compared with $134.6 million on December 31, 2000. It is anticipated that approximately two-thirds of the 2001 backlog will be converted to sales in 2002. 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. The U.S. Government, and other governments, may terminate any of our government contracts and, in general, subcontracts, at their convenience as well as for default based on performance. If any of our government contracts were to be terminated for convenience, we generally would be entitled to receive payment for work completed and allowable termination or cancellation costs. Upon termination for convenience of a fixed-price type contract, we normally are entitled, to the extent of available funding, to receive the purchase price for delivered items, reimbursement for allowable costs for work-in-progress and an allowance for profit on the contract or adjustment for loss if completion of performance would have resulted in a loss. Upon termination for convenience of a cost reimbursement contract, we normally are entitled, to the extent of available funding, to reimbursement of allowable costs plus a portion of the fee. The amount of the fee recovered, if any, is related to the portion of the work accomplished prior to termination and is determined by negotiation. U.S. government contracts also are conditioned upon the continuing availability of Congressional appropriations. Long-term government contracts and related orders are subject to cancellation if appropriations for subsequent performance periods become unavailable. Congress usually appropriates funds on a fiscal-year basis even though contract performance may extend over many years. Consequently, at the outset of a program, the contract is usually partially funded, and Congress annually determines if additional funds are to be appropriated to the contract. REALIMAGE SOLUTIONS GROUP The REALimage Solutions Group was sold to Japan-based Real Vision, Inc., in September 2001. As part of Real Vision, the group is continuing to develop the "Studio-on-a-Chip" technology, which brings 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. The sale was for a maximum value of $12 million, consisting of cash of $6.3 million plus future royalties, on a when and if earned basis, up to $6 million for REALimage technology, other assets, and the performance of certain development support during a seven-month transition period leading to closing the transaction in April 2002. Real Vision has indicated it will continue the development of the technology, and E&S is maintaining a technical staff to support Real Vision in Salt Lake City during the transition period. Shortly after the sale of the REALimage Group, E&S closed its offices in Seattle, Washington, and San Jose, California. PRODUCTS & MARKETS Prior to 2002, the REALimage Solutions Group developed and sold graphics chips and graphics subsystems for professional PC workstations. Early in 2000, the group's strategic focus changed from development and manufacture of graphics accelerator cards for professional digital content creation customers to development of the next generation REALimage chip, the RI 5000. This chip, referred to 10 as "Studio-on-a-Chip", brings together both graphics and video processing technology on a single chip for digital video content creation and post-production. The group also began to establish a new application and market for REALimage technology in 2000 when REALimage chips were selected by Honeywell for use in cockpit navigation systems for military aircraft and business jets. COMPETITIVE CONDITIONS Due to the sale of the REALimage Solutions Group to Real Vision, Inc. of Japan, we do not compete in this industry or market any longer. BACKLOG Because of the shift in strategic focus, the in-process development of the new RI 5000 chipset, and the sale of REALimage, the group has no backlog as of December 31, 2001, compared to $0.7 million as of December 31, 2000. APPLICATIONS GROUP The Applications Group is composed of synergistic businesses that use E&S core technology in growth markets. The group's products are applications that leverage E&S's technology and apply them to other growth markets. After these applications have been developed and produced, our strategy is to spin them off or sell them to companies involved in complementary businesses. 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 subsystems from the Simulation Group. E&S integrates these systems with projection equipment, audio components, and audience-participation systems from other suppliers. Products include Digistar-Registered Trademark- II, a calligraphic star projection system designed to compete with analog star projectors in planetariums, and StarRider-Registered Trademark-, a full-color, domed theater experience available in interactive or video playback formats. The Applications Group is a leading supplier of digital display systems in the planetarium marketplace. In addition to projection and theater systems, the Applications Group develops and markets show content for planetariums and domed theaters. In 2001, the Applications Group achieved several important milestones. The Applications Group launched its second interactive show called Crack the Cosmic Code. The show debuted at the StarRider theater at Exploration Place in Wichita, Kansas. The Applications Group continued its development of its new product, which will be launched in the first half of 2002, as well as several new domed theater shows, which are available to theaters around the world for licensing. In 2001, the Applications Group continued to expand the market for E&S RAPIDsite-TM-. E&S RAPIDsite is a photorealistic visualization tool designed for use by real-estate developers, consulting engineers, architects, and municipal planners involved with all types of land development projects. RAPIDsite features fast 3D-model construction, accelerated graphics rendering performance and easy-to-use interactive exploration of a proposed development on a Windows NT computer with an OpenGL graphics accelerator. Throughout 2001, we had been actively seeking sale or spin-off opportunities for our RAPIDsite-TM- visualization solutions business which is part of the Applications Group. The general economic 11 downturn made it difficult to sell this business. In December, we decided to discontinue the RAPIDsite business. COMPETITIVE CONDITIONS Primary competitive factors for the Applications Group's products are functionality, performance, price, and access to customers and distribution channels. Our digital theater products compete with traditional optical-mechanical products and digital display systems offered by Minolta Planetarium Co. Ltd., GoTo Optical Mfg. Co., Carl Zeiss Inc., Spitz, Inc., Trimension, Inc. and Sky-Skan, Inc. BACKLOG The Applications Group's backlog was $2.7 million December 31, 2001, compared with $7.4 million on December 31, 2000. It is anticipated that most of the 2001 backlog will be converted to sales in 2002. SIGNIFICANT CUSTOMERS Worldwide customers using E&S products include U.S. and international armed forces, NASA, aerospace companies, most major airlines, 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 $69.5 million or 48% of total sales, $66.7 million or 40% of total sales, and $84.5 million or 42% of total sales in 2001, 2000, and 1999, respectively. Sales to the United Kingdom Ministry of Defense, either directly or indirectly through sales to prime contractors or subcontractors, accounted for $13.6 million or 9% of total sales, $22.3 million or 13% and $33.8 million or 17% of total sales in 2001, 2000 and 1999, respectively. In 2001, sales to Thales Training & Simulation Ltd. totaled $23.9 million or 16.4% of total sales of which 57% related to U.S. government and United Kingdom Ministry of Defence contracts and sales to The Boeing Company totaled $15.1 million or 10% of total sales of which 100% related to U.S. government and United Kingdom Ministry of Defence contracts. In 2000, sales to Lockheed Martin Corporation were $22.5 million or 14% of total sales, of which 100% related to U.S. government and United Kingdom Ministry of Defence contracts and sales to Thales Training & Simulation Ltd. were $19.6 million or 12% of total sales, of which 58% related to United Kingdom Ministry of Defence contracts. In 1999, sales to Lockheed Martin Corporation were $35.8 million or 18% of total sales, of which 100% related to U.S. government and United Kingdom Ministry of Defence contracts and sales to The Boeing Company were $25.4 million or 13% of total sales, of which 100% related to U.S. government and United Kingdom Ministry of Defence contracts. All of our sales to significant customers are within the Simulation Group. DEPENDENCE ON SUPPLIERS Most of our current parts and assemblies are readily available through multiple sources in the open market; however, a limited number are available only from a single source. In these cases, we stock a substantial inventory, or obtain the agreement of the vendor to maintain adequate stock for future demands, and/or attempt to develop alternative components or sources where appropriate. On June 3, 1999, we entered into an electronic manufacturing services agreement with Sanmina Corporation (now Sanmina-SCI). The agreement commits us to purchase a minimum of $22 million of electronic products and assemblies from Sanmina-SCI each year until June 3, 2002. If we fail to meet these minimum purchase levels, subject to adjustment, we may be required to pay 25 percent of the 12 difference between the $22 million and the amount purchased. We have fully satisfied the requirements of this contract, which ends in June 2002. Various alternatives, which include a renewed contract with Sanmina-SCI, are being evaluated. 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. and internationally, we hold active patents that cover many aspects of our graphics technology. Several patent applications are presently pending in the U.S., Japan, and several European countries, and other patent applications are in preparation. E&S actively pursues patents on its new technology. E&S routinely copyrights software, documentation, and chip masks designed by us and institutes copyright registration for such software, documentation, and masks when appropriate. 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. Our research and development expenses were $28.8 million, $44.3 million, and $44.4 million in 2001, 2000, and 1999, respectively. As a percentage of sales, research and development expenses were 20%, 27%, and 22% in 2001, 2000, and 1999, respectively. We continue 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 we maintain technical excellence, leadership, and market competitiveness. However, due to the sale of the REALimage Solutions Group, the discontinuation of the RAPIDsite business and the reduction of effort required to develop our Harmony and iNTegrator products, management expects that the total research and development spending necessary to continue the timely development of products will be lower in 2002 than in 2001. INTERNATIONAL SALES Sales of products known to be ultimately installed outside the United States are considered international sales by E&S and were $49.5 million, $60.9 million, and $86.7 million in 2001, 2000, and 1999, respectively. International sales represented 34%, 36%, and 43% of total sales in 2001, 2000, and 1999, respectively. For additional information, see Note 19 of Notes to Consolidated Financial Statements included in Part II of this annual report. EMPLOYEES As of March 1, 2002, Evans & Sutherland and its subsidiaries employed a total of 724 persons compared to 847 employees as of March 2, 2001. We believe our relations with our employees are good. None of our employees is subject to collective bargaining agreements. ENVIRONMENTAL STANDARDS We believe our facilities and operations are within standards fully acceptable to the Environmental Protection Agency and that all facilities and procedures are in accordance with environmental rules and regulations, and international, federal, state, and local laws. 13 STRATEGIC RELATIONSHIPS In October 2001, we announced an agreement with NVIDIA-Registered Trademark- Corporation. As part of this agreement, NVIDIA Corporation acquired certain key 3D-graphics patents from E&S and the companies agreed to a broad cross-license of technologies. This agreement with NVIDIA allows E&S to leverage its general graphics technology into high volume markets, while adding new capabilities including NVIDIA's programmable Shader technology to E&S's base of unique technology and patents for the simulation industry. During the fourth quarter of 2001, E&S entered into a multiyear agreement with graphics technology leader ATI Technologies Inc., under which ATI will provide graphics accelerator chips for our next-generation PC-based visual systems. ATI chips will replace REALimage chips in E&S's next-generation Ensemble and simFUSION image generators. On July 22, 1998, Intel purchased 901,408 shares of E&S's preferred stock plus a warrant to purchase an additional 378,462 shares of the preferred stock at an exercise price of $33.28125 per share for approximately $24.0 million. In March 2001, Intel converted the 901,408 shares of E&S's preferred stock into 901,408 shares of E&S's common stock. In March 2001, Intel and E&S amended the preferred stock and warrant purchase agreement to terminate certain contractual rights of Intel, including registration rights, board and committee observation rights, right of first refusal, right of participation, right of maintenance, standstill agreement, and right to require E&S to repurchase the preferred stock in the event of any transaction qualifying as a specific corporate event. E&S also entered into an agreement to accelerate development of high-end graphics and video subsystems for Intel-based workstations in July 1998. ACQUISITIONS AND DISPOSITIONS Early in 2001, we announced our intention to spin out or sell our REALimage Solutions Group. In the third quarter of 2001, E&S sold the REALimage Solutions Group to Real Vision, Inc., a Japanese company that has been a partner with E&S in the development of technology for professional video applications. The sale was for a maximum value of $12 million, consisting of cash of $6.3 million plus future royalties, on a when and if earned basis, up to $6 million for REALimage technology, other assets, and the performance of certain development support during a seven-month transition period leading to closing the transaction in April 2002. Real Vision has indicated it will continue the development of the technology, and E&S is maintaining a technical staff to support Real Vision in Salt Lake City during the transition period. As part of the sale of the REALimage Group, E&S closed its offices in Seattle, Washington, and San Jose, California. In December 2000, we completed the divestiture of our German subsidiary via a management-led buyout and recorded a loss of $0.3 million. The former subsidiary, which was called Evans & Sutherland Computer GmbH, now operates under a new name. The divested company has no remaining connection with E&S. We will continue to operate in Germany and throughout Europe under our own name, providing marketing, sales, and support for our growing visual systems business and traditional customer base. On March 28, 2000, we sold certain assets of our Application Group relating to digital video products to RT-SET Real Time Synthesized Entertainment Technology Ltd. and its subsidiary, RT-SET America Inc., for $1.4 million in cash, common stock of RT-SET Real Time Synthesized Entertainment Technology Ltd. valued at approximately $1.0 million, and the assumption of certain liabilities. On June 15, 2000, we received additional common stock of RT-SET Real Time Synthesized Entertainment Technology Ltd. valued at $1.5 million related to the successful development of a product included in the purchased assets. 14 On June 3, 1999, we sold certain of our manufacturing capital assets and inventory of $6.0 million to Sanmina Corporation (now Sanmina-SCI) as part of our efforts to outsource the production of certain electronic products and assemblies. In addition, we entered into an electronic manufacturing services agreement with Sanmina-SCI. The electronic manufacturing services agreement commits us to purchase a minimum of $22.0 million of electronic products and assemblies from Sanmina-SCI each year until June 3, 2002. If we fail to meet these minimum purchase levels, subject to adjustment, we may be required to pay 25% of the difference between the $22.0 million and the amount purchased. We have fully satisfied the requirements of this contract, which ends in June 2002. Various alternatives, which include a renewed contract with Sanmina-SCI, are being evaluated. On June 26, 1998, E&S, through its wholly-owned subsidiary, Evans & Sutherland Graphics Corporation ("ESGC"), acquired all of the outstanding stock of AccelGraphics, Inc. ("AGI") to expand E&S's workstation graphics development, integration and distribution within the workstation graphics marketplace. To acquire AGI, E&S paid approximately $23.7 million in cash and 1,109,303 shares of E&S's common stock, which was valued at $25.7 million. In addition, E&S converted all outstanding AGI options into options to purchase approximately 351,000 shares of common stock of E&S with a fair value of $3.4 million and incurred transaction costs of approximately $1.1 million. To further expand E&S's presence within the workstation graphics marketplace, on June 26, 1998, E&S 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. E&S paid approximately $1.2 million and incurred transaction costs of approximately $250,000. ITEM 2. PROPERTIES Evans & Sutherland's principal executive, engineering, manufacturing and operations facilities for each of its business segments are located in the University of Utah Research Park, in Salt Lake City, Utah, where it owns seven buildings totaling approximately 450,000 square feet. E&S occupies four buildings and leases one of the remaining three buildings to other businesses. The remaining two buildings are vacant. We plan to sell the three buildings we do not occupy. The buildings are located on land leased from the University of Utah (the "U of U Property") with an initial term of 40-years or longer. Five of the buildings have land leases that expire in 2030, with a ten-year renewal option. The remaining two buildings have land leases that expire in 2012 and 2014 respectively, with 40-year renewal options. All of our interests in the U of U Property are subject to a lien by Foothill Capital Corporation to secure repayment of the borrowing facility as set forth in the Liquidity and Capital Resources section of the Management's Discussion and Analysis of Financial Condition and Results of Operations. E&S 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 our manufacturing, engineering or operating facilities. E&S believes that these properties are suitable for its immediate needs and it does not currently plan to expand its facilities or relocate. ITEM 3. LEGAL PROCEEDINGS LOCKHEED MARTIN CORPORATION V. EVANS & SUTHERLAND COMPUTER CORPORATION (UNITED STATES (MIDDLE) DISTRICT COURT (FLORIDA), CASE NO. 6:00-CV-755-ORL-19C, FILED ON MAY 23, 2000). On May 23, 2000, Lockheed Martin Corporation served E&S with a civil complaint filed in the Circuit Court of the Ninth Judicial Circuit in and for Orange County, Florida. Lockheed alleged in the complaint that we breached a contract to provide certain visual systems for the Combined Arms Tactical Trainer program for the United Kingdom Ministry of Defence. The contract has an original value of $33.9 million. In the complaint, Lockheed seeks compensatory damages of $8.5 million plus interest as well as consequential damages and attorneys' fees. The $8.5 million being sought from E&S by Lockheed was paid to us from May 1999 to March 2000 and was recognized as revenue by us during 1999. On June 12, 2000, we filed our answer and counterclaim. In the counterclaim, we allege as grounds for 15 recovery against Lockheed (1) breach of contract, (2) breach of implied covenant of good faith and fair dealing, (3) unjust enrichment, (4) unfair competition, (5) misappropriation of trade secrets, (6) intentional interference with advantageous business relationship, (7) replevin, and (8) promissory estoppel. In our counterclaim, we seek compensatory damages of not less than $10.0 million and not more than $25.4 million. On June 14, 2000, the case was removed to the Orlando Division of the United States District Court for the District of Florida where it currently remains. On July 7, 2000, Lockheed answered our counterclaim but also filed a motion for dismissal of our counterclaims for unjust enrichment, unfair competition, promissory estoppel, and incidental damages. On July 24, 2000, we filed our opposition to Lockheed's motion to dismiss our counterclaims. On October 20, 2000 the court denied Lockheed's motion to dismiss in its entirety, without prejudice. On January 16, 2001, we filed a motion for partial summary judgment, asking the court to dismiss all of Lockheed's breach of contract claims. The court denied that motion on August 30, 2001, citing the existence of material disputed facts. On September 6, 2001 the court granted Lockheed's leave to amend its complaint, which was filed on September 17, 2001. We filed a motion to dismiss these new claims on October 4, 2001, and Lockheed has opposed it. The court currently has that motion under advisement. Discovery in the matter is scheduled to conclude on September 30, 2002. A trial date is currently set for March, 2003. We dispute Lockheed's allegations in the complaint, are vigorously defending the action, and are vigorously prosecuting our counterclaims. Although management believes E&S will ultimately prevail in the litigation, an unfavorable outcome of these matters would have a material adverse impact on our financial condition and operations. In the normal course of business, E&S has various other legal claims and other contingent matters, including items raised by government contracting officers and auditors. Although the final outcome of such matters cannot be predicted, we believe the ultimate disposition of these matters would have a material adverse effect on our consolidated financial condition, liquidity or results of operations. 16 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 2001. EXECUTIVE OFFICERS OF THE REGISTRANT The following sets forth certain information regarding the executive officers of E&S as of March 1, 2002:
NAME AGE POSITION - ---- -------- ------------------------------------------ James R. Oyler 55 President and Chief Executive Officer David B. Figgins 53 Vice President and General Manager, Product Marketing L. Eugene Frazier 56 Vice President and General Manager, Strategic Visualization William M. Thomas 47 Vice President, Chief Financial Officer, Treasurer and Corporate Secretary E. Thomas Atchison 53 Vice President, Manufacturing, Service, and Support Nicholas Gibbs 43 Vice President and General Manager, Simulation Systems Richard Flitton 39 Vice President and General Manager, Commercial Simulation
Mr. Oyler was appointed President and Chief Executive Officer of E&S and a member of the Board of Directors in December 1994. He is also a director of Ikos Systems, Inc. Before joining Evans & Sutherland, Mr. Oyler served as President of AMG, Inc. from mid-1990 until December 1994, and a Senior Vice President for Harris Corporation from 1976 through mid-1990. He has seven years of service with E&S. Mr. Figgins was appointed Vice President, Product Marketing, in January 2002. He joined E&S as Vice President and General Manager, PC Simulation, in April of 1998, and was appointed Vice President of the Simulation Group in January 1999. In June 2001, he was appointed Vice President and Operating Officer, Simulation Group. Before joining E&S, Mr. Figgins served as Vice President of Business Development and Marketing for Raytheon Training, where he was employed from May 1986 to April 1998. Mr. Figgins has over 25 years experience in the simulation and training industry and has held increasingly responsible technical, marketing and management positions in small, medium and large organizations with senior executive positions in the last decade. Mr. Figgins is a graduate of Royal Air Force Halton and holds a M.S in Management from Purdue University. He has four years of service with E&S. Mr. Frazier was appointed Vice President, Strategic Visualization, in January 2002. He joined E&S in September 1997 as Vice President, Programs. In June of 1998, Mr. Frazier was appointed Vice President, Programs and Shared Technology. In April of 1999, he was appointed Vice President and General Manager, Systems. Mr. Frazier served as Vice President and General Manager of Simulation Systems until June of 2001, when he was appointed Vice President and Operating Officer for Simulation. Prior to his assignment at E&S, he was Director, Technology Development and Advanced Programs at Lockheed Martin Tactical Defense Systems. Before working with Lockheed Martin, he held increasingly responsible assignments in Simulation for LORAL Corporation. He has four years of service with E&S. Mr. Thomas was appointed Vice President and Chief Financial Officer in December 2000 and Corporate Secretary in February 2001. He became Treasurer in January 2002. He joined E&S in 17 August 2000 as Vice President, Finance, for the Simulation Group. From May 1998 to August 2000, Mr. Thomas was Executive Vice President and Chief Financial Officer for Edge Technologies, Inc. During the three year period from 1995 to 1998, Mr. Thomas was Chief Financial Officer for Stanley Aviation Corporation. Previously, he was a Director of Finance for a Hughes Aircraft Company subsidiary, Financial Executive and Strategic Planner for a Large Scale Information Technology Business Unit, and Senior Business Manager and Assistant Controller for multiple divisions of Hughes. Mr. Thomas was employed by Hughes from 1982 to 1995. He has one year of service with E&S. Mr. Atchison was appointed Vice President, Manufacturing, Service, and Support, in October 2001. He joined E&S in 1998, when E&S acquired Silicon Reality, Inc. in June 1998, and served as Director, Materials, until July of 1999, when he was appointed Vice President, Manufacturing. At Silicon Reality, Mr. Atchison was Vice President, Operations, Chief Operating Officer, and Chief Financial Officer from October 1997 to June 1998. Prior to Silicon Reality, he was Vice President, Investor Relations and Business Development for Alphatec, and managed production control for National Semiconductor/ Fairchild. He has three years of service with E&S. Mr. Gibbs is the Vice President and General Manager of the Simulation Systems Business Unit. Prior to this role, he served as General Manager of the Service and Support Division. He has also held management positions in Supply Chain Management and Quality Assurance. Mr. Gibbs received a B.S. in Mathematics from the University of Utah. Mr. Gibbs has been with E&S for over 15 years. Mr. Flitton was appointed Vice President and General Manager for the Commercial Simulation division of Evans & Sutherland in January 2002. Mr. Flitton has been in the simulation industry since 1979, and has been with E&S since 1994. His first assignment with E&S, was as UK Product Manager for the Commercial Simulation group, followed by an 18-month assignment as Program Manager for the E&S subsidiary Xionix Simulation, in Dallas TX. Mr. Flitton then moved to the E&S Salt Lake City Headquarters and held the positions of US Regional Program Manager and then Products Director for the Commercial Airline group. His prior assignment was as the Product Manager for high-end IG systems within the Simulation Systems Group in Salt Lake City. Prior to joining E&S, Mr. Flitton served a full engineering apprenticeship with Rediffusion Simulation in the UK. Mr. Flitton was Principal Engineer and then Group Leader of the Visual Engineering Group of Rediffusion. Mr. Flitton has a BEng Hons in Electo/Mechanical Engineering from the University of Brighton (UK) and an M.B.A. from the University of Warwick (UK). He is also Member of The Royal Aeronautical Society (MRAeS). 18 FORM 10-K PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS PRICE RANGE OF COMMON STOCK Our common stock trades on The Nasdaq Stock Market under the symbol "ESCC." The following table sets forth the range of the high and low sales prices per share of our 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 -------- -------- 2001 First Quarter $ 8 $ 6 3/8 Second Quarter $8 11/16 $ 7 1/16 Third Quarter $ 8 5/16 $ 5 7/8 Fourth Quarter $ 7 3/16 $ 5 3/8 2000 First Quarter $ 13 1/2 $10 1/16 Second Quarter $ 11 3/8 $ 6 1/4 Third Quarter $ 7 1/4 $ 5 3/8 Fourth Quarter $ 7 3/4 $ 5 1/8
APPROXIMATE NUMBER OF EQUITY SECURITY HOLDERS On March 1, 2002, there were 657 shareholders of record of our common stock. Because brokers and other institutions hold many of our shares on behalf of shareholders, we are unable to estimate the total number of shareholders represented by these record holders. DIVIDENDS We have never paid a cash dividend on our common stock, retaining our earnings for the operation and expansion of our business. We intend for the foreseeable future to continue the policy of retaining our earnings to finance the development and growth of our business. The payment of dividends is restricted under the terms of our credit facilities. See "Item 7--Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." 19 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA The following selected financial data for the five fiscal years ended December 31, 2001 are derived from our Consolidated Financial Statements. The selected financial data should be read in conjunction with our 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."
2001(1) 2000(2) 1999(3) 1998(4) 1997 ---------- ---------- ---------- ---------- ---------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) FOR THE YEAR Sales $ 145,263 $ 166,980 $ 200,885 $ 191,766 $ 159,353 Net income (loss) before accretion of preferred stock (27,457) (69,570) (23,454) (15,983) 5,080 Net income (loss) per common share: Basic (2.70) (7.45) (2.49) (1.70) 0.56 Diluted (2.70) (7.45) (2.49) (1.70) 0.53 Average weighted number of common shares outstanding Basic 10,169 9,372 9,501 9,461 9,060 Diluted 10,169 9,372 9,501 9,461 9,502 AT END OF YEAR Total assets $ 177,353 $ 216,078 $ 258,464 $ 275,668 $ 234,390 Long-term debt, less current portion 18,086 25,563 18,015 18,062 18,015 Redeemable preferred stock -- 24,000 23,772 23,544 -- Stockholders' equity 64,659 67,634 137,194 165,083 165,634
- ------------------------ (1) During 2001, we incurred an impairment loss of $0.2 million and restructuring charges of $2.8 million. See Notes 1 and 21 of the Notes to Consolidated Financial Statements included in Part II of this annual report. (2) During 2000, we recorded deferred tax expense of $20.6 million as a result of our decision to fully reserve net deferred tax assets due to cumulative net operating losses and the cancellation of a significant contract and the related complaint filed by Lockheed Martin Corporation. (3) During 1999, we 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 and 21 of the Notes to Consolidated Financial Statements included in Part II of this annual report. (4) During 1998, we incurred a $20.8 million charge to expense acquired in-process technology in connection with the acquisitions of AccelGraphics, Inc. and Silicon Reality, Inc. 20 QUARTERLY FINANCIAL DATA (UNAUDITED) (In thousands, except per share amounts)
QUARTER ENDED -------------------------------------------------- MARCH 30 JUNE 29 SEPT. 28(2) DEC. 31(3) ---------- ---------- ----------- ---------- 2001 Sales $ 39,632 $ 48,097 $ 29,601 $ 27,933 Gross profit 13,215 11,973 1,793 2,459 Net loss before income taxes (6,048) (5,208) (17,987) (1,386) Net income (loss) applicable to common stock (6,124) (5,132) (16,309) 108 Net income (loss) per common share(1): Basic (0.64) (0.50) (1.57) 0.01 Diluted (0.64) (0.50) (1.57) 0.01
QUARTER ENDED -------------------------------------------------- MARCH 31 JUNE 30(4) SEPT. 29(5) DEC. 31(6) ---------- ---------- ----------- ---------- 2000 Sales $ 45,955 $ 25,589 $ 48,092 $ 47,344 Gross profit 16,113 (12,303) 14,804 10,834 Net income (loss) before income taxes (4,827) (31,598) 448 (14,570) Net income (loss) applicable to common stock (3,229) (52,253) 244 (14,560) Net income (loss) per common share(1): Basic (0.35) (5.58) 0.03 (1.55) Diluted (0.35) (5.58) 0.03 (1.55)
- ------------------------ (1) Earnings per share are computed independently for each of the quarters presented and therefore may not sum to the total for the year. (2) During the third quarter of 2001, we recorded a restructuring charge of $2.1 million and an income tax benefit of $2.0 million as a result of the resolution of certain tax contingencies. (3) During the fourth quarter of 2001, we recorded a $9 million gain on the sale of certain patents. Also during this quarter, we recorded an impairment loss of $0.2 million, a restructuring charge of $0.7 million and an income tax benefit of $1.6 million as a result of the resolution of certain tax contingencies. (4) During the second quarter of 2000, we recorded a negative adjustment to revenue of $10.9 million as a result of the cancellation of a significant contract by Lockheed. Additionally, we recorded deferred tax expenses of $20.6 million as a result of our decision to fully-reserve net deferred tax assets due to cumulative net operating losses and the cancellation of a significant contract and the related civil complaint filed by Lockheed. (5) During the third quarter of 2000, we recorded a $6.7 million gain on the sale of certain investment securities and a $1.9 million loss on available for sale investment securities whose market value decline was determined to be other than temporary. (6) During the fourth quarter of 2000, we recorded a $5.9 million loss on available for sale investment securities whose market value decline was determined to be other than temporary. 21 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CRITICAL ACCOUNTING POLICIES 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. A summary of significant accounting policies can be found in Note 1 to the consolidated financial statements. We have identified the accounting policies which are critical to our business and the understanding of our results of operation and financial position. REVENUE RECOGNITION Revenue from long-term contracts which require significant production, modification or customization is recorded using the percentage-of-completion method, using the ratio of costs incurred to management's estimate of total anticipated costs. Our estimates of total anticipated costs include assumptions, such as estimated man-hours to complete, estimated materials costs, and estimates of other direct and indirect costs. Actual results may vary significantly from our estimates. If the actual costs are higher than management's anticipated total costs, then an adjustment is required to reduce the previously recognized revenue as the ratio of costs incurred to management's estimate was overstated. If actual costs are lower than management's anticipated total costs, then an adjustment is required to increase the previously recognized revenue as the ratio of costs incurred to management's estimate was understated. COSTS AND ESTIMATED EARNINGS IN EXCESS OF BILLINGS ON UNCOMPLETED CONTRACTS AND BILLINGS IN EXCESS OF COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS Billings on uncompleted long-term contracts may be greater than or less than incurred costs and estimated earnings and are recorded as an asset or liability on the balance sheets. As revenue recognized on these long-term contracts includes estimates of management's anticipated total costs, the amounts in costs and estimated earnings in excess of billings on uncompleted contracts and billings in excess of costs and estimated earnings on uncompleted contracts also include these estimates. INVENTORIES Inventory amounts include materials at standard costs. Inventory also includes inventoried costs on programs and long-term contracts which includes direct engineering and production costs and applicable overhead, not in excess of estimated realizable value, which have not yet been recognized as cost of sales. We periodically review inventories for excess and obsolete amounts as well as for amounts which are in excess of estimated realizable value, and provide a reserve that we consider sufficient to cover these items. Assumptions on which we estimate this reserve include future sales, pricing of future products and estimates of total anticipated costs to complete projects. Changes in any of these assumptions would result in adjustments to our operating results. ACCRUED EXPENSES Accrued expenses include amounts for liquidated damages and late delivery penalties on contracts on which we are late in delivering our products. (See Note 8 to the consolidated financial statements). We have included all amounts which management believes we are liable as of December 31, 2001. These liquidated damages are based, in part, on our estimate of when we will complete certain projects. To the extent delivery dates are not consistent with our estimates, these liquidated damage 22 accruals may require additional adjustments. We are currently a party to contracts which include further possible liquidated damages and late delivery penalties. LEGAL PROCEEDINGS Lockheed Martin Corporation served us with a complaint on March 23, 2000 alleging breach of contract and is seeking $8.5 million in compensatory damages plus interest as well as consequential damages and attorneys' fees. We believe that a loss with respect to the $8.5 million collected from Lockheed as asserted in their legal proceedings is remote and that no amount can be currently estimated. As additional information becomes available, we will assess the appropriateness of the accounting and reflect adjustments as considered necessary. Although management believes we will ultimately prevail in the litigation, an unfavorable outcome of these matters would have a material adverse effect on our financial condition and liquidity. INCOME TAXES As part of the process of preparing our consolidated financial statements we are required to estimate our actual income taxes in each of the jurisdictions in which we operate. This involves estimating our actual current tax exposure together with assessing temporary differences resulting from differing treatments of items, such as accrued liabilities, for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included in our consolidated balance sheet. We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income and, to the extent we believe that recovery is not likely, we must establish a valuation allowance. To the extent we establish a valuation allowance or increase or decrease this allowance in a period, we must include a corresponding adjustment within the tax provision in the statement of operations. Significant management judgment is required to determine our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets. ALLOWANCE FOR DOUBTFUL ACCOUNTS The preparation of our financial statements requires us to make estimates and assumptions that affect the reported amount of assets at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. We specifically analyze accounts receivable and consider historic experience, customer creditworthiness, facts and circumstances specific to outstanding balances, current economic trends and changes in our payment terms when evaluating the adequacy of the allowance for doubtful accounts. Changes in any of these factors may result in material differences in the expense recognized for bad debts. CERTAIN DEFENSE CONTRACTS A significant factor in our financial performance is six large, fixed price defense contracts which use our Harmony image generator. These six contracts represented a significant portion of our $27.5 million net loss for the year 2001. We entered into these contracts between two and four years ago. However, these six contracts are now 90% complete and we expect to have these contracts essentially completed by 2002 year end. 23 RESULTS OF OPERATIONS The following discussions should be read in conjunction with our Consolidated Financial Statements contained herein under Item 8 of this annual report.
YEAR ENDED DECEMBER 31, -------------------------------------- 2001 2000 1999 -------- -------- -------- Sales 100.0% 100.0% 100.0% Cost of sales 79.7 82.4 63.5 Write-off of inventories -- -- 6.6 -------- -------- -------- Gross profit 20.3 17.6 29.9 -------- -------- -------- Operating expenses: Selling, general and administrative 20.7 20.6 22.2 Research and development 19.8 26.5 22.1 REALimage transition costs 3.6 -- -- Restructuring charge 2.0 (0.5) 0.7 Impairment loss 0.2 -- 4.8 -------- -------- -------- Operating expenses 46.3 46.6 49.8 -------- -------- -------- (26.0) (29.0) (19.9) Gain on sale of assets held for sale 6.2 -- -- Gain on sale of business unit 0.5 1.1 -- -------- -------- -------- Operating loss (19.3) (27.9) (19.9) Other income (expense) (1.8) (2.4) 0.6 -------- -------- -------- Pretax loss (21.1) (30.3) (19.3) Income tax expense (benefit) (2.2) 11.4 (7.6) -------- -------- -------- Net loss (18.9) (41.7) (11.7) Accretion of preferred stock -- 0.1 0.1 -------- -------- -------- Net loss applicable to common stock (18.9)% (41.8)% (11.8)% ======== ======== ========
2001 VS. 2000 SALES In 2001, our total sales decreased $21.7 million, or 13% ($145.3 million in 2001 compared to $167.0 million in 2000). Sales in the Simulation Group declined $14.6 million, or 10% ($135.3 million in 2001 compared to $149.9 million in 2000). Sales in the REALimage Solutions Group declined $4.0 million, or 70% ($1.7 million in 2001 compared to $5.7 million in 2000). Sales in the Applications Group declined $3.1 million, or 27% ($8.2 million in 2001 compared to $11.3 million in 2000). The primary reason for the decline in sales in the Simulation Group is due to delays in government programs relating to our Harmony image generator. In addition, the Simulation Group also experienced a decline in sales volumes to its commercial airline customers. These declines more than offset increases in the sales volumes of our simFUSION PC-based image generator and support services. The decrease in the REALimage Solutions Group declined as this group was sold during the third quarter of 2001. Sales in the Applications Group declined due to lower sales volumes of our planetarium and large-format entertainment products. GROSS PROFIT Gross profit was essentially unchanged in 2001 from 2000 (both $29.4 million). As a percent of sales, gross profit increased to 20.3% in 2001 from 17.6% in 2000. Gross profit in the Simulation Group improved due to higher sales volumes and lower costs of sales for support services and lower 24 costs of sales on sales to commercial airline customers. These improvements in the Simulation Group were offset by lower sales to government customers and higher costs of sales on sales of simFUSION PC-based image generators. The lower sales to government customers was due to delays and cost over-runs on programs involving our Harmony image generator. Gross profit in the Applications Group increased as cost of sales decreased on sales of planetarium systems and higher sales of our RAPIDsite real-estate planning tool. SELLING, GENERAL AND ADMINISTRATIVE Selling, general and administrative expenses decreased $4.3 million, or 13% ($30.1 million in 2001 compared to $34.4 million in 2000). As a percent of sales, selling, general and administrative expenses increased to 20.7% in 2001 from 20.6% in 2000. These expenses decreased in the Simulation Group as the result of lower headcount and lower incentive bonus expense. Selling, general and administrative expenses decreased in the Application Group due to lower headcount, lower commissions due to lower orders, lower advertising and lower incentive bonus expense. The decrease in selling, general and administrative expenses in 2001 is also partially due to all operating costs from April 1 through August 31, 2001 of $1.3 million associated with the REALimage Solutions Group being recorded in the "REALimage transition costs" expense category. Selling, general and administrative expenses were $31.4 million including the $1.3 million of costs associated with the REALimage Solutions Group. RESEARCH AND DEVELOPMENT Research and development expenses decreased $15.5 million, or 35% ($28.8 million in 2001 compared to $44.3 million in 2000). As a percent of sales, research and development expenses declined to 19.8% in 2001 from 26.5% in 2000. Research and development expenses in the Simulation Group declined during 2001 as a result of lower labor and related expenses as the effort required on our Harmony, iNTegrator, Ensemble and PC-based simulation products has declined. Research and development expenses in the Applications Group were essentially unchanged. The decrease in research and development expenses in 2001 is also partially due to all operating costs from April 1 through August 31, 2001 associated with the REALimage Solutions Group being recorded in the "REALimage transition costs" expense category. Research and development expenses were $32.7 million including these costs associated with the REALimage Solutions Group. Due to the sale of the REALimage Solutions Group, the discontinuation of the RAPIDsite business and the reduction of effort required to develop our Harmony and iNTegrator products, management expects that the total research and development spending necessary to continue the timely development of products will be lower in 2002 than in 2001. REALIMAGE TRANSITION COSTS During the second quarter of 2001, we decided to sell the REALimage Solutions Group. Accordingly, REALimage transition costs include all the expenses associated with the REALimage Solutions Group that were incurred in the second and third quarters of 2001. These costs totaled $5.3 million and were 3.6% of revenues for 2001. On August 31, 2001, we finalized an asset purchase and intellectual property license agreement to sell the REALimage Solutions Group to Real Vision, Inc. of Japan for a maximum value of $12.3 million which is expected to close in April 2002. The consideration to E&S consisted of $4.0 million cash, a receivable for $2.3 million which was paid in December 2001, and future royalties payable on a when and if earned basis of up to a maximum of $6.0 million. The consideration to Real Vision, Inc. consists of REALimage technology, other assets, and an obligation from E&S to provide certain development support of the REALimage technology during a seven-month transition period concluding in April 2002. During 2000, no comparable transition costs were incurred. 25 RESTRUCTURING CHARGE During 2001, we initiated a restructuring plan focused on reducing the operating cost structure of E&S. As part of the plan, we recorded a charge of $2.8 million relating to a reduction in force of approximately 92 employees. We estimate that this restructuring plan will reduce expenses by $8.2 million per year going forward. As of December 31, 2001, we had paid $1.9 million in severance benefits. The majority of the remaining benefits will be paid out over the next two quarters. We also recognized a restructuring charge of $1.5 million in 1999 and reversed $0.8 million of that charge in 2000. The charge in 1999 was based on the expected costs related to the termination of 28 employees. The reversal of a portion of these charges in 2000 was the result of certain of these employees being transferred within E&S rather than being terminated and, therefore, these termination costs were not incurred. In addition, estimated severance and related charges were lower than expected for the terminated employees. IMPAIRMENT LOSS We recognized an impairment loss of $0.2 million in 2001 and there was no such charge in 2000. The 2001 charge was 0.2% of sales. The impairment loss related to the write-off of goodwill, acquired in our acquisition of AccelGraphics, Inc. and Silicon Reality, Inc. in the second quarter of 1998. GAIN ON SALE OF ASSETS HELD FOR SALE In the fourth quarter of 2001, we recognized a gain of $9.0 million on the sale of certain of our key 3D-graphics patents. This gain on sale of assets held for sale was 6.2% of sales in 2001 and there was no such transaction in 2000. GAIN ON SALE OF BUSINESS UNIT We recognized a gain on sale of business unit of $0.8 million in 2001 and $1.9 million in 2000. As a percent of sales the gain was 0.5% in 2001 and 1.1% in 2000. The 2001 gain was the result of our sale of our REALimage Solutions Group to Real Vision, Inc. of Japan. The sale was for a maximum value of $12 million, consisting of cash of $6.3 million plus future royalties, on a when and if earned basis, up to $6 million, for REALimage technology, other assets, and the performance of certain development support during a seven-month transition period leading to closing the transaction in April 2002. The 2000 gain was the result of our sale of certain assets of our Application Group relating to its digital studio business to RT-SET Real Time Synthesized Entertainment Technology Ltd. ("RT-SET") and its subsidiary, RT-SET America Inc., for $1.4 million in cash, common stock of RT-SET and the assumption of certain liabilities. OTHER INCOME (EXPENSE), NET Other income (expense), net improved by $1.4 million (an expense of $2.6 million in 2001 compared to an expense of $4.0 million in 2000). The loss on write-down of investment securities improved $7.5 million ($0.3 million in 2001 compared to $7.8 million in 2000). The losses in both years are the result of other-than-temporary declines in the values of certain marketable investment securities of E&S. The gain on sale of investment securities declined $6.0 million ($0.5 million in 2001 compared to $6.5 million in 2000). The larger gain in 2000 was primarily due to the sale of our investment in Silicon Light Machines, Inc. to Cypress Semiconductor, Inc. ("Cypress") in which we received Cypress stock. Interest income was essentially zero in 2001 compared to $0.7 million in 2000. Interest expense increased $0.3 million to $2.5 million in 2001 from $2.2 million in 2000. The increase in net income expense was due to lower average cash balances and higher average borrowing balances in 2001 compared to 2000. 26 INCOME TAXES E&S recorded an income tax benefit of $3.2 million in 2001 compared to an expense of $19.0 million in 2000. Income tax benefit of $3.2 million for 2001 is primarily attributable to adjustments to prior year tax provisions as the result of the resolution of certain worldwide tax contingencies. Included in this amount is $0.6 million for withholding taxes paid in Japan for taxes associated with the REALimage transaction. During the second quarter of 2000, we increased our deferred tax asset valuation allowance by $20.6 million. As a result of cumulative net operating losses, and the cancellation of a significant contract and the related civil complaint filed by Lockheed as discussed in Note 14 to the consolidated financial statements, we fully reserved our net deferred tax assets which previously existed at the end of the first quarter of 2000 and those deferred tax assets recognized during the second quarter of 2000. These net deferred tax assets relate to temporary differences, tax credit carry forwards and net operating loss carry forwards. The valuation allowance was recorded in accordance with SFAS 109, which requires that a valuation allowance be established when there is significant uncertainty as to the realizability of the deferred tax assets. We evaluate the realizability of our deferred tax assets on a quarterly basis. If the deferred tax assets are realized in the future, or if a portion or all of the valuation allowance is no longer deemed to be necessary, the related tax benefits will reduce future income tax provisions. 2000 VS. 1999 SALES In 2000, our total sales decreased $33.9 million, or 17% ($167.0 million in 2000 compared to $200.9 million in 1999). Sales in the Simulation Group decreased $20.7 million, or 12% ($149.9 million in 2000 compared to $170.6 million in 1999). Sales in REALimage Solutions Group decreased $16.3 million, or 74% ($5.7 million in 2000 compared to $22.0 million in 1999). Sales in the Applications Group increased $3.0 million, or 36% ($11.3 million in 2000 compared to $8.3 million in 1999). The decrease in sales in the Simulation Group is due to the cancellation of the contract with Lockheed Martin Corporation for the delivery of visual systems to the United Kingdom Ministry of Defence ("UK MOD") for the Combined Arms Tactical Trainer program ("UK CATT") and an adjustment to revenue on percent complete contracts where a review of the estimated costs to complete the contracts resulted in a negative adjustment to revenue of $10.9 million in the second quarter of 2000. The decrease was partially offset by increased sales volume of visual systems to commercial airline customers, increased sales volumes of our simFUSION workstation-based product and increased sales related to customer service and support contracts. The decrease in sales in the REALimage Solutions Group is due to a decrease in the number of units sold and decreased selling prices of existing products due to increased competition and delays in the introduction of new products. The increase in sales in the Applications Group is due to an increase in sales volume of large-format entertainment products and planetarium systems which is partially offset by decreased sales of our digital video products due to the sale of this business to RT-SET Real Time Synthesized Entertainment Technology Ltd. and its subsidiary RT-SET America Inc. (together "RT-SET") in the first quarter of 2000. GROSS PROFIT Gross profit decreased $30.7 million, or 51% ($29.4 million in 2000 compared to $60.1 million in 1999). As a percent of sales, gross profit decreased to 17.6% in 2000 from 29.9% in 1999. Gross profit in the Simulation Group in 2000 was negatively impacted by (i) the cancellation of the UK CATT contract due to the loss of revenue and the write-off of obsolete and excess inventory specific to the UK CATT contract, (ii) adjustment for estimated actual costs at completion of contract on percent-complete contracts of $16.7 million ($10.9 million as a reduction in sales as discussed previously, and $5.8 million as an increase in cost of sales relating to contracts with total estimated actual costs that 27 exceed the contract value) and (iii) higher costs on several contracts to government customers which include the Harmony image generator. Gross profit in the REALimage Solutions Group decreased due to lower revenue attributed to a decrease in the number of units sold and decreased selling prices of existing products due to increased competition and delays in the introduction of new products. Gross profit in the Applications Group increased due to increased revenue from sales of large-format entertainment products and planetarium systems which was partially offset by decreased sales of our digital video products. SELLING, GENERAL AND ADMINISTRATIVE Selling, general and administrative expenses decreased $10.2 million, or 23% ($34.4 million in 2000 compared to $44.6 million in 1999). As a percent of sales, selling, general and administrative expenses were 20.6% in 2000 compared to 22.2% in 1999. The decrease in these expenses in the Simulation Group is due primarily to lower marketing headcount, lower marketing consulting expenses and lower marketing travel expenses. The decrease in these expenses in the REALimage Solution Group is due to decreased sales volume resulting in decreased commissions and other selling-related costs and decreased labor and associated costs due to lower headcount as a result of the restructuring which took place at the end of the third quarter of 1999. The decrease in these expenses in the Applications Group is due to the reduction of employees and related expenses as a result of the sale of certain assets of our digital video products business to RT-SET. RESEARCH AND DEVELOPMENT Research and development expenses decreased $10.2 million, or 23% ($34.4 million in 2000 compared to $44.6 million in 1999). As a percent of sales, research and development expenses were 20.6% in 2000 compared to 22.2% in 1999. Research and development expenses in the Simulation Group increased due to increased efforts of the continued development of our simFUSION workstation-based product and other value-priced simulation products. Research and development expenses relating to the REALimage Solutions Group decreased due to decreased headcount as a result of the group's restructuring at the end of the third quarter of 1999. AMORTIZATION OF GOODWILL AND OTHER INTANGIBLE ASSETS Amortization of goodwill and other intangible assets decreased $1.3 million, or 87% ($0.2 million in 2000 compared to $1.5 million in 1999). The decrease in this expense was due to the write-off of $9.3 million of goodwill and other intangible assets during the third quarter of 1999 in the REALimage Solutions Group. IMPAIRMENT LOSS We recognized an impairment loss of $9.7 million in 1999 and related to the write-down to fair value of goodwill, intangibles and other long-lived assets acquired in our acquisitions of AccelGraphic, Inc. and Silicon Reality, Inc. in the second quarter of 1998. The impairment consisted of the write-off of $4.9 million of goodwill, $4.4 million of intangible assets and $0.4 million of property, plant and equipment. There was no such charge in 2000. RESTRUCTURING CHARGE We recognized a restructuring charge of $1.5 million in 1999 and reversed $0.8 million of that charge in 2000. The charge in 1999 was based on the expected costs related to the termination of 28 employees. The reversal of a portion of these charges in 2000 was the result of certain of these employees being transferred within E&S rather than being terminated and, therefore, these termination costs were not incurred. In addition, estimated severance and related charges were lower than expected for the terminated employees. 28 GAIN ON SALE OF BUSINESS UNIT During 2000, we sold certain assets of our Applications Group relating to its digital video business and recognized $1.9 million of gain on the transaction. See "Item 1--Business--Acquisitions and Dispositions." There was no such event in 1999. OTHER INCOME (EXPENSE), NET Other income (expense), net was a net expense of $4.0 million in 2000 compared to a net income of $1.1 million in 1999. Interest income declined $1.1 million, or 61% ($0.7 million in 2000 compared to $1.8 million in 1999). The decline in interest income is due to lower average balances of cash, cash equivalents and short-term investments in 2000 compared to 1999 and due to interest income received in 1999 on delayed income tax refunds. Interest expense increased $0.9 million or 69% ($2.2 million in 2000 compared to $1.3 million in 1999). The increase was due to higher average borrowing balances and a higher average rate of interest paid on those borrowings in 2000 compared to 1999. Loss on write-down of investment securities increased $7.4 million, or 1,850% ($7.8 million in 2000 compared to $0.4 million in 1999). The losses in both years are the result of other-than-temporary declines in the values of certain marketable investment securities of E&S. In 2000 we recognized $6.5 million gain on the sale of investment securities. This gain was primarily due to the sale of our investment in Silicon Light Machines, Inc. to Cypress in which we received Cypress stock. There was no such event in 1999. INCOME TAXES Income tax expense (benefit) increased $34.4 million (expense of $19.0 million in 2000 compared to a benefit of $15.4 million in 1999). During the second quarter of 2000, we increased our deferred tax asset valuation allowance by $20.6 million. As a result of the net operating loss in the second quarter of 2000, the cumulative net operating losses for 2000, 1999 and 1998, and the cancellation of a significant contract and the related civil complaint filed by Lockheed as discussed in Note 14 to the consolidated financial statements, we fully reserved our net deferred tax assets which previously existed at the end of the first quarter of 2000 and those deferred tax assets recognized during the second quarter of 2000. These net deferred tax assets relate to temporary differences, tax credit carry forwards and net operating loss carry forwards. The valuation allowance was recorded in accordance with SFAS 109, which requires that a valuation allowance be established when there is significant uncertainty as to the realizability of the deferred tax assets. We evaluate the realizability of our deferred tax assets on a quarterly basis. If the deferred tax assets are realized in the future, or if a portion or all of the valuation allowance is no longer deemed to be necessary, the related tax benefits will reduce future income tax provisions. LIQUIDITY AND CAPITAL RESOURCES At December 31, 2001, we had working capital of $54.5 million, including cash, cash equivalents and restricted cash of $11.5 million, compared to working capital of $75.1 million at December 31, 2000 including cash, cash equivalents, short-term investments and restricted cash of $13.9 million. During 2001, we used $28.2 million of cash in our operating activities, generated $12.4 million of cash in our investing activities and generated $14.6 million of cash in our financing activities. Cash from our operating activities was provided by a $12.5 million decrease in net costs and estimated earnings in excess of billings on uncompleted contracts. The decrease in net costs and estimated earnings in excess of billings on uncompleted contracts was due to the achievement of billing milestones during the year and the adjustment to revenue on percent complete contracts due to the change in estimated actual costs to complete the contracts. Cash used in our operating activities included a $15.6 million decrease in accounts payable and a $8.5 million decrease in accrued expenses. 29 Our investing activities included purchases of property, plant and equipment of $6.6 million, proceeds from the sale of certain patents of $9.0 million, proceeds from the sale of our REALimage Solutions Group of $6.3 million and proceeds from sale of investment securities of $3.8 million. Our financing activities during the year included net borrowings of $13.0 million, proceeds from issuances of common stock of $0.4 million, and a decrease in restricted cash of $1.2 million. In December 2000, we entered into a secured credit facility (the "Foothill Facility") with Foothill Capital Corporation ("Foothill"). The Foothill Facility provides for borrowings and the issuance of letters of credit up to $30.0 million. On February 22, 2002, E&S and Foothill amended the Foothill Facility whereby Foothill waived all events of financial covenant default through December 31, 2001 and revised E&S's 2002 financial covenants. The Foothill Facility expires in December 2002. Borrowings under the Foothill Facility bear interest at the Wells Fargo Bank National Association prevailing prime rate plus 1.5% to 3.0%, depending on the amount outstanding. The Foothill Facility provides Foothill with a first priority perfected security interest in substantially all of our assets, including, but not limited to, all of our intellectual property. Pursuant to the terms of the Foothill Facility, all cash receipts of E&S must be deposited into a Foothill controlled account. The Foothill Facility, among other things, (i) requires E&S to maintain certain financial ratios and covenants, including a minimum tangible net worth that adjusts each quarter, a minimum unbilled receivables to billed receivables ratio, and a limitation of $12.0 million of aggregate capital expenditures in any fiscal year; (ii) restricts our ability to incur debt or liens; sell, assign, pledge or lease assets; merge with another company; and (iii) restricts the payment of dividends and repurchase of any of our outstanding shares without the prior consent of the lender. Due to Foothill's waiver on February 22, 2002 of E&S's noncompliance with financial covenants through December 31, 2001 and the modification of the financial covenants, we are currently in compliance with our financial covenants and ratios, although a continuation of recent negative trends could impact future compliance with such covenants. Should the need arise, we will negotiate with Foothill to modify and expand various financial ratios and covenants, however no assurance can be given that such negotiations will result in modifications that will allow us to continue to be in compliance or otherwise be acceptable to us. E&S will need to replace the Foothill Facility on or before December 14, 2002. In the event E&S is not able to obtain an acceptable credit facility to replace the Foothill Facility on or before December 14, 2002, E&S may be unable to meet its anticipated working capital needs, routine capital expenditures, and current debt service obligations on a short-term and long-term basis. As of December 31, 2001, we have $15.7 million in outstanding borrowings and $6.0 million in outstanding letters of credit under the Foothill Facility. Since the end of 2001, we have progressed against the facility, and as of March 12, 2002 have $6.1 million in outstanding debt and $4.8 million in outstanding letters of credit. Evans & Sutherland Computer Limited, a wholly-owned subsidiary of Evans & Sutherland Computer Corporation, has a $3.0 million overdraft facility (the "Overdraft Facility") with Lloyds TSB Bank plc ("Lloyds"). Borrowings under the Overdraft Facility bear interest at Lloyds' short-term offered rate plus 1.75% per annum. As of December 31, 2001, there were $4.9 million in outstanding borrowings. As of March 12, 2002, we had fully paid-off the outstanding balance. The Overdraft Facility is subject to reduction or demand repayment for any reason at any time at Lloyds' discretion and expires on November 30, 2002. Evans & Sutherland Computer Limited executed a letter of negative pledge in favor of Lloyds whereby it agreed not to sell or encumber its assets, except in the ordinary course of business. Covenants contained in the Overdraft Facility restrict dividend payments from Evans & Sutherland Computer Limited and require maintenance of certain financial covenants. In addition, at December 31, 2001, we have $0.9 million of cash on deposit with Lloyds in a restricted cash collateral account to support certain obligations that the bank guarantees. In July 2000, we formed a joint venture with Quadrant Group plc known as Quest Flight Training Limited ("Quest"). Quest provides certain equipment, software, training and other goods and services to the Secretary of State for Defence of the U.K. Ministry of Defence and other related governmental 30 entities with regard to an upgrade of the Ministry of Defence E3D Facility and E3D Sentry Aircrew Training Services. In connection with the services of Quest to the U.K. Ministry of Defence, we guaranteed various obligations of Quest. Some of our guaranteed obligations are without any maximum amount. We believe that the guarantees we isssued in connection with this project will not be called upon for payment or performance; however, no assurance can be made that we will not be obligated to satisfy the obligations of the guarantees. As of December 31, 2001, we had approximately $18.0 million of 6% Convertible Subordinated Debentures due in 2012 (the "6% Debentures"). The 6% Debentures are unsecured and are convertible at each bondholder's option into shares of our common stock at a conversion price of $42.10 or 428,000 shares of our common stock, subject to adjustment. The 6% Debentures are redeemable at our option, in whole or in part, at par. On February 18, 1998, our Board of Directors authorized the repurchase of up to 600,000 shares of our 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, our Board of Directors authorized the repurchase of an additional 1,000,000 shares of our common stock. Between February 18, 1998 and December 31, 1999, we repurchased 1,136,500 shares of our common stock, leaving 463,500 shares available for repurchase as of March 12, 2002. We did not repurchase any shares of our stock during 2001. Stock may be acquired on the open market or through negotiated transactions. Under the program, repurchases may be made from time to time, depending on market conditions, share price and other factors. The Foothill Facility requires that we obtain prior consent from Foothill before we repurchase any shares. We also maintain trade credit arrangements with certain of our suppliers. The unavailability of a significant portion of, or the loss of, the various borrowing facilities of E&S or trade credit from suppliers would have a material adverse effect on our financial condition and operations. In the event our various borrowing facilities were to become unavailable, we were unable to make timely deliveries of products pursuant to the terms of various agreements with third parties, or certain of our contracts were adversely impacted for failure to meet delivery requirements, we may be unable to meet our anticipated working capital needs, routine capital expenditures, and current debt service obligations on a short-term and long-term basis. We believe that the principal sources of liquidity for 2002 will be a result of cash flows from operations and proceeds on the sale of certain of our buildings which, subsequent to December 31, 2001, have been designated by management as assets to be disposed of. Positive cash flows from operations during 2002 are largely expected as a result of the restructuring which has taken place, the progress to date on our Harmony image generator fixed-price contracts and other cost-cutting measures which will be implemented during 2002. Circumstances that could materially affect liquidity in 2002 include, but are not limited to, the following: (i) our ability to meet contractual milestones related to the delivery and integration of our Harmony image generators, (ii) our ability to successfully develop and produce new technologies and products, (iii) our ability to meet our forecasted sales levels during 2002, (iv) our ability to reduce costs and expenses, (v) our ability to maintain our commercial simulation business in light of current economic conditions and (vi) our ability to favorably negotiate sale agreements related to certain of our buildings. Management believes that existing cash, cash equivalents, borrowings available under our various borrowing facilities, other asset-related cash sources and expected cash from future operations will be sufficient to meet our anticipated working capital needs, routine capital expenditures and current debt service obligations for the next twelve months. The Foothill Facility expires in December 2002 and the Overdraft Facility expires on November 30, 2002. We anticipate the need to replace these credit facilities; however, there can be no assurances that we will be successful in renegotiating our existing borrowing facilities or obtaining additional debt or equity financing. Our cash and cash equivalents, 31 subject to various restrictions previously set forth, are available for working capital needs, capital expenditures, strategic investments, mergers and acquisitions, stock repurchases and other potential cash needs as they may arise. EFFECTS OF INFLATION The effects of inflation were not considered material during fiscal years 2001, 2000 and 1999, and are not expected to be material for fiscal year 2002. ACQUIRED IN-PROCESS TECHNOLOGY In connection with the acquisitions of AGI and SRI, we 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 E&S's results of operations. We recorded an impairment loss of $0.2 million relating to the remaining balance of goodwill at the time of the sale of the REALimage Solutions Group, in the third quarter of 2001. During the third quarter of 1999, we 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 E&S 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 our current projections for operating results for the acquired businesses or E&S as a whole. Following is a description of the acquired in-process technology and the estimates made by E&S for each of the technologies. 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 32 requirements. During the third quarter of 1999, we determined the technology and graphics subsystem, as originally designed, would not be a viable product in the workstation marketplace. The cost to complete this project subsequent to the acquisition of AGI was $1.7 million. The project was completed in the fourth quarter of 1999, approximately 9 months later than planned. This project was funded by working capital. The assigned value for this acquired in-process technology was $2.7 million. ON-BOARD GEOMETRY ENGINE GRAPHICS SUBSYSTEM (ACCELGMX). This technology is a mid-range graphics subsystem with a geometry engine on board. This technology is aimed at the performance intensive graphics end-user. It has fewer features than the mid-range professional technology, but faster geometry performance compared to the mid-range professional technology on Pentium II processors. This technology was completed in the third quarter of 1998 and the AccelGMX product that uses this technology began shipping to customers at that time. The cost to complete this project subsequent to the acquisition of AGI was $0.1 million and was funded by working capital. The assigned value for this acquired in-process technology was $5.3 million. The AccelGALAXY performed below sales estimates due to the delay in our product introduction by E&S 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 our 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 we no longer expects to generate significant sales from this product. The E&S Lightning 1200 performed below sales estimates due to the delay in our product introduction. 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. At the time of the sale of the REALimage Solutions Group in the third quarter of 2001, sales of all the group's products had decreased to nominal levels. We periodically review the value assigned to the separate components of goodwill, intangibles and other long-lived assets through comparison to anticipated, undiscounted cash flows from the underlying assets to assess recoverability. The assets are considered to be impaired when the expected future undiscounted cash flows from these assets do not exceed the carrying balances of the related assets. Based on the events described above and in accordance with SFAS 121 during the third quarter of 1999 we 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. We recorded an impairment loss of $0.2 million relating to the remaining value of goodwill at the time of the sale of the REALimage Solutions Group in the third quarter of 2001. OUTLOOK 2002 is expected to be a year that returns E&S to a focus on its core business. This encompasses visualization systems, components, spares, repairs, and training for the simulation marketplace. Our focus is a function of the sale of the REALimage Solutions Group in 2001 and closing down the RAPIDsite business in 2001. Implicit in these changes is a consolidation of the business base. Revenues are expected to contract by 10% from the $145 million mark set in 2001. However, a more focused management team coupled with core product offerings is expected to revive our financial performance through higher margin business. New 2001 core business bookings, averaging greater than 40% gross margin, have positioned our year-end backlog, of $104 million, to support this improvement. Our main near-term challenge continues to be the completion of our initial Harmony programs (referred to as the "Big 6 Programs"). We did make significant progress on these programs during 33 2001. Our return to profitability, on a quarter-by-quarter basis, is dependent in large part on the successful execution of these programs in the first half of 2002. Year-to-date 2002, milestones are being met, a majority of first unit systems have passed testing, and several are already in training. Combined, the Big 6 Programs are in excess of 90% complete. In looking towards the second half of the year when these programs are expected to be essentially complete, we believe that the financial posture will be much improved. Cash generation for the second half of 2002 is expected to increase to a level of $5 million per quarter from operations and profits are expected to be produced. The foregoing contains "forward-looking statements" within the meaning of that term in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act of 1934, as amended, including, among others, those statements preceded by, followed by or including the words "estimates," "believes," "expects," "anticipates," "plans," "projects," and similar expressions. These forward-looking statements include, but are not limited to, the following statements: - the successful execution of the Big 6 programs by the end of 2002; - we will generate $5 million of cash per quarter and will be profitable in the second half of 2002; - 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 our products and services; - Simulation Group will experience growth in its markets as simulation training increases in value as an alternative to other training methods, and as simulation training technology and cost-effectiveness improve; - additional enhancements to iNTegrator will expand its functionality and help secure E&S's dominant position in its main target markets, both commercial and military simulation; - E&S is able to compete effectively in the simulation market and will continue to be able to do so in the foreseeable future; - approximately two-third's of Simulation Group's 2001 backlog will be converted to sales in 2002 and replaced with new orders; - the Applications Group's new product will be launched in the first half of 2002; - our properties are suitable for our immediate needs; - total research and development spending will be lower in 2002 than in 2001; - E&S will ultimately prevail in the litigation with Lockheed Martin Corporation; - E&S will not be liable for any further material liquidated damages and late delivery penalties during 2002; - existing cash, cash equivalents, borrowings available under E&S's various borrowing facilities, other asset-related cash sources and expected cash from future operations will be sufficient to meet E&S's anticipated working capital needs, routine capital expenditures and current debt service obligations for the next twelve months; - the guarantees of E&S issued in connection with the services of our joint venture entity, Quest Flight Training Ltd. to the UK Ministry of Defence or other parties will not be called upon for payment or performance; - revenue is expected to contract by 10% from 2001 to 2002; and 34 - 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" discussed below, important factors to consider in evaluating such forward-looking statements include risk of product demand, market acceptance, economic conditions, competitive products and pricing, difficulties in product development, product delays, commercialization and technology, and our ability to maintain credit facilities to support our operations on favorable and acceptable terms. In light of these risks and uncertainties, there can be no assurance that the events contemplated by the forward-looking statements contained in this annual report will, in fact, occur. FACTORS THAT MAY AFFECT FUTURE RESULTS Our domestic and international businesses operate in highly competitive markets that involve a number of risks, some of which are beyond our control. While we are optimistic about our long-term prospects, the following discussion highlights some risks and uncertainties that should be considered in evaluating our growth outlook. OUR BUSINESS MAY SUFFER IF OUR COMPETITIVE STRATEGY IS NOT SUCCESSFUL Our continued success depends on our ability to compete in an industry that is highly competitive, with rapid technological advances and constantly improving products in both price and performance. As most market areas in which we operate continue to grow, we are experiencing increased competition, and we expect this trend to continue. In recent years, we have been forced to adapt to domestic and worldwide political, economic, and technological developments that have strongly affected our markets. Under our current competitive strategy, we endeavor to remain competitive by growing existing businesses, developing new businesses internally, selectively acquiring businesses, increasing efficiency, improving access to new markets, and reducing costs. Although our executive management team and Board of Directors continue to review and monitor our strategic plans, we have no assurance that we will be able to continue to follow our current strategy or that this strategy will be successful. OUR STOCK PRICE MAY BE ADVERSELY IMPACTED IF OUR SALES OR EARNINGS FAIL TO MEET EXPECTATIONS Our stock price is subject to significant volatility and will likely be adversely affected if sales or earnings in any quarter fail to meet the investment community's expectations. Our sales and earnings may fail to meet expectations because they fluctuate and are difficult to predict. Our earnings during 2001 and 2000 fluctuated significantly from quarter to quarter. One of the reasons we experience such fluctuations is that the largest share of our sales and earnings is from our Simulation Group, which typically has long delivery cycles and contract lengths. The timing of customer acceptance of certain large-scale commercial or government contracts may affect the timing and amount of sales that can be recognized; thus, causing our periodic operating results to fluctuate. Our results may further fluctuate if United States and international governments delay or even cancel production on large-scale contracts due to lack of available funding. 35 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: - delays in the availability of products, - delays from chip suppliers, - discontinuance of key components from suppliers, - other supply constraints, - transit interruptions, - 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. OUR SIGNIFICANT DEBT COULD ADVERSELY AFFECT OUR FINANCIAL RESOURCES AND PREVENT US FROM SATISFYING OUR DEBT SERVICE OBLIGATIONS We have a significant amount of indebtedness and may also incur additional indebtedness in the future. We may not generate sufficient cash flow from operations, or have future borrowings available to us, sufficient to pay our debt. At December 31, 2001, total indebtedness was $38.9 million and our total stockholders' equity was $64.7 million. Our ability to make debt payments or refinance our indebtedness depends on future performance, which, to a certain extent, is subject to general economic, financial, competitive and other factors, some of which are beyond our control. Based upon our current level of operations and anticipated growth, management believes that available cash flow, together with available credit, will be adequate to meet our financial needs. There can be no assurance, however, that our business will generate sufficient cash flow from operations or that future borrowings will be available in an amount sufficient to enable us to pay our debts or to make necessary capital expenditures, or that any refinancing of debt would be available on commercially reasonable terms or at all. Our substantial indebtedness could have important consequences including, but not limited to, the following: - the ability to obtain additional financing for working capital, capital expenditures, acquisitions, or other purposes may be impaired or unavailable; - a portion of cash flow will be used to pay interest expense, which will reduce the funds that would otherwise be available for operations and future business opportunities; - a substantial decrease in net operating cash flows or an increase in expenses could make it difficult for us to meet our debt service requirements and force us to modify operations; - we may be more highly leveraged than our competitors, which may place us at a competitive disadvantage; - our substantial indebtedness may make us more vulnerable to a downturn in our business or in the economy generally; and 36 - some of our existing debt contains financial and restrictive covenants that limit our ability to, among other things, borrow additional funds, acquire and dispose of assets, and pay cash dividends. A portion of our outstanding indebtedness bears interest at variable rates. Any increase in interest rates will reduce funds available to us for our operations and future business opportunities and will exacerbate the consequences of our leveraged capital structure. COVENANTS AND RESTRICTIONS IN OUR CREDIT DOCUMENTS LIMIT OUR ABILITY TO TAKE CERTAIN ACTIONS Our credit documents contain significant financial and operating covenants that limit the discretion of management with respect to certain business matters. These covenants include, among others, restrictions on our ability to: - declare dividends or redeem or repurchase capital stock; - incur certain additional debt; - grant liens; - make certain payments and investments; - sell or otherwise dispose of assets; and - consolidate with other entities. We must also meet certain financial ratios and tests, including a minimum tangible net worth that adjusts each quarter, an unbilled receivables to billed receivables ratio, and a limitation of $12.0 million of aggregate capital expenditures in any fiscal year. Failure to comply with the obligations contained in the credit documents could result in an event of default, and possibly the acceleration of the related debt and the acceleration of debt under other instruments evidencing debt that may contain cross-acceleration or cross-default provisions. On February 22, 2002, Foothill agreed to waive all events of financial covenant default through December 31, 2001 and to revise our 2002 financial covenants. Therefore, we are currently in compliance with our financial covenants, although a continuation of recent negative operating trends could impact our future compliance with such covenants. Should the need arise, we will negotiate with our lenders to modify and expand various financial covenants, however, no assurance can be given that such negotiations will result in modifications that will allow us to continue to be in compliance or otherwise be acceptable to us. 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, 2001, $29.8 million of our costs and estimated earnings that exceeded our billings on uncompleted contracts related to four 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. 37 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. OUR SIGNIFICANT INVESTMENT IN RESEARCH AND DEVELOPMENT MAY NOT BE REALIZED We have no assurance that our significant investment in research and development will generate future sales or benefits. We currently make and plan to continue to make a significant investment in research and development. Total spending for research and development was $28.8 million or 19.8% of sales in 2001 as compared to $44.3 million or 26.5% of sales in 2000. 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. WE MAY NOT CONTINUE TO BE SUCCESSFUL IF WE ARE UNABLE TO DEVELOP, PRODUCE AND TRANSITION OUR PRODUCTS Our continued success depends on our ability to develop, produce and transition technologically complex and innovative products that meet customer needs. We have no assurance that we will be able to successfully continue such development, production and transition. The development of new technologies and products is increasingly complex and expensive, which among other risks, increases the risk of product introduction delays. The introduction of a new product requires close collaboration and continued technological advancement involving multiple hardware and software design and manufacturing teams within E&S as well as teams at outside suppliers of key components. The failure of any one of these elements could cause our new products to fail to meet specifications or to miss the aggressive timetables that we establish and the market demands. As the variety and complexity of our product families increase, the process of planning and managing production, inventory levels, and delivery schedules also becomes increasingly complex. There is no assurance that acceptance of and demand for our new products will not be affected by delays in this process. Additionally, if we are unable to meet our delivery schedules, we may be subject to the penalties, including liquidated damages that are included in some of our customer contracts, and termination of our contracts. Product transitions are a recurring part of our business. Our short product life cycles require our ability to successfully manage the timely transition from current products to new products. In fact, it is not unusual for us to announce a new product while its predecessor is still in the final stages of its development. Our transition results could be adversely affected by such factors as: - development delays, 38 - late release of products to manufacturing, - quality or yield problems experienced by production or suppliers, - variations in product costs, - excess inventories of older products and components, and - delays in customer purchases of existing products in anticipation of the introduction of new products. IN THE EVENT WE SUFFER FURTHER PRODUCT DELAYS, WE MAY BE REQUIRED TO PAY CERTAIN CUSTOMERS SUBSTANTIAL LIQUIDATED DAMAGES AND OTHER PENALTIES The variety and complexity of our high technology product lines require us to deal with suppliers and subcontractors supplying highly specialized parts, operating highly sophisticated and narrow tolerance equipment in performing highly technical calculations. The processes of planning and managing production, inventory levels and delivery schedules are also highly complex and specialized. Many of our products must be custom designed and manufactured, which is not only complicated and expensive, but can also require a number of months to accomplish. Slight errors in design, planning and managing production, inventory levels, delivery schedules, or manufacturing can result in unsatisfactory products that may not be correctable. If we are unable to meet our delivery schedules, we may be subject to penalties, including liquidated damages that are included in some of our customer contracts. During the fourth quarter of 1999, we accrued $8.2 million for payments of liquidated damages and penalties due to product delays. As of December 31, 2000, we have paid $6.0 million in connection with liquidated damages. During 2000, we accrued an additional $0.9 million for late delivery penalties. During 2001 we accrued $2.9 million to cover penalties, against which we paid $2.7 million. In 2001, we also accrued $1.5 million to cover additional costs incurred by customers. There is no assurance that we may not incur substantial liquidated damages in the future in connection with further product delays. WE MAY NOT MAINTAIN A SIGNIFICANT PORTION OF OUR SALES IF WE FAIL TO MAINTAIN OUR UNITED STATES GOVERNMENT CONTRACTS In 2001, 48% 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. 39 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. OUR SALES MAY SUFFER IF WE LOSE CERTAIN SIGNIFICANT CUSTOMERS We currently derive a significant portion of our sales from a limited number of non-U.S. government customers. The loss of any one or more of these customers could have a material adverse effect on our business, financial condition and results of operations. We were dependent on four of our non-U.S. government customers for approximately 32% of our consolidated sales in 2001. 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. OUR SALES WILL DECREASE IF WE FAIL TO MAINTAIN OUR INTERNATIONAL BUSINESS Any reduction of our international business could significantly affect our sales. Our international business accounted for 34% of our 2001 sales. We expect that international sales will continue to be a significant portion of our overall business in the foreseeable future. Our international business experiences many of the same risks our domestic business encounters as well as additional risks such as exposure to currency fluctuations and changes in foreign economic and political environments. Despite our exposure to currency fluctuations, we are not engaged in any material hedging activities to offset the risk of exchange rate fluctuations. Our international transactions frequently involve increased financial and legal risks arising from stringent contractual terms and conditions and widely differing legal systems, customs, and standards in foreign countries. In addition, our international sales often include sales to various foreign government armed forces, with many of the same inherent risks associated with United States government sales identified previously. FUTURE LOSSES COULD IMPAIR OUR ABILITY TO RAISE CAPITAL OR BORROW MONEY AND CONSEQUENTLY AFFECT OUR STOCK PRICE Although we recorded net sales of $145.3 million for the twelve months ended December 31, 2001, we incurred a net loss of $27.5 million in 2001. We have incurred net losses totaling $136.5 million over the past four years. We cannot assure you that we will be profitable in future periods. Losses in future periods could impair our ability to raise additional capital or borrow money as needed, could decrease our stock price and could cause a violation of certain covenants in our credit facilities. IF OUR COMMERCIAL SIMULATION BUSINESS DECLINES, OUR SALES WILL DECREASE We have no assurance that our commercial simulation (airline) business will continue to succeed. Our commercial simulation business currently accounts for approximately 15% to 20% of our sales. This business is subject to many of the risks related to the commercial simulation market that may 40 adversely affect our business. The following risks are characteristic of the commercial simulation market: - uncertainty of economic conditions, - dependence upon the strength of the commercial airline industry, - air pilot training requirements, - competition, - changes in technology, and - timely performance by subcontractors on contracts in which E&S is the prime contractor. WE MAY MAKE ACQUISITIONS THAT ARE UNSUCCESSFUL OR STRAIN OR DIVERT OUR RESOURCES FROM MORE PROFITABLE OPERATIONS We intend to consider acquisitions, alliances, and transactions involving other companies that could complement our existing business. However, we may not be able to identify suitable acquisition parties, joint venture candidates, or transaction counterparties. Also, even if we can identify suitable parties, we may not be able to obtain the financing necessary to complete any such transaction or consummate these transactions on terms that we find favorable. We may not be able to successfully integrate any businesses that we acquire into our existing operations. If we cannot successfully integrate acquisitions, our operating expenses may increase. This increase would affect our net earnings, which could adversely affect the value of our outstanding securities. Moreover, these types of transactions may result in potentially dilutive issuances of equity securities, the incurrence of additional debt, and amortization of expenses related to goodwill and intangible assets, all of which could adversely affect our profitability. These transactions involve numerous other risks as well, including the diversion of management attention from other business concerns, entry into markets in which we have had no or only limited experience, and the potential loss of key employees of acquired companies. Occurrence of any of these risks could have a material adverse effect on us. OUR OPERATIONS COULD BE HURT BY TERRORIST ATTACKS AND OTHER ACTIVITIES THAT MAKE AIR TRAVEL DIFFICULT OR REDUCE THE WILLINGNESS OF OUR COMMERCIAL AIRLINE CUSTOMERS TO PURCHASE OUR SIMULATION PRODUCTS. During 2001, $30.0 million, or 21% of our total revenue generated from our Simulation Group, was derived from sales of our simulation products to commercial airline companies and other third parties in the commercial airline industry. The demand for our various commercial simulation products and services is heavily dependant upon new orders from these commercial airline customers. In the event terrorist attacks or other activities make air travel difficult or reduce the demand or willingness of our customers to purchase our commercial simulation products, our revenue may decline substantially. Since September 11, 2001, training requirements have increased to certify pilots, co-pilots and flight engineers for different aircraft types and changing flight procedures. In conjunction with this trend, the Simulation Group has been contacted by one of our largest commercial customers to deliver two-times the average annual number of systems. In addition to these additional systems, the contract provides for an option to deliver further systems in 2002. However, at this time, we are unable to predict the long-term impact of these events on either our industry as a whole or on our operations and financial condition in particular. OUR SHAREHOLDERS MAY NOT REALIZE CERTAIN OPPORTUNITIES BECAUSE OF THE ANTI-TAKEOVER EFFECT OF STATE LAW We may be subject to the Utah Control Shares Acquisition Act which provides that any person who acquires 20% or more of the outstanding voting shares of a publicly held Utah corporation will 41 not have voting rights with respect to the acquired shares unless a majority of the disinterested shareholders of the corporation votes to grant such rights. This could deprive shareholders of opportunities to realize takeover premiums for their shares or other advantages that large accumulations of stock would provide because anyone interested in acquiring E&S could only do so with the cooperation of our board of directors. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The principal market risks to which we are exposed are changes in foreign currency exchange rates and changes in interest rates. Our international sales, which accounted for 34% of our total sales in 2001 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. We do not enter into contracts for trading purposes and do not use leveraged contracts. As of December 31, 2001, we had no material sales or purchase contracts in currencies other than U.S. dollars and had no foreign currency sales or purchase contracts. We reduce our exposure to changes in interest rates by maintaining a high proportion of our debt in fixed-rate instruments. As of December 31, 2001, 47% of our total debt was in fixed-rate instruments. Had we fully drawn on our $30 million revolving line of credit with Foothill Capital Corporation and our foreign line of credit, 39% of our total debt would be in fixed-rate instruments. The information below summarizes E&S's market risks associated with debt obligations as of December 31, 2001. Fair values have been determined by quoted market prices. For debt obligations, the table below presents the principal cash flows and related interest rates at year end by fiscal year of maturity. Bank borrowings bear variable rates of interest and the 6% Debentures bear a fixed rate of interest. The information below should be read in conjunction with Note 10 of Notes to the Consolidated Financial Statements in Part II of this annual report.
THERE- FAIR RATE 2002 2003 2004 2005 2006 AFTER TOTAL VALUE -------- -------- -------- -------- -------- -------- -------- -------- -------- DEBT Bank Borrowings 9.1% $ 20,830 -- $ 71 -- -- -- $ 20,901 $ 20,901 ======== ======== ======== ======== ======== ======== ======== ======== 6% Debentures 6.0% -- -- -- -- -- $ 18,015 $ 18,015 $ 6,756 -------- -------- -------- -------- -------- -------- -------- -------- Total debt $ 20,830 -- $ 71 -- -- $ 18,015 $ 38,916 $ 27,657 ======== ======== ======== ======== ======== ======== ======== ========
42 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 Auditors - Consolidated Balance Sheets as of December 31, 2001 and 2000 - Consolidated Statements of Operations for each of the years in the three-year period ended December 31, 2001 - Consolidated Statements of Comprehensive Loss for each of the years in the three-year period ended December 31, 2001 - Consolidated Statements of Stockholders' Equity for each of the years in the three-year period ended December 31, 2001 - Consolidated Statements of Cash Flows for each of the years in the three-year period ended December 31, 2001 - Notes to Consolidated Financial Statements for each of the years in the three-year period ended December 31, 2001 The following consists of a list of Financial Statement Schedules included in Part IV of this report: - Schedule II--Valuation and Qualifying Accounts for each of the years in the three-year period ended December 31, 2001 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. 43 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. We believe 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 our business. Evans & Sutherland's financial statements have been audited by KPMG LLP, independent public accountants. Management has made available all of our financial records and related data to allow KPMG LLP to express an informed professional opinion in their accompanying report. The Audit Committee of the Board of Directors is composed of three independent directors and meets regularly with the independent accountants, as well as with Evans & Sutherland management, to review accounting, auditing, internal accounting control and financial reporting matters. James R. Oyler William M. Thomas Vice President and Chief Financial President and Chief Executive Officer Officer
REPORT OF INDEPENDENT AUDITORS The Board of Directors and Stockholders Evans & Sutherland Computer Corporation: We have audited the consolidated financial statements of Evans & Sutherland Computer Corporation and subsidiaries 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 Evans & Sutherland's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Evans & Sutherland Computer Corporation and subsidiaries as of December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. KPMG LLP Salt Lake City, Utah March 15, 2002 44 EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
DECEMBER 31, ---------------------- 2001 2000 -------- -------- Assets: Cash and cash equivalents $ 10,651 $ 11,898 Restricted cash 870 2,024 Accounts receivable, less allowances for doubtful receivables of $6,413 in 2001 and $4,411 in 2000 30,516 34,572 Inventories 38,226 38,383 Costs and estimated earnings in excess of billings on uncompleted contracts 47,761 68,464 Prepaid expenses and deposits 4,817 5,326 -------- -------- Total current assets 132,841 160,667 Property, plant and equipment, net 41,967 48,665 Investments 1,952 5,429 Goodwill and other intangible assets, net -- 374 Other assets 593 943 -------- -------- Total assets $177,353 $216,078 ======== ======== Liabilities and stockholders' equity: Current portion of long-term debt $ 154 $ 344 Line of credit agreements 20,676 -- Accounts payable 11,503 27,087 Accrued expenses 17,272 26,527 Customer deposits 3,650 3,908 Billings in excess of costs and estimated earnings on uncompleted contracts 25,053 27,710 -------- -------- Total current liabilities 78,308 85,576 -------- -------- Long-term debt 18,086 25,563 Pension and retirement obligations 16,300 13,305 -------- -------- Total liabilities 112,694 124,444 Commitments and contingencies (notes 6, 9 and 13) Redeemable preferred stock, class B-1, no par value; authorized 1,500,000 shares; issued and outstanding zero shares in 2001 and 901,408 shares in 2000 -- 24,000 -------- -------- 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 10,739,753 shares in 2001 and 9,772,118 shares in 2000 2,148 1,954 Additional paid-in capital 49,030 24,752 Common stock in treasury, at cost; 352,500 shares (4,709) (4,709) Retained earnings 18,561 46,018 Accumulated other comprehensive loss (371) (381) -------- -------- Total stockholders' equity 64,659 67,634 -------- -------- Total liabilities and stockholders' equity $177,353 $216,078 ======== ========
45 EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31, ------------------------------------ 2001 2000 1999 -------- -------- -------- Sales $145,263 $166,980 $200,885 Cost of sales 115,823 137,532 127,556 Write-off of inventories -- -- 13,230 -------- -------- -------- Gross profit 29,440 29,448 60,099 -------- -------- -------- Expenses: Selling, general and administrative 30,061 34,406 44,554 Research and development 28,844 44,264 44,358 REALimage transition costs 5,297 -- -- Restructuring charges 2,843 (761) 1,460 Impairment loss 220 -- 9,693 -------- -------- -------- Operating expenses 67,265 77,909 100,065 -------- -------- -------- (37,825) (48,461) (39,966) Gain on sale of assets held for sale 9,000 -- -- Gain on sale of business unit 774 1,918 -- -------- -------- -------- Operating loss (28,051) (46,543) (39,966) Other income (expense): Interest income 31 659 1,849 Interest expense (2,456) (2,195) (1,333) Loss on write down of investment securities (306) (7,786) (350) Gain on sale of investment securities 538 6,472 -- Other (385) (1,154) 933 -------- -------- -------- (2,578) (4,004) 1,099 -------- -------- -------- Loss before income taxes (30,629) (50,547) (38,867) Income tax expense (benefit) (3,172) 19,023 (15,413) -------- -------- -------- Net loss (27,457) (69,570) (23,454) Accretion of redeemable preferred stock -- 228 228 -------- -------- -------- Net loss applicable to common stock $(27,457) $(69,798) $(23,682) ======== ======== ======== Net loss per common share: Basic and Diluted $ (2.70) $ (7.45) $ (2.49) ======== ======== ======== Basic and diluted weighted average common shares outstanding 10,169 9,372 9,501 ======== ======== ========
46 EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (IN THOUSANDS)
YEAR ENDED DECEMBER 31, ------------------------------------ 2001 2000 1999 -------- -------- -------- Net loss $(27,457) $(69,570) $(23,454) Other comprehensive income (loss): Foreign currency translation adjustments 14 (419) (337) Unrealized losses on securities (4) (27) (48) Reclassification adjustment for losses included in net loss -- -- 275 -------- -------- -------- Other comprehensive income (loss) before income taxes 10 (446) (110) Income tax expense related to items of other comprehensive income (loss) -- -- 70 -------- -------- -------- Other comprehensive income (loss), net of income taxes 10 (446) (180) -------- -------- -------- Comprehensive loss $(27,447) $(70,016) $(23,634) ======== ======== ========
47 EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS)
ACCUMULATED COMMON STOCK ADDITIONAL OTHER ----------------------- PAID-IN TREASURY RETAINED COMPREHENSIVE SHARES AMOUNT CAPITAL STOCK EARNINGS INCOME (LOSS) TOTAL ---------- ---------- ---------- ---------- ---------- ---------------- ---------- Balance at December 31, 1998 9,598 $ 1,920 $ 23,420 $ -- $ 139,498 $ 245 $ 165,083 Issuance of common stock for cash 142 28 1,361 -- -- -- 1,389 Repurchase of 413,500 common shares (61) (12) (911) (4,709) -- -- (5,632) Compensation expense on employee stock purchase plan -- -- 117 -- -- -- 117 Tax benefit from issuance of common stock to employees -- -- 99 -- -- -- 99 Other comprehensive loss -- -- -- -- -- (180) (180) Net loss -- -- -- -- (23,454) -- (23,454) Accretion of redeemable preferred stock -- -- -- -- (228) -- (228) ---------- ---------- ---------- ---------- ---------- ---------------- ---------- Balance at December 31, 1999 9,679 1,936 24,086 (4,709) 115,816 65 137,194 Issuance of common stock for cash 93 18 562 -- -- -- 580 Compensation expense on employee stock purchase plan -- -- 104 -- -- 104 Other comprehensive loss -- -- -- -- -- (446) (446) Net loss -- -- -- -- (69,570) -- (69,570) Accretion of redeemable preferred stock -- -- -- -- (228) -- (228) ---------- ---------- ---------- ---------- ---------- ---------------- ---------- Balance at December 31, 2000 9,772 1,954 24,752 (4,709) 46,018 (381) 67,634 Issuance of common stock for cash 67 14 392 -- -- -- 406 Compensation expense on employee stock purchase plan -- -- 66 -- -- -- 66 Other comprehensive income -- -- -- -- -- 10 10 Net loss -- -- -- -- (27,457) -- (27,457) Conversion of redeemable preferred stock for common stock 901 180 23,820 -- -- -- 24,000 ---------- ---------- ---------- ---------- ---------- ---------------- ---------- Balance at December 31, 2001 10,740 $ 2,148 $ 49,030 $ (4,709) $ 18,561 $ (371) $ 64,659 ========== ========== ========== ========== ========== ================ ==========
48 EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEAR ENDED DECEMBER 31, --------------------------------------- 2001 2000 1999 ----------- ----------- ----------- Cash flows from operating activities: Net loss $ (27,457) $ (69,570) $ (23,454) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Write-off of inventories -- -- 13,230 Impairment loss 220 -- 9,693 Depreciation and amortization 13,709 14,264 15,499 Gain on sale of a business unit (774) (1,918) -- Gain on sale of assets held for sale (9,000) -- -- Loss on disposal of property, plant and equipment 130 2,794 -- Provision for losses on accounts receivable 2,358 3,829 558 Provision for obsolete and excess inventories 943 6,613 910 Provision for warranty expense 2,197 1,189 958 Deferred income taxes -- 20,341 (8,475) Loss on write-down of investment securities 306 7,786 350 Gain on sale of investment securities (538) (6,472) -- Other, net 18 852 732 Changes in assets and liabilities, net of effect of purchase/sale of business: Accounts receivable 1,698 (9,977) 17,474 Inventories (786) (5,992) (6,104) Costs and estimated earnings in excess of billings on uncompleted contracts, net 12,520 27,296 (16,446) Prepaid expenses and deposits 508 2,407 (565) Accounts payable (15,584) 6,932 (5,041) Accrued expenses (8,456) (1,720) 9,695 Customer deposits (258) (812) 1,381 ----------- ----------- ----------- Net cash provided by (used in) operating activities (28,246) (2,158) 10,395 ----------- ----------- ----------- Cash flows from investing activities: Purchases of short-term investments -- (1,875) (14,700) Proceeds from sale of short-term investments -- 2,627 39,767 Purchase of investment securities -- (500) (636) Proceeds from sale of investment securities 3,780 1,428 -- Proceeds from sale of business unit 6,300 1,400 -- Proceeds from sale of assets held for sale 9,000 -- -- Investment in joint venture -- (754) -- Purchases of property, plant and equipment (6,646) (13,868) (14,530) Proceeds from sale of property, plant and equipment 26 1,382 -- Proceeds from sale of certain manufacturing assets -- -- 6,010 Decrease (increase) in other assets (44) -- -- ----------- ----------- ----------- Net cash provided by (used in) investing activities 12,416 (10,160) 15,911 ----------- ----------- ----------- Cash flows from financing activities: Borrowings under line of credit agreements and other long-term debt 239,223 22,365 716 Payments under line of credit agreements and other long-term debt (226,214) (16,919) (1,869) Payments of debt issuance costs -- (1,296) -- Decrease (increase) in restricted cash 1,154 (2,024) -- Proceeds from issuance of common stock 406 580 1,389 Proceeds from issuance of preferred stock -- -- -- Payments for repurchases of common stock -- -- (5,478) ----------- ----------- ----------- Net cash provided by (used in) financing activities 14,569 2,706 (5,242) ----------- ----------- ----------- Effect of foreign exchange rates on cash and cash equivalents 14 (600) (788) ----------- ----------- ----------- Net change in cash and cash equivalents (1,247) (10,212) 20,276 Cash and cash equivalents at beginning of year 11,898 22,110 1,834 ----------- ----------- ----------- Cash and cash equivalents at end of year $ 10,651 $ 11,898 $ 22,110 =========== =========== =========== Supplemental Disclosures of Cash Flow Information Cash paid (received) during the year for: Interest $ 2,426 $ 1,539 $ 1,321 Income taxes 846 (5,887) (5,846) Accretion of redeemable preferred stock -- 228 228
49 EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001, DECEMBER 31, 2000 AND DECEMBER 31, 1999 (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES DESCRIPTION OF BUSINESS Evans & Sutherland Computer Corporation ("Evans & Sutherland," "E&S," "we," "us" or "our") 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. Our core computer graphics technology is used to produce high performance image generators for simulation including PC-based visual system products, to provide graphics acceleration technology to the professional digital content creation market, and to apply our core technologies to the expanding market of PC-based applications and products. BASIS OF PRESENTATION The consolidated financial statements include the accounts of E&S and its wholly-owned subsidiaries. All inter-company accounts and transactions have been eliminated in consolidation. Certain reclassifications have been made in the 2000 and 1999 consolidated financial statements and notes to conform to the 2001 presentation. LIQUIDITY Management believes that existing cash, cash equivalents, borrowings available under its various borrowing facilities, cash expected from the anticipated sale of certain of E&S's buildings, other asset-related cash sources and expected cash from future operations will be sufficient to meet our anticipated working capital needs, routine capital expenditures and current debt service obligations for the next twelve months. The Foothill Facility expires in December 2002 and the Overdraft Facility expires on November 30, 2002 (see Note 10). There can be no assurances that we will be successful in renegotiating our existing borrowing facilities or obtaining additional debt or equity financing. Our cash and cash equivalents, subject to various restrictions, are available for working capital needs, capital expenditures, strategic investments, mergers and acquisitions, stock repurchases and other potential cash needs as they may arise. During 2002, we expect to generate cash due to improved earnings, moving unbilled receivables into receivables and cash, reducing inventory and the sale of some of our real estate. Due to these expected developments, we expect our liquidity position to improve and for Foothill to continue the facility. In the event our various borrowing facilities were to become unavailable, we were unable to timely deliver products pursuant to the terms of various agreements with third parties, or certain of our contracts were adversely impacted for failure to meet delivery requirements, we may be unable to meet our anticipated working capital needs, routine capital expenditures, and current debt service obligations on a short-term and long-term basis. REVENUE RECOGNITION Sales include revenue from system and software products, software license rights and service contracts. 50 EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) We have adopted the American Institute of Certified Public Accountants ("AICPA") Statement of Position ("SOP") 97-2, "Software Revenue Recognition", as modified by SOP 98-9. SOP 97-2 generally requires revenue earned on software arrangements involving multiple elements such as software products, enhancements, post-contract customer support, installation and training to be allocated to each element based on the relative fair values of the elements. The fair value of an element must be based on evidence that is specific to the vendor. The revenue allocated to software products is generally recognized upon delivery of the products. The revenue allocated to post-contract customer support is generally recognized over the support period. We recognize revenues from product sales that do not require significant production, modification, or customization when the following criteria are met: we have signed a non-cancelable agreement; we have 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 recognized in accordance with provisions of SOP 81-1 "Accounting for Performance of Construction-Type and Certain Production-Type Contracts" using the ratio of costs incurred to management's estimate of total anticipated costs. If estimated total costs on any contract indicate a loss, we provide currently for the total anticipated loss on the contract. Billings on uncompleted long-term contracts may be greater than or less than incurred costs and estimated earnings and are recorded as an asset or liability in the accompanying consolidated balance sheets. CASH AND CASH EQUIVALENTS We consider all highly liquid financial instruments purchased with an original maturity to E&S of 90 days or less to be cash equivalents. Cash equivalents include debt securities and money-market funds of $0 and $3.8 million at December 31, 2001 and 2000, respectively. RESTRICTED CASH We have restricted deposits pledged as collateral on overdraft protection, letters of credit and certain other obligations all of which mature or expire within one year. INVENTORIES Inventory amounts include materials at standard costs. Inventory also includes inventoried costs on programs and long-term contracts which includes direct engineering and production costs and applicable overhead, not in excess of estimated realizable value, which have not yet been recognized as cost of sales. Spare parts and general stock materials are stated at cost not in excess of realizable value. We periodically review inventories for excess and obsolete amounts and provide a reserve that we consider 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 We periodically review 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 51 EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) assets to assess recoverability. The assets are considered to be impaired when the expected future undiscounted cash flows from these assets do not exceed the carrying balances of the related assets. The impairment loss of $9.7 million for the year ended December 31, 1999, as determined in accordance with Statement of Financial Accounting Standards No. 121 ("SFAS 121"), "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of", relates to the write-down to fair value of goodwill, intangibles and other long-lived assets acquired in the acquisition of AccelGraphics, Inc. ("AGI") and Silicon Reality, Inc. ("SRI"). Fair value was determined utilizing discounted cash flow analyses and the replacement cost approach. The impairment loss consisted of the write-off of $4.9 million of goodwill, $4.4 million of intangible assets and $0.4 million of property, plant and equipment. 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, we 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 at December 31, 2000 consisted primarily of goodwill and other intangible assets recorded in connection with the acquisitions of AccelGraphics, Inc. and Silicon Reality, Inc. on June 26, 1998. The goodwill and other intangible assets were being amortized using the straight-line method over a period of seven years for goodwill and six months to seven years for other intangible assets. As of December 31, 2000 accumulated amortization of goodwill and other intangible assets was $15.9 million. 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 We classify our marketable debt and equity securities as available-for-sale. Available-for-sale securities are recorded at fair value. Unrealized holding gains and losses, net of the related tax effect, are excluded from earnings and are reported as a component of accumulated other comprehensive income (loss) until realized. Dividend income is recognized when earned. Realized gains and losses from the sale of securities are included in results of operations and are determined on the specific-identification basis. A decline in the market value below cost that is deemed other than temporary is charged to results of operations resulting in the establishment of a new cost basis for both marketable and non-marketable investment securities. Non-marketable 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 52 EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) achieve its objectives. Our 50% investment in a joint venture is stated at cost, adjusted for equity in undistributed earnings since acquisition. WARRANTY RESERVE We provide 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 We have adopted the footnote disclosure provisions of Statement of Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock Based Compensation". SFAS 123 encourages entities to adopt a fair value based method of accounting for stock options or similar equity instruments. However, it also allows an entity to continue measuring compensation cost for stock based compensation using the intrinsic-value method of accounting prescribed by Accounting Principles Board Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to Employees". We have elected to continue to apply the provisions of APB 25 and provide pro forma footnote disclosures required by SFAS 123. INCOME TAXES We use the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry-forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. FOREIGN CURRENCY TRANSLATION Prior to their disposition in 2000 (See Note 2) the local foreign currency was the functional currency for our German subsidiaries. Our United Kingdom subsidiary uses the U.S. dollar as its functional currency. Assets and liabilities of German operations were translated to U.S. dollars at the current exchange rates as of the applicable balance sheet date. Sales and expenses were translated at the average exchange rates prevailing during the period. Adjustments resulting from translation were reported as a separate component of stockholders' equity. Certain transactions of the German subsidiaries were denominated in currencies other than the functional currency, including transactions with the parent company. Transaction gains and losses were included in other income (expense) for the period in which the transaction occurred. ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that 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. 53 EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) CONCENTRATION OF CREDIT RISK Financial instruments that potentially subject E&S to concentrations of credit risk are primarily cash, cash equivalents, short-term investments and accounts receivable. Our short-term investment portfolio consists of investment-grade securities diversified among security types, industries and issuers. Our investments are managed by recognized financial institutions that follow our investment policy. Our policy limits the amount of credit exposure in any one issue, and we believes no significant concentration of credit risk exists with respect to these investments. In the normal course of business, E&S provides unsecured credit terms to its customers. Accordingly, we perform ongoing credit evaluations of our customers and maintain allowances for possible losses which, when realized, have generally been within the range of management's expectations. In accordance with accounting for long-term contracts, we record an asset for costs and estimated earnings in excess of billings on uncompleted contracts. At December 31, 2001, $29.8 million of the costs and estimated earnings in excess of billings on uncompleted contracts pertain to four 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. We expect to achieve most of the remaining billing milestones during 2002. Our inability to achieve these contractual milestones may significantly impact the realization of such amounts and have a material adverse impact to the operating results and liquidity of E&S. RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting for Derivative Instruments and Hedging Activities". SFAS 133, as amended by SFAS 137 and SFAS 138, is effective for all fiscal years beginning after June 15, 2000. SFAS 133 establishes new accounting and reporting standards for companies to report information about derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives), and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. For a derivative not designated as a hedging instrument, changes in the fair value of the derivative are recognized in earnings in the period of change. We adopted SFAS 133 as of January 1, 2001. The impact of adopting SFAS 133 was not material to the financial statements. In July 2001, the FASB issued SFAS No. 141, "Accounting for Business Combinations" and No. 142, "Accounting for Goodwill and Other Intangible Assetds". SFAS 141 is effective for E&S beginning July 1, 2001. The Statement establishes accounting and reporting standards for business combinations and prohibits the use of the pooling-of-interests method of accounting for those transactions after June 30, 2001. SFAS 142 is effective for E&S beginning January 1, 2002. The Statement establishes accounting and reporting standards for goodwill and intangible assets. Beginning January 1, 2002, we do not have any goodwill, therefore the impact of adopting SFAS 142 is not expected to be material to the financial statements. In October 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations" and No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", that replaces SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of". SFAS 143 is effective for E&S beginning July 1, 2002. The Statement addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The impact of adopting SFAS 143 is not expected to be material 54 EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) to the financial statements. SFAS 144 establishes one accounting model for long-lived assets to be disposed of by sale and addresses significant implementation issues. SFAS No. 144 is effective for E&S beginning after January 1, 2002. Management does not expect the adoption of this statement to have a material impact on its financial statements. (2) ACQUISITIONS AND DISPOSITIONS In the third quarter of 2001, E&S sold the REALimage group to Real Vision, Inc., a Japanese company. The sale was for a maximum value of $12 million, consisting of cash of $6.3 million plus future royalties, on a when and if earned basis, up to $6 million for REALimage technology, other assets, and the performance of certain development support during a seven-month transition period leading to closing the transaction in April 2002. Real Vision has indicated it will continue the development of the technology, and E&S is maintaining a technical staff to support Real Vision in Salt Lake City during the transition period. As part of the sale of the REALimage Group, E&S closed its offices in Seattle, Washington, and San Jose, California and recorded an impairment loss of $0.2 million related to the write-off of certain remaining goodwill balances. E&S is recognizing the proceeds received on the sale of the REALimage Group on a percent complete basis over the seven-month transition period ending in April, 2002. The gain on sale of business unit recognized through December 31, 2001 is calculated based on the ratio of costs incurred to management's estimate of anticipated costs to be incurred during the transition period and excludes $0.6 million of withholding taxes which have been recorded as income tax expense on the accompanying statement of operations. In the fourth quarter of 2001 we recognized $9.0 million on the sale of certain of our key 3D-graphics patents, which were being held for sale, to NVIDIA Corporation. In December 2000, we completed the divestiture of our German subsidiary via a management-led buyout and recorded a loss of $0.3 million. The former subsidiary, which was called Evans & Sutherland Computer GmbH, now operates under a new name. The divested company has no remaining connection with E&S. We will continue to operate in Germany and throughout Europe under our own name, providing marketing, sales, and support for our growing visual systems business and traditional customer base. On March 28, 2000, we sold certain assets of its Applications Group relating to digital video products to RT-SET Real Time Synthesized Entertainment Technology Ltd. and its subsidiary, RT-SET America Inc., for $1.4 million in cash, common stock of RT-SET Real Time Synthesized Entertainment Technology Ltd. valued at approximately $1.0 million, and the assumption of certain liabilities. On June 15, 2000, we received additional common stock of RT-SET Real Time Synthesized Entertainment Technology Ltd. valued at $1.5 million as consideration for the successful development of a product included in the purchased assets. We recognized a gain of $1.9 million on the sale of these assets. On June 3, 1999, we sold certain of our manufacturing capital assets and inventory of $6.0 million to Sanmina-SCI as part of our efforts to outsource the production of certain electronic products and assemblies. In addition, we entered into an electronic manufacturing services agreement with Sanmina-SCI. The electronic manufacturing services agreement commits E&S to purchase a minimum of $22.0 million of electronic products and assemblies from Sanmina-SCI each year until June 3, 2002. If we fail to meet these minimum purchase levels, subject to adjustment, we may be required to pay 25% of the difference between the $22.0 million and the amount purchased. 55 EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (3) INVENTORIES Inventories consist of the following (in thousands):
DECEMBER 31, ------------------------ 2001 2000 --------- --------- Raw materials $ 22,437 $ 26,701 Work-in-process 10,047 9,219 Finished goods 5,742 2,463 --------- --------- $ 38,226 $ 38,383 ========= =========
(4) COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS Comparative information with respect to uncompleted contracts is summarized as follows (in thousands):
DECEMBER 31, ------------------------ 2001 2000 --------- --------- Accumulated costs and estimated earnings on uncompleted contracts $ 294,774 $ 252,012 Less total billings on uncompleted contracts (272,066) (211,258) --------- --------- $ 22,708 $ 40,754 ========= ========= Costs and estimated earnings in excess of billings on uncompleted contracts $ 47,761 $ 68,464 Billings in excess of costs and estimated earnings on uncompleted contracts (25,053) (27,710) --------- --------- $ 22,708 $ 40,754 ========= =========
(5) PROPERTY, PLANT AND EQUIPMENT The cost and estimated useful lives of property, plant and equipment are summarized as follows (dollars in thousands):
DECEMBER 31, ESTIMATED ------------------------ USEFUL LIVES 2001 2000 ------------ --------- --------- Buildings and improvements 40 years $ 42,044 $ 41,343 Manufacturing machinery and equipment 3 to 8 years 75,865 80,212 Office furniture and equipment 8 years 5,546 6,308 Construction-in-process -- 2,329 2,779 --------- --------- 125,784 130,642 Less accumulated depreciation and amortization (83,817) (81,977) --------- --------- $ 41,967 $ 48,665 ========= =========
56 EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) All buildings and improvements owned by E&S are constructed on land leased from an unrelated third party. Such leases extend for a term of 40 years from 1986, with options to extend two of the leases for an additional 40 years and the remaining five leases for an additional ten years. At the end of the lease term, including any extension, the buildings and improvements revert to the lessor. We have undertaken actions to sell certain buildings that are not, or will not be used in operations by us. Accordingly, subsequent to December 31, 2001, we have designated these as assets to be disposed of. (6) LEASES We lease certain of our buildings and related improvements to third parties under non-cancelable operating leases. Cost and accumulated depreciation of the leased buildings and improvements at December 31, 2001 were $8.9 million and $3.7 million, respectively. Rental income for all operating leases for 2001, 2000 and 1999 was $2.2 million, $1.8 million and $1.6 million, respectively. We occupy real property and use certain equipment under lease arrangements that are accounted for as operating leases. Rental expenses for all operating leases for 2001, 2000 and 1999 were $4.0 million, $2.0 million and $2.1 million, respectively. At December 31, 2001, 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, 2002 $ 1,393 $ 3,527 2003 1,265 2,912 2004 180 971 2005 -- 667 2006 -- 665 Thereafter -- 9,460 ----------- ----------- $ 2,838 $ 18,202 =========== ===========
57 EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (7) INVESTMENTS We had the following investments in marketable equity securities, adjusted for unrealized holding gains and losses and other-than-temporary declines in fair value, nonmarketable equity securities, adjusted for other-than-temporary declines in fair value and a joint venture (in thousands):
DECEMBER 31, ------------------------ 2001 2000 --------- --------- Marketable securities: Cypress Semiconductor, Inc. (Cypress) $ -- $ 3,276 vi[z]rt (formerly RT-SET Real Time Synthesized Entertainment Technology Ltd.) 57 358 Iwerks Entertainment, Inc. (Iwerks) 37 9 C3-D Digital Inc. (C3-D) 14 16 --------- --------- 108 3,659 --------- --------- Nonmarketable securities: Quantum Vision, Inc. (Quantum) 500 500 Total Graphics Solutions N.V. (TGS) 500 500 Other 16 16 --------- --------- 1,016 1,016 --------- --------- Investment in joint venture: Quest Flight Training Ltd. 828 754 --------- --------- Total investment securities $ 1,952 $ 5,429 ========= =========
Quantum is a start-up company that owns patented technology to improve cathode raytube (CRT) performance used in large projection systems. TGS develops and markets portable graphics software tools, which provide hardware independence for application developers. Each investment in non-marketable investment securities was made either to enhance a current technology of E&S or to complement our strategic direction. We own, including total shares purchased or available to purchase under warrants, less than 15% of the outstanding common stock and common stock equivalents of Quantum and TGS. We have one of six seats on TGS's board of directors. There are no inter-company transactions, technological dependencies, related guarantees, obligations, contingencies, interchange of personnel, nor ability to exercise significant influence on any of the companies in which we have investments. Accordingly, we account for Quantum and TGS utilizing the cost method. We have a 50% interest in Quest Flight Training Ltd. (Quest), a joint venture providing aircrew training services for the United Kingdom Ministry of Defence under a 30 year contract. The investment is accounted for under the equity method. Equity in earnings of Quest of $74,000 in 2001 and $43,000 in 2000 is recorded in other income (expense). The financial position and operating results of Quest are immaterial to our financial results. We guarantee a portion of the joint venture's third-party borrowings. At December 31, 2001, Quest had outstanding debt of $7.4 million. Management believes, based on current facts and circumstances and the joint venture's financial position and operating results, that the likelihood of a payment pursuant to such guarantee is remote. However, if we were required to make such a payment it would have a material adverse impact on our operating results and liquidity. 58 EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) During 2000, we recognized a $6.7 million gain on the sale of our investment in SLM to Cypress in which we received shares of Cypress stock which was offset by a $0.2 million loss on the subsequent sale of certain Cypress shares. During 2001, we sold our remaining interest in Cypress for cash proceeds of $3.8 million. During 2001, 2000 and 1999 we wrote down our investments in marketable securities by $0.3 million, $7.8 million and $0.4 million respectively due to other-than-temporary declines in market value. These amounts are recorded in other income (expense), net in our consolidated statements of operations. (8) ACCRUED EXPENSES Accrued expenses consist of the following (in thousands):
DECEMBER 31, ------------------------ 2001 2000 --------- --------- Compensation and benefits $ 8,880 $ 11,277 Liquidated damages and late delivery penalties 1,500 3,091 Other 6,892 12,159 --------- --------- $ 17,272 $ 26,527 ========= =========
On October 16, 1997, E&S and CAE Electronics Ltd. ("CAE") entered into a Sub-Contract (the "Sub-Contract") for E&S 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 our 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, we incurred liquidated damages on this Sub-Contract totaling $6.0 million. E&S and CAE agreed to an interim solution, which provides for the installation of our ESIG 4530 image generators to integrate with the dynamic mission simulators and tactical control centers until our Harmony VSC are able to support the dynamic mission simulators and tactical control centers. As of December 31, 2000, integration of a Harmony VSC with a dynamic mission simulator has been tested. A Harmony VSC is currently being installed and integrated with a dynamic mission simulator at the training site. Upon successful completion of the integration, the ESIG 4530 image generators currently installed at the training site will be replaced with Harmony VSCs. We have agreed to pay CAE (i) $0.5 million for reimbursement of certain expenses and costs incurred by CAE relating to the integration and retrofit of the ESIG 4530 to the dynamic mission simulators and tactical control centers and (ii) $5.5 million as liquidated damages resulting from certain delays of the Harmony VSC. As of December 31, 2000, we have paid $6.0 million to CAE. As of December 31, 2001 we have agreed to pay $1.5 million of additional costs incurred by CAE for retrofit of the simulators with the Harmony Visual System (VSC). If further delays in the integration of the Harmony VSC occur, we may be obligated to pay CAE additional penalties. 59 EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (9) EMPLOYEE BENEFIT PLANS Pension Plan (the "Plan")--We have 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. Our funding policy is to contribute amounts sufficient to satisfy regulatory funding standards, based upon independent actuarial valuations. Supplemental Executive Retirement Plan ("SERP")--We have a non-qualified SERP. The SERP, which is unfunded, provides eligible executives defined pension benefits, outside our pension plan, based on average earnings, years of service and age at retirement. The following provides a reconciliation of benefit obligations, plan assets, and funded assets of the Plan and SERP (in thousands):
PENSION PLAN SERP ------------------------ ------------------------ 2001 2000 2001 2000 --------- --------- --------- --------- Change in benefit obligation: Beginning of year $ 43,956 $ 36,904 $ 6,269 $ 5,749 Service cost 2,891 2,460 746 815 Interest cost 3,127 2,759 447 410 Actuarial (gain) loss 200 3,722 (518) (521) Benefits paid (1,075) (1,889) (200) (184) Curtailment -- -- -- -- --------- --------- --------- --------- End of year $ 49,099 $ 43,956 $ 6,744 $ 6,269 ========= ========= ========= ========= Change in plan assets: Fair value at beginning of year $ 44,566 $ 43,721 Actual return on plan assets (333) 2,086 Employer contributions -- 648 Benefits paid (1,075) (1,889) --------- --------- Fair value at end of year $ 43,158 $ 44,566 ========= ========= Reconciliation of funded status: Funded status $ (5,940) $ 610 $ (5,706) $ (6,269) Unrecognized actuarial (gain) loss (4,300) (9,018) (1,241) 68 Unrecognized prior service cost 688 730 -- 495 Unrecognized transition obligation -- 79 -- -- Contribution -- -- 199 -- --------- --------- --------- --------- Accrued benefit liability $ (9,552) $ (7,599) $ (6,748) $ (5,706) ========= ========= ========= ========= Assumptions (weighted average): Discount rate 7.25% 7.8% 7.25% 7.3% Expected return on plan assets 9.0% 9.0% N/A N/A Compensation increase 4.5% 4.5% 4.5% 4.5%
60 EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Net periodic pension and other postretirement benefit costs include the following components (in thousands):
PENSION PLAN SERP ------------------------------ ------------------------------ 2001 2000 1999 2001 2000 1999 -------- -------- -------- -------- -------- -------- Components of net periodic benefit cost: Service cost $ 2,891 $ 2,460 $ 3,252 $ 746 $ 815 $ 739 Interest cost 3,127 2,759 2,892 447 410 418 Expected return on assets (3,921) (3,907) (3,575) -- -- -- Amortization of actuarial (gain) loss (264) (692) -- -- 1 53 Amortization of prior year service cost 41 41 37 48 48 73 Amortization of transition 79 79 79 -- -- -- -------- -------- -------- -------- -------- -------- Net periodic benefit cost $ 1,953 $ 740 $ 2,685 $ 1,241 $ 1,274 $ 1,283 ======== ======== ======== ======== ======== ========
Deferred Savings Plan--We have a deferred savings plan that qualifies under Section 401(k) of the Internal Revenue Code. The plan covers all employees of E&S who have at least one year of service and who are age 18 or older. We make matching contributions of 50 percent of each employee's contribution not to exceed six percent of the employee's compensation. Our contributions to this plan for 2001, 2000 and 1999 were $1.1 million, $1.0 million and $1.1 million, respectively. Life Insurance--We purchase 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, 2001 and 2000, the investment in the policies was $2.7 million and $3.2 million, respectively, and net life insurance expense was $0.1 million, $0.1 million and $0.2 million for 2001, 2000, 1999, respectively. (10) LONG-TERM DEBT Included in long-term debt is approximately $18.0 million of 6% Convertible Subordinated Debentures due in 2012 (the "6% Debentures"). The 6% Debentures are unsecured and are convertible at each bondholder's option into shares of our common stock at a conversion price of $42.10 or 428,000 shares of our common stock subject to adjustment. The 6% Debentures are redeemable at our option, in whole or in part, at par. 61 EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The following is a summary of lines of credit (dollars in thousands):
2001 2000 --------- --------- Balance at end of year $ 20,676 $ 7,345 Weighted average interest rate at end of year 9.1% 12.5% Maximum balance outstanding during the year $ 25,530 $ 7,345 Average balance outstanding during the year $ 13,617 $ 1,612 Weighted average interest rate during the year 10.8% 9.6%
The average balance outstanding and weighted average interest rate are computed based on the outstanding balances and interest rates at month-end during each year. In December 2000, we entered into a secured credit facility (the "Foothill Facility") with Foothill Capital Corporation ("Foothill"). The Foothill Facility provides for borrowings and the issuance of letters of credit up to $30.0 million. On February 22, 2002, E&S and Foothill amended the Foothill Facility whereby Foothill waived all events of financial covenant default through December 31, 2001 and revised E&S's 2002 financial covenants. The Foothill Facility expires in December 2002. Borrowings under the Foothill Facility bear interest at the Wells Fargo Bank National Association prevailing prime rate plus 1.5% to 3.0%, depending on the amount outstanding. In addition, the Foothill Facility has an unused line fee equal to 0.375% per annum times the difference between $30.0 million and the sum of the average undrawn portion of the letters of credit and the average daily balance of all outstanding borrowings, payable each quarter. The Foothill Facility provides Foothill with a first priority perfected security interest in substantially all of our assets, including, but not limited to, all of our intellectual property. Pursuant to the terms of the Foothill Facility, all cash receipts of E&S must be deposited into a Foothill controlled account. The Foothill Facility, among other things, (i) requires E&S to maintain certain financial ratios and covenants, including a minimum tangible net worth that adjusts each quarter, a minimum unbilled receivables to billed receivables ratio, and a limitation of $12.0 million of aggregate capital expenditures in any fiscal year; (ii) restricts our ability to incur debt or liens; sell, assign, pledge or lease assets; merge with another company; and (iii) restricts the payment of dividends and repurchase of any of our outstanding shares without the prior consent of the lender. Due to Foothill's waiver on February 22, 2002 of E&S's noncompliance with financial covenants through December 31, 2001 and the modification of the financial covenants, we are currently in compliance with its financial covenants and ratios, although a continuation of recent negative trends could impact future compliance with such covenants. Should the need arise, we will negotiate with Foothill to modify and expand various financial ratios and covenants, however no assurance can be given that such negotiations will result in modifications that will allow us to continue to be in compliance or otherwise be acceptable to E&S. E&S will need to replace the Foothill Facility on or before December 14, 2002. In the event E&S is not able to obtain an acceptable credit facility to replace the Foothill Facility on or before December 14, 2002, E&S may be unable to meet its anticipated working capital needs, routine capital expenditures, and current debt service obligations on a short-term and long-term basis. As of December 31, 2001, we have $15.7 million in outstanding borrowings and $6.0 million in outstanding letters of credit under the Foothill Facility. Evans & Sutherland Computer Limited, a wholly-owned subsidiary of Evans & Sutherland Computer Corporation, has a $3.0 million overdraft facility (the "Overdraft Facility") with Lloyds TSB Bank plc ("Lloyds"). Borrowings under the Overdraft Facility bear interest at Lloyds' short-term offered rate plus 1.75% per annum. As of December 31, 2001, there were $4.9 million in outstanding 62 EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) borrowings. The Overdraft Facility is subject to reduction or demand repayment for any reason at any time at Lloyds' discretion and expires on November 30, 2002. Evans & Sutherland Computer Limited executed a letter of negative pledge in favor of Lloyds whereby it agreed not to sell or encumber its assets, except in the ordinary course of business. Covenants contained in the Overdraft Facility restrict dividend payments from Evans & Sutherland Computer Limited and require maintenance of certain financial covenants. In addition, at December 31, 2001, we have $0.9 million of cash on deposit with Lloyds in a restricted cash collateral account to support certain obligations that the bank guarantees. (11) INCOME TAXES Income tax benefit of $3.2 million for 2001 is primarily attributable to adjustments to prior years tax provisions as a result of the resolution of certain worldwide tax contingencies. Included in this amount is $0.6 million for withholding taxes paid in Japan for taxes associated with the REALimage transaction. Components of income tax expense (benefit) attributable to earnings before income taxes for 2000 and 1999 are as follows (in thousands):
SHARE AND STOCK OPTION CURRENT DEFERRED BENEFIT TOTAL ----------- ----------- ------------ ----------- Year ended December 31, 2000: Federal $ (1,598) $ 17,750 $ -- $ 16,152 State (230) 2,591 -- 2,361 Foreign 510 -- -- 510 ----------- ----------- ----------- ----------- $ (1,318) $ 20,341 $ -- $ 19,023 =========== =========== =========== =========== Year ended December 31, 1999: Federal $ (6,734) $ (6,816) $ 85 $ (13,465) State (150) (2,056) 14 (2,192) Foreign 244 -- -- 244 ----------- ----------- ----------- ----------- $ (6,640) $ (8,872) $ 99 $ (15,413) =========== =========== =========== ===========
The actual tax expense differs from the expected tax expense (benefit) as computed by applying the U.S. federal statutory tax rate of 35 percent as a result of the following (in thousands):
2001 2000 1999 --------- --------- --------- Tax benefit at U.S. federal statutory rate $ (10,720) $ (17,692) $ (13,603) Losses (gains) of foreign subsidiaries (320) -- -- Adjustment to prior year tax provisions (3,172) -- -- Earnings of foreign sales corporation -- -- (232) State taxes (net of federal income tax benefit) -- 1,521 (1,425) Research and development and foreign tax credits (681) (437) (925) Change in federal valuation allowance 12,599 35,607 -- Other, net (878) 24 772 --------- --------- --------- $ (3,172) $ 19,023 $ (15,413) ========= ========= =========
63 EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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, 2001 and 2000, are presented below (in thousands):
2001 2000 --------- --------- Deferred tax assets: Warranty, vacation, and other accruals $ 5,475 $ 4,481 Inventory reserves and other inventory-related temporary basis differences 3,348 4,407 Pension accrual 6,387 5,204 Long-term contract related temporary differences 882 612 Net operating loss carryforwards 30,538 19,803 Unrealized loss on marketable equity securities -- -- Write-down of investment securities 2,191 2,350 Liquidated damages and late delivery penalties 1,034 134 Credit carryforwards 5,190 4,987 Other 343 332 --------- --------- Total gross deferred tax assets 55,388 42,310 Less valuation allowance 54,094 40,866 --------- --------- Total deferred tax assets 1,294 1,444 --------- --------- Deferred tax liabilities: Intangible assets -- (111) Plant and equipment, principally due to differences in depreciation (1,181) (1,108) Other (113) (225) --------- --------- Total gross deferred tax liabilities (1,294) (1,444) --------- --------- Net deferred tax asset $ -- $ -- ========= =========
Worldwide income before income taxes for the years ended December 31, 2001, 2000 and 1999, consisted of the following (in thousands):
2001 2000 1999 --------- --------- --------- United States $ (31,570) $ (51,395) $ (40,113) Foreign 941 848 1,246 --------- --------- --------- $ (30,629) $ (50,547) $ (38,867) ========= ========= =========
We have total federal net operating loss carryovers of $81.0 million, of which $24.3 million expire in 2021, $45.4 million expire in 2020, and the remainder expires between 2006 and 2019. We have various tax credit carryovers of $5.2 million that expire between 2003 and 2021. We also have state net operating loss carryovers that expire depending on the rules of the various states to which the loss is allocated. During the years ended December 31, 2001 and 2000, we increased the valuation allowance on deferred tax assets by approximately $13.2 million and $40.7 million, respectively. These amounts relate to an increase in the general valuation allowance established under the provisions of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes", which requires that a valuation allowance be established when it is more likely than not that the net deferred tax assets will not be realized. 64 EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) On March 9, 2002, President Bush signed into law the Jobs Creation and Worker Assistance Act of 1992. Among other provisions, the Act provides for a 5-year carryback of losses generated in 2001 without the normal alternative minimum tax limitation. We expect to be able to generate some additional federal tax refunds due to this new law. (12) 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 our 6% Debentures ($6.8 and $7.9 million as of December 31, 2001 and 2000, respectively) is based on quoted market prices. (13) COMMITMENTS AND CONTINGENCIES On November 27, 2000, we entered into a three year agreement with a third party to provide E&S with certain copy service, mail service, software and equipment through November 30, 2003. Minimum commitments under this agreement totaled $640,000 at December 31, 2001. On September 26, 2000, we entered into a purchase agreement with a third party that commits E&S to purchase a minimum $4.5 million of licensed products and support for design development software. The agreement is effective for a period of three years with an option to renew the agreement for an additional two-year term. On June 3, 1999, we entered into an electronic manufacturing services agreement with Sanmina Corporation (now Sanmina-SCI). The agreement commits us to purchase a minimum of $22 million of electronic products and assemblies from Sanmina-SCI each year until June 3, 2002. If we fail to meet these minimum purchase levels, subject to adjustment, we may be required to pay 25 percent of the difference between the $22 million and the amount purchased. We have fully satisfied the requirements of this contract, which ends in June 2002. Various alternatives, which include a renewed contract with Sanmina-SCI, are being evaluated. Certain of our contracts to deliver Harmony image generators contain liquidated damage provisions for delays in delivery. We incurred $2.9 million, $0.9 million and $8.2 million for such damages in 2001, 2000 and 1999, respectively. If further delays in the delivery of the Harmony image generator occur, we may incur additional liquidated damages. (14) LEGAL PROCEEDINGS LOCKHEED MARTIN CORPORATION V. EVANS & SUTHERLAND COMPUTER CORPORATION (UNITED STATES (MIDDLE) DISTRICT COURT (FLORIDA), CASE NO. 6:00-CV-755-ORL-19C, FILED ON MAY 23, 2000). On May 23, 2000, Lockheed Martin Corporation served E&S with a civil complaint filed in the Circuit Court of the Ninth Judicial Circuit in and for Orange County, Florida. Lockheed alleged in the complaint that we breached a contract to provide certain visual systems for the Combined Arms Tactical Trainer program for the United Kingdom Ministry of Defence. The contract has an original value of $33.9 million. In the complaint, Lockheed seeks compensatory damages of $8.5 million plus interest as well as consequential damages and attorneys' fees. The $8.5 million being sought from E&S by Lockheed was paid to us from May 1999 to March 2000 and was recognized as revenue by us during 1999. On June 12, 2000, we filed its answer and counterclaim. In the counterclaim, we allege as grounds for recovery against Lockheed (1) breach of contract, (2) breach of implied covenant of good faith and fair dealing, (3) unjust enrichment, (4) unfair competition, (5) misappropriation of trade secrets, (6) intentional interference with advantageous business relationship, (7) replevin, and (8) promissory 65 EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) estoppel. In its counterclaim, we seek compensatory damages of not less than $10.0 million and not more than $25.4 million. On June 14, 2000, the case was removed to the Orlando Division of the United States District Court for the District of Florida where it currently remains. On July 7, 2000, Lockheed answered our counterclaim but also filed a motion for dismissal of our counterclaims for unjust enrichment, unfair competition, promissory estoppel, and incidental damages. On July 24, 2000, we filed our opposition to Lockheed's motion to dismiss these certain counterclaims of E&S. On October 20, 2000 the court denied Lockheed's motion to dismiss in its entirety, without prejudice. On January 16, 2001, we filed a motion for partial summary judgment, asking the court to dismiss all of Lockheed's breach of contract claims. The court denied that motion on August 30, 2001, citing the existence of material disputed facts. On September 6, 2001 the court granted Lockheed's leave to amend its complaint, which was filed on September 17, 2001. We filed a motion to dismiss these new claims on October 4, 2001, and Lockheed has opposed it. The court currently has that motion under advisement. Discovery in the matter is scheduled to conclude on September 30, 2002. A trial date is currently set for March, 2003. We dispute Lockheed's allegations in the complaint, is vigorously defending the action, and is vigorously prosecuting its counterclaims. Although management believes E&S will ultimately prevail in the litigation, an unfavorable outcome of these matters would have a material adverse impact on our financial condition and operations. In the normal course of business, E&S has various other legal claims and other contingent matters, including items raised by government contracting officers and auditors. Although the final outcome of such matters cannot be predicted, we believe the ultimate disposition of these matters would have a material adverse effect on our consolidated financial condition, liquidity or results of operations. (15) STOCK OPTION AND STOCK PURCHASE PLANS Stock Option Plans--We have stock incentive plans that provide for the grant of options to officers and employees to acquire shares of our 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. We grant options to our directors under our Director Plan. Option grants are 66 EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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):
2001 2000 1999 -------------------------- -------------------------- -------------------------- WEIGHTED- WEIGHTED- WEIGHTED- AVERAGE AVERAGE AVERAGE NUMBER EXERCISE NUMBER EXERCISE NUMBER EXERCISE OF SHARES PRICE OF SHARES PRICE OF SHARES PRICE ---------- ---------- ---------- ---------- ---------- ---------- Outstanding at beginning of year 2,657 $ 12.63 2,087 $ 14.05 2,084 $ 13.80 Granted 267 7.35 865 9.18 472 14.25 Exercised (3) 5.17 (9) 1.03 (84) 7.72 Canceled (411) 11.76 (286) 13.30 (385) 14.32 ---------- ---------- ---------- Outstanding at end of year 2,510 12.22 2,657 12.63 2,087 14.05 ========== ========== ========== Exercisable at end of year 1,803 1,480 14.12 1,219 14.16 ========== ========== ========== Weighted-average fair value of options granted during the year 1.92 5.91 5.32
Shareholders authorized an additional 850,000 and 400,000 shares to be granted under the plans during 2001 and 2000, respectively. As of December 31, 2001, options to purchase 1,303,000 shares of common stock were authorized and reserved for future grant. The following table summarizes information about fixed stock options outstanding as of December 31, 2001 (options in thousands):
OPTIONS OUTSTANDING OPTIONS EXERCISABLE --------------------------------------------- ---------------------------- WEIGHTED- NUMBER AVERAGE WEIGHTED- NUMBER WEIGHTED- OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE RANGE OF EXERCISE AS OF CONTRACTUAL EXERCISE AS OF EXERCISE PRICES 12/31/01 LIFE PRICE 12/31/01 PRICE ----------------- ----------- ----------- ----------- ----------- ----------- $ 1.21 - $ 8.04 478 8.8 $ 6.75 86 $ 6.06 8.26 - 12.22 546 6.7 11.34 323 11.67 12.23 - 13.25 212 6.0 12.81 185 12.84 13.31 - 13.56 853 6.7 13.56 852 13.56 13.56 - 22.50 419 5.9 16.51 355 16.82 24.38 - 32.88 2 6.0 28.20 2 28.19 1.21 - 32.88 2,510 6.9 12.22 1,803 13.45
We account 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, our net 67 EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) loss and loss per common share would have been changed to the following pro forma amounts (in thousands, except per share data):
2001 2000 1999 ----------- ----------- ----------- Net loss Pro forma $ (28,352) $ (71,923) $ (26,995) Basic and diluted loss per common share Pro forma (2.79) (7.67) (2.84)
The per share weighted-average fair value of stock options granted during 2001, 2000 and 1999 was $1.92, $5.91 and $5.32, respectively. 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 2001, 2000 and 1999:
2001 2000 1999 --------- --------- --------- Expected life (in years) 2.6 4.5 2.6 Risk-free interest rate 3.0% 6.1% 6.3% Expected volatility 37% 79% 52% Dividend yield -- -- --
Stock Purchase Plan--We have an employee stock purchase plan whereby qualified employees are allowed to have up to 10% of their annual earnings withheld to purchase our common stock at 85% of the market value of the stock at the time of the sale. A total of 500,000 shares are authorized under the plan. Shares totaling 63,000, 84,000 and 58,000 were purchased under this plan in fiscal 2001, 2000 and 1999, and as of December 31, 2001, 50,000 shares were available for future issuance under this plan. (16) PREFERRED STOCK PREFERRED STOCK--CLASS A We have 5,000,000 authorized shares of Class A Preferred Stock. Prior to 1998, we 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 E&S for shareholders of record on November 19, 1998, and for all future issuances of common stock. The Rights are not currently exercisable or transferable apart from the common stock and have voting rights or rights to receive dividends. Each Right entitles the registered holder to purchase from E&S one thousandth of a share of Preferred Stock at a price per share of $60.00, subject to adjustment. The Rights will be exercisable ten business days following a public announcement of a person or group of affiliated persons acquiring beneficial ownership of 15% or more of our 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 E&S at a price of $0.01 per Right before November 30, 2008. 68 EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) In the event that we are acquired in a merger or other business combination transaction, provision shall be made so that each holder of a Right, excluding the Rights beneficially owned by the acquiring persons, will have the right to receive, upon exercise thereof at the then current exercise price, that number of shares of common shares of the surviving company which at the time of such transaction will have a market value of two times the exercise price of the Right. In the event that a person or group of affiliated persons acquires beneficial ownership of 15% or more of our outstanding common shares, provision shall be made so that each holder of a Right, excluding the Rights beneficially owned by the acquiring persons, shall have the right to receive, upon exercise thereof, a share of common stock at a purchase price equal to 50% of the then current exercise price. On June 7, 2000, E&S and American Stock Transfer & Trust Company amended the Rights to allow the State of Wisconsin Investment Board to acquire beneficial ownership up to 19.9% of our outstanding common shares without triggering the exercisability of the Rights. PREFERRED STOCK--CLASS B We have 5,000,000 authorized shares of Class B Preferred Stock. On July 22, 1998, Intel Corporation ("Intel") purchased 901,408 shares of our preferred stock plus a warrant to purchase an additional 378,462 shares of the preferred stock at an exercise price of $33.28125 per share for approximately $24.0 million. In March 2001, Intel converted the 901,408 shares of our preferred stock into 901,408 shares of our common stock. In March 2001, Intel and E&S amended the preferred stock and warrant purchase agreement to terminate certain contractual rights of Intel, including registration rights, board and committee observation rights, right of first refusal, right of participation, right of maintenance, standstill agreement, and right to require E&S to repurchase the preferred stock in the event of any transaction qualifying as a specific corporate event. (17) NET INCOME (LOSS) PER COMMON SHARE Net income (loss) per common share is computed based on the weighted-average number of common shares and, as appropriate, dilutive common stock equivalents outstanding during the period. Stock options, warrants, and the 6% Debentures are considered to be common stock equivalents. Basic net income (loss) per common share is the amount of net income (loss) for the period available to each share of common stock outstanding during the reporting period. Diluted net income (loss) per share is the amount of net income (loss) for the period available to each share of common stock outstanding during the reporting period and to each share that would have been outstanding assuming the issuance of common shares for all dilutive potential common shares outstanding during the period. In calculating net loss per common share, the net loss was the same for both the basic and diluted calculation. The diluted weighted average number of common shares outstanding during 2001, 2000 and 1999 excludes common stock issuable pursuant to outstanding stock options, the 6% Debentures and the Class B-1 Preferred Stock because to do so would have had an anti-dilutive effect on loss per common share. The total number of common shares excluded from diluted loss per share related to the above was approximately 2.2 million, 2.8 million and 2.5 million in 2001, 2000 and 1999, respectively. (18) SEGMENT AND RELATED INFORMATION Our business units have been aggregated into three reportable segments: Simulation, REALimage Solutions and Applications. These reportable segments offer different products and services and are 69 EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) managed and evaluated separately because each segment uses different technologies and requires different marketing strategies. The Simulation segment provides a broad line of visual systems for flight and ground simulators for training purposes to government, aerospace and commercial airline customers. The REALimage Solutions segment provides graphics acceleration technology to the professional digital content creation market. The Applications segment provides digital video applications for entertainment, educational and multimedia industries. As discussed in Note 2, we sold the REALimage Solutions segment in the third quarter of 2001. The accounting policies of the segments are the same as those described in the summary of significant accounting policies (Note 1). We evaluate 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. Our assets are not identifiable by segment.
REALIMAGE SIMULATION SOLUTIONS APPLICATIONS TOTAL ------------ ------------ ------------ ------------ YEAR ENDED DECEMBER 31, 2001: Sales $ 135,309 $ 1,714 $ 8,240 $ 145,263 Operating income (loss) (31,359) 4,132 (824) (28,051) YEAR ENDED DECEMBER 31, 2000: Sales $ 149,909 $ 5,736 $ 11,335 $ 166,980 Operating loss (43,106) (3,132) (305) (46,543) YEAR ENDED DECEMBER 31, 1999: Sales $ 170,578 $ 21,961 $ 8,346 $ 200,885 Operating loss (8,686) (26,685) (4,595) (39,966)
The 2001 operating income amount for the REALimage Solutions segment includes a $9.0 million gain on the sale of assets held for sale, a $0.8 million gain on sale of business unit and an impairment loss of $0.2 million. The restructuring charge of $2.8 million in 2001 affected all segments. The operating loss amount for 2000 for the REALimage Solutions segment included a credit of $0.8 million related to the reversal of restructuring charge accruals established in prior years. The operating loss in 1999 for the Simulation segment includes a write-off of inventories of $12.1 million. The operating loss in 1999 for the REALimage Solutions segment includes an impairment loss of $9.7 million, a restructuring charge of $1.5 million and a write-off of inventories of $1.1 million. 70 EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (19) 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):
2001 2000 1999 --------- --------- --------- United States $ 95,734 $ 106,045 $ 114,190 United Kingdom 26,960 26,584 50,100 Europe (excluding United Kingdom) 10,479 21,723 27,777 Pacific Rim 9,069 8,162 8,324 Other 3,021 4,466 494 --------- --------- --------- $ 145,263 $ 166,980 $ 200,885 ========= ========= =========
The following table presents property, plant and equipment by geographic location based on the location of the assets (in thousands):
2001 2000 --------- --------- United States $ 40,488 $ 47,777 Europe 1,479 888 --------- --------- Total property, plant and equipment, net $ 41,967 $ 48,665 ========= =========
(20) SIGNIFICANT CUSTOMERS Sales to the U.S. government, either directly or indirectly through sales to prime contractors or subcontractors, accounted for $69.5 million or 48% of total sales, $66.7 million or 40% of total sales, and $84.5 million or 42% of total sales, in 2001, 2000 and 1999, respectively. Sales to the United Kingdom Ministry of Defence ("UK MOD"), either directly or indirectly through sales to prime contractors or subcontractors, accounted for $13.6 million or 9% of total sales, $22.3 million or 13% of total sales, and $33.8 million or 17% of total sales in 2001, 2000 and 1999, respectively. In 2001, sales to Thales Training & Simulation ("Thales") were $23.9 million or 16% of total sales, of which 57% related to UK MOD sales and sales to The Boeing Company ("Boeing") were $15.1 million of 10% of total sales, of which 100% related to U.S. government or UK MOD contracts. In 2000, sales to Lockheed Martin Corporation ("Lockheed") were $22.5 million or 14% of total sales, of which 100% related to U.S. government and UK MOD contracts and sales to Thales Training & Simulation Ltd. were $19.6 million or 12% of total sales, of which 58% related to UK MOD contracts. In 1999, sales to Lockheed were $35.8 million or 18% of total sales, of which 100% related to U.S. government and UK MOD contracts, and sales to The Boeing Company ("Boeing") were $25.4 million or 13% of total sales, of which 100% related to U.S. government and UK MOD contracts. Aggregated accounts receivable from agencies of the United States government, either directly or indirectly through prime or subcontractors, was $10.8 million or 29% of gross accounts receivable at December 31, 2001 and $9.3 million or 24% of gross accounts receivable at December 31, 2000. Aggregated accounts receivable from the UK MOD, either directly or indirectly through prime or subcontractors, was $5.4 million or 15% of gross accounts receivable at December 31, 2001 and 71 EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) $2.1 million or 5% of gross accounts receivable at December 31, 2000. Aggregated accounts receivable from the Federal Department of Defense of the Federal Republic of Germany, either directly or indirectly through prime or subcontractors, was $3.3 million or 9% of gross accounts receivable at December 31, 2001 and $10.6 million or 27% of gross accounts receivable at December 31, 2000. The amount of costs and estimated earnings in excess of billings on uncompleted contracts from agencies of the United States government and the UK MOD, either directly or indirectly through prime or subcontractors was $9.8 million and $28.7 million, or 21% and 60% of total costs and estimated earnings in excess of billings on uncompleted contracts, respectively, at December 31, 2001. The amount of costs and estimated earnings in excess of billings on uncompleted contracts from agencies of the United States government and the UK MOD, either directly or indirectly through prime or subcontractors, was $16.8 million and $20.5 million, or 25% and 30% of total costs and estimated earnings in excess of billings on uncompleted contracts, respectively, at December 31, 2000. (21) RESTRUCTURING CHARGE In the third quarter of 2001, we initiated a restructuring plan focused on reducing the operating cost structure of E&S. As part of the plan, we recorded a charge of $2.1 million relating to a reduction in force of approximately 80 employees. In the fourth quarter of 2001, we extended the restructuring plan initiated in the third quarter. As part of the plan, we recorded a charge of $0.7 million relating to a reduction in force of approximately 12 employees. As of December 31, 2001, we had paid $1.9 million in severance benefits related to these restructurings. The majority of the remaining benefits will be paid out over the next two quarters. 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 Cost Incurred in a Restructuring)" and Staff Accounting Bulletin No. 100, "Restructuring and Impairment Charges". In the third quarter of 1999, we initiated a restructuring plan focused on reducing the operating cost structure of its REALimage Solutions Group. As part of the plan, we 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. During 2000, after all employee severance costs were incurred, we reversed $0.8 million of the 1999 restructuring charge as a result of certain employees being transferred within E&S rather than being terminated and estimated severance and related charges being lower than expected for the terminated employees. (22) RELATED PARTY TRANSACTIONS We had purchases of $0.4 million during 1999, from a supplier for which our Chief Executive Officer serves as a director. (23) REALIMAGE TRANSITION COSTS Early in 2001, we announced our intention to spin out or sell its REALimage Solutions Group. Therefore, we categorized all the costs and expenses associated with the REALimage Solutions Group from the beginning of 2001 until the sale of the business in the third quarter of 2001 in the REALimage transition costs expense category. These expenses totaled $5.3 million. 72 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 our directors is incorporated by reference from "Election of Directors" in the Proxy Statement to be delivered to shareholders in connection with the 2002 Annual Meeting of Shareholders to be held on May 16, 2002. 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 2002 Annual Meeting of Shareholders to be held on May 16, 2002. Information concerning our current executive officers 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 2002 Annual Meeting of Shareholders to be held on May 16, 2002. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS Information regarding this item is incorporated by reference from "Security Ownership of Certain Beneficial Owners and Management" in the Proxy Statement to be delivered to shareholders in connection with the 2002 Annual Meeting of Shareholders to be held on May 16, 2002. 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 2002 Annual Meeting of Shareholders to be held on May 16, 2002. 73 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 Auditors Consolidated Balance Sheets as of December 31, 2001 and 2000 Consolidated Statements of Operations for each of the years in the three-year period ended December 31, 2001 Consolidated Statements of Comprehensive Loss for each of the years in the three-year period ended December 31, 2001 Consolidated Statements of Stockholders' Equity for each of the years in the three-year period ended December 31, 2001 Consolidated Statements of Cash Flows for each of the years in the three-year period ended December 31, 2001 Notes to Consolidated Financial Statements for each of the years in the three-year period ended December 31, 2001 2. Financial Statement Schedules--included in Part IV of this report: Schedule II--Valuation and Qualifying Accounts Schedules other than those listed above are omitted because of the absence of conditions under which they are required or because the required information is presented in the financial statements or notes thereto. 3. Exhibits 2.1 Agreement and Plan of Merger, dated April 22, 1998, among Evans & Sutherland Computer Corporation, E&S Merger Corp., and AccelGraphics, Inc., filed as Annex I to Evans & Sutherland Computer Corporation's Registration Statement on Form S-4, SEC File No. 333-51041, and incorporated herein by this reference. 3.1 Articles of Incorporation, as amended, filed as Exhibit 3.1 to Evans & Sutherland Computer Corporation's Annual Report on Form 10-K, SEC File No. 000-08771, for the fiscal year ended December 25, 1987, and incorporated herein by this reference. 3.1.1 Amendments to Articles of Incorporation filed as Exhibit 3.1.1 to Evans & Sutherland Computer Corporation's Annual Report on Form 10-K, SEC File No. 000-08771, for the fiscal year ended December 30, 1988, and incorporated herein by this reference. 3.1.2 Certificate of Designation, Preferences and Other Rights of the Class B-1 Preferred Stock of Evans & Sutherland Computer Corporation, filed as Exhibit 3.1 to Evans & Sutherland Computer Corporation's Form 10-Q for the quarter ended September 25, 1998, and incorporated herein by this reference. 74 3.2 Amended and Restated Bylaws of Evans & Sutherland Computer Corporation, filed as Exhibit 3.2 to Evans & Sutherland Computer Corporation's Form 10-K for the year ended December 31, 2000, and incorporated herein by this reference. 3.3 Amendment No. 1 to the Amended and Restated Bylaws of Evans & Sutherland Computer Corporation, filed as Exhibit 3.3 to Evans & Sutherland Computer Corporation's Form 10-K for the year ended December 31, 2000, and incorporated herein by this reference. 4.1 Form of Rights Agreement, dated as of November 19, 1998, between Evans & Sutherland Computer Corporation and American Stock Transfer Trust Company which includes as Exhibit A, the form of Certificate of Designation for the Rights, as Exhibit B, the form of Rights Certificate and as Exhibit C, a Summary of Rights, filed as Exhibit 1 to Evans & Sutherland Computer Corporation's Registration Statement on Form 8-A filed December 8, 1998, and incorporated herein by this reference. 4.2 First Amendment to Rights Agreement dated as of June 7, 2000 between Evans & Sutherland Computer Corporation and American Stock Transfer & Trust Company, filed as Exhibit 10.14 to Evans & Sutherland Computer Corporation's Form 10-Q for the quarter ended June 30, 2000, and incorporated herein by this reference. * 10.1 1985 Stock Option Plan, as amended, filed as Exhibit 1 to Evans & Sutherland Computer Corporation's Post-Effective Amendment No. 1 to Registration Statement on Form S-8, SEC File No. 2-76027, and incorporated herein by this reference. * 10.2 1989 Stock Option Plan for Non-employee Directors, filed as Exhibit 10.5 to Evans & Sutherland Computer Corporation's Annual Report on Form 10-K, SEC File No. 000-08771, for the fiscal year ended December 29, 1989, and incorporated herein by this reference. * 10.3 1991 Employee Stock Purchase Plan of Evans & Sutherland Computer Corporation, as amended as of February 21, 2001, filed as exhibit 4.1 to Evans & Sutherland Computer Corporation's Post Effective Amendment No. 1 to Registration Statement on Form S-8, SEC File No. 33-39632, and incorporated herein by this reference. * 10.4 Evans & Sutherland Computer Corporation 1998 Stock Option Plan, as amended as through May 17, 2000, filed as exhibit 4.1 to Evans & Sutherland Computer Corporation's Post Effective Amendment No. 1 to Registration Statement on Form S-8, SEC File No. 333-58733, and incorporated herein by this reference. * 10.5 Evans & Sutherland Computer Corporation's 1995 Long-Term Incentive Equity Plan, filed as Exhibit 10.11 to Evans & Sutherland Computer Corporation's Annual Report on Form 10-K, SEC File No. 000-08771, for the fiscal year ended December 29, 1995, and incorporated herein by this reference. * 10.6 Evans & Sutherland Computer Corporation's Executive Savings Plan, filed as Exhibit 10.14 to Evans & Sutherland Computer Corporation's Annual Report on Form 10-K, SEC File No. 000-08771, for the fiscal year ended December 29, 1995, and incorporated herein by this reference. * 10.7 Evans & Sutherland Computer Corporation's Supplemental Executive Retirement Plan (SERP), filed as Exhibit 10.15 to Evans & Sutherland Computer Corporation's Annual Report on Form 10-K, SEC File No. 000-08771, for the fiscal year ended December 29, 1995, and incorporated herein by this reference. 10.8 Business Loan Agreement by and between U.S. Bank National Association and Evans & Sutherland Computer Corporation as of November 13, 1998, filed as Exhibit 10.8 to Evans & 75 Sutherland Computer Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1998, and incorporated herein by this reference. 10.9 Addendum to Business Loan Agreement by and between U.S. Bank National Association and Evans & Sutherland Computer Corporation as of February 5, 1999, filed as Exhibit 10.9 to Evans & Sutherland Computer Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1998, and incorporated herein by reference. 10.11 Series B Preferred Stock and Warrant Purchase Agreement dated as of July 20, 1998, between Evans & Sutherland Computer Corporation and Intel Corporation, filed as Exhibit 4.2 to Evans & Sutherland Computer Corporation's Form 10-Q for the quarter ended September 25, 1998, and incorporated herein by this reference. 10.12 Warrant to Purchase Series B Preferred Stock dated as of July 22, 1998, between Evans & Sutherland Computer Corporation and Intel Corporation, filed as Exhibit 4.3 to Evans & Sutherland Computer Corporation's Form 10-Q for the quarter ended September 25, 1998, and incorporated herein by this reference. 10.13 Master Agreement for Electronic Manufacturing Services, dated as of June 3, 1999, between Evans & Sutherland Computer Corporation and Sanmina Corporation, filed as Exhibit 10.1 to Evans & Sutherland Computer Corporation's Form 10-Q for the quarter ended July 2, 1999, and incorporated herein by this reference. 10.14 Loan Agreement by and between Zions First National Bank, a national banking association, and Evans & Sutherland Computer Corporation, dated March 31, 2000, filed as Exhibit 10.1 to Evans & Sutherland Computer Corporation's Form 10-Q for the quarter ended March 31, 2000 and incorporated herein by this reference. 10.15 $15,000,000 Promissory Note in favor of Zions First National Bank, a national banking association, dated March 31, 2000, filed as Exhibit 10.2 to Evans & Sutherland Computer Corporation's Form 10-Q for the quarter ended March 31, 2000, and incorporated herein by this reference. 10.16 Trust Deed, Assignment of Rents, Security Agreement and Fixture Filing executed by Evans & Sutherland Computer Corporation to Zions First National Bank, a national banking association, in favor of Zions First National Bank, a national banking association, dated March 31, 2000, filed as Exhibit 10.3 to Evans & Sutherland Computer Corporation's Form 10-Q for the quarter ended March 31, 2000, and incorporated herein by this reference. 10.17 Assignment of tenant's Interest in Ground Lease for Security executed by Evans & Sutherland Computer Corporation and Zions First National Bank, a national banking association, dated March 31, 2000, filed as Exhibit 10.4 to Evans & Sutherland Computer Corporation's Form 10-Q for the quarter ended March 31, 2000, and incorporated herein by this reference. 10.18 Assignment of Lease by Evans & Sutherland Computer Corporation and Zions First National Bank, a national banking association, dated March 31, 2000, filed as Exhibit 10.5 to Evans & Sutherland Computer Corporation's Form 10-Q for the quarter ended March 31, 2000, and incorporated herein by this reference. 10.19 Commercial Credit and Security Agreement, dated March 2, 1998, between Evans & Sutherland Computer Corporation and First Security Bank, N.A., filed as Exhibit 10.6 to Evans & Sutherland Computer Corporation's Form 10-Q for the quarter ended March 31, 2000, and incorporated herein by this reference. 76 10.20 Modification Agreement dated February 22, 2000, between Evans & Sutherland Computer Corporation and First Security Bank, N.A., filed as Exhibit 10.7 to Evans & Sutherland Computer Corporation's Form 10-Q for the quarter ended March 31, 2000, and incorporated herein by this reference. 10.21 Letter of Credit and Reimbursement Agreement between Evans & Sutherland Computer Corporation and Zions First National Bank, dated April 24, 2000, filed as Exhibit 10.1 to Evans & Sutherland Computer Corporation's Form 10-Q for the quarter ended June 30, 2000, and incorporated herein by this reference. 10.22 Supplemental Letter of Credit and Reimbursement Agreement between Evans & Sutherland Computer Corporation and Zions First National Bank, dated May 31, 2000, filed as Exhibit 10.2 to Evans & Sutherland Computer Corporation's Form 10-Q for the quarter ended June 30, 2000, and incorporated herein by this reference. 10.23 Managed Agency Account Assignment Agreement between Evans & Sutherland Computer Corporation and Zions First National Bank, dated May 31, 2000, filed as Exhibit 10.3 to Evans & Sutherland Computer Corporation's Form 10-Q for the quarter ended June 30, 2000, and incorporated herein by this reference. 10.24 Second Loan Modification Agreement made and entered into effective June 30, 2000 by and among Evans & Sutherland Computer Corporation, Evans & Sutherland Computer GmbH, Evans & Sutherland Computer Limited, Evans & Sutherland Graphics Corporation and Zions First National Bank, a national banking association, filed as Exhibit 10.4 to Evans & Sutherland Computer Corporation's Form 10-Q for the quarter ended June 30, 2000, and incorporated herein by this reference. 10.25 $15,000,000 Renewal and Substitute promissory Note in favor of Zions First National Bank, a national banking association, dated June 30, 2000, filed as Exhibit 10.5 to Evans & Sutherland Computer Corporation's Form 10-Q for the quarter ended June 30, 2000, and incorporated herein by this reference. * 10.26 Employment agreement between Evans & Sutherland Computer Corporation and James R. Oyler, dated May 16, 2000, filed as Exhibit 10.6 to Evans & Sutherland Computer Corporation's Form 10-Q for the quarter ended June 30, 2000, and incorporated herein by this reference. * 10.27 Employment agreement between Evans & Sutherland Computer Corporation and Richard J. Gaynor, dated May 16, 2000, filed as Exhibit 10.7 to Evans & Sutherland Computer Corporation's Form 10-Q for the quarter ended June 30, 2000, and incorporated herein by this reference. * 10.28 Employment agreement between Evans & Sutherland Computer Corporation and David B. Figgins, dated May 16, 2000, filed as Exhibit 10.8 to Evans & Sutherland Computer Corporation's Form 10-Q for the quarter ended June 30, 2000, and incorporated herein by this reference. * 10.29 Employment agreement between Evans & Sutherland Computer Corporation and George K. Saul, dated May 16, 2000, filed as Exhibit 10.9 to Evans & Sutherland Computer Corporation's Form 10-Q for the quarter ended June 30, 2000, and incorporated herein by this reference. * 10.30 Employment agreement between Evans & Sutherland Computer Corporation and Robert H. Ard, dated May 16, 2000, filed as Exhibit 10.10 to Evans & Sutherland Computer Corporation's Form 10-Q for the quarter ended June 30, 2000, and incorporated herein by this reference. 77 * 10.31 Employment agreement between Evans & Sutherland Computer Corporation and Thomas Atchison, dated July 25, 2000, filed as Exhibit 10.11 to Evans & Sutherland Computer Corporation's Form 10-Q for the quarter ended June 30, 2000, and incorporated herein by this reference. 10.32 Overdraft Facility dated June 15, 2000 between Evans & Sutherland Computer Limited and Lloyds TSB Bank plc, filed as Exhibit 10.12 to Evans & Sutherland Computer Corporation's Form 10-Q for the quarter ended June 30, 2000, and incorporated herein by this reference. * 10.33 Amendment to employment agreement between Evans & Sutherland Computer Corporation and James R. Oyler, dated September 22, 2000, filed as Exhibit 10.1 to Evans & Sutherland Computer Corporation's Form 10-Q for the quarter ended September 29, 2000, and incorporated herein by this reference. * 10.34 Amendment to employment agreement between Evans & Sutherland Computer Corporation and Richard J. Gaynor, dated September 22, 2000, filed as Exhibit 10.2 to Evans & Sutherland Computer Corporation's Form 10-Q for the quarter ended September 29, 2000, and incorporated herein by this reference. * 10.35 Amendment to employment agreement between Evans & Sutherland Computer Corporation and David B. Figgins, dated September 22, 2000, filed as Exhibit 10.3 to Evans & Sutherland Computer Corporation's Form 10-Q for the quarter ended September 29, 2000, and incorporated herein by this reference. * 10.36 Amendment to employment agreement between Evans & Sutherland Computer Corporation and George K. Saul, dated September 22, 2000, filed as Exhibit 10.4 to Evans & Sutherland Computer Corporation's Form 10-Q for the quarter ended September 29, 2000, and incorporated herein by this reference. * 10.37 Amendment to employment agreement between Evans & Sutherland Computer Corporation and Robert H. Ard, dated September 22, 2000, filed as Exhibit 10.5 to Evans & Sutherland Computer Corporation's Form 10-Q for the quarter ended September 29, 2000, and incorporated herein by this reference. * 10.38 Amendment to employment agreement between Evans & Sutherland Computer Corporation and Thomas Atchison, dated September 22, 2000, filed as Exhibit 10.6 to Evans & Sutherland Computer Corporation's Form 10-Q for the quarter ended September 29, 2000, and incorporated herein by this reference. * 10.39 Employment agreement between Evans & Sutherland Computer Corporation and Nicholas J. Iuanow, dated September 22, 2000, filed as Exhibit 10.7 to Evans & Sutherland Computer Corporation's Form 10-Q for the quarter ended September 29, 2000, and incorporated herein by this reference. * 10.40 Employment agreement between Evans & Sutherland Computer Corporation and William M. Thomas, dated December 22, 2000, filed as Exhibit 10.40 to Evans & Sutherland Computer Corporation's Form 10-K for the year ended December 31, 2000, and incorporated herein by this reference herein. 10.41 Loan and Security Agreement by and between Evans & Sutherland Computer Corporation and Foothill Capital Corporation, dated December 14, 2000, filed as Exhibit 10.41 to Evans & Sutherland Computer Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 2001, and incorporated herein by this reference. 10.42 Leasehold Deed of Trust, Assignment of Rents, Security Agreement and Fixture filing between Evans & Sutherland Computer Corporation, Chicago Title Company, Foothill 78 Capital Corporation, dated December 14, 2001, filed as Exhibit 10.42 to Evans & Sutherland Computer Corporation's Form 10-K for the year ended December 31, 2000, and incorporated herein by this reference herein. 10.43 Leasehold Deed of Trust, Assignment of Rents, Security Agreement and Fixture filing between Evans & Sutherland Computer Corporation, Chicago Title Company, Foothill Capital Corporation, dated December 14, 2001, filed as Exhibit 10.43 to Evans & Sutherland Computer Corporation's Form 10-K for the year ended December 31, 2000, and incorporated herein by this reference herein. 10.44 Leasehold Deed of Trust, Assignment of Rents, Security Agreement and Fixture filing between Evans & Sutherland Computer Corporation, Chicago Title Company, Foothill Capital Corporation, dated December 14, 2001, filed as Exhibit 10.44 to Evans & Sutherland Computer Corporation's Form 10-K for the year ended December 31, 2000, and incorporated herein by this reference. 10.45 Absolute Assignment of Sub-Leases and Rent by Evans & Sutherland Computer Corporation, dated December 14, 2001, filed as Exhibit 10.45 to Evans & Sutherland Computer Corporation's Form 10-K for the year ended December 31, 2000, and incorporated herein by this reference. 10.46 Absolute Assignment of Sub-Leases and Rent by Evans & Sutherland Computer Corporation, dated December 14, 2001, filed as Exhibit 10.46 to Evans & Sutherland Computer Corporation's Form 10-K for the year ended December 31, 2000, and incorporated herein by this reference. 10.47 Absolute Assignment of Sub-Leases and Rent by Evans & Sutherland Computer Corporation, dated December 14, 2001, filed as Exhibit 10.47 to Evans & Sutherland Computer Corporation's Form 10-K for the year ended December 31, 2000, and incorporated herein by this reference. 10.48 Pledge and Security Agreement between Evans & Sutherland Computer Corporation and Foothill Capital Corporation, dated December 14, 2001, filed as Exhibit 10.48 to Evans & Sutherland Computer Corporation's Form 10-K for the year ended December 31, 2000, and incorporated herein by this reference. 10.49 Intellectual Property Security Agreement between Evans & Sutherland Computer Corporation and Foothill Capital Corporation, dated December 14, 2001, filed as Exhibit 10.49 to Evans & Sutherland Computer Corporation's Form 10-K for the year ended December 31, 2000, and incorporated herein by this reference. 10.50 Amendment No. 1 to Series B Preferred Stock and Warrant Purchase Agreement between Evans & Sutherland Computer Corporation and Intel Corporation, dated effective as of March 1, 2001, filed as Exhibit 10.50 to Evans & Sutherland Computer Corporation's Form 10-K for the year ended December 31, 2000, and incorporated herein by this reference. 10.51 Asset Purchase and Intellectual Property License Agreement between Real Vision Inc. and Evans & Sutherland Computer Corporation, dated August 31, 2001, filed as Exhibit 10.1 to Evans & Sutherland Computer Corporation's Form 10-Q for the quarter ended September 28, 2001, and incorporated herein by reference. 10.52 Initial License Agreement between Real Vision Inc. and Evans & Sutherland Computer Corporation, dated August 31, 2001, filed as Exhibit 10.2 to Evans & Sutherland Computer Corporation's Form 10-Q for the quarter ended September 28, 2001, and incorporated herein by reference. 79 10.53 Foothill Covenant waiver for the third quarter 2001, filed as Exhibit 10.3 to Evans & Sutherland Computer Corporation's Form 10-Q for the quarter ended September 28, 2001, and incorporated herein by reference. 10.54 Master Sales Agreement between Evans & Sutherland Computer Corporation and ATI Technologies Inc., dated August 27, 2001, filed as Exhibit 10.4 to Evans & Sutherland Computer Corporation's Form 10-Q for the quarter ended September 28, 2001, and incorporated herein by reference. 10.55 Software License Agreement between Evans & Sutherland Computer Corporation and ATI Technologies Inc., dated August 27, 2001, filed as Exhibit 10.5 to Evans & Sutherland Computer Corporation's Form 10-Q for the quarter ended September 28, 2001, and incorporated herein by reference. 10.56 Amendment Number One to Loan and Security Agreement and Waiver by and between Foothill Capital Corporation and Evans & Sutherland Computer Corporation, dated February 22, 2002, filed herein. 10.57 Patent Purchase and License Agreement between Nvidia International Inc., Evans & Sutherland Computer Corporation, and Evans & Sutherland Graphics Corporation, dated October 15, 2001, filed herein. 10.58 Patent Cross License Agreement between Nvidia Corporation and Evans & Sutherland Computer Corporation, dated October 15, 2001, filed herein. Certain information in this exhibit will be omitted and filed separately with the Securities and Exchange Commission pursuant to a confidential treatment request under Rule 24b-2 of the Securities and Exchange Act of 1934, as amended. 21.1 Subsidiaries of Registrant, filed herein. 23.1 Consent of Independent Auditors, filed herein. 24.1 Powers of Attorney for Messrs. James R. Oyler, William M. Thomas, Gerald S. Casilli, Wolf-Dieter Hass and Ivan E. Sutherland, filed herein. - ------------------------ * Management contract for Compensatory plan or arrangement required to be filed as an exhibit pursuant to Item 14(c) of Form 10-K. TRADEMARKS USED IN THIS FORM 10-K AccelGALAXY, AccelGMX, Digistar, E&S, E&S Lightning 1200, EaSIEST, Ensemble, ESIG, Harmony, INTegrator, RAPIDsite, REALimage, simFUSION, StarRider, Symphony and Vanguard are trademarks or registered trademarks of Evans & Sutherland Computer Corporation. All other product, service, or trade names or marks are the properties of their respective owners. 80 SCHEDULE II EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (IN THOUSANDS)
DEDUCTIONS BALANCE AT ADDITIONS CHARGED BEGINNING CHARGED TO (RECOVERED) BALANCE OF COST AND AGAINST AT END OF YEAR EXPENSES ALLOWANCE YEAR ----------- ----------- ----------- ----------- Allowance for doubtful receivables December 31, 2001 $ 4,411 $ 2,358 $ 356 $ 6,413 December 31, 2000 1,322 3,829 740 4,411 December 31, 1999 1,616 558 852 1,322 Inventory Reserves December 31, 2001 $ 9,894 $ 943 $ 3,652 $ 7,185 December 31, 2000 6,047 6,613 2,766 9,894 December 31, 1999 6,963 910 1,826 6,047 Warranty Reserves December 31, 2001 $ 1,447 $ 2,197 $ 1,678 $ 1,966 December 31, 2000 1,376 1,189 1,118 1,447 December 31, 1999 1,436 958 1,018 1,376
81 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 29, 2002 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. Director, Chief Executive /s/ JAMES R. OYLER Officer and President ------------------------------------------- (Principal Executive March 29, 2002 JAMES R. OYLER Officer) Vice President, Chief /s/ WILLIAM M. THOMAS Financial Officer, Treasurer ------------------------------------------- and Corporate Secretary March 29, 2002 WILLIAM M. THOMAS (Principal Financial and Accounting Officer) * ------------------------------------------- Director March 29, 2002 GERALD S. CASILLI * ------------------------------------------- Director March 29, 2002 WOLF-DIETER HASS * ------------------------------------------- Director March 29, 2002 IVAN E. SUTHERLAND
*By: /s/ WILLIAM M. THOMAS -------------------------------------- WILLIAM M. THOMAS March 29, 2002 *Attorney-in-Fact
82 EX-10.56 3 a2075343zex-10_56.txt EX-10.56 EXHIBIT 10.56 AMENDMENT NUMBER ONE TO LOAN AND SECURITY AGREEMENT AND WAIVER This Amendment Number One to Loan and Security Agreement and Waiver ("Amendment") is entered into as of February 22, 2002, by and between FOOTHILL CAPITAL CORPORATION, a California corporation ("Foothill"), and EVANS & SUTHERLAND COMPUTER CORPORATION, a Utah corporation ("Borrower"), in light of the following: A. Borrower and Foothill have previously entered into that certain Loan and Security Agreement, dated as of December 14, 2000 (the "Agreement"). B. Borrower and Foothill desire to amend the Agreement as provided for and on the conditions herein. NOW, THEREFORE, Borrower and Foothill hereby amend and supplement the Agreement as follows: 1. DEFINITIONS. All initially capitalized terms used in this Amendment shall have the meanings given to them in the Agreement unless specifically defined herein. 2. WAIVER. Foothill hereby waives any Event of Default arising as of December 31, 2001 from the breach of Section 7.17 of the Agreement. 3. AMENDMENTS. (a) The following new definition is hereby added in appropriate alphabetical order to Section 1 of the Agreement: "'UNBILLED RECEIVABLES' means all Accounts generated by Borrower from recognizing revenues under the cost of completion method, which Accounts have not yet been billed to the respective Account Debtors." (b) Section 7.17 of the Agreement is hereby amended and restated to read as follows: "7.17 Financial Covenants. (a) Fail to maintain Tangible Net Worth of at least the required amounts set forth in the following table as of the applicable dates set forth opposite thereto:
Applicable Amount Applicable Date $43,000,000 3/29/02 $43,000,000 6/28/02 $46,000,000 9/27/02, and the last day of each fiscal quarter thereafter
(b) Fail to maintain a ratio of Unbilled Receivables to net Accounts equal to or less than the ratios set forth in the following table as of the applicable dates set forth opposite thereto:
Applicable Ratio Applicable Date 1.90 : 1.00 3/29/02 1.50 : 1.00 6/28/02 1.60 : 1.00 9/27/02, and the last day of each fiscal quarter thereafter
4. REPRESENTATIONS AND WARRANTIES. Borrower hereby affirms to Foothill that all of Borrower's representations and warranties set forth in the Agreement are true, complete and accurate in all respects as of the date hereof. 5. NO DEFAULTS. Borrower hereby affirms to Foothill that, other than any Event of Default being waived hereunder, no Event of Default has occurred and is continuing as of the date hereof. 6. CONDITION PRECEDENT. The effectiveness of this Amendment is expressly conditioned upon the following: (a) Payment by Borrower to Foothill of an amendment fee in the aggregate amount of Thirty Thousand Dollars ($30,000), such fee to be charged to Borrower's loan account pursuant to Section 2.5(e) of the Agreement; and (b) Receipt by Foothill of an executed copy of this Amendment. 7. COSTS AND EXPENSES. Borrower shall pay to Foothill all of Foothill's out-of-pocket costs and expenses (including, without limitation, the fees and expenses of its counsel, which counsel may include any local counsel deemed necessary, search fees, filing and recording fees, documentation fees, appraisal fees, travel expenses, and other fees) arising in connection with the preparation, execution, and delivery of this Amendment and all related documents. 8. LIMITED EFFECT. In the event of a conflict between the terms and provisions of this Amendment and the terms and provisions of the Agreement, the terms and provisions of this Amendment shall govern. In all other respects, the Agreement, as amended and supplemented hereby, shall remain in full force and effect. 9. COUNTERPARTS; EFFECTIVENESS. This Amendment may be executed in any number of counterparts and by different parties on separate counterparts, each of which when so executed and delivered shall be deemed to be an original. All such counterparts, taken together, shall constitute but one and the same Amendment. This Amendment shall become effective upon the execution of a counterpart of this Amendment by each of the parties hereto. IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of the date first set forth above. FOOTHILL CAPITAL CORPORATION, a California corporation By: Charles Kim -------------------------------------------- Title: Vice President ----------------------------------------- EVANS & SUTHERLAND COMPUTER, a Utah corporation By: William M. Thomas -------------------------------------------- Title: Vice President & CFO ----------------------------------------- EX-10.57 4 a2075343zex-10_57.txt EX-10.57 EXHIBIT 10.57 NVIDIA/E&S CONFIDENTIAL ================================================================================ PATENT PURCHASE AND LICENSE AGREEMENT between: NVIDIA INTERNATIONAL INC. a Caymans Islands company; and EVANS & SUTHERLAND COMPUTER CORPORATION a Utah corporation and EVANS & SUTHERLAND GRAPHICS CORPORATION a Utah Corporation ---------------------------- Dated as of October 15, 2001 ---------------------------- ================================================================================ PATENT PURCHASE AND LICENSE AGREEMENT THIS PATENT PURCHASE AND LICENSE AGREEMENT is entered into as of October 15, 2001, by and between EVANS & SUTHERLAND COMPUTER CORPORATION, a Utah corporation ("ESCC"), EVANS & SUTHERLAND GRAPHICS CORPORATION, a Utah corporation ("ESGC") (as used herein, "E&S" means and refers to ESCC and ESGC collectively for all purposes other than as relates to US Patent No. 5,657,047, and to ESGC for all purposes as relates to US Patent No. 5,657,047), and NVIDIA INTERNATIONAL INC., a Caymans Islands company ("Nvidia"). Certain capitalized terms used in this Agreement are defined in EXHIBIT A. RECITALS WHEREAS, Nvidia and E&S wish to provide for the sale of the Patents (as defined in Section 1.1 of the Agreement) to Nvidia on the terms set forth in the Agreement; and WHEREAS, contemporaneously with the execution and delivery of the Agreement, Nvidia's parent, Nvidia Corporation, and E&S are entering into a Patent Cross License Agreement (the "Cross License Agreement") pursuant to which Nvidia Corporation and ESCC are each granting to the other a nonexclusive license under their respective patents (including those patents which are the subject of this Agreement) which are in existence or which will be issued in the future as specified in and subject to the terms and conditions set forth in the Cross License Agreement. NOW THEREFORE, Nvidia and E&S, intending to be legally bound, agree as follows: AGREEMENT 1. SALE OF PATENTS. 1.1 SALE OF PATENTS. Contemporaneously with the execution and delivery of this Agreement, E&S shall cause to be sold, assigned, transferred, conveyed and delivered to Nvidia, and E&S hereby sells, assigns, transfers, conveys and delivers to Nvidia, good and valid title and all of its right, title and interest, in the following (collectively, the "Patents"), on the terms set forth in this Agreement: (a) All of the United States patents identified on EXHIBIT B, (b) All patents and patent applications (whether filed or not), throughout the world, that are counterparts, reissues, extensions, divisions, continuations and continuations in part of any of the United States patents identified in EXHIBIT B; (c) Subject to Section 2.3 of the Exclusive Patent License Agreement attached hereto as EXHIBIT C (the "Exclusive Patent License Agreement"), all past, present and future claims of infringement of any of the foregoing, excluding claims of infringement of the Patents with respect to the Exclusive Field of Use as defined in the Exclusive Patent License Agreement; and (d) All files related to the prosecution and enforcement of any of the foregoing. 1 1.2 PURCHASE PRICE. As consideration for the sale of the Patents to Nvidia, contemporaneously with the execution and delivery of this Agreement, Nvidia is paying to E&S, in cash by wire transfer of immediately available funds to an account or accounts designated by ESCC, a total of Nine Million Dollars (U.S.$9,000,000). 1.3 NO ASSUMED LIABILITIES. (a) E&S acknowledges and agrees that Nvidia is not assuming, and is not required to perform or discharge, any obligations or Liabilities of any nature of E&S (whether or not related to the Patents). (b) Notwithstanding anything in this Agreement, Nvidia is purchasing the Patents subject to the patent licenses, and any limitations therein, under the Patents found in the licenses and other agreements listed in EXHIBIT D (collectively, the "Prior Patent Licenses"). The rights and obligations of the licensor under the Prior Patent Licenses shall not be assumed by Nvidia, but shall continue solely in E&S. E&S shall retain all benefits of, and Nvidia shall not interfere with, such agreements. E&S shall not extend, renew or modify any license rights under the Patents granted under the Prior Patent Licenses nor consent to any assignment or sublicense of or under any of the Prior Patent Licenses. 1.4 TRANSFER TAXES AND OTHER CHARGES. Each party shall be responsible for the payment of its own tax liability arising from this transaction. 1.5 LICENSE TO E&S. As part of this Agreement, Nvidia and E&S are entering into and hereby agree to the Exclusive Patent License Agreement attached hereto as EXHIBIT C, which is incorporated herein by this reference, pursuant to which Nvidia is granting to E&S a license under the Patents which is exclusive in the field of use specified therein, as specified in and subject to the terms and conditions set forth in the Exclusive Patent License Agreement. 1.6 OTHER DOCUMENTS. Contemporaneously with the execution and delivery of this Agreement, E&S shall cause to be executed and delivered to Nvidia (i) assignments, in a form reasonably satisfactory to Nvidia, bills of sale, and other documents as may be necessary or appropriate (in the reasonable judgment of Nvidia or its counsel) to assign, convey, transfer and deliver good and valid title to the Patents to Nvidia free of any Encumbrances; (ii) evidence that all consents, approvals, and authorizations required to have been obtained in connection with the Transactions have been obtained; (iii) and a certified copy of resolutions of E&S's Board of Directors authorizing the execution of this Agreement and approving the Transactions. 2. REPRESENTATIONS AND WARRANTIES OF E&S. E&S represents and warrants to Nvidia that, as of the date hereof and except as specifically set forth in the Disclosure Schedule: 2.1 DUE ORGANIZATION; NO SUBSIDIARIES, ETC. ESCC is a corporation duly organized, validly existing and in good standing under the laws of the State of Utah. ESGC is a corporation duly organized, validly existing and in good standing under the laws of the State of Utah and a wholly-owned subsidiary of ESCC. 2 2.2 TITLE TO PATENTS. E&S owns, and has good and valid title to, the Patents. Except for the Prior Patent Licenses, the Patents are solely owned by E&S free and clear of any licenses or Encumbrances. There are no counterparts, reissues, extensions, divisions, continuations or continuations-in-part of any of the United States patents listed in EXHIBIT B, except those counterparts, reissues, extensions, divisions, continuations or continuations-in-part identified in EXHIBIT B. No offer of a license under any of the Patents is currently outstanding, other than as contemplated in connection with the Transactions. 2.3 COMPLIANCE WITH LEGAL REQUIREMENTS. To E&S's knowledge, each of the United States patents identified in EXHIBIT B is valid, enforceable and subsisting. All required maintenance fees and annuities have been paid and applicable Legal Requirements satisfied with respect to the Patents. There is no outstanding notice or other written communication from any Governmental Body or any other person regarding any actual, alleged, possible or potential violation of, or failure to comply with, any Legal Requirement or challenging the validity or enforceability of any of the Patents. 2.4 PROCEEDINGS. There is no pending Proceeding, and to E&S's knowledge no person has threatened to commence any Proceeding: (a) respecting any of the Patents; or (b) that challenges, or that may have the effect of preventing, delaying, making illegal or otherwise interfering with, any of the Transactions. There is no Order to which E&S is subject relating to any of the Patents. To E&S's knowledge, there is no proposed Order that, if issued or otherwise put into effect, (i) may have an adverse effect on the Patents or (ii) may have the effect of preventing, delaying, making illegal or otherwise interfering with any of the Transactions. 2.5 AUTHORITY; BINDING NATURE OF AGREEMENTS. E&S has the power and authority to enter into and to perform its obligations under this Agreement, and the execution, delivery and performance of this Agreement have been duly authorized by all necessary action on the part of E&S and its stockholders, board of directors and officers. Each of the Transactional Agreements to which E&S is a party constitutes the legal, valid and binding obligation of E&S, and is enforceable against E&S in accordance with its terms. 2.6 NON-CONTRAVENTION; CONSENTS. (a) E&S is not, nor as a result of its execution, delivery or performance of this Agreement will E&S be, in violation of any Contract relating to the Patents. Except as specifically described in the Disclosure Schedule, E&S is not obligated to provide any consideration (whether financial or otherwise) to any third party, nor is any third party otherwise entitled to any consideration, with respect to any exercise of rights by E&S or Nvidia in the Patents. (b) E&S's execution, delivery and performance of this Agreement will not result in the imposition or creation of any Encumbrance upon or with respect to any of the Patents. (c) All filings, notices, consents, approvals, and authorizations required to be obtained by E&S in connection with the execution, delivery and performance of this Agreement and the conveyance of the Patents to Nvidia have been obtained. 3 3. INDEMNIFICATION, ETC. 3.1 SURVIVAL OF REPRESENTATIONS AND COVENANTS. (a) The representations, warranties, covenants and obligations of each party to this Agreement shall survive (without limitation) the execution and delivery of this Agreement and the sale of the Patents to Nvidia. All of said representations, warranties, covenants and obligations are personal to Nvidia and not assignable in whole or in part, and shall remain in full force and effect and shall survive for an unlimited period of time solely as to Nvidia. (b) The representations, warranties, covenants and obligations of E&S, and the rights and remedies that may be exercised by the Indemnitees, shall not be limited or otherwise affected by or as a result of any information furnished to, or any investigation made by or any knowledge of, any of the Indemnitees or any of their officers, directors, employees, agents, attorneys, accountants, advisors, or consultants. 3.2 INDEMNIFICATION. E&S shall hold harmless and indemnify each of the Indemnitees from and against, and shall compensate and reimburse each of the Indemnitees for, any Damages that are suffered or incurred by any of the Indemnitees or to which any of the Indemnitees may otherwise become subject at any time (regardless of whether or not such Damages relate to any third-party claim) that arise or result directly or indirectly from: (a) any breach of any representations, warranties, covenants, or obligations of E&S in the Transactional Agreements; (b) any Liability of E&S, including any Liability arising from any challenge to, or claim for damages or other relief in connection with, any of the Transactions under fraudulent transfer, bankruptcy or similar laws, and any Liability of E&S relating to the Patents to the extent such Liability arises from or relates to any event, circumstance, action, or other matter occurring prior to the date hereof; or (c) any Proceeding relating to the foregoing (including any Proceeding by any Indemnitee to enforce any of its rights hereunder, to the extent the Indemnitee prevails in such proceeding). 3.3 NONEXCLUSIVITY OF INDEMNIFICATION REMEDIES. The indemnification remedies and other remedies provided in this Section 3 shall not be deemed to be exclusive. Accordingly, the exercise by any Person of any of its rights under this Section 3 shall not be deemed to be an election of remedies and shall not be deemed to prejudice, or to constitute or operate as a waiver of, any other right or remedy that such Person may be entitled to exercise (whether under this Agreement, under any other Contract, under any statute, rule or other Legal Requirement, at common law, in equity or otherwise). 3.4 DEFENSE OF THIRD PARTY CLAIMS. In the event of the assertion or commencement by any Person of any claim or Proceeding against Nvidia or any other Indemnitee with respect to which E&S may become obligated to indemnify, hold harmless, defend, compensate or reimburse any Indemnitee pursuant to this Section 3 (other than a claim or Proceeding challenging the validity or enforceability of the Patents as to which there is no occurrence of an event described in Section 3.2), Nvidia shall have the right, at its election, to designate E&S to assume the defense of such claim or Proceeding at the sole expense of E&S. If Nvidia so elects to designate E&S to assume the defense of any such claim or Proceeding: (a) E&S shall proceed to defend such claim or Proceeding in a diligent manner with counsel satisfactory to Nvidia; 4 (b) Nvidia shall make available to E&S any documents and materials in the possession of Nvidia that may be necessary to the defense of such claim or Proceeding; (c) E&S shall keep Nvidia informed of all material developments and events relating to such claim or Proceeding; (d) Nvidia shall have the right to participate in the defense of such claim or Proceeding at its sole expense; (e) E&S shall not settle, adjust or compromise such claim or Proceeding without the prior written consent of Nvidia, which consent will not be unreasonably withheld or delayed; and (f) Nvidia may at any time (notwithstanding the prior designation of E&S to assume the defense of such claim or Proceeding) assume the defense of such claim or Proceeding at its sole expense. If Nvidia does not elect to designate E&S to assume the defense of any such claim or Proceeding (or if, after initially designating E&S to assume such defense, Nvidia elects to assume such defense), Nvidia may proceed with the defense of such claim or Proceeding on its own. If Nvidia so proceeds with the defense of any such claim or Proceeding on its own: (i) all expenses relating to the defense of such claim or Proceeding (whether or not incurred by Nvidia) shall be borne and paid exclusively by Nvidia; (ii) E&S shall make available to Nvidia any documents and materials in the possession or control of E&S that may be necessary to the defense of such claim or Proceeding; (iii) Nvidia shall keep E&S informed of all material developments and events relating to such claim or Proceeding; and (iv) Nvidia shall have the right to settle, adjust or compromise such claim or Proceeding with the consent of E&S; PROVIDED, HOWEVER, that E&S shall not unreasonably withhold such consent. Notwithstanding anything to the contrary in this Agreement, the defense of any claim or Proceeding in which the validity or enforceability of the Patents is at issue, and as to which there is no occurrence of an event described in Section 3.2, shall be handled in accordance with the provisions of the Exclusive Patent License Agreement. 4. LIMITATION OF LIABILITY. EXCEPT AS OTHERWISE EXPRESSLY PROVIDED IN THIS AGREEMENT, IN NO EVENT SHALL E&S BE LIABLE TO NVIDIA FOR SPECIAL, INDIRECT, CONSEQUENTIAL OR PUNITIVE DAMAGES ARISING OUT OF THIS AGREEMENT, INCLUDING BUT NOT LIMITED TO LOST BUSINESS, REVENUES OR PROFITS AND WORK STOPPAGES OR DELAYS, EVEN IF E&S HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. NOTWITHSTANDING ANYTHING TO THE CONTRARY IN THIS AGREEMENT, IN NO EVENT SHALL E&S BE LIABLE TO NVIDIA 5 FOR DAMAGES HEREUNDER IN EXCESS OF TWICE THE AMOUNT PAID BY NVIDIA FOR THE PATENTS PURSUANT TO SECTION 1.2 OF THIS AGREEMENT. 5. CERTAIN COVENANTS. 5.1 FURTHER ACTIONS. E&S shall cooperate with Nvidia and Nvidia's affiliates and representatives, and shall execute and deliver such documents and take such other actions as Nvidia may reasonably request for the purpose of evidencing the sale of the Patents and putting Nvidia in possession and control of the Patents. E&S hereby irrevocably nominates, constitutes and appoints Nvidia as the true and lawful attorney-in-fact of E&S (with full power of substitution) and hereby authorizes Nvidia, in the name of and on behalf of E&S, to execute, deliver, acknowledge, certify, file and record any document, to institute and prosecute any Proceeding and to take any other action that Nvidia may deem appropriate for the purpose of (i) collecting, asserting, enforcing or perfecting any claim, right or interest of any kind that is included in or relates to any of the Patents, (ii) subject to Section 2.3 of the Exclusive Patent License Agreement, defending or compromising any claim or Proceeding relating to any of the Patents or (iii) otherwise carrying out or facilitating the sale of the Patents to Nvidia. Such power of attorney is coupled with an interest and shall be irrevocable, and shall survive the liquidation and dissolution of E&S. 6. MISCELLANEOUS PROVISIONS. 6.1 AGREEMENT ASSIGNMENT. Except as otherwise expressly provided in the Exclusive Patent License Agreement, this Agreement or any rights or obligations hereunder are not assignable by E&S without the prior written consent of Nvidia, which consent may be withheld at the sole discretion of Nvidia. Any attempted assignment in derogation of the foregoing shall be null and void. Nvidia may freely assign this Agreement or any or all of its rights hereunder (excluding its indemnification rights under Section 3), in whole or part, to any other Person without obtaining the consent or approval of any other Person. None of the provisions of this Agreement is intended to provide any rights or remedies to any Person other than the parties to this Agreement. This Agreement shall inure to the benefit of the parties, their permitted successors and assigns, except as provided in Section 3.1(a). 6.2 NOTICE. All notices required or permitted to be given hereunder shall be in writing and shall be delivered by hand, or if dispatched by prepaid air courier or by registered or certified airmail, postage prepaid, addressed as follows: If to Nvidia: If to E&S: Nvidia International Inc. Evans & Sutherland Computer Corp. 2701 San Tomas Expressway 600 Komas Drive Santa Clara, CA 95050 Salt Lake City, UT 84108 United States of America United States of America Attn.: Chief Patent Counsel Attn: Chief Financial Officer Such notices shall be deemed to have been served when received by addressee or, if delivery is not accomplished by reason of some fault of the addressee, when tendered for delivery. Either party may give written notice of a change of address and, after notice of such change has been 6 received, any notice or request shall thereafter be given to such party as above provided at such changed address. 6.3 CONSTRUCTION; NO RULE OF STRICT CONSTRUCTION. Regardless of which party may have drafted this Agreement, no rule of strict construction shall be applied against either party. The headings contained in this Agreement are for convenience of reference only, shall not be deemed to be part of this Agreement, and shall not be referred to in connection with the construction or interpretation of this Agreement. For purpose of this Agreement, a Person shall be deemed to have "knowledge" of a particular fact or other matter if any officer, director, or attorney or accountant (in the course of their engagement) of or to such Person has knowledge of such fact or other matter. As used in this Agreement, the words "include" and "including," and variations thereof, shall not be deemed to be terms of limitation, but rather shall be deemed to be followed by the words "without limitation." Except as otherwise indicated, all references in this Agreement to "Sections" and "Exhibits" are intended to refer to Sections of this Agreement and Exhibits to this Agreement. 6.4 SEVERABILITY. If any provision of this Agreement is determined by a court to be unenforceable, the parties shall deem the provision to be modified to the extent necessary to allow it to be enforced to the extent permitted by law, or if it cannot be modified, the provision will be severed and deleted from this Agreement, and the remainder of the Agreement will continue in effect. 6.5 ENTIRE AGREEMENT. This Agreement, including the Exclusive Patent License Agreement, embodies the entire understanding of the parties with respect to the subject matter hereof, and merges all prior and contemporaneous discussions between them, and neither of the parties shall be bound by any conditions, definitions, warranties, understandings, or representations with respect to the subject matter hereof other than as expressly provided herein. Nothing in this Agreement shall modify or supersede any of the terms or conditions of the Cross License Agreement. No oral explanation or oral information by either party hereto shall alter the meaning or interpretation of this Agreement. 6.6 MODIFICATION; WAIVER. No modification or amendment to this Agreement, nor any waiver of any rights, will be effective unless assented to in writing by the party to be charged, and the waiver of any breach or default will not constitute a waiver of any other right hereunder or any subsequent breach or default. 6.7 GOVERNING LAW. This Agreement and matters connected with the performance thereof shall be construed, interpreted, applied and governed in all respects in accordance with the laws of the United States of America and the State of California, without reference to conflict of laws principles. 6.8 JURISDICTION; VENUE. E&S and Nvidia agree that all disputes and litigation regarding this Agreement and matters connected with its performance shall be subject to the exclusive jurisdiction of the United States District Court for the Northern District of California, if such court has personal and subject matter jurisdiction of the litigation, or if not the courts of the State of California located in the County of Santa Clara, California. Each party to this Agreement (i) expressly and irrevocably consents and submits to the jurisdiction of such courts in connection with any such legal proceeding; (ii) agrees that such courts shall be deemed to be a convenient forum; and (iii) agrees not to assert (by way of motion, as a defense or otherwise), in 7 any such legal proceeding commenced in such courts, any claim that such party is not subject personally to the jurisdiction of such courts, that such legal proceeding has been brought in an inconvenient forum, that the venue of such proceeding is improper or that this Agreement or the subject matter of this Agreement may not be enforced in or by such courts. 6.9 CONFIDENTIALITY OF TERMS. The parties hereto shall keep the terms of this Agreement confidential and shall not now or hereafter divulge these terms to any third party except: (a) with the prior written consent of the other party; (b) if so required by the Order of any Governmental Body having jurisdiction to call therefor, provided that the disclosing party uses its best efforts to give the other party reasonable notice prior to such disclosure and joins or cooperates in obtaining an appropriate protective order; (c) only to the extent a party determines such disclosure may be required by regulation, law or legal process, including to legal and financial advisors in their capacity of advising a party in such matters and in disclosure documents required to be filed with the SEC or under stock exchange rules; (d) during the course of litigation so long as the disclosure of such terms and conditions are restricted in the same manner as is the confidential information of other litigating parties and so long as: (a) the restrictions are embodied in a court-entered protective order; and (b) the disclosing party informs the other party in writing at least ten (10) days in advance of the disclosure; (e) in confidence to employees with a need to know, legal counsel, accountants, banks and financing sources and their advisors solely in connection with complying with financial transactions; or (f) where the terms disclosed are, through no act or failure to act on the part of the disclosing party, generally known in the computer graphics or simulation industry; (g) in confidence to employees of the acquiring party with a need to know, and legal counsel, accountants, banks and financing sources and their advisors solely in connection with the negotiation and closing of a transaction involving a Change of Control or the sale of one or more of the Patents. The parties shall cooperate in preparing and agree to an announcement or press release relating to this Agreement. 6.10 COMPLIANCE WITH LAWS. Anything contained in this Agreement to the contrary notwithstanding, the obligations of the parties hereto and of the Subsidiaries of the parties shall be subject to all laws, present and future, of any government having jurisdiction over the parties hereto or the Subsidiaries of the parties. 6.11 FORCE MAJEURE. The parties hereto shall be excused from any failure to perform any obligation hereunder to the extent such failure is caused by war, acts of public enemies, 8 strikes or other labor disturbances, fires, floods, acts of God, or any causes of like or different kind beyond the control of the parties. 6.12 GUARANTY. ESCC hereby unconditionally, absolutely and irrevocably guarantees the complete performance of ESGC of all of ESGC's representations, warranties, covenants, indemnities and obligations under this Agreement. ESCC agrees that its liability under this Section 6.12 shall be the immediate, direct and primary obligation of ESCC and shall not be contingent upon Nvidia's exercise or enforcement of any remedy it may have against ESGC. 6.13 COUNTERPARTS. This Agreement may be executed in counterparts, each of which shall constitute an original and all of which, when taken together, shall constitute one agreement. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered as of the date first written above. EVANS & SUTHERLAND COMPUTER CORPORATION By: /s/ James R. Oyler Name: James R. Oyler Title: President and CEO EVANS & SUTHERLAND GRAPHICS CORPORATION By: /s/ James R. Oyler Name: James R. Oyler Title: President and CEO NVIDIA INTERNATIONAL INC. By: /s/ Jen-Hsun Huang Name: Jen-Hsun Huang Title: President and CEO 9 EX-10.58 5 a2075343zex-10_58.txt EX-10.58 EXHIBIT 10.58 NVIDIA/E&S CONFIDENTIAL THIS EXHIBIT CONTAINS CONFIDENTIAL INFORMATION WHICH HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A CONFIDENTIAL TREATMENT REQUEST UNDER RULE 24b-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. THE CONFIDENTIAL INFORMATION ON PAGES 1, 2, 5, AND 7 HAS BEEN REPLACED WITH BRACKETS. PATENT CROSS LICENSE AGREEMENT BETWEEN NVIDIA CORPORATION AND EVANS AND SUTHERLAND COMPUTER CORPORATION This Patent Cross License Agreement ("AGREEMENT") is entered into as of October 15, 2001 ("EFFECTIVE DATE") by and between NVIDIA CORPORATION, a Delaware corporation, having an office at 2701 San Tomas Expressway, Santa Clara, CA 95050, U.S.A. ("NVIDIA") and EVANS AND SUTHERLAND COMPUTER CORPORATION, a Utah corporation, having an office at 600 Komas Drive, Salt Lake City, UT 84108, U.S.A. ("E&S"). IN CONSIDERATION OF THE MUTUAL COVENANTS AND PROMISES CONTAINED HEREIN, THE PARTIES AGREE AS FOLLOWS: 1. DEFINITIONS 1.1. "CAPTURE PERIOD" shall mean (subject to Section 3.9) any time on or prior to the [ ] anniversary of the Effective Date. 1.2. "CHANGE OF CONTROL" shall mean a transaction or a series of related transactions in which (i) more than fifty percent (50%) of the outstanding shares or securities entitled to vote for the election of directors of a party become owned or controlled, directly or indirectly, by one or more related persons or entities, (ii) a party transfers all or substantially all of its business and assets, whether by sale, assignment, merger or otherwise, to another person or entity, (iii) a party files or commences a petition or case seeking reorganization, readjustment or arrangement of its business or files or commences any other petition or case under any law relating to bankruptcy or insolvency, or (iv) a party has filed or commenced against it a petition or case under any law relating to bankruptcy or insolvency, which petition or case is not dismissed within ninety (90) days after the date of its filing or commencement. - 1 - NVIDIA/E&S CONFIDENTIAL 1.3. "E&S LICENSED PRODUCTS" shall mean (subject to the provisions of Section 3.8) any goods and services sold by E&S as E&S' own product (as further defined in Section 3.4) and not on behalf of another. 1.4. "E&S PATENTS" shall mean all Patents that at any time during the term of this Agreement are owned or controlled by E&S or any of its Subsidiaries or to which such entities have the right to grant licenses, to the extent that E&S or any of its Subsidiaries has the right to grant licenses within and of the scope set forth herein without the requirement to pay consideration to any third party (other than employees of the applicable party) for the grant of a license under this Agreement. 1.5. "SPECIFIED FIELD OF USE" shall mean Sales of no more than [ ] units in the aggregate in any calendar year that are primarily designed for use in (a) [ ] used for [ ] and [ ] or [ ] of [ ], or [ ]; (b) [ ] for [ ] and other features; (c) [ ] for use in [ ] and [ ] for the [ ]; (d) software and components designed for use in such [ ] or for use in [ ] or other [ ]; and (e) [ ] (essentially [ ]) for [ ] and [ ], or [ ] or [ ]. Notwithstanding anything to the contrary in the preceding sentence, the "Specified Field of Use" shall not include any [ ] or [ ], or [ ] unless included as a component of a system defined in (a) through (e) above. 1.6. "LICENSED PRODUCTS" shall mean Nvidia Licensed Products or E&S Licensed Products as applicable. 1.7. "NVIDIA LICENSED PRODUCTS" shall mean any goods and services sold by Nvidia as Nvidia's own product (as further defined in Section 3.4) and not on behalf of another. 1.8. "NVIDIA PATENTS" shall mean all Patents that at any time during the term of this Agreement are owned or controlled by Nvidia or any of its Subsidiaries or to which such entities have the right to grant licenses, to the extent that Nvidia or any of its Subsidiaries has the right to grant licenses within and of the scope set forth herein without the requirement to pay consideration to any third party (other than employees of the applicable party) for the grant of a license under this Agreement. 1.9. "PATENT PURCHASE AND LICENSE AGREEMENT" shall mean the Patent Purchase and License Agreement entered into by E&S and Nvidia Subsidiary, Nvidia International Inc., concurrently with this Agreement. - 2 - NVIDIA/E&S CONFIDENTIAL 1.10. "PATENTS" shall mean all classes or types of patents, utility models and design patents (including, without limitation, originals, divisions, continuations, continuations-in-part, extensions or reissues), and applications for these classes or types of patent rights in all countries of the world that have or are entitled to claim the benefit of a first effective filing date during the Capture Period, including but not limited to the patents that are the subject of the Patent Purchase and License Agreement. 1.11. "SALES" shall mean the sale, leasing, license, or other disposition of E&S Licensed Products, including any such sale, leasing, license, or other disposition by E&S Subsidiaries (and any former Subsidiary to which the benefits of the licenses granted under this Agreement are extended pursuant to Section 3.5). 1.12. "SUBSIDIARY" shall mean any corporation, partnership or other entity, now or hereafter: (i) more than fifty percent (50%) of whose outstanding shares or securities entitled to vote for the election of directors or similar managing authority is directly or indirectly owned or controlled by a party hereto; or (ii) that does not have outstanding shares or securities but more than fifty percent (50%) of whose ownership interest representing the right to make the decisions for such entity is directly or indirectly owned or controlled by a party hereto; provided, however, that in each case such corporation, partnership or other entity shall be deemed to be a Subsidiary only so long as such ownership or control exists and is more than fifty percent (50%). 2. MUTUAL RELEASES 2.1. BY NVIDIA. Nvidia, on behalf of itself and its Subsidiaries, hereby releases, acquits and forever discharges E&S, its Subsidiaries that are Subsidiaries on the Effective Date, and its and their distributors and customers, direct and indirect, from any and all claims or liability for infringement of any Nvidia Patents that arose prior to the Effective Date of this Agreement, to the extent such infringement would have been licensed under the license granted to E&S hereunder if such license had been in existence at the time of such infringing activity. 2.2. BY E&S. E&S, on behalf of itself and its Subsidiaries, hereby releases, acquits and forever discharges Nvidia, its Subsidiaries that are Subsidiaries on the Effective Date, and its and their distributors and customers, direct and indirect, from any and all claims or liability for infringement of any E&S Patents that arose prior to the Effective Date of this Agreement, to the extent such infringement would have been licensed under the license granted to Nvidia hereunder if such license had been in existence at the time of such infringing activity. - 3 - NVIDIA/E&S CONFIDENTIAL 3. GRANT OF RIGHTS 3.1. NVIDIA LICENSE TO E&S. Subject to the terms and conditions of this Agreement, Nvidia hereby grants to E&S and to its Subsidiaries a non-exclusive, non-transferable, royalty-free, worldwide license, without the right to sublicense, under Nvidia Patents to: (a) make, have made (subject to Section 3.3 below), use, import, and directly or indirectly sell, offer to sell and otherwise dispose of E&S Licensed Products; and (b) make, have made, use and/or import any equipment and practice any method or process for use in the manufacture of E&S Licensed Products. 3.2. E&S LICENSE TO NVIDIA. Subject to the terms and conditions of this Agreement, E&S hereby grants to Nvidia and to its Subsidiaries a non-exclusive, non-transferable, royalty-free, worldwide license, without the right to sublicense, under E&S Patents to: (a) make, have made (subject to Section 3.3), use, import, and directly or indirectly sell, offer to sell and otherwise dispose of Nvidia Licensed Products; and (b) make, have made, use and/or import any equipment and practice any method or process for use in the manufacture of Nvidia Licensed Products. 3.3. HAVE MADE RIGHTS. (a) Each party's rights to have Licensed Products manufactured for it by third parties under the licenses granted under Sections 3.1 and 3.2 above shall apply only when the specifications (other than library tools and standard cells) of the product to be manufactured by such third party ("Foundered Product") are furnished by (as between the licensed party under this Agreement and the third party manufacturer) the licensed party. (b) Upon written request, the licensed party shall inform the other party whether, and if so to what extent, any manufacturer identified by the other party is manufacturing products for the licensed party pursuant to the "have made" rights licensed hereunder. 3.4. FOUNDRY RIGHTS. The parties understand, acknowledge and agree that the licenses granted hereunder are intended to cover only the products of the two parties to this Agreement and their Subsidiaries, and are not intended to cover foundry activities that either party may undertake on behalf of third parties. Therefore, for the licenses granted in Sections 3.1 and 3.2, the definition of Licensed Products of a party hereto shall exclude products (including without limitation Applications - 4 - NVIDIA/E&S CONFIDENTIAL Specific Integrated Circuits ("ASICs")) manufactured on behalf of a third party from designs received in a substantially completed form from a third party for resale to or on behalf of that party. The limitations on the definition of Licensed Products set forth in this Section 3.4 shall not apply to manufacturing methods and processes as licensed hereunder pursuant to Sections 3.1 (b) and 3.2 (b). 3.5. LICENSES AND SUBSIDIARIES. (a) Except as provided below, this Agreement shall extend to and be binding upon all of each party's Subsidiaries, and the parties shall ensure that all such Subsidiaries are bound by the terms of this Agreement. Upon written request by a party, the other party will give it written notice to identify any Subsidiary to which a license has been extended. (b) The extension of license rights to a Subsidiary shall apply only (i) during the time period when such a business entity meets all requirements of a Subsidiary and (ii) in the case of one but only one Subsidiary per party during the term of this Agreement, after such entity ceases to be a Subsidiary, if such former Subsidiary has so elected pursuant to the provisions of Section 3.5(c), but only as to E&S Licensed Products or Nvidia Licensed Products, as the case may be, of such former Subsidiary that (A) were, as of the date such entity ceased to be a Subsidiary, in production and shipped as commercial products or (B) were, as of the date such entity ceased to be a Subsidiary, under development and are placed in production and shipped as commercial products of such entity within [ ] thereafter (collectively "Covered Products"), and any improvements or derivatives of Covered Products; provided that in the case of such former Subsidiary of E&S, Covered Products shall be limited to Covered Products within the Specified Field of Use. (c) If a Subsidiary of a party that owns or controls any Patents at any time during the term of this Agreement that are licensed to the other party hereunder ceases to be a Subsidiary, the licenses granted to the other party and its Subsidiaries hereunder under such Patents having an effective filing date on or prior to the date such Subsidiary ceases to be a Subsidiary shall continue even after such entity ceases to be a Subsidiary for the life of all such Patents. If a Subsidiary of a party ceases to be a Subsidiary, in the case of one but only one Subsidiary per party during the term of this Agreement, such Subsidiary may elect to retain benefits of the licenses granted hereunder, subject to the limitations set forth in Section 3.5(b), by written notice of such election to the other party given at or prior to the time it ceases to be a Subsidiary, and in the event of such election all Patents owned or controlled by such former Subsidiary or any of its Subsidiaries at any time during the term of this Agreement shall be subject - 5 - NVIDIA/E&S CONFIDENTIAL to and included within the licenses granted to the other party and its Subsidiaries under this Agreement. (d) Each party agrees to take all steps that are reasonable under the circumstances so that Patents covering inventions that are made solely by one or more of its and/or its Subsidiaries' employees and contractors for which substantially all of the funding is provided by it and/or its Subsidiaries, are included among the Patents licensed by it hereunder. 3.6. COVENANTS NOT TO SUE. (a) Nvidia covenants and agrees for itself and on behalf of its Subsidiaries, that neither Nvidia nor any of its Subsidiaries shall commence, maintain, prosecute or voluntarily aid in any action at law, equity or any other proceeding against users, customers and distributors of E&S Licensed Products based in whole or in part on any claim of infringement of any Nvidia Patent arising out of the use, promotion, sale, offer for sale, importation or other distribution or transfer of E&S Licensed Products, either alone or in combination with other products; provided, however, that such covenant shall not apply to any product or portion thereof not provided by E&S that itself infringes an Nvidia Patent. (b) E&S covenants and agrees for itself and on behalf of its Subsidiaries, that neither E&S nor any of its Subsidiaries shall commence, maintain, prosecute or voluntarily aid in any action at law, equity or any other proceeding against users, customers and distributors of Nvidia Licensed Products based in whole or in part on any claim of infringement of any E&S Patent arising out of the use, promotion, sale, offer for sale, importation or other distribution or transfer of Nvidia Licensed Products, either alone or in combination with other products; provided, however, that such covenant shall not apply to any product or portion thereof not provided by Nvidia that itself infringes an E&S Patent. 3.7. FULL RIGHTS. (a) In the event that neither a party nor any of its Subsidiaries has the right to grant a license under any particular patent right of the scope set forth herein, then the license granted herein under such Patent shall be of the broadest scope within the scope set forth herein which the licensing party or any of its Subsidiaries has the right to grant. (b) Notwithstanding anything to the contrary contained herein, in the event that either party or any of its Subsidiaries obtains rights to any Patents that would be included within the Patents licensed hereunder but for the fact that such a license would require the party granting such license to make payments to a third party (other than employees or contractors of the - 6 - NVIDIA/E&S CONFIDENTIAL applicable party, its Subsidiaries, or employees or contractors thereof), such Patents shall be included within the Nvidia Patents or the E&S Patents, as the case may be, if the party to whom such Patents would be licensed under this Agreement agrees in a separate written agreement to be bound by, and protect such grantor against, those payment obligations. 3.8. CHANGE OF CONTROL. In the event that E&S undergoes a Change of Control, the definition of E&S Licensed Product shall automatically be limited to and deemed amended to include only those E&S Licensed Products that are within the Specified Field of Use. 3.9. MATERIAL BREACH. In the event that a party hereto commits a material breach of this Agreement and does not correct such breach within [ ] after receiving written notice complaining thereof from the other party hereto, the Capture Period in Section 1.1 that applies to licensed Patents that are owned or controlled by the party providing such written notice shall automatically [ ] the date on which a party that [ ] of this [ ] thereof under [ ], but the Capture Period in Section 1.1 that applies to licensed Patents that are owned or controlled by the party that commits any such material breach shall remain unaffected. 3.10. MUTUAL ASSISTANCE. (a) If either party (the "defendant party") is sued or threatened with suit for patent infringement by a third party, the other party (the "assisting party") will, upon request and at the sole expense of the defendant party, assist the defendant party by making available prior art or other information reasonably available to such party relevant to the validity of such infringement claim. Nothing in this Section 3.10 shall obligate the assisting party to (i) provide information or materials to the defendant party that, in the opinion of the assisting party, would waive the attorney client privilege, constitutes attorney work product, or contains trade secret or confidential information of any third party to whom such party owes an obligation of confidentiality, or (ii) commit resources that would interfere unreasonably with its business. The defendant party shall bear the costs, and reimburse the assisting party for any reasonable costs (including the time of its employees) incurred by the assisting party, in providing such information, including any such reasonable costs incurred in connection with depositions or other participation by the assisting party or its employees in the proceedings. (b) Unless otherwise agreed in writing by the assisting party, the defendant party shall use the information provided by the assisting party under Section 3.10(a) solely for purposes of defense against the infringement claim, and shall maintain such information in strict confidence and - 7 - NVIDIA/E&S CONFIDENTIAL disclose such information solely (i) to its counsel, experts retained by its counsel in connection with defense of the claim, and employees with a need to know such information in connection with the defense of the claim, subject in each case to written confidentiality agreements, and (ii) upon at least ten (10) days prior advance notice to the assisting party, in connection with court proceedings, subject to confidentiality provisions embodied in a court-entered protective order. 3.11. NO OTHER RIGHTS. No other rights are granted hereunder, by implication, estoppel or otherwise, except as expressly provided herein. Specifically, except as expressly provided in this Section 3, nothing in the licenses granted hereunder or otherwise contained in this Agreement shall expressly or by implication, estoppel or otherwise give either party any right to license the other party's Patents to others. 4. EFFECTIVE DATE, TERM AND TERMINATION 4.1. TERM. This Agreement and the rights and licenses granted hereunder shall become effective on the Effective Date, and shall continue in effect until the expiration of the last to expire of the licensed Patents, unless and to the extent terminated by a party pursuant to Section 4.2. 4.2. TERMINATION RIGHTS. A party may terminate the rights and licenses granted to the other party and its Subsidiaries under this Agreement upon sixty (60) days written notice of termination to the other party given at any time upon or after the appointment of a receiver for all or substantially all of the other party's property or the making of an assignment for the benefit of its creditors under any law relating to bankruptcy or insolvency, or the institution of any proceedings for the liquidation or winding up of the other party's business or for the termination of its corporate charter. In the event of a termination under this Section 4.2, the rights and licenses granted under this Agreement to the other party and its Subsidiaries shall terminate as to Patents having an effective filing date on or after the date of such termination, but shall continue as to Patents having an effective filing date before the date of such termination solely for Covered Products and any improvements or derivatives thereof, provided that in the case of E&S and its Subsidiaries such Covered Products shall be limited to Covered Products within the Specified Field of Use, and the rights and licenses granted under this Agreement to the terminating party and its Subsidiaries shall survive such termination, subject to continued compliance with the terms and conditions of this Agreement. 4.3. SURVIVAL. The provisions of Sections 1, 2, 3.11, 4.2, 4.3, 5 and 6 will survive any termination or expiration of this Agreement. - 8 - NVIDIA/E&S CONFIDENTIAL 5. DISCLAIMERS 5.1. DISCLAIMER. Nothing contained in this Agreement shall be construed as: (a) a warranty or representation by either of the parties to this Agreement as to the validity, enforceability or scope of any Patent; (b) a warranty or representation that any manufacture, sale, lease, use or other disposition of Licensed Products hereunder will be free from infringement of any third party patents other than those under which licenses have been granted hereunder; (c) an agreement to bring or prosecute actions or suits against third parties for infringement or conferring any right to bring or prosecute actions or suits against third parties for infringement; (d) conferring any right to use in advertising, publicity, or otherwise, any trademark, trade name or names, or any contraction, abbreviation or simulation thereof, of either party; (e) conferring by implication, estoppel or otherwise, upon any party licensed hereunder, any license or other right under any patent, copyright, mask work, trade secret, trademark or other intellectual property right except the licenses and rights expressly granted hereunder; or (f) an obligation to furnish any technical information or know-how except as expressly provided herein. 5.2. NO IMPLIED WARRANTIES. EACH PARTY HEREBY DISCLAIMS ANY IMPLIED WARRANTIES WITH RESPECT TO THE PATENTS LICENSED HEREUNDER, INCLUDING WITHOUT LIMITATION, THE WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. 5.3. LIMITATION OF LIABILITY. IN NO EVENT SHALL EITHER PARTY BE LIABLE TO THE OTHER FOR SPECIAL, INDIRECT, CONSEQUENTIAL OR PUNITIVE DAMAGES ARISING OUT OF THIS AGREEMENT, INCLUDING BUT NOT LIMITED TO LOST BUSINESS, REVENUES OR PROFITS AND WORK STOPPAGES OR DELAYS, EVEN IF THAT PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. 6. MISCELLANEOUS PROVISIONS 6.1. AUTHORITY. Each of the parties hereto represents and warrants that it has the right to grant the other the licenses granted hereunder. - 9 - NVIDIA/E&S CONFIDENTIAL 6.2. AGREEMENT ASSIGNMENT. This Agreement is personal to the parties, and the Agreement and any rights or obligations hereunder are not assignable without the prior written consent of the other party, which consent may be withheld at the sole discretion of such other party, except (subject to the provisions of Section 3.8) in connection with the transfer of all, or substantially all of its business and assets whether by sale, change in ownership, merger, acquisition or otherwise. The provisions of this Section 6.2 shall not be construed as a waiver by either party of its rights under applicable law to prohibit or restrict the assignment of this Agreement and the licenses granted hereunder, nor constitute a consent to the assumption or assignment of this Agreement or any of the licenses granted hereunder except as expressly provided and limited by Sections 3.8 and 6.2 of this Agreement. Any attempted assignment in derogation of the foregoing shall be null and void. The Agreement shall be binding upon and inure to the benefit of the parties and their permitted successors and assigns. 6.3. PATENT ASSIGNMENTS. Neither party nor its Subsidiaries shall assign or transfer any of its licensed Patents unless such assignment is made subject to the terms and conditions of this Agreement. Any attempted assignment in derogation of the foregoing shall be null and void. 6.4. NOTICE. All notices required or permitted to be given hereunder shall be in writing and shall be delivered by hand, or if dispatched by prepaid air courier or by registered or certified airmail, postage prepaid, addressed as follows: If to Nvidia: If to E&S: ------------ --------- Nvidia Corporation Evans and Sutherland Computer Corp. 2701 San Tomas Expressway 600 Komas Drive Santa Clara, CA 95050 Salt Lake City, UT 84108 United States of America United States of America Attn.: Chief Patent Counsel Attn: Chief Financial Officer Such notices shall be deemed to have been served when received by addressee or, if delivery is not accomplished by reason of some fault of the addressee, when tendered for delivery. Either party may give written notice of a change of address and, after notice of such change has been received, any notice or request shall thereafter be given to such party as above provided at such changed address. 6.5. CONSTRUCTION; NO RULE OF STRICT CONSTRUCTION. Regardless of which party may have drafted this Agreement, no rule of strict construction shall be applied against either party. The headings contained in this Agreement are for convenience of reference only, shall not be deemed to be a part of this Agreement and shall not be referred to in connection with the construction or interpretation of this Agreement. As used in this Agreement, the words "include" and "including," and variations - 10 - NVIDIA/E&S CONFIDENTIAL thereof, shall not be deemed to be terms of limitation, but rather shall be deemed to be followed by the words "without limitation." Except as otherwise indicated, all references in this Agreement to "Sections" are intended to refer to Sections of this Agreement. 6.6. SEVERABILITY. If any provision of this Agreement is determined by a court to be unenforceable, the parties shall deem the provision to be modified to the extent necessary to allow it to be enforced to the extent permitted by law, or if it cannot be modified, the provision will be severed and deleted from this Agreement, and the remainder of the Agreement will continue in effect. 6.7. TAXES. Each party shall be responsible for the payment of its own tax liability arising from this transaction. The parties intend that this Agreement constitutes a nontaxable exchange of like kind intangible personal property pursuant to the rules of Section 1031 of the Internal Revenue Code of 1986, as amended. The parties agree to report this transaction consistent with nontaxable treatment in all tax returns, reports and filings. 6.8. ENTIRE AGREEMENT. This Agreement embodies the entire understanding of the parties with respect to the subject matter hereof, and merges all prior and contemporaneous discussions between them, and neither of the parties shall be bound by any conditions, definitions, warranties, understandings, or representations with respect to the subject matter hereof other than as expressly provided herein; provided that nothing in this Agreement shall modify or supersede the terms, conditions, warranties, representations or other provisions of the Patent Purchase and License Agreement. No oral explanation or oral information by either party hereto shall alter the meaning or interpretation of this Agreement. 6.9. MODIFICATION; WAIVER. No modification or amendment to this Agreement, nor any waiver of any rights, will be effective unless assented to in writing by the party to be charged, and the waiver of any breach or default will not constitute a waiver of any other right hereunder or any subsequent breach or default. 6.10.GOVERNING LAW. This Agreement and matters connected with the performance thereof shall be construed, interpreted, applied and governed in all respects in accordance with the laws of the United States of America and the State of California, without reference to conflict of laws principles. 6.11.JURISDICTION; VENUE. E&S and Nvidia agree that all disputes and litigation regarding this Agreement and matters connected with its performance shall be subject to the exclusive jurisdiction of the United States District Court for the Northern District of California, if such court has personal and subject matter jurisdiction of the litigation, or if not the courts of the State of California located in the County of Santa Clara. Each party to this Agreement: (i) expressly and irrevocably consents and submits to the jurisdiction of such courts in connection - 11 - NVIDIA/E&S CONFIDENTIAL with any such legal proceeding; (ii) agrees that such courts shall be deemed to be a convenient forum; and (iii) agrees not to assert (by way of motion, as a defense or otherwise), in any such legal proceeding commenced in such courts, any claim that such party is not subject personally to the jurisdiction of such courts, that such legal proceeding has been brought in an inconvenient forum, that the venue of such proceeding is improper or that this Agreement or the subject matter of this Agreement may not be enforced in or by such courts. 6.12.CONFIDENTIALITY OF TERMS. The parties hereto shall keep the terms of this Agreement confidential and shall not now or hereafter divulge these terms to any third party except: (a) with the prior written consent of the other party; (b) if so required by the order or demand of any governmental body having jurisdiction to call therefor, provided that the disclosing party uses its best efforts to give the other party reasonable notice prior to such disclosure and joins or cooperates in obtaining an appropriate protective order; (c) only to the extent a party determines such disclosure may be required by regulation, law or legal process, including to legal and financial advisors in their capacity of advising a party in such matters and in disclosure documents required to be filed with the SEC or under stock exchange rules; (d) during the course of litigation so long as the disclosure of such terms and conditions are restricted in the same manner as is the confidential information of other litigating parties and so long as: (a) the restrictions are embodied in a court-entered protective order; and (b) the disclosing party informs the other party in writing at least ten (10) days in advance of the disclosure; (e) in confidence to employees with a need to know, legal counsel, accountants, banks and financing sources and their advisors solely in connection with complying with financial transactions; (f) where the terms disclosed are, through no act or failure to act on the part of the disclosing party, generally known in the computer graphics or simulation industry; or (g) in confidence to employees of the acquiring party with a need to know, and legal counsel, accountants, banks and financing sources and their advisors solely in connection with the negotiation and closing of a transaction involving a Change of Control. - 12 - NVIDIA/E&S CONFIDENTIAL The parties shall cooperate in preparing and agree to an announcement or press release relating to this Agreement. 6.13.COMPLIANCE WITH LAWS. Anything contained in this Agreement to the contrary notwithstanding, the obligations of the parties hereto and of the Subsidiaries of the parties shall be subject to all laws, present and future, of any government having jurisdiction over the parties hereto or the Subsidiaries of the parties. 6.14.FORCE MAJEURE. The parties hereto shall be excused from any failure to perform any obligation hereunder to the extent such failure is caused by war, acts of public enemies, strikes or other labor disturbances, fires, floods, acts of God, or any causes of like or different kind beyond the control of the parties. 6.15.IMPORT AND EXPORT LAWS. Neither party shall export or re-export Licensed Products, or any direct product thereof, without first having obtained the appropriate U.S. or foreign government licenses. In no event will either party export Licensed Products to any country to which export is prohibited by the U.S. Each party shall indemnify, defend and hold the other harmless from and against any claims, damages or litigation costs resulting from or relating to the indemnifying party's failure to comply with this Section 6.15. 6.16.SECTION 365(n). For purposes of Section 365(n) of the United States Bankruptcy Code (the "Code"), this Agreement is an "executory contract," the Patents are "intellectual property," and the parties are each a "licensor of a right to intellectual property" within the meaning of the Code. Notwithstanding any provision contained herein to the contrary, if a party is under any proceeding under the Code, and such party as debtor-in-possession or its trustee elects to reject this Agreement, the other party may, pursuant to Section 365(n)(1) and (2) of the Code, retain all of its rights hereunder to the maximum extent permitted by law. 6.17.COUNTERPARTS. This Agreement may be executed in counterparts, each of which shall constitute an original and all of which, when taken together, shall constitute one agreement. - 13 - NVIDIA/E&S CONFIDENTIAL IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered as of the Effective Date. EVANS AND SUTHERLAND COMPUTER NVIDIA CORPORATION CORPORATION By: /s/ James R. Oyler By: /s/ Jen-Hsun Huang James R. Oyler Jen-Hsun Huang - -------------- -------------- Printed Name Printed Name President and CEO President and CEO - ----------------- ----------------- Title Title - 14 - EX-21.1 6 a2075343zex-21_1.txt EX-21.1 Exhibit 21.1 EVANS & SUTHERLAND COMPUTER CORPORATION SUBSIDIARIES OF THE REGISTRANT
State or Other Jurisdiction of Incorporation or Names Under Which Subsidiary Name Organization Each Subsidiary Does Business - ----------------------------------------------- ------------------ --------------------------------------------- Evans & Sutherland Graphics Corporation Utah Evans & Sutherland Graphics Corporation Xionix Simulation, Inc. Georgia Xionix Simulation, Inc. Evans & Sutherland Computer Limited United Kingdom Evans & Sutherland Computer Limited E&S Foreign Sales Corporation Virgin Islands E&S Foreign Sales Corporation E&S Partners, Inc. Utah E&S Partners, Inc. REALimage, Inc. Delaware REALimage, Inc.
EX-23.1 7 a2075343zex-23_1.txt EX-23.1 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 March 15, 2002 relating to the consolidated balance sheets of Evans & Sutherland Computer Corporation and subsidiaries as of December 31, 2001 and December 31, 2000, and the related consolidated statements of operations, comprehensive loss, stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 2001 and related schedule, which report appears in the December 31, 2001 Annual Report on Form 10-K of Evans & Sutherland Computer Corporation. KPMG LLP Salt Lake City, Utah March 29, 2002 EX-24.1 8 a2075343zex-24_1.txt EX-24.1 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 and William M. Thomas, or any of them, as his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign in the name of or on behalf of the undersigned, as a director and/or officer of said corporation, the Annual Report on Form 10-K of Evans & Sutherland Computer Corporation for the year ended December 31, 2001, 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 28th day of March, 2002.
SIGNATURE TITLE DATE /s/ James R. Oyler President and Chief Executive Officer March 28, 2002 - ---------------------------- (Principal Executive Officer) and James R. Oyler Director /s/ William M. Thomas Vice President, Chief Financial March 28, 2002 - ---------------------------- Officer, Treasurer and Corporate William M. Thomas Secretary (Principal Financial and Accounting Officer) /s/ Gerald S. Casilli Director March 28, 2002 - ---------------------------- Gerald S. Casilli /s/ Wolf-Dieter Hass Director March 28, 2002 - ---------------------------- Wolf-Dieter Hass /s/ Ivan E. Sutherland Director March 28, 2002 - ---------------------------- Ivan E. Sutherland
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