-----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, TNzHT0cbZ2NaW0HZ4J4XcHAgZ/4F4aTmndLa7sOKN80vCmVN6uz3zub6Br/gSRXC dqbuSJvQ5TXNqBcxnmXxKg== 0001047469-99-013117.txt : 19990416 0001047469-99-013117.hdr.sgml : 19990416 ACCESSION NUMBER: 0001047469-99-013117 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: EVANS & SUTHERLAND COMPUTER CORP CENTRAL INDEX KEY: 0000276283 STANDARD INDUSTRIAL CLASSIFICATION: 3690 IRS NUMBER: 870278175 STATE OF INCORPORATION: UT FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-14677 FILM NUMBER: 99583714 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-K405 1 FORM 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, 1998 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition Period from ____________ to ____________ Commission File Number 0-8771 ------------ EVANS & SUTHERLAND COMPUTER CORPORATION (Exact name of registrant as specified in its charter) Utah 87-0278175 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 600 Komas Drive, Salt Lake City, Utah 84108 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (801) 588-1000 Securities Registered Pursuant to Section 12(b) of the Act: "None" Securities Registered Pursuant to Section 12(g) of the Act: Title of Class -------------------------------------------- Common Stock, $.20 par value 6% Convertible Debentures Due 2012 Preferred Stock Purchase Rights Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ______ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ] The aggregate market value of the voting and non-voting common stock held by non-affiliates of the Registrant as of March 5, 1999 was approximately $105,050,000 The Registrant had issued and outstanding 9,586,463 shares of its common stock on March 5, 1999. DOCUMENTS INCORPORATED BY REFERENCE Part III incorporates information by reference from the Registrant's 1999 Proxy Statement for its Annual Meeting of Shareholders to be held on May 20, 1999. [THIS SPACE INTENTIONALLY LEFT BLANK] EVANS & SUTHERLAND COMPUTER CORPORATION FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1998 PART I Item 1. Business.................................................................................. 5 Item 2. Properties................................................................................12 Item 3. Legal Proceedings.........................................................................12 Item 4. Submission of Matters to a Vote of Security Holders.......................................12 PART II Item 5. Market Price of and Dividends on the Registrant's Common Equity and Related Stockholder Matters..............................................................14 Item 6. Selected Consolidated Financial Data......................................................15 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations....................................................................17 Item 7A. Quantitative and Qualitative Disclosures About Market Risk................................28 Item 8. Financial Statements and Supplementary Data...............................................30 Report of Management....................................................................31 Report of Independent Accountants.......................................................31 Consolidated Balance Sheets.............................................................32 Consolidated Statements of Operations...................................................33 Consolidated Statements of Comprehensive Income.........................................34 Consolidated Statements of Stockholders' Equity.........................................35 Consolidated Statements of Cash Flows...................................................36 Notes to Consolidated Financial Statements..............................................37 Item 9. Disagreements on Accounting and Financial Disclosure......................................56 PART III Item 10. Directors and Executive Officers of the Company...........................................56 Item 11. Executive Compensation....................................................................56 Item 12. Security Ownership of Certain Beneficial Owners and Management............................56 Item 13. Certain Relationships and Related Transactions............................................56 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K..........................57 Signatures ..........................................................................................61
[THIS SPACE INTENTIONALLY LEFT BLANK] FORM 10-K PART I ITEM 1. BUSINESS GENERAL Evans & Sutherland Computer Corporation ("Evans & Sutherland," "E&S(R)," or the "Company"), incorporated in the State of Utah on May 10, 1968, is an established high-technology company with outstanding computer graphics technology and a worldwide presence in high-performance 3D visual simulation. In addition, E&S is now applying this core technology into higher-growth personal computer ("PC") products for both simulation and workstations. The Company's core computer graphics technology is shared among the Company's: (1) Simulation business to produce high performance image generators for simulation including PC-based visual system products; (2) Workstation Products business to provide original equipment manufacturers ("OEM") of personal workstations with high quality graphics performance; and (3) Applications business to apply the Company's core technologies to the expanding market of PC-based applications and products. RECENT DEVELOPMENTS On June 26, 1998, the Company, through its wholly-owned subsidiary, Evans & Sutherland Graphics Corporation ("ESGC"), acquired all of the outstanding stock of AccelGraphics, Inc. ("AGI") to expand the Company's workstation graphics development, integration and distribution within the workstation graphics marketplace. ESGC is based in Milpitas, California, and is a provider of high-performance, cost-effective, three-dimensional graphics subsystem products for the Windows NT(R)-based PC workstation market. To further expand the Company's presence within the workstation graphics marketplace, on June 26, 1998, the Company acquired the assets and assumed certain liabilities of Silicon Reality, Inc. ("SRI"), a designer and developer of 3D graphics hardware and software products for the PC workstation marketplace. On July 22, 1998, Intel Corporation purchased 901,408 shares of the Company's preferred stock plus a warrant to purchase an additional 378,462 shares of the preferred stock at an exercise price of $33.28125 per share for approximately $24 million. These preferred shares have certain liquidation and conversion rights in addition to other rights and preferences. The Company also entered into an agreement to accelerate development of high-end graphics and video subsystems for Intel-based workstations. In the third quarter of 1998, E&S began shipping its Harmony(TM) image generator system. Harmony is the highest performance member of the Company's Symphony(TM) family of simulation products. It is selected by customers demanding superior image quality, deterministic real-time control and superior price/performance. In the fourth quarter of 1998, E&S introduced and demonstrated its PC-based simulation solution called Ensemble(TM) which is at the lower end of the Symphony line. Ensemble is the first true PC-based image generation simulation system with the scalability, flexibility and affordability to create new markets and applications for real-time simulation and visualization. Harmony and Ensemble complete the Company's transition to the new Symphony product suite offering complete compatibility across the product range. On February 18, 1998, the Company's Board of Directors authorized the repurchase of up to 600,000 shares of the Company's common stock, including the 327,000 shares still available from the repurchase authorization approved by the Board of Directors on November 11, 1996. On September 8, 1998, the Company's Board of Directors authorized the repurchase of an additional 1,000,000 shares of the Company's common stock. Subsequent to February 18, 1998, the Company has repurchased 784,000 shares of its common stock; thus, 816,000 shares currently remain available for repurchase as of March 31, 1999. Stock may be acquired in the open market or through negotiated transactions. Under the program, repurchases may be made from time to time, depending on market conditions, share price, and other factors. These repurchases are to be used primarily to meet current and near-term requirements for the Company's stock-based benefit plans. FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS This annual report, including all documents incorporated herein by reference, includes certain "forward-looking statements" within the meaning of that term in Section 27A of the Securities Act of 1933, and Section 21E of the Exchange Act, including, among others, those statements preceded by, followed by or including the words "believes," "expects," "anticipates" or similar expressions. These forward-looking statements are based largely on our current expectations and are subject to a number of risks and uncertainties. Our actual results could differ materially from these forward-looking statements. In addition to the other risks described in the "Factors That May Affect Future Results" discussion under Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations in Part II of this annual report, important factors to consider in evaluating such forward-looking statements include risk of product demand, market acceptance, economic conditions, competitive products and pricing, difficulties in product development, commercialization and technology. In light of these risks and uncertainties, there can be no assurance that the events contemplated by the forward-looking statements contained in this annual report will, in fact, occur. REPORTABLE SEGMENTS The Company's business units have been aggregated into three reportable segments: the Simulation Group, the Workstation Products Group, and the Applications Group. The three groups benefit from shared core graphics technology and each group's new products are based on open Intel and Microsoft hardware and software standards. Each reportable segment markets its products to a worldwide customer base. Financial information by reportable segment for each of the three years ended December 31, 1998 is included in note 19 of the Notes to Consolidated Financial Statements included in Part II of this annual report. Simulation Group E&S is an industry leader in providing visual systems to both government and commercial simulation customers. The Simulation Group provides more than 50 percent of the worldwide market for government and military applications and commercial airline training simulators. The group anticipates continued growth in these marketplaces as simulation training increases in value as an alternative to other training methods, and as simulation training technology and cost-effectiveness improve. Products & Markets The Simulation Group provides a broad line of visual systems for flight and ground training and related services to the United States and international armed forces, NASA, and aerospace companies. E&S remains an industry leader for visual systems sales to various United States government agencies and more than 20 foreign governments for the primary purpose of training military vehicle operators. The Simulation Group is also a leading independent supplier of visual systems for flight simulators for commercial airlines. This group provides over 50 percent of the visual systems installed in full-flight training simulators for civil airlines, training centers, simulator manufacturers, and aircraft manufacturers. The group's visual systems create dynamic, high quality, out-the-window scenes that simulate the view vehicle operators see when performing tasks under actual operating conditions. The visual systems are an integral part of full mission simulators, which incorporate a number of other components, including cockpits or vehicle cabs and large hydraulic motion systems. Generally, the Simulation Group's visual systems products consist of the following four major components. These components are available as sub-systems, but are typically sold together as a complete visual system solution delivered to an operator or prime contractor. (1) Image generators ("IG"s) create computer-generated images and send these images to display devices, such as projectors or computer monitors. The group's primary IG offerings include ESIG(TM) and the Symphony family of products from Harmony on the high end to PC-based Ensemble IGs at the low end. E&S is unique in offering a complete, high-to-low family of IGs that can use the same software and databases. While Harmony is the industry's flagship for highest performance, Ensemble is the first true PC-based image generation simulation system with the scalability, flexibility and affordability to create new markets and applications for real-time simulation and visualization. (2) Display systems consist of projectors, display screens, computer monitors, and specialized optics. These display systems are offered in a broad range of configurations, from onboard instrument displays to domes offering a 360-degree field of view, depending on the applications. (3) Databases of synthetic environments are offered as options or as custom creations. The group provides database development as well as database development tools such as INTegrator(R). Databases developed using INTegrator are a key element of the Symphony product family. These can be run on a full range of image generators, from the PC-based Ensemble IG to the high-end Harmony systems. (4) System integration, installation and support services are also differentiating elements of all systems and components sold. The Simulation Group's products are marketed worldwide by the Company or its agents. Products and services are sold directly to end users by E&S as a prime contractor, through simulator prime contractors with E&S acting as a subcontractor, and through system OEMs. E&S continues to develop and form both domestic and international marketing alliances, which are proving to be an effective method of reaching specific markets. In addition, the Company has OEM agreements for its visual system products with companies such as STN Atlas Elektronik GmbH in Germany and Mitsubishi Precision Co., Ltd. in Japan. Competitive Conditions Primary competitive factors for the Simulation Group's products are performance, price, service, and product availability. Because competitors are constantly striving to improve their products, the group must ensure that it continues to offer products with the best performance at a competitive price. Prime contractors, including CAE Electronics, Ltd. ("CAE"), Thomson Training and Simulation, Ltd. ("Thomson"), and Lockheed Martin offer competing visual systems in the simulation market. The Company believes it is able to compete effectively in this environment and will continue to be able to do so in the foreseeable future. In 1998, the group was awarded several highly competitive orders against CAE and Flight Safety International, Inc., the principal competitors in the commercial simulation market. In both the government and commercial simulation markets, the group competes for the graphics computers market with Silicon Graphics, Inc. Backlog The Simulation Group's backlog was $146.7 million on December 31, 1998, compared with $151.0 million on December 31, 1997. It is anticipated that most of the 1998 backlog will be converted to revenue in 1999. Business Subject to Government Contract Renegotiation A significant portion of the Simulation Group's business is dependent on contracts and subcontracts associated with government business. In the normal course of this business, the government may renegotiate profits or terminate contracts or subcontracts. Management does not believe, however, that such renegotiations or terminations would have a material adverse effect on the Company's consolidated financial condition, liquidity, or results of operations. Workstation Products Group The Workstation Products Group develops and sells graphics chips and graphics subsystems for the personal workstation marketplace. This group sells to most personal workstation OEMs and is gaining market share in the professional graphics market. The group anticipates continued growth in the Windows NT workstation marketplace with the market's transition from proprietary UNIX architecture systems to Microsoft and Intel-based open architecture systems. To expand the Company's workstation graphics development, integration and distribution within the workstation graphics marketplace, the Company, on June 26, 1998, through its wholly-owned subsidiary, Evans & Sutherland Graphics Corporation, acquired all of the outstanding stock of AccelGraphics, Inc. ESGC is a provider of high-performance, cost-effective, three-dimensional graphics subsystem products for the Windows NT(R)-based personal workstation market. To further expand the Company's presence within the workstation graphics marketplace, on June 26, 1998, the Company acquired the assets and assumed certain liabilities of Silicon Reality, Inc., a designer and developer of 3D graphics hardware and software products for the PC workstation marketplace. Products & Markets The Workstation Products Group provides a family of REALimage(TM) chip-based, 3D graphics subsystems and their associated software to personal workstation OEMs. A majority of the group's revenues are currently derived from the AccelGALAXY(TM) product. The group's principal product lines are summarized below:
Product Line Introduction Date Description E&S Lightning 1200(TM) March 1999 Based on the REALimage 1200 chipset, positioned as a professional card for price-sensitive users of CAD, modeling, DCC, and visualization simulation applications, is Pentium III ready and incorporates E&S's newest software architecture, DYNAMICgeometry(TM). AccelGALAXY July 1998 Based on the REALimage 2100 chipset, positioned as a mid-range card for a variety of professional applications and was upgraded with new driver software in March 1999 to be Pentium III ready, incorporating E&S's newest software architecture, DYNAMICgeometry. AccelECLIPSE II(TM) November 1997 Based on the REALimage 1000 chipset and positioned for mid-level applications with advanced texture and overlay and anti-aliasing support.
These families of workstation products support a wide range of professional OpenGL(R) graphics applications, including mechanical computer automated design, engineering analysis, digital content creation, visualization, simulation, animation, entertainment and architectural, engineering and construction. To optimize its position in these markets, E&S maintains close working relationships with more than 40 independent software vendors that provide products into these markets. Consequently, E&S is certified and/or tested on most of the popular PC workstation applications. Another partnership important to the group's ability to deliver competitive products to personal workstation OEMs is E&S's alliance with Intel Corporation ("Intel"). This alliance was strengthened in July 1998, with Intel's purchase of 901,408 shares of the Company's preferred stock. At the same time, Intel and the Company also entered into an agreement to accelerate development of high end graphics and video subsystems for Intel-based workstations. This coordinated development effort with Intel gives E&S a distinct advantage in keeping pace with new chip releases by Intel thereby providing personal workstation OEMs with timely and optimal graphics solutions. The Workstation Products Group also benefits from the advanced technology developed in the Company's Simulation Group, and then in turn flows technology back to the simulation business, particularly for PC-based visual systems. This group's products are sold to key OEM customers primarily through direct sales. The Workstation Group also utilizes sales representatives to support sales to distributors around the world and has a non-exclusive partnership with Mitsubishi Electronics to manufacture and sell certain specific REALimage-based chipsets. Competitive Conditions The group's future success will depend in large part on achieving design wins and having current and future products chosen as the graphics subsystem by the personal workstation OEMs. The group's major OEM customers typically introduce new system configurations as often as twice a year, usually based on spring and fall design cycles. Accordingly, the group's existing products must have competitive performance levels or the group must introduce timely new products with such performance characteristics in order to be included in new system configurations. The Workstation Products Group's principal competitors include Intergraph, Inc., a system OEM that uses its own chip design, 3Dlabs Inc., Ltd., that sells graphics subsystems based on their own chipsets to system OEMs and companies such as Diamond Multimedia Systems, Inc. and ELSA Inc. that utilize other companies' graphics chips. The group also competes indirectly with Silicon Graphics, Inc. because Silicon Graphics, Inc. employs a vertical system sales strategy that competes directly with Dell Computer Corporation, Hewlett-Packard Company, Compaq Computer Corporation and other E&S customers. Competition may also emerge from companies such as ATI Technologies Inc., Intel and nVidia Corporation, who currently provide lower performance graphics products for the consumer PC market. Backlog The Workstation Products Group's backlog was $3.0 million on December 31, 1998, compared with $0.2 million on December 31, 1997. The group expects that most of the 1998 backlog will be converted to revenue in 1999. The Workstation Products Group's business operates off very short lead times as is typical in the PC industry. Sales of the group's products are primarily made pursuant to standard purchase orders that are cancelable without significant penalties. Applications Group The Applications Group is composed of new and synergistic businesses that use E&S core technology in growth markets. The group's products are applications that leverage the technology of the Company's Simulation or Workstation Products Groups and apply them to other growth markets. Products & Markets The Applications Group's digital theater products include hardware, software, and content for both the entertainment and educational marketplaces. Digital theater focuses on immersive all-dome theater applications combining colorful digitally-produced imagery, full-spectrum audio, and audience-participation hardware. The group provides turnkey solutions incorporating visual systems and sub-systems from the Simulation and Workstation Products Groups. E&S integrates these systems with projection equipment, audio components, and audience-participation systems from other suppliers. Products include Digistar(R), a calligraphic projection system designed to compete with analog star projectors in planetariums, and StarRider(R), a full-color, interactive, domed theater experience. The group is a leading supplier of digital display systems in the planetarium marketplace. In December of 1998 the group debuted "Journey to Infinity" the first interactive StarRider(R) system and show at the Adler Planetarium and Astronomy Museum in Chicago. The digital video products provide Windows NT, open system, standard platform based virtual studio systems for digital content production in the television broadcast, film, video, corporate training and multimedia industries. The E&S solution offers significant improvement in cost, ease of use and flexibility compared with the traditional, proprietary UNIX-based systems common in this developing market. The group's products are all-inclusive system solutions that incorporate visual system components and subsystems from the Simulation and Workstation Products Groups. E&S MindSet(TM), Virtual Studio System(TM) and the FuseBox(TM) control software with real-time frame accurate camera tracking and enable live talent to perform in real time on a virtual set generated using E&S 3D computer technology. The video output of the set meets today's digital broadcast video standards. Systems are installed world-wide in production, postproduction, broadcast and educational applications. The Applications Group's products are sold directly to end users by E&S as a prime contractor or selectively through dealers. Competitive Conditions The Company's digital theater products compete with traditional optical-mechanical products and digital display systems offered by Minolta Planetarium Co. Ltd., GoTo Optical Mfg. Co., Carl Zeiss Inc., Spitz, Inc., Trimension, Inc. and Sky-Skan, Inc. The competitors for the virtual set product are mostly small companies including Orad and RT-Set, both Israeli companies, Brainstorm, a Spanish corporation, and Peak Systems GmbH, a German company. Discreet Logic of Montreal, Canada has installed a small number of high-end systems. Backlog The Applications Group's backlog was $6.0 million on December 31, 1998, compared with $3.7 million on December 31, 1997. It is anticipated that most of the 1998 backlog will be converted to revenue in 1999. SIGNIFICANT CUSTOMERS Worldwide customers using E&S products include U.S. and international armed forces, NASA, aerospace companies, most major airlines, PC manufacturers, film and video studios, laboratories, museums, planetariums and science centers. In 1998, sales to the U.S. government and the United Kingdom Ministry of Defense ("UK MOD"), either directly or indirectly through sales to prime contractors or subcontractors, accounted for $70.8 million, or 37% of total net sales, and $32.1 million, or 17% of total net sales, respectively. In 1997 and 1996, sales to the U.S. government, either directly or indirectly through sales to prime contractors or subcontractors, accounted for $45.5 million, or 29% of total net sales, and $25.8 million, or 20% of total net sales, respectively. In 1998, sales to The Boeing Company ("Boeing") were approximately $28.1 million, or 15% of total net sales, of which approximately 98% related to U.S. government and UK MOD contracts, and sales to Lockheed Corporation ("Lockheed") were approximately $22.0 million, or 11% of total net sales, of which approximately 91% related to U.S. government contracts. In 1997, sales to Thomson Training & Simulation Ltd. ("Thomson") were $19.3 million, or 12% of total net sales. In 1996, sales to Thomson were $15.8 million, or 12% of total net sales, sales to Hughes Training Incorporated ("Hughes") were $14.9 million, or 11% of total net sales, and sales to Rikei Corporation were $14.3 million, or 11% of total net sales. A portion of the Company's sales to Hughes was for U.S. government contracts. DEPENDENCE ON SUPPLIERS Most of the Company's parts and assemblies are readily available through multiple sources in the open market; however, a limited number are available only from a single source. In these cases, the Company stocks a substantial inventory, or obtains the agreement of the vendor to maintain adequate stock for future demands, and/or attempts to develop alternative components or sources where appropriate. SEASONALITY E&S believes there is no inherent seasonal pattern to its business. Sales volume fluctuates quarter-to-quarter due to relatively large and nonrecurring individual sales and customer-established shipping dates. INTELLECTUAL PROPERTY E&S owns a number of patents and trademarks and is a licensee under several others. In the U.S., the Company holds active patents that cover many aspects of the Company's graphics technology. Several patent applications are presently pending in the U.S., Japan and several European countries. E&S copyrights chip masks designed by the Company and has instituted copyright procedures for these masks in Japan. E&S does not rely on, and is not dependent on, patent and/or trademarks ownership to maintain its competitive position. In the event any or all patents are held to be invalid, management believes the Company would not suffer significant long-term damage. However, E&S actively pursues patents on its new technology. RESEARCH & DEVELOPMENT E&S considers the timely development and introduction of new products to be essential to maintaining its competitive position and capitalizing on market opportunities. The Company's research and development expenses were $31.8 million, $25.5 million and $21.8 million in 1998, 1997 and 1996, respectively. As a percentage of sales, research and development expenses were 16.6%, 16.0% and 16.7% in 1998, 1997 and 1996, respectively. The Company continues to fund substantially all research and development efforts internally. It is anticipated that high levels of research and development will continue to ensure that the Company maintains technical excellence, leadership, and market competitiveness. INTERNATIONAL SALES Sales of product known to be ultimately installed outside the United States are considered international sales by the Company and were $84.9 million, $94.6 million and $88.4 million in 1998, 1997 and 1996, respectively. International sales represented 44%, 59% and 68% of total sales in 1998, 1997 and 1996, respectively. For additional information, see note 20 of Notes to Consolidated Financial Statements included in Part II of this annual report. EMPLOYEES As of March 5, 1999, Evans & Sutherland and its subsidiaries employed a total of 951 persons. The Company believes its relations with its employees are good. None of the Company's employees are subject to collective bargaining agreements. ENVIRONMENTAL STANDARDS The Company believes its facilities and operations are within standards fully acceptable to the Environmental Protection Agency and that all facilities and procedures are in accordance with environmental rules and regulations, and international, federal, state, and local laws. ITEM 2. PROPERTIES Evans & Sutherland's principal executive, manufacturing, engineering, and operations facilities are located in the University of Utah Research Park, in Salt Lake City, Utah, where it owns six buildings totaling approximately 440,000 square feet. E&S occupies four buildings and leases the remaining two buildings to other businesses. The buildings are located on land leased from the University of Utah on 40-year land leases. Two buildings have options to renew the land leases for an additional 40 years, and four have options to renew the land leases for 10 years. The Company also owns 46 acres of land in North Salt Lake. E&S has no encumbrance on any of the real property. The Company and its subsidiaries hold leases on several sales, service, and production facilities located throughout the United States, Europe, and Asia. The largest of these is a 20,000 square foot facility in Milpitas, CA. E&S believes that these properties are suitable for its immediate needs and it does not currently plan to expand its facilities or relocate. ITEM 3. LEGAL PROCEEDINGS Neither the Company nor any of its subsidiaries is a party to any material legal proceeding. However, the Company is involved in ordinary routine litigation incidental to its business. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of fiscal year 1998. EXECUTIVE OFFICERS OF THE REGISTRANT The following sets forth certain information regarding the executive officers of the Company as of March 31, 1999:
Name Age Position - - ------------------------ ----------------------- --------------------------------------------------------------- Stewart Carrell 65 Chairman of the Board of Directors James R. Oyler 53 President and Chief Executive Officer John T. Lemley 55 Vice President and Chief Financial Officer David B. Figgins 50 Vice President - Simulation Group William C. Gibbs 41 Vice President of Corporate Development Charles R. Maule 48 Vice President - Workstation Group Mark C. McBride 37 Vice President, Corporate Controller and Corporate Secretary
- - ------------------------ Mr. Carrell was elected Chairman of the Board of Directors of the Company in March 1991. He has been a member of the Board for 15 years. He also serves as the Chairman of Seattle Silicon Corporation, and he is a director of Tripos, Inc. From mid-1984 until October 1993, Mr. Carrell was Chairman and Chief Executive Officer of Diasonics, Inc., a medical imaging company. From November 1983 until early 1987, Mr. Carrell was also a General Partner in Hambrecht & Quist LLC, an investment banking and venture capital firm. Mr. Oyler was appointed President and Chief Executive Officer of the Company and a member of the Board of Directors in December 1994. He is also a director of Ikos Systems, Inc. and Silicon Light Machines. Previously, Mr. Oyler served as President of AMG, Inc. from mid-1990 through December 1994 and as Senior Vice President of Harris Corporation from 1976 through mid-1990. He has four years of service with the Company. Mr. Lemley joined the Company in November 1995 as Vice President and Chief Financial Officer. Prior to coming to the Company, he was Senior Vice President and Chief Financial Officer at Megahertz Holding Corporation. Previously, he was with Medtronic, Inc., where he was Vice President, Corporate Controller and Acting Chief Financial Officer. Prior to Medtronic, Mr. Lemley spent 17 years in a variety of financial management positions with Hewlett Packard Company. He has three years of service with the Company. Mr. Figgins was appointed Vice President of the Simulation Group in January 1999. He joined the Company in April 1998 as Vice President of PC Simulation in the Government Simulation business unit. Previously, he was Vice President of Business Development and Marketing for Raytheon Training where he was employed from May 1986 to April 1998. He has less than one year of service with the Company. Mr. Gibbs joined the Company in December 1998 as Vice President of Corporate Development. Previously, he was a partner at the law firm of Snell & Wilmer, LLP from December 1990 to December 1998. He has less than one year of service with the Company. Mr. Maule was appointed Vice President of the Workstation Group in January 1999. He joined the Company in February 1996 as Vice President and General Manager of Desktop Graphics. Prior to joining the Company, he was Vice President of Marketing and Strategy for Concurrent Computer Corporation from October 1994 to February 1996. Previously, Mr. Maule served as Director of Business Development for Lockheed Missiles & Space Company from November 1992 to September 1994. He has three years of service with the Company. Mr. McBride has been Vice President and Corporate Controller since September 1996 and was appointed Corporate Secretary in March 1998. Prior to joining the Company, he was Senior Vice President and Chief Financial Officer at HealthRider, Inc. from September 1993 to September 1996. From August 1985 to September 1993, he was employed by Price Waterhouse LLP in various capacities, ending with Senior Manager. Mr. McBride is a Certified Public Accountant. He has two years of service with the Company. FORM 10-K PART II ITEM 5. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS PRICE RANGE OF COMMON STOCK The Company's common stock trades on the NASDAQ Stock Market under the symbol "ESCC." The following table sets forth the range of the high and low sales prices per share of the Company's common stock for the fiscal quarters indicated, as reported by NASDAQ. Quotations represent actual transactions in NASDAQ's quotation system but do not include retail markup, markdown, or commission. HIGH LOW -------------- -------------- 1998 First Quarter $ 31 1/4 $ 26 1/2 Second Quarter 30 22 1/2 Third Quarter 29 13 3/4 Fourth Quarter 22 1/2 12 1997 First Quarter $ 28 3/8 $ 22 Second Quarter 29 3/4 22 1/8 Third Quarter 33 1/2 26 Fourth Quarter 37 28 1/4 APPROXIMATE NUMBER OF EQUITY SECURITY HOLDERS On March 5, 1999, there were 790 shareholders of record of the Company's common stock. Because many of such shares are held by brokers and other institutions on behalf of shareholders, the Company is unable to estimate the total number of shareholders represented by these record holders. DIVIDENDS Evans & Sutherland has never paid a cash dividend on its common stock, retaining its earnings for the operation and expansion of its business. The Company intends for the foreseeable future to continue the policy of retaining its earnings to finance the development and growth of its business. ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA (In thousands, except per share amounts)
1998(1) 1997 1996 1995(2) 1994(3) ----------- ------------ ----------- ------------ ------------ FOR THE YEAR Net sales $ 191,766 $ 159,353 $ 130,564 $ 113,194 $ 113,090 Earnings (loss) before extraordinary gain and accretion of preferred stock (15,983) 5,080 10,352 20,484 (5,559) Earnings (loss) per common share before extraordinary gain: Basic (1.70) 0.56 1.16 2.37 (0.65) Diluted (1.70) 0.53 1.12 2.33 (0.65) Average weighted number of common shares outstanding: Basic 9,461 9,060 8,944 8,639 8,520 Diluted 9,461 9,502 9,222 8,785 8,520 AT END OF YEAR Total assets $ 275,668 $ 234,390 $ 210,891 $ 211,002 $ 180,764 Long-term debt, less current portion 18,062 18,015 18,015 18,015 20,375 Redeemable preferred stock 23,544 - - - - Stockholders' equity 165,083 165,634 160,472 148,491 127,118
- - -------------------- (1) During 1998, the Company incurred a $20.8 million charge to expense acquired in-process technology in connection with the acquisitions of AccelGraphics, Inc. and Silicon Reality, Inc. See note 2 of the Notes to Consolidated Financial Statements included in Part II of this annual report (2) During 1995, the Company repurchased $2.4 million of 6% Convertible Subordinated Debentures ("6% Debentures") on the open market. These purchases resulted in an extraordinary gain, net of income taxes, of approximately $0.3 million in 1995. (3) During 1994, the Company repurchased $16.7 million of 6% Debentures on the open market. These purchases resulted in an extraordinary gain, net of income taxes, of approximately $1.9 million in 1994. The Company incurred a restructuring charge of $8.2 million. The restructuring was undertaken to remove the Company's divisional structure, reengineer research and development, consolidate manufacturing, finance, administration and field service operations, and to modify product lines. QUARTERLY FINANCIAL DATA (Unaudited) (In thousands, except per share amounts)
Quarter Ended -------------------------------------------------------- March 27 June 26(1) Sept. 25 Dec. 31 ------------- ------------ ------------ ------------ 1998 Net sales $ 42,421 $ 43,638 $ 47,262 $ 58,445 Gross profit 17,125 19,279 20,637 24,405 Earnings (loss) before income taxes 2,353 (17,063) (1,219) 2,072 Net earnings (loss) applicable to common stock 1,589 (18,271) (794) 1,398 Earnings (loss) per common share(2): Basic 0.18 (2.04) (0.08) 0.14 Diluted 0.17 (2.04) (0.08) 0.13 Quarter Ended -------------------------------------------------------- March 28 June 27 Sept. 26 Dec. 31 ------------- ------------ ------------ ------------ 1997 Net sales $ 33,642 $ 37,907 $ 38,450 $ 49,353 Gross profit 15,128 17,424 19,284 23,378 Earnings (loss) before income taxes 2,015 2,707 5,102 (2,986) Net earnings (loss) applicable to common stock 1,411 1,975 3,825 (2,131) Earnings (loss) per common share(2): Basic 0.16 0.22 0.42 (0.23) Diluted 0.15 0.21 0.40 (0.23)
(1) The second quarter of 1998 includes a $20.8 million charge to expense acquired in-process technology in connection with the acquisitions of AccelGraphics, Inc. and Silicon Reality, Inc. See note 2 of the Notes to Consolidated Financial Statements included in Part II of this annual report. (2) Earnings per share are computed independently for each of the quarters presented and therefore may not sum to the totals for the year. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussions should be read in conjunction with the Company's Consolidated Financial Statements contained herein under Item 8 of this report.
Year Year Year Ended Ended Ended Dec. 31, Dec. 31, Dec. 27, 1998 1997 1996 ----------- ---------- ----------- Net sales 100.0% 100.0% 100.0% Cost of sales 57.5 52.8 50.5 ----------- ---------- ----------- Gross profit 42.5 47.2 49.5 Operating expenses Selling, general and administrative 20.9 22.2 24.0 Research and development 16.6 16.0 16.7 Write-off of acquired in-process technology 10.8 - - Amortization of goodwill and other intangible assets 2.5 - - ----------- ---------- ----------- Total operating expenses 50.8 38.2 40.7 ----------- ---------- ----------- Operating earnings (loss) (8.3) 9.0 8.8 Other income (expense), net 1.1 (4.7) 3.5 ----------- ---------- ----------- Earnings (loss) before income taxes (7.2) 4.3 12.3 Income tax expense 1.1 1.1 4.4 ----------- ---------- ----------- Net earnings (loss) (8.3) 3.2 7.9 Accretion of preferred stock 0.1 - - ----------- ---------- ----------- Net earnings (loss) applicable to common stock (8.4)% 3.2% 7.9% =========== ========== ===========
RESULTS OF OPERATIONS 1998 vs. 1997 Sales In 1998, sales increased $32.4 million, or 20% ($191.8 million compared to $159.4 million in 1997). Sales for simulation products increased $21.0 million, or 14% ($167.0 million in 1998 compared to $146.0 million in 1997). The increase in sales of simulation products is primarily due to increased sales volumes due to strong demand by U.S. and European government customers and commercial airline customers. Sales of workstation products increased $11.6 million, or 199% ($17.5 million in 1998 compared to $5.8 million in 1997). The increase in sales of workstation products is primarily due to the acquisition of AccelGraphics, Inc. at the end of the second quarter of 1998. Sales of application products declined $0.2 million, or 3% ($7.3 million in 1998 compared to $7.5 million in 1997). The decrease in sales of application products is primarily due to decreased sales volumes of location-based entertainment products partially offset by increased sales volumes of virtual studio systems. Gross Margin Gross margin decreased to 42.5% in 1998 from 47.2% in 1997. The decrease in gross margin is primarily due to the increased sales volumes related to contracts in which the Company functions as the prime contractor, increased competition and the change in the nature of the revenues derived from workstation products. Contracts in which the Company functions as the prime contractor include costs related to work performed by subcontractors which have significantly lower gross margins than work performed by the Company. During 1997 and the first half of 1998, revenues related to workstation products were derived primarily from royalties which had minimal associated cost of sales. Due to the acquisition of AccelGraphics, Inc., revenues in the second half of 1998 related to sales of graphics subsystems which had product costs consistent with a manufacturing operation. Selling, General and Administrative Selling, general and administrative expenses increased $4.8 million, or 14% ($40.1 million in 1998 compared to $35.3 million in 1997) but decreased as a percent of sales (20.9% in 1998 compared to 22.2% in 1997). The increase in these expenses is primarily due to increased selling, marketing and administrative expenses related to the operations of ESGC (formerly AccelGraphics, Inc.) during the second half of 1998, increased labor costs due to increased headcount and increased selling and marketing costs related to tradeshows, travel and commissions. These increases were partially offset by a decrease in incentive bonus expense. Research and Development Research and development expenses increased $6.3 million, or 25% ($31.8 million in 1998 compared to $25.5 million in 1997) and increased slightly as a percent of sales (16.6% in 1998 compared to 16.0% in 1997). The increase in these expenses is primarily due to increased research and development expenses related to the operations of ESCG during the second half of 1998 and increased labor, materials and design costs to support increased research and development activity in both the Simulation and Workstation Products Groups. Acquired In-Process Technology In connection with the purchases of AGI and SRI, the Company made allocations of the purchase price to acquired in-process technology. These amounts were expensed as non-recurring charges in the quarter ended June 26, 1998 because the acquired in-process technology had not yet reached technological feasibility and had no future alternative uses. Calculations of the value of the acquired in-process technology are based on adjusted after-tax cash flows that give explicit consideration to the SEC's views on acquired in-process technology as set forth in its September 15, 1998 letter to the American Institute of Certified Public Accountants. The fair value for the in-process technology in each acquisition was based on analysis of the markets, projected cash flows and risks associated with achieving such projected cash flows. In developing these cash flow projections, revenues were forecasted based on relevant factors, including aggregate revenue growth rates for the business as a whole, individual product revenues, characteristics of the potential market for the products, the anticipated life of the technology under development and the stage of completion of each project. Operating expenses and resulting profit margins were forecasted based on the characteristics and cash flow generating potential of the acquired in-process technology, and included assumptions that certain expenses would decline over time as operating efficiencies were obtained or support requirements decreased. Appropriate adjustments were made to operating income to derive net cash flow, and the estimated net cash flows of the in-process technologies in each acquisition were then discounted to present value using rates of return that the Company believes reflect the specific risk/return characteristics of these research and development projects. As a result of the valuations, the amount of purchase price allocated to in-process technology was $20.8 million. Since the date of acquisitions, the Company has used the acquired in-process technology to develop new graphics subsystem products which have or will become an extension of the Company's chip products when completed. These products increase the vertical reach of the Company's product offerings into the mid-range and high-end graphics marketplace. Products using the acquired in-process technology have been introduced at various times following the acquisition date of AGI and SRI, and the Company currently expects to complete the development of the remaining projects at various dates during 1999. Upon completion, the Company will offer the related products to its customers. The nature of the efforts required to develop the acquired in-process technology into commercially viable products principally relate to the completion of all planning, designing and testing activities that are necessary to establish that the products can be produced to meet its design requirements, including functions, features and technical performance requirements. The Company currently expects that the acquired in-process technology projects will be successfully developed, but there can be no assurance that commercial viability of these projects will be achieved. Furthermore, the graphics industry continues to undergo tremendous changes in competition and rapid development of competing technologies. Changes in graphics technology or other developments may cause the Company to alter or abandon these development plans. The in-process technologies will be used in future products and the linear successors to those products and will not be used as the foundation for alternative or future technologies. Failure to complete the development of these projects in their entirety, or in a timely manner, could have a material adverse impact on the Company's operating results, financial condition and results of operations. No assurance can be given that actual revenues and operating profit attributable to acquired in-process technology will not deviate from the projections used to value such technology in connection with each of the respective acquisitions. On-going operations and financial results for the acquired technology and the Company as a whole are subject to a variety of factors which may not have been known or estimable at the date of such acquisition, and the estimates discussed below should not be considered the Company's current projections for operating results for the acquired businesses or the Company as a whole. A description of the acquired in-process technology and the estimates made by the Company for each of the technologies is discussed below. Mid-range Professional Graphics Subsystem (2100). This technology is a graphics subsystem with built in VGA core and integral DMA engines. This technology provides superior graphics performance over previous technologies, and includes features such as stereo and dual monitor support and various texture memory configurations. The technology is used in the AccelGALAXY product, which was completed and began shipping to customers in late third quarter of 1998. The assigned value to this technology is $5.8 million. CAD-focused Professional Graphics Subsystem (1200). This technology is a graphic subsystem with lower costs compared to the mid-range technology, resulting in a more cost-effective graphics solution for the end-user. It provides the cost sensitive user with adequate graphics performance, with few features, and a single texture configuration option. This technology and a product based on this technology are still in development with introduction planned in 1999. The assigned value for this technology is $6.0 million. Multiple-Controller Graphics Subsystems (2200). This technology is a high-end graphics subsystem involving the parallel use of two or four controllers. This technology is aimed at super users in the graphics area who need significant increases in performance and features to accomplish their tasks and are willing to pay the increased price necessary to support those requirements. This technology is in development with its introduction date under review. The assigned value for this technology is $2.5 million. On-board Geometry Engine Graphics Subsystem (AccelGMX(TM)). This technology is a mid-range graphics subsystem with a geometry engine on board. This technology is aimed at the performance intensive graphics end-user. It has fewer features than the mid-range professional technology, but faster geometry performance compared to the mid-range professional technology on Pentium II processors. This technology was completed in the third quarter of 1998 and the AccelGMX product that uses this technology began shipping to customers at that time. The assigned value of this technology was $5.1 million. At the time of the valuation, the cost to complete all the projects was $1.2 million. As of December 31, 1998, approximately $0.9 million had been incurred for these projects. Costs to complete the projects are expected to be approximately $0.4 million. As of December, the AccelGALAXY, using the Mid-range Professional Graphics technology, was completed a month later than scheduled, with a cost overrun due to extra work required to successfully achieve certification on all required professional applications and the AccelGMX, using the On-board Geometry Engine Graphics technology, was completed on time and on budget. The AccelGMX and AccelGALAXY products started shipping in late third quarter of 1998. The CAD-focused Professional Graphics Subsystem was on schedule with a small cost overrun due to board layout and cost issues. The Multiple-Controller Graphics Subsystems was recently reevaluated due to changes in the marketplace. The introduction of a product using this technology has been delayed further into 1999. The AccelGALAXY has performed below revenue estimates due to the delay in product introduction by the Company and a delayed design win at one major OEM. Since revenue for this product was only recognized in the fourth quarter of 1998, management is unable to predict the long-term effect of this one-month delay. Subsequent to the Company's acquisition of AGI, the developer of the chip used on the AccelGMX also acquired a board company, Dynamic Pictures, and entered the graphics accelerator market in direct competition with the AccelGMX. As a result, the AccelGMX has performed below revenue estimates. Amortization of Goodwill and Other Intangible Assets Amortization of goodwill and other intangible assets increased $4.7 million ($4.8 million in 1998 compared to $29,000 in 1997). The increase in these expenses is due to the amortization of goodwill and other intangible assets related to the acquisitions of AGI and SRI during the second quarter of 1998. The goodwill is being amortized using the straight-line method over an estimated useful life of seven years. The other intangible assets are being amortized using the straight-line method over estimated useful lives ranging from six months to seven years. Amortization of goodwill and other intangible assets is estimated to be $2.9 million and $2.3 million in fiscal years 1999 and 2000, respectively. Other Income (Expense), Net Other income (expense), net was $2.1 million of income in 1998 and $7.6 million of expense in 1997. Interest income was $2.7 million and $3.2 million in 1998 and 1997, respectively. The decrease in interest income is primarily due to the decrease in the average cash and cash equivalents and short-term investments balances in 1998 as compared to 1997. During 1998, the Company recognized a gain of $2.5 million as a result of the sale of its investment in Sense8 Corporation. The Company recognized a loss due to the write down of its investment securities of $1.1 million and $9.6 million in 1998 and 1997, respectively. These write downs were necessary as management believed that the decline in market value of these investments below cost were other than temporary. During 1998 the Company liquidated one of its investment securities that it had written down to zero in 1997 and recognized no gain or loss. Income Taxes The effective tax rate, excluding the write-off acquired in-process technology, was 30.7% and 25.7% of pre-tax earnings in 1998 and 1997, respectively. The Company expects the effective income tax rate in 1999 to approximate the rate in 1998. 1997 vs. 1996 Sales In 1997, sales increased 22% ($159.4 million compared to $130.6 million in 1996). Sales for simulation products increased $27.3 million, or 23% ($146.0 million in 1997 compared to $118.8 million in 1996). The increase in sales of simulation products is primarily due to increased sales volumes due to strong demand by U.S. government customers and commercial airline customers. Sales of workstation products increased $5.8 million ($5.8 million in 1997 compared to none in 1996). The increase in sales of workstation products is due to commencement of this business in 1997. During 1997, revenues related to workstation products were derived primarily from royalties based on the sale of chip sets by a third party to graphics subsystem manufacturers. Sales of application products increased $0.5 million, or 7% ($7.5 million in 1997 compared to $7.0 million in 1996). The increase in sales of application products is primarily due to the introduction of virtual studio systems partially offset by a decrease in sales volumes of digital theater products. Gross Margin Gross margin decreased to 47.2% in 1997 from 49.5% in 1996. The decrease in gross margin is primarily due to the increased sales volumes related to contracts in which the Company functions as the prime contractor and increased competition. Contracts in which the Company functions as the prime contractor include costs related to work performed by subcontractors which have significantly lower gross margins than work performed by the Company. Selling, General and Administrative Selling, general, and administrative expenses increased $4.0 million, or 13% ($35.3 million in 1997 compared to $31.3 million in 1996), but decreased as a percent of sales (22.2% in 1997 compared to 24.0% in 1996). The increase in these expenses in 1997 is due primarily to increased selling and marketing costs related to tradeshow activity and additional selling and administrative expenses related to the operation of the new businesses. Research and Development Research and development expenses increased $3.7 million, or 17% ($25.5 million in 1997 compared to $21.8 million in 1996), but decreased as a percent of sales (16.0% in 1997 compared to 16.7% in 1996). The increase in these expenses in 1997 is due primarily to increased activity related to the introduction of several new products, and additional expenses related to the new businesses. Other Income (Expense), Net Other income (expense), net, was $7.6 million of expense in 1997 and $4.5 million of income in 1996. This change was due primarily to a write-down of the Company's investments in certain investment securities of $9.6 million during 1997. There were no gains from sales of investment securities in 1997 compared to a $1.9 million gain in 1996. In addition, interest income decreased $0.7 million, or 17% ($3.2 million in 1997 compared to $3.9 million in 1996) due to the decrease in the average cash and cash equivalents and short-term investments balances in 1997 as compared to 1996. Income Taxes Provision for income taxes was 25.7% and 35.4% of pre-tax earnings for 1997 and 1996, respectively. LIQUIDITY AND CAPITAL RESOURCES At December 31, 1998, the Company had working capital of $134.4 million, including cash, cash equivalents and short-term investments of $27.7 million, compared to working capital of $129.0 million at December 31, 1997, including cash, cash equivalents and short-term investments of $57.1 million. During 1998, the Company used $20.8 million of cash in its operating activities and generated $2.1 million and $12.2 million of cash from its investing and financing activities, respectively. The primary uses of cash from its operating activities included a net loss of $16.0 million, an increase in inventories of $28.9 million and an increase in net costs and estimated earnings in excess of billings on uncompleted contracts of $6.1 million. These primary uses of cash were partially offset by $15.9 million of depreciation and amortization expense and write-off of acquired in-process technology of $20.8 million. The increase in inventories is attributed to the Company's transition to new products that required the need to carry inventories of old and new products simultaneously and the Company's initial transition efforts to outsource certain aspects of its manufacturing assemblies which resulted in temporary duplications of certain inventories. The increases in accounts receivable and costs and estimated earnings in excess of billings on uncompleted contracts was due to the Company's overall revenue growth in addition to the timing of revenue and billing milestones. The Company's investing activities during 1998 included capital expenditures of $18.5 million and payments for the acquisition of AGI and SRI of $7.6 million, net of cash acquired. Proceeds from the sale of short-term investments totaled $47.7 million in 1998 while purchases of short-term investments used $22.2 million in funds. In July 1998, the Company obtained approximately $24.0 million, less transaction costs of approximately $0.5 million, of financing through the sale of 901,408 shares of the Company's Class B-1 Preferred Stock, no par value, and issued warrants to purchase 378,462 additional shares of the Company's Class B-1 Preferred Stock at an exercise price of $33.28125 per share to Intel. In the event of a default, Intel has the right to sell to the Company any or all of the shares associated with the preferred stock. The preferred shares have certain liquidation and conversion rights, in addition to other rights and preferences. Additional financing activities included proceeds from the issuance of common stock relating to the exercise of stock options of $2.0 million and borrowings under line of credit agreements of $5.0 million. In addition, the Company used $15.7 million for the repurchases of common stock and $2.7 million for repayments under line of credit agreements. In November 1998, the Company entered into a revolving line of credit agreement with U.S. Bank National Association. The revolving line of credit provides for borrowings by the Company of up to $20.0 million. Borrowings bear interest at the prevailing prime rate minus 1.0% or the LIBOR rate plus 1.0%. The revolving line of credit expires on November 10, 1999. The revolving line of credit, among other things, (i) requires the Company to maintain certain financial ratios; (ii) restricts the Company's ability to incur debt or liens; sell, assign, pledge or lease assets; merge with another company; and (iii) restricts the payment of dividends and repurchase of any of the Company's outstanding shares without prior consent of the lender. The revolving line of credit is unsecured. There were no borrowings under this agreement outstanding as of March 31, 1999. In addition, the Company has a $7.5 million unsecured line for letters of credit with U.S. Bank National Association for which there were approximately $6.6 million outstanding at December 31, 1998. At December 31, 1998, the Company had revolving line of credit agreements with foreign banks totaling approximately $7.1 million, of which approximately $2.8 million was unused and available. At December 31, 1998, the Company had approximately $18.0 million of 6% Convertible Subordinated Debentures due in 2012 (the "6% Debentures"). The 6% Debentures are unsecured and are convertible at each bondholder's option into shares of the Company's common stock at a conversion price of $42.10 or 428,000 shares of the Company's common stock subject to adjustment. The 6% Debentures are redeemable at the Company's option, in whole or in part, at par. On February 18, 1998, the Company's Board of Directors authorized the repurchase of up to 600,000 shares of the Company's common stock, including the 327,000 shares still available from the repurchase authorization approved by the Board of Directors on November 11, 1996. On September 8, 1998, the Company's Board of Directors authorized the repurchase of an additional 1,000,000 shares of the Company's common stock. Subsequent to February 18, 1998, the Company has repurchased 784,000 shares of its common stock; thus, 816,000 shares currently remain available for repurchase as of March 31, 1999. Stock may be acquired in the open market or through negotiated transactions. Under the program, repurchases may be made from time to time, depending on market conditions, share price, and other factors. These repurchases are to be used primarily to meet current and near-term requirements for the Company's stock-based benefit plans. Management believes that existing cash, cash equivalents and short-term investment balances, borrowings available under its line of credit agreements and cash from future operations will be sufficient to meet the Company's anticipated working capital needs, routine capital expenditures and current debt service obligations for the next twelve months. The Company's cash, cash equivalents and short-term investments are available for working capital needs, capital expenditures, strategic investments, mergers and acquisitions, stock repurchases and other potential cash needs as they may arise. On a longer-term basis, if future cash from operations and existing line of credit agreements are not sufficient to meet the Company's cash requirements, the Company may be required to renegotiate its existing line of credit agreements or seek additional financing from the issuance of debt or equity securities. There can be no assurances that the Company would be successful in renegotiating its existing line of credit agreements or obtaining additional debt or equity financing. YEAR 2000 ISSUE The Year 2000 issue is the result of potential problems with computer systems or any equipment with computer chips that store the year portion of the date as just two digits (for example, 98 for 1998). Systems using this two-digit approach will not be able to determine whether "00" represents the year 2000 or 1900. The problem, if not corrected, will make those systems fail altogether or, even worse, allow them to generate incorrect calculations causing a disruption of normal operations. The Company has created a company-wide Year 2000 team to identify and resolve Year 2000 issues associated either with the Company's internal systems or the products and services sold by the Company. As part of this effort, the Company is communicating with its main suppliers of technology products and services regarding the Year 2000 status of such products or services. The Company has identified and is testing its main internal systems and expects to complete testing in early 1999. Throughout 1999 the Company expects to complete implementation of any needed Year 2000-related modifications to its information systems. The Company is also currently assessing its internal non-information technology systems, and expects to complete testing and any needed modifications to these systems in early 1999. The Company's total cost relating to these activities has not been and is not expected to be material to the Company's financial position, results of operations, or cash flows. The Company believes that necessary modifications will be made on a timely basis. However, there can be no assurance that there will not be a delay in, or increased costs associated with, the implementation of such modifications, or that the Company's suppliers will adequately prepare for the Year 2000 issue. It is possible that any such delays, increased costs, or supplier failures could have a material adverse impact on the Company's operations and financial results, by, for example, impacting the Company's ability to deliver products or services to its customers. The Company expects in mid-1999 to finalize its assessment of and contingency planning for potential operational or performance problems related to Year 2000 issues with its information systems. The Company's Year 2000 effort has included testing products currently or recently on the Company's price list for Year 2000 issues. Generally, for products that were identified as needing updates to address Year 2000 issues, the Company has prepared or is preparing updates, or has removed or is removing the product from its price list. Some of the Company's customers are using product versions that the Company will not support for Year 2000 issues; the Company is encouraging these customers to migrate to current product versions that are Year 2000 ready. For third party products which the Company distributes with its products, the Company has sought information from the product manufacturers regarding the products' Year 2000 readiness status. Customers who use the third-party products are directed to the product manufacturer for detailed Year 2000 status information. On its Year 2000 web site at www.es.com/investor/y2k_corp.html, the Company provides information regarding which of its products are Year 2000 ready and other general information related to the Company's Year 2000 efforts. The Company's total costs relating to these activities has not been and is not expected to be material to the Company's financial position or results of operations. Additionally, there can be no guarantee that one or more of the Company's current products do not contain Year 2000 date issues that may result in material costs to the Company. EFFECTS OF INFLATION The effects of inflation were not considered material during fiscal years 1998, 1997 and 1996, and are not expected to be material for fiscal year 1999. OUTLOOK Looking forward, the Company expects revenue to continue to grow in 1999 as it has during the previous three fiscal years. One good predictor of future revenue in the Company's simulation business is its backlog amount. As of December 31, 1998 the Company's orders backlog was $155.7 million. Products within the Workstation Products and Applications Groups have much shorter lead times between order and delivery, therefore the backlog amount is much less useful as a predictor for these businesses. The Company's main challenges result from managing the introduction of new products into its existing business lines and developing new products into markets where the Company is a relatively recent entrant. The Company believes it will be successful if it can make these product introductions on schedule, while keeping costs down and avoiding being beaten to the market by competitors. As 1999 began, the Company was in the process of ramping up production of its Harmony image generator, finishing the installation its first StarRider interactive planetarium system, developing several new graphic subsystems for use in personal workstations as well as developing other new hardware and software start-up businesses. The Company is investing considerable resources in capital equipment, human resources and other research and development expenses to develop these new products. The near-term success of the Company is dependent in large part in the successful execution of these programs. The foregoing contains forward-looking statements that involve risks and uncertainties, including but not limited to quarterly fluctuations in results, the timely availability and customer acceptance of new products, the impact of competitive products and pricing, general market trends and conditions, and other risks detailed below in "Factors That May Affect Future Results". Actual results may vary materially from projected results. FACTORS THAT MAY AFFECT FUTURE RESULTS Evans & Sutherland's domestic and international businesses operate in highly competitive markets that involve a number of risks, some of which are beyond the Company's control. While E&S management is optimistic about the Company's long-term prospects, the following discussion highlights some risks and uncertainties that should be considered in evaluating its growth outlook. See "Forward-Looking Statements and Risks" in Part I of this annual report. E&S's Business May Suffer if its Competitive Strategy is Not Successful Our continued success depends on our ability to compete in an industry that is highly competitive, with rapid technological advances and constantly improving products in both price and performance. As most market areas in which we operate continue to grow, we are experiencing increased competition, and we expect this trend to continue. In recent years, we have been forced to adapt to domestic and worldwide political, economic, and technological developments that have strongly affected our markets. Under our current competitive strategy, we endeavor to remain competitive by growing existing businesses, developing new businesses internally, selectively acquiring businesses, increasing efficiency, improving access to new markets, and reducing costs. Although our executive management team and Board of Directors continue to review and monitor our strategic plans, we have no assurance that we will be able to continue to follow our current strategy or that this strategy will be successful. E&S's Stock Price May be Adversely Impacted if its Revenues or Earnings Fail to Meet Expectations Our stock price is subject to significant volatility and will likely be adversely affected if revenues or earnings in any quarter fail to meet the investment community's expectations. Our revenues and earnings may fail to meet expectations because they fluctuate and are difficult to predict. Our earnings during 1997 and 1998 fluctuated significantly from quarter to quarter. One of the reasons we experience such fluctuations is that the largest share of our revenues and earnings is from our core simulation-related business, which typically has long delivery cycles and contract lengths. The timing of customer acceptance of certain large-scale commercial or government contracts may affect the timing and amount of revenue that can be recognized; thus, causing our periodic operating results to fluctuate. Our results may further fluctuate if United States and international governments delay or even cancel production on large-scale contracts due to lack of available funding. Our earnings may not meet either investor or internal expectations because our budgeted operating expenses are relatively fixed in the short term and even a small revenue shortfall may cause a period's results to be below expectations. Such a revenue shortfall could arise from any number of factors, including: o delays in the availability of products, o delays from chip suppliers, o discontinuance of key components from suppliers, o other supply constraints, o transit interruptions, o overall economic conditions, and customer demand. Another reason our earnings may not meet expectations is that our gross margins are heavily influenced by mix considerations. These mix considerations include the mix of lower-margin prime contracts versus sub-contracts, the mix of new products and markets versus established products and markets, the mix of high-end products versus low-end products, as well as the mix of configurations within these product categories. Future margins may not duplicate historical margins or growth rates. E&S's Significant Investment in Research and Development May Not Payoff We have no assurance that our significant investment in research and development will generate future revenues or benefits. We currently make and plan to continue to make a significant investment in research and development. Total spending for research and development was $31.8 million or 16.6% of sales in 1998 as compared to $25.5 million or 16.0% of sales in 1997. This investment is necessary for us to be able to compete in the graphics simulation industry. Developing new products and software is expensive and often involves a long payback cycle. While we have every reason to believe these investments will be rewarded with revenue-generating products, customer acceptance ultimately dictates the success of development and marketing efforts. E&S May Not Continue to be Successful if it is Unable to Develop, Produce and Transition New Products Our continued success depends on our ability to develop, produce and transition technologically complex and innovative products that meet customer needs. We have no assurance that we will be able to successfully continue such development, production and transition. The development of new technologies and products is increasingly complex and expensive, which among other risks, increases the risk of product introduction delays. The introduction of a new product requires close collaboration and continued technological advancement involving multiple hardware and software design and manufacturing teams within E&S as well as teams at outside suppliers of key components. The failure of any one of these elements could cause our new products to fail to meet specifications or to miss the aggressive timetables that we establish and the market demands. As the variety and complexity of our product families increase, the process of planning and managing production, inventory levels, and delivery schedules also becomes increasingly complex. There is no assurance that acceptance of and demand for our new products will not be affected by delays in this process. Additionally, if we are unable to meet our delivery schedules, we may be subject to the penalties, including liquidated damages, that are included in some of our customer contracts. Product transitions are a recurring part of our business. Our short product life cycles require our ability to successfully manage the timely transition from current products to new products. In fact, it is not unusual for us to announce a new product while its predecessor is still in the final stages of its development. Our transition results could be adversely affected by such factors as: o development delays, o late release of products to manufacturing, o quality or yield problems experienced by production or suppliers, o variations in product costs, o excess inventories of older products and components, and o delays in customer purchases of existing products in anticipation of the introduction of new products. E&S May Not Maintain a Significant Portion of its Sales if it Fails to Maintain its United States Government Contracts In 1998, 37% of our sales were to agencies of the United States government, either directly or through prime contractors or subcontractors, for which there is intense competition. Accordingly, we have no assurance that we will be able to maintain a significant portion of our sales. These sales are subject to the inherent risks related to government contracts, including uncertainty of economic conditions, changes in government policies and requirements that may reflect rapidly changing military and political developments, and unavailability of funds. These risks also include technological uncertainties and obsolescence, and dependence on annual Congressional appropriation and allotment of funds. In the past, some of our programs have been delayed, curtailed, or terminated. Although we cannot predict such uncertainties, in our opinion there are no spending reductions or funding limitations pending that would impact our contracts. Other characteristics of the government contract market that may affect our operating results include the complexity of designs, the difficulty of forecasting costs and schedules when bidding on developmental and highly sophisticated technical work, and the speed with which product lines become obsolete due to technological advances and other factors characteristic of the market. Our earnings may vary materially on some contracts depending upon the types of government long-term contracts undertaken, the costs incurred in their performance, and the achievement of other performance objectives. Furthermore, due to the intense competition for available United States government business, maintaining or expanding government business increasingly requires us to commit additional working capital for long-term programs and additional investments in company-funded research and development. Our dependence on government contracts may lead to other perils as well because as a United States government contractor or sub-contractor, our contracts and operations are subject to government oversight. The government may investigate and make inquiries of our business practices and conduct audits of our contract performance and cost accounting. These investigations may lead to claims against E&S. Under United States government procurement regulations and practices, an indictment of a government contractor could result in that contractor being fined and/or suspended for a period of time from eligibility for bidding on, or for award of, new government contracts; a conviction could result in debarment for a specified period of time. E&S's Revenues May Suffer if it Loses Certain Significant Customers We currently derive a significant portion of our revenues from a limited number of non U.S. government customers. The loss of any one or more of these customers could have a material adverse effect on our business, financial condition and results of operations. In 1998 we were dependent on three of our customers for approximately 27% of our consolidated revenues. In 1997 we were dependent on three of our customers for approximately 26% of our consolidated revenues. We expect that sales to a limited number of customers will continue to account for a substantial portion of our revenues in the foreseeable future. We have no assurance that revenues from this limited number of customers will continue to reach or exceed historical levels in the future. We do not have supply contracts with any of our significant customers. E&S's Revenues Will Decrease if it Fails to Maintain its International Business Any reduction of our international business could significantly affect our revenues. Our international business accounted for 44% of our 1998 sales. We expect that international sales will continue to be a significant portion of our overall business in the foreseeable future. Our international business experiences many of the same risks our domestic business encounters as well as additional risks such as exposure to currency fluctuations and changes in foreign economic and political environments. Despite our exposure to currency fluctuations, we are not engaged in any hedging activities to offset the risk of exchange rate fluctuations. The recent economic crisis affecting the Asian markets is an example of a change in a foreign economic environment that could affect our international business. Any similar economic downturns may also decrease the number of orders we receive and our receivable collections. Our international transactions frequently involve increased financial and legal risks arising from stringent contractual terms and conditions and widely differing legal systems, customs, and standards in foreign countries. In addition, our international sales often include sales to various foreign government armed forces, with many of the same inherent risks associated with United States government sales identified above. If E&S's Commercial Simulation Business Fails, E&S's Revenues will Decrease We have no assurance that our commercial simulation (airline) business will continue to succeed. Our commercial simulation business currently accounts for approximately 15% to 20% of our revenues. This business is subject to many of the risks related to the commercial simulation market that may adversely affect our business. The following risks are characteristic of the commercial simulation market: o uncertainty of economic conditions, o dependence upon the strength of the commercial airline industry, o air pilot training requirements, o competition, o changes in technology, and o timely performance by subcontractors on contracts in which E&S is the prime contractor. E&S May Not Meet its Revenue Projections if its New Businesses Fail We have no assurance that our new businesses will gain market acceptance or survive the intense competitive pressures of their respective markets. Our new businesses currently account for approximately 12% to 15% of our revenues in the aggregate; however, we project these businesses to grow to approximately 25% to 30% of revenues for 1999. These businesses will not survive and we will not meet our revenue projections if we are unable to: o develop strong partner relationships with manufacturers of computer chips and personal computers in our workstation products group, o gain market acceptance of new technology and increase market size and demand in a developing new market in our digital theater business, and o gain market acceptance in a developing new market in our digital video business. Other factors that may also affect the success of our new businesses include technological uncertainties and obsolescence, uncertainty of economic conditions, unavailability of working capital, and other risks inherent in new businesses. E&S's Operations Will be Significantly Impaired if it Fails to be Year 2000 Compliant We have no assurance that all of our internal systems, products and services, and suppliers will be Year 2000 compliant and that the lack of compliance will not significantly impact our operations and financial results including our ability to continue as a going concern. The Year 2000 issue is the result of potential problems with computer systems or any equipment with computer chips that store the year portion of the date as just two digits (e.g. 98 for 1998). Systems using this two-digit approach will not be able to determine whether "00" represents the year 2000 or 1900. The problem, if not corrected, will make those systems fail altogether or, even worse, allow them to generate incorrect calculations causing a disruption of normal operations. Although we have created a company-wide Year 2000 team to identify and resolve Year 2000 issues associated with our information and non-information technology systems and our products and services, we have no assurance that we will address all potential problems. There can be no assurance that there will not be a delay in, or increased costs associated with, the implementation of Year 2000 modifications, or that our suppliers will adequately prepare for the Year 2000 issue. It is possible that any such delays, increased costs, or supplier failures could have a material adverse impact on our operations and financial results, by, for example, impacting our ability to deliver products or services to our customers. In mid-1999 we expect to finalize a contingency plan to cope with potential Year 2000 problems. For third-party products that we distribute with our products, we have sought information from the product manufacturers regarding the products' Year 2000 readiness status. We direct customers who use the third-party products to the product manufacturer for detailed Year 2000 status information. On our Year 2000 web site at www.es.com/investor/y2k_corp.html, we provide information regarding which of our products is Year 2000 ready and other general information related to our Year 2000 efforts. We have no assurance that the third-party products will be Year 2000 ready or that a lack of readiness by such third parties will not materially adversely impact our operations and financial results. E&S's Shareholders May Not Realize Certain Opportunities Because of the Anti-Takeover Effect of State Law We are subject to the Utah Control Shares Acquisition Act which provides that any person who acquires 20% or more of the outstanding voting shares of a publicly held Utah corporation will not have voting rights with respect to the acquired shares unless a majority of the disinterested shareholders of the corporation votes to grant such rights. This could deprive shareholders of opportunities to realize takeover premiums for their shares or other advantages that large accumulations of stock would provide because anyone interested in acquiring E&S could only do so with the cooperation of the board. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The principal market risks to which the Company is exposed are changes in foreign currency exchange rates and changes in interest rates. The Company's international sales, which accounted for 44% of the Company's total sales in 1998 are concentrated in the United Kingdom, continental Europe and Asia. The Company manages its exposure to changes in foreign currency exchange rates by entering into most of its sales and purchase contracts for products and materials in U.S. dollars. Occasionally, the Company enters into sales and purchase contracts for products and materials denominated in currencies other than U.S. dollars and in those cases the Company enters into foreign exchange forward sales or purchase contracts to offset those exposures. Foreign currency purchase and sale contracts are entered into for periods consistent with related underlying exposures and do not constitute positions independent of those exposures. The Company does not enter into contracts for trading purposes and does not use leveraged contracts. As of December 31, 1998, the Company had no material sales or purchase contracts in currencies other than U.S. dollars and had no foreign currency sales or purchase contracts. The Company reduces its exposure to changes in interest rates by maintaining a high proportion of its debt in fixed-rate instruments. As of December 31, 1998, 81% of the Company's total debt was in fixed-rate instruments; however, the Company has a revolving line of credit that provides for borrowings by the Company of up to $20.0 million. The borrowings bear interest at a variable rate at the prevailing prime rate minus 1.0% or the LIBOR rate plus 1.0%. If the Company were to borrow all of the $20.0 million of the revolving line of credit and the $7.1 million of foreign lines of credit, 40% of the Company's total debt would be in fixed-rate instruments. In addition, the Company maintains an average maturity of its short-term investment portfolio under twelve months to avoid large changes in its market value. As of December 31, 1998, the average maturity of the Company's short-term investments was approximately eleven months. The information below summarizes the Company's market risks associated with debt obligations and short-term investments as of December 31, 1998. Fair values have been determined by quoted market prices. For debt obligations, the table below presents the principal cash flows and related interest rates at year end by fiscal year of maturity. Bank borrowings bear variable rates of interest and the convertible subordinated debentures bear a fixed rate of interest. For short-term investments, the interest rate disclosed presents the weighted average rate of the portfolio at year end. The information below should be read in conjunction with notes 3, 11 and 12 of Notes to the Consolidated Financial Statements in Part II of this annual report.
Rate 1999 2000 2001 2002 2003 There- Total Fair after Value --------- -------- --------- ------ ------ ------ --------- --------- --------- Debt Bank borrowings in Deutsche Marks 6.9% $ 4,195 - - - - - $ 4,195 $ 4,195 Other Various 103 - - - - - 103 103 -------- --------- ------ ------ ------ --------- --------- --------- Total Notes Payable $ 4,298 - - - - - $ 4,298 $ 4,298 ======== ========= ====== ====== ====== ========= ========= ========= Convertible subordinated debentures 6.0% - - - - - $ 18,015 $18,015 $ 16,214 Other Various - - - - - 47 47 47 -------- --------- ------ ------ ------ --------- --------- --------- Total long-term debt - - - - - $ 18,062 $ 18,062 $ 16,261 ======== ========= ====== ====== ====== ========= ========= ========= Short-term Investments 5.9% $15,216 $ 10,691 - - - - $ 25,907 $ 25,907 ======== ========= ====== ====== ====== ========= ========= =========
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The following constitutes a list of Financial Statements included in Part II of this report: Report of Management Report of Independent Accountants Consolidated Balance Sheets as of December 31, 1998 and December 31, 1997. Consolidated Statements of Operations for the years ended December 31, 1998, December 31, 1997, and December 27, 1996. Consolidated Statements of Comprehensive Income for the years ended December 31, 1998, December 31, 1997 and December 27, 1996. Consolidated Statements of Stockholders' Equity for the years ended December 31, 1998, December 31, 1997, and December 27, 1996. Consolidated Statements of Cash Flows for the years ended December 31, 1998, December 31, 1997, and December 27, 1996. Notes to Consolidated Financial Statements. The following consists of a list of Financial Statement Schedules included in Part IV of this report: Schedule II - Valuation and Qualifying Accounts for the years ended December 31, 1998, December 31, 1997, and December 27, 1996. Schedules other than those listed above are omitted because of the absence of conditions under which they are required or because the required information is presented in the Financial Statements or notes thereto. REPORT OF MANAGEMENT Responsibility for the integrity and objectivity of the financial information presented in this report rests with the management of Evans & Sutherland. The accompanying financial statements have been prepared in conformity with generally accepted accounting principles applied on a consistent basis and, where necessary, include estimates based on management judgment. Management also prepared other information in this report and is responsible for its accuracy and consistency with the financial statements. Evans & Sutherland has established and maintains an effective system of internal accounting controls. The Company believes this system provides reasonable assurance that transactions are executed in accordance with management authorization in order to permit the financial statements to be prepared with integrity and reliability and to safeguard, verify, and maintain accountability of assets. In addition, Evans & Sutherland's business ethics policy requires employees to maintain the highest level of ethical standards in the conduct of the Company's business. Evans & Sutherland's financial statements have been audited by KPMG LLP, independent public accountants. Management has made available all the Company's financial records and related data to allow KPMG LLP to express an informed professional opinion in their accompanying report. The Audit Committee of the Board of Directors is composed of the Chairman of the Board and all outside directors and meets regularly with the independent accountants, as well as with Evans & Sutherland management, to review accounting, auditing, internal accounting control, and financial reporting matters. /s/ James R. Oyler /s/ John T. Lemley James R. Oyler John T. Lemley President and Vice President and Chief Executive Officer Chief Financial Officer REPORT OF INDEPENDENT ACCOUNTANTS The Board of Directors and Stockholders Evans & Sutherland Computer Corporation: We have audited the consolidated financial statements of Evans & Sutherland Computer Corporation and subsidiaries as listed in the accompanying index. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedule as listed in the accompanying index. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Evans & Sutherland Computer Corporation and subsidiaries as of December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1998, in conformity with generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. KPMG LLP February 12, 1999 Salt Lake City, Utah EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands, except share amounts)
December 31, ------------------------------- 1998 1997 ------------- -------------- Assets: Cash and cash equivalents $ 1,834 $ 8,176 Short-term investments 25,907 48,928 Accounts receivable, less allowances for doubtful receivables of $1,616 in 1998 and $851 in 1997 46,866 36,066 Inventories 53,319 26,885 Costs and estimated earnings in excess of billings on uncompleted contracts 58,682 51,799 Deferred income taxes 9,450 4,224 Prepaid expenses and deposits 7,278 3,620 ---------- ----------- Total current assets 203,336 179,698 Property, plant and equipment, net 53,693 44,368 Investment securities 3,380 5,000 Deferred income taxes 2,487 3,802 Goodwill and other intangible assets, net 11,351 101 Other assets 1,421 1,421 ---------- ----------- Total assets $275,668 $234,390 ========== =========== Liabilities and stockholders' equity: Line of credit agreements $ 4,298 $ 950 Accounts payable 24,667 14,353 Accrued expenses 27,147 18,061 Customer deposits 3,339 6,574 Income taxes payable 2,436 4,462 Billings in excess of costs and estimated earnings on uncompleted contracts 7,092 6,341 ---------- ----------- Total current liabilities 68,979 50,741 ---------- ----------- Long-term debt 18,062 18,015 ---------- ----------- Commitments and contingencies (notes 7, 10 and 15) Redeemable preferred stock, class B-1, no par value; authorized 1,500,000 shares; issued and outstanding 901,408 shares at December 31, 1998 and no shares at December 31, 1997 23,544 - ---------- ----------- Stockholders' equity: Preferred stock, no par value; authorized 8,500,000 shares; - - no shares issued and outstanding Common stock, $.20 par value; authorized 30,000,000 shares; issued and outstanding 9,597,660 shares in 1998 and 9,066,743 shares in 1997 1,920 1,813 Additional paid-in capital 23,420 8,025 Retained earnings 139,498 155,576 Accumulated other comprehensive income 245 220 ---------- ----------- Total stockholders' equity 165,083 165,634 ---------- ----------- Total liabilities and stockholders' equity $275,668 $234,390 ========== ===========
See accompanying notes to consolidated financial statements EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share amounts)
Year ended --------------------------------------- Dec. 31, Dec. 31, Dec. 27, 1998 1997 1996 ------------- ------------ ------------ Net sales $ 191,766 $ 159,353 $ 130,564 Cost of sales 110,320 84,139 65,935 ------------- ------------ ------------ Gross profit 81,446 75,214 64,629 ------------- ------------ ------------ Expenses: Selling, general and administrative 40,088 35,304 31,328 Research and development 31,797 25,492 21,753 Write-off of acquired in-process technology 20,780 - - Amortization of goodwill and other intangible assets 4,767 29 29 ------------- ------------ ------------ 97,432 60,825 53,110 ------------- ------------ ------------ Operating earnings (loss) (15,986) 14,389 11,519 ------------- ------------ ------------ Other income (expense): Interest income 2,659 3,239 3,892 Interest expense (1,335) (1,300) (1,434) Loss on write down of investment securities (1,075) (9,575) - Gain on sale of investment securities 2,493 - 1,868 Other (613) 85 184 ------------- ------------ ----------- 2,129 (7,551) 4,510 ------------- ------------ ------------ Earnings (loss) before income taxes (13,857) 6,838 16,029 Income tax expense 2,126 1,758 5,677 ------------- ------------ ------------ Net earnings (loss) (15,983) 5,080 10,352 Accretion of preferred stock 95 - - ------------- ------------ ------------ Net earnings (loss) applicable to common stock $ (16,078) $ 5,080 $ 10,352 ============= ============ ============ Earnings (loss) per common share: Basic $ (1.70) $ 0.56 $ 1.16 ============= ============ ============ Diluted $ (1.70) $ 0.53 $ 1.12 ============= ============ ============
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (In thousands)
Year ended ------------------------------------------ Dec. 31, Dec. 31, Dec. 27, 1998 1997 1996 ------------- ------------- ------------ Net earnings (loss) $ (15,983) $ 5,080 $ 10,352 Other comprehensive income (loss): Foreign currency translation adjustments 126 297 289 Unrealized gains (losses) on securities (89) 1,505 (3,460) Reclassification adjustment for losses included in net earnings (loss) - (868) - ------------- ------------- ------------ Other comprehensive income (loss) before income taxes 37 934 (3,171) Income tax expense (benefit) related to items of other comprehensive income (loss) 12 240 (1,123) ------------- ------------- ------------ Other comprehensive income (loss), net of income taxes 25 694 (2,048) ------------- ------------- ------------ Comprehensive income (loss) $ (15,958) $ 5,774 $ 8,304 ============= ============= ============
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (In thousands, except share amounts)
Accumulated Additional Other Common Stock Paid-In Retained Comprehensive ----------------------- Shares Amount Capital Earnings Income Total ------------ --------- ----------- ----------- ---------------- ------------ Balance at December 25, 1995 8,715 $ 1,743 $ 5,112 $ 140,062 $ 1,574 $ 148,491 Issuance of common stock for cash 196 39 2,746 - - 2,785 Common stock issued in connection with acquisitions 149 30 51 82 - 163 Common stock repurchased and retired (3) (1) (51) - - (52) Compensation expense on employee stock purchase plan - - 90 - - 90 Tax benefit from issuance of common stock to employees - - 691 - - 691 Other comprehensive loss - - - - (2,048) (2,048) Net earnings - - - 10,352 - 10,352 ------------ --------- ----------- ----------- ---------------- ------------ Balance at December 27, 1996 9,057 1,811 8,639 150,496 (474) 160,472 ------------ --------- ----------- ----------- ---------------- ------------ Issuance of common stock for cash 183 37 3,104 - - 3,141 Common stock repurchased and retired (173) (35) (4,590) - - (4,625) Compensation expense on employee stock purchase plan - - 102 - - 102 Tax benefit from issuance of common stock to employees - - 770 - - 770 Other comprehensive income - - - - 694 694 Net earnings - - - 5,080 - 5,080 ------------ --------- ----------- ----------- ---------------- ------------ Balance at December 31, 1997 9,067 1,813 8,025 155,576 220 165,634 ------------ --------- ----------- ----------- ---------------- ------------ Issuance of common stock for cash 156 32 1,990 - - 2,022 Common stock issued in connection with acquisitions 1,109 222 28,373 - - 28,595 Common stock repurchased and retired (734) (147) (15,538) - - (15,685) Compensation expense on employee stock purchase plan - - 186 - - 186 Tax benefit from issuance of common stock to employees - - 384 - - 384 Other comprehensive income - - - - 25 25 Net loss - - - (15,983) - (15,983) Accretion of preferred stock - - - (95) - (95) ------------ --------- ----------- ----------- ---------------- ------------ Balance at December 31, 1998 9,598 $ 1,920 $ 23,420 $ 139,498 245 $ 165,083 ============ ========= =========== =========== ================ ============
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
Year ended ----------------------------------------------- Dec. 31, Dec. 31, Dec. 27, 1998 1997 1996 ------------- ------------- ------------- Cash flows from operating activities: Net earnings (loss) $ (15,983) $ 5,080 $ 10,352 Adjustments to reconcile net earnings (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 15,934 10,041 9,120 Provision for losses on accounts receivable 496 370 335 Provision for write down of inventories 1,987 1,009 1,077 Provision for warranty expense 872 726 673 Deferred income taxes (2,919) (3,299) 1,283 Loss on write down of investment securities 1,075 9,575 - Gain on sale of investment securities (2,493) - (1,868) Write-off of acquired in-process technology 20,780 - - Other, net 868 169 159 Changes in assets and liabilities net of effects of purchase/sale of business: Accounts receivable (3,613) (2,935) (7,406) Inventories (28,867) (8,641) (4,705) Costs and estimated earnings in excess of billings on uncompleted contracts, net (6,110) (15,060) (19,036) Prepaid expenses and deposits (3,533) (1,430) (745) Accounts payable 5,699 8,071 3,502 Accrued expenses (266) 1,161 288 Customer deposits (3,235) 4,496 (3,489) Income taxes (1,473) 4,958 (10,461) ---------- ---------- ---------- Net cash provided by (used in) operating activities (20,781) 14,291 (20,921) ---------- ---------- ---------- Cash flows from investing activities: Purchases of short-term investments (22,217) (80,443) (57,354) Proceeds from sale of short-term investments 47,691 77,858 97,262 Purchases of investment securities (541) (4,208) (1,447) Proceeds from sale of investment securities 3,304 - 1,886 Purchases of property, plant and equipment (18,516) (10,804) (10,521) Increase in other assets - - (1,463) Payments for business acquisitions, net of cash acquired (7,603) - - ---------- ---------- ---------- Net cash provided by (used in) investing activities 2,118 (17,597) 28,363 ---------- ---------- ---------- Cash flows from financing activities: Borrowings under line of credit agreements 3,915 - 1,940 Payments under line of credit agreements (1,575) (3,827) (36) Net proceeds from issuance of common stock 2,022 3,141 2,785 Net proceeds from issuance of preferred stock 23,544 - - Payments for repurchases of common stock (15,685) (4,625) - ---------- ---------- ---------- Net cash provided by (used in) financing activities 12,221 (5,311) 4,689 ---------- ---------- ---------- Effect of foreign exchange rate on cash and cash equivalents 100 272 (633) ---------- ---------- ---------- Net change in cash and cash equivalents (6,342) (8,345) 11,498 Cash and cash equivalents at beginning of year 8,176 16,521 5,023 ---------- ---------- ---------- Cash and cash equivalents at end of year $ 1,834 $ 8,176 $ 16,521 ========== ========== ========== Supplemental Disclosures of Cash Flow Information Cash paid during the year for: Interest $ 1,309 $ 1,351 $ 1,385 Income taxes 7,130 1,915 14,736 Accretion of preferred stock 95 - -
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998, December 31, 1997, and December 27, 1996 (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Description of Business Evans & Sutherland Computer Corporation ("E&S" or the "Company") is an established high-technology company with outstanding computer graphics technology and a worldwide presence in high-performance 3D visual simulation. In addition, E&S is now applying this core technology into higher-growth personal computer ("PC") products for both simulation and workstations. The Company's core computer graphics technology is used to produce high performance image generators for simulation including PC-based visual system products, to provide original equipment manufacturers of personal workstations with high quality graphics performance, and to apply the Company's core technologies to the expanding market of PC-based applications and products. The Company changed its fiscal year end from the last Friday in December to a calendar year end in 1997. The fiscal year ends for the years included in the accompanying consolidated financial statements are the periods ended December 31, 1998, December 31, 1997, and December 27, 1996. Principles of Consolidation The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. Revenue Recognition Net sales include revenue from system and software products, software license rights, and service contracts. In October 1997, the American Institute of Certified Public Accountants ("AICPA") issued Statement of Position ("SOP") 97-2, Software Revenue Recognition, which supersedes SOP 91-1, Software Revenue Recognition. Additionally, in 1998 the AICPA issued SOP 98-9 Modification of SOP 97-2 with Respect to Certain Transactions. Effective January 1, 1998, the Company adopted the provisions of SOP 97-2 as modified by SOP 98-9. Revenue was recognized in accordance with SOP 97-2 in 1998, and SOP 91-1 in prior years. SOP 97-2 generally requires revenue earned on software arrangements involving multiple elements such as software products, enhancements, post-contract customer support, installation and training to be allocated to each element based on the relative fair values of the elements. The fair value of an element must be based on evidence which is specific to the vendor. The revenue allocated to software products is generally recognized upon delivery of the products. The revenue allocated to unspecified upgrades and updates and post contract customer support is generally recognized as the services are performed. The Company recognizes revenues from product sales that do not require significant production, modification, or customization when the following criteria are met: the Company has signed a noncancelable agreement; the Company has shipped the product; there are no uncertainties surrounding product acceptance; the fees are fixed and determinable; and collection is considered probable. Revenue from long-term contracts which require significant production, modification or customization is recorded using the percentage-of-completion method, determined by the units-delivered method, or when there is significant nonrecurring engineering, the ratio of costs incurred to management's estimate of total anticipated costs. If estimated total costs on any contract indicate a loss, the Company provides currently for the total anticipated loss on the contract. Billings on uncompleted long-term contracts may be greater than or less than incurred costs and estimated earnings and are recorded as an asset or liability in the accompanying consolidated balance sheets. Cash and Cash Equivalents The Company considers all highly liquid financial instruments purchased with an original maturity to the Company of 90 days or less to be cash equivalents. Cash equivalents consist of debt securities and money market funds of $1.8 million and $6.9 million as of December 31, 1998 and 1997, respectively. Inventories Raw materials and supplies inventories are stated at the lower of weighted-average cost or market. Work-in-process and finished goods are stated on the basis of accumulated manufacturing costs, but not in excess of market (net realizable value). The Company periodically reviews inventories for obsolescence and provides a reserve that it considers sufficient to cover any impaired inventories. Property, Plant and Equipment Property, plant and equipment are stated at cost. Depreciation and amortization are computed using the straight-line methods based on the estimated useful lives of the related assets. Goodwill and Other Intangible Assets Goodwill and other intangible assets consist primarily of goodwill and other intangible assets recorded in connection with the acquisitions of AccelGraphics, Inc. and Silicon Reality, Inc. on June 26, 1998. The goodwill is being amortized using the straight-line method over seven years. The other intangible assets are being amortized using the straight-line method over six months to seven years. As of December 31, 1998 and 1997, accumulated amortization of goodwill and other intangible assets was $4.9 million and $0.1 million, respectively. The Company assesses whether its goodwill and other intangible assets are impaired based on a periodic evaluation of undiscounted projected cash flows through the remaining amortization period. If an impairment exists, the amount of such impairment is calculated and recorded based on the estimated fair value of the asset. Software Development Costs Software development costs, if material, are capitalized from the date technological feasibility is achieved until the product is available for general release to customers. Such deferrable costs have not been material during the periods presented. Investments The Company classifies its marketable debt and equity securities as available-for-sale. Available-for-sale securities are recorded at fair value. Unrealized holding gains and losses, net of the related tax effect, are excluded from earnings and are reported as a separate component of stockholders' equity until realized. Dividend income is recognized when earned. Realized gains and losses from the sale of securities are included in results of operations and are determined on the specific-identification basis. Nonmarketable investment securities are recorded at the lower of cost or fair value. Some of the factors which are considered in determining the fair value of these securities include analyses of each investee's financial condition and operations, the status of its technology and strategies in place to achieve its objectives. A decline in the market value below cost that is deemed other than temporary is charged to results of operations resulting in the establishment of a new cost basis for both available-for-sale and nonmarketable investment securities. Warranty Reserve The Company provides a warranty reserve for estimated future costs of servicing products under warranty agreements extending for periods from 90 days to one year. Anticipated costs for product warranty are based upon estimates derived from experience factors and are recorded at the time of sale or over the contract period for long-term contracts. Stock-Based Compensation The Company has adopted the footnote disclosure provisions of Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock Based Compensation. SFAS 123 encourages entities to adopt a fair value based method of accounting for stock options or similar equity instruments. However, it also allows an entity to continue measuring compensation cost for stock based compensation using the intrinsic-value method of accounting prescribed by Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees (APB 25). The Company has elected to continue to apply the provisions of APB 25 and provide pro forma footnote disclosures required by SFAS 123. Income Taxes The Company uses the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Foreign Currency Translation The local foreign currency is the functional currency for the Company's foreign subsidiaries. Assets and liabilities of foreign operations are translated to U.S. dollars at the current exchange rates as of the applicable balance sheet date. Revenues and expenses are translated at the average exchange rates prevailing during the period. Adjustments resulting from translation are reported as a separate component of stockholders' equity. Certain transactions of the foreign subsidiaries are denominated in currencies other than the functional currency, including transactions with the parent company. Transaction gains and losses are included in other income (expense) for the period in which the transaction occurs. Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that effect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Concentration of Credit Risk Financial instruments that potentially subject the Company to concentrations of credit risk are primarily cash, cash equivalents, short-term investments, and accounts receivable. The Company's short-term investment portfolio consists of investment-grade securities diversified among security types, industries, and issuers. The Company's investments are managed by recognized financial institutions that follow the Company's investment policy. The Company's policy limits the amount of credit exposure in any one issue, and the Company believes no significant concentration of credit risk exists with respect to these investments. In the normal course of business, the Company provides unsecured credit terms to its customers. Accordingly, the Company performs ongoing credit evaluations of its customers and maintains allowances for possible losses which, when realized, have been within the range of management's expectations. Recent Accounting Pronouncements In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", was issued. The statement requires derivatives to be recorded on the balance sheet as assets or liabilities, measured at fair value. Gains or losses resulting from changes in fair value of the derivatives are recorded depending upon whether the instruments meet the criteria for hedge accounting. The impact of adopting this statement is not anticipated to be material to the financial statements. This statement is effective for fiscal years beginning after June 15, 1999. In March 1998, American Institute of Certified Public Accountants issued Statement of Position ("SOP") No. 98-1, "Software for Internal Use," which provides guidance on accounting for the cost of computer software developed or obtained for internal use. SOP No. 98-1 is effective for fiscal years beginning after December 15, 1998. The Company does not expect that the adoption of SOP No. 98-1 will have a material impact on its consolidated financial statements. Reclassifications Certain reclassifications have been made in the 1997 and 1996 consolidated financial statements to conform to the 1998 presentation. (2) BUSINESS ACQUISITIONS On June 26, 1998, the Company acquired all of the outstanding stock of AccelGraphics, Inc. ("AGI") for approximately $23.7 million in cash and 1,109,303 shares of the Company's common stock which was valued at $25.7 million. In addition, the Company converted all outstanding AGI options into options to purchase approximately 351,000 shares of common stock of the Company with a fair value of $3.4 million and incurred transaction costs of approximately $1.1 million. AGI is based in Milpitas, California, and is a provider of high-performance, cost-effective, three-dimensional graphics subsystem products for the professional Windows NT and Windows 95 markets. The acquisition was accounted for by the purchase method and, accordingly, the results of operations of AGI have been included in the Company's consolidated financial statements from June 26, 1998 forward. Also on June 26, 1998, the Company acquired the assets and assumed certain liabilities of Silicon Reality, Inc. ("SRI") for a purchase price of approximately $1.2 million, including transaction costs of approximately $250,000. SRI is based in Federal Way, Washington, and designs and produces three-dimensional graphics hardware and software products for the personal computer marketplace. This acquisition was accounted for by the purchase method and, accordingly, the results of operations of SRI have been included in the Company's consolidated financial statements from June 26, 1998 forward. A modified income approach was used to allocate a portion of the purchase price to the acquired in-process technology. Under this method, the fair value for the in-process technology in each acquisition was based on analysis of the markets, projected cash flows and risks associated with achieving such projected cash flows. In developing these cash flow projections, revenues were forecasted based on relevant factors, including aggregate revenue growth rates for the business as a whole, individual product revenues, characteristics of the potential market for the products, the anticipated life of the technology under development and the stage of completion of each project. Operating expenses and resulting profit margins were forecasted based on the characteristics and cash flow generating potential of the acquired in-process technology, and included assumptions that certain expenses would decline over time as operating efficiencies were obtained or support requirements decreased. Appropriate adjustments were made to operating income to derive net cash flow, and the estimated net cash flows of the in-process technologies in each acquisition were then discounted to present value using rates of return that the Company believes reflect the specific risk/return characteristics of these research and development projects. The projected revenues used in the income approach are based upon the revenues likely to be generated upon completion of the projects and the beginning of commercial sales, as estimated by management. The projections assume that the product will be successful and that the product's development and commercialization meet management's current time schedule. In determining the operating cash flows related exclusively to in-process technology, management has considered the contribution of both prior technologies (as demonstrated by prior products) and core technology or know-how that is generic among most or all products. Where appropriate, the operating income estimates for each project have been apportioned between in-process technology and the appropriate intangible asset (i.e. various core technologies). The operating income apportionment factor was determined on the basis of an analysis of the specific contribution of each element of core technology to the subject in-process technology, the estimated effect of this contribution on the profitability of the subject in-process project, and the relative importance of the core technology to the product's ultimate customer. The discount rate applicable to in-process technology projects reflects the risks inherent in each project. This rate is higher than the rate applied to AGI's current products, as the current products have already demonstrated their technological feasibility product and market acceptance. The discount rate for in-process technology considers the following risk elements (in addition to the baseline business and market risks considered as part of the current product discount rate); risk of successfully completing the in-process technology project, risk that market demand will exist in the future for the in-process technology product, risk that the forecasted cost structure will be possible, and the risk that as yet unknown competitive products will emerge. An after-tax rate of 20 to 30 percent was applied to the in-process technology projects. The revenues earned by the in-process technology products represent the return on all of the assets acquired under the agreement. The cash flows generated by the new products must provide a return on each asset purchased that is consistent with the value and the relative risk of that asset. To separately value in-process technology, the value and required rate of return for other identifiable assets must be determined. The required return on these other assets is charged to (deducted from) the cash flows generated by the projects shown in the in-process technology model to determine the incremental cash flows specifically attributable to the in-process technology project. As part of the analysis, management determined individual rates of return applicable to each asset identified in the allocation table and estimated the effective capital charge to be applied to the valuation of in-process technology. Capital charges have been made for returns related to current assets, fixed assets, workforce and tradename. The total purchase price and final allocation among the tangible and intangible assets and liabilities acquired (including acquired in-process technology) is summarized as follows (dollars in thousands): Total Purchase Price: Total cash consideration $ 24,688 Total stock consideration 25,695 Value of options assumed 3,400 Transaction costs 1,350 ---------------- $ 55,133 =============== Amortization Period (Months) ---------------- Purchase Price Allocation: Net tangible assets $ 17,329 Intangible assets: Workforce-in 1,019 60 Customer list 250 60 AccelGraphics name 699 36 Current products 5,640 6 - 24 Core technology 1,754 84 Goodwill 7,662 84 In-process technology 20,780 Expensed ---------------- $ 55,133 ================ The following unaudited pro forma financial information (in thousands, except per share amounts) presents the combined results of operations of the Company, AGI, and SRI for 1998 and 1997 as if the acquisitions had occurred as of the beginning of 1997, after giving effect to certain adjustments, including, but not limited to, amortization of goodwill and other intangible assets, decreased interest income and entries to conform to the Company's accounting policies. The $20.8 million charge for acquired in-process technology has been excluded from the pro forma results as it is a material non-recurring charge. 1998 1997 ---------------- ---------------- Net sales $ 208,503 $ 194,146 Net loss (4,836) (1,545) Loss per share: Basic (0.46) (0.15) Diluted (0.46) (0.15) On March 20, 1996, the Company acquired Terabit Computer Specialty Company, Inc. ("Terabit"). Terabit, established in 1979, developed, marketed and supported simulated cockpit instruments and other airborne electronics displays used in training simulators for military and commercial aircraft. To effect the acquisition, 149,000 shares of the Company's common stock were issued in exchange for all of the outstanding common stock of Terabit. The acquisition was accounted for using the pooling of interests method. (3) SHORT-TERM INVESTMENTS The amortized cost, gross unrealized holding gains and losses, and fair value of short-term available-for-sale marketable investments were as follows (in thousands):
Amortized Gross Gross Fair cost unrealized unrealized value holding holding gains losses ------------ ------------ ------------ ------------- At December 31, 1998: State and municipal securities: Maturing in one year or less $ 6,370 $ 202 $ - $ 6,572 Maturing between one and two years 2,212 - (140) 2,072 Corporate debt securities: Maturing in one year or less 8,634 10 - 8,644 Maturing between one and two years 8,603 35 (19) 8,619 ------------ ------------ ------------ ------------- $ 25,819 $ 247 $ (159) $ 25,907 ============ ============ ============ ============= At December 31, 1997: U.S. government securities: Maturing in one year or less $ 3,179 $ - $ (3) $ 3,176 Maturing between one and three years 1,509 7 - 1,516 State and municipal securities: Maturing in one year or less 14,714 17 (10) 14,721 Maturing between one and three years 9,389 42 (14) 9,417 Corporate debt securities: Maturing in one year or less 2,501 1 - 2,502 Maturing between one and three years 16,045 - (149) 15,896 Other 1,700 - - 1,700 ------------ ------------ ------------ ------------- $ 49,037 $ 67 $ 176 $ 48,928 ============ ============ ============ =============
(4) INVENTORIES Inventories consist of the following (in thousands): December 31, 1998 1997 ------------- ------------- Raw materials $ 26,084 $ 13,674 Work-in-process 23,511 10,040 Finished goods 3,724 3,171 ------------- ------------- $ 53,319 $ 26,885 ============= ============= (5) LONG-TERM CONTRACTS Comparative information with respect to uncompleted contracts are summarized as follows (in thousands):
December 31, 1998 1997 -------------- ------------- Accumulated costs and estimated $236,757 $217,354 earnings on uncompleted contracts Less total billings on uncompleted contracts (185,167) (171,896) ------------ ----------- $ 51,590 $ 45,458 ============ =========== Costs and estimated earnings in excess of billings on uncompleted contracts $ 58,682 $ 51,799 Billings in excess of costs and estimated earnings on uncompleted contracts (7,092) (6,341) ------------ ----------- $ 51,590 $ 45,458 ============ ===========
(6) PROPERTY, PLANT AND EQUIPMENT The cost and estimated useful lives of property, plant, and equipment are summarized as follows (dollars in thousands):
Estimated December 31, useful lives 1998 1997 --------------- ------------ ----------- Land - $ 1,436 $ 1,436 Buildings and improvements 40 years 37,378 38,152 Machinery and equipment 3 to 8 years 94,614 79,372 Office furniture and equipment 8 years 2,616 2,178 Construction-in-process - 3,330 2,030 ------------ ----------- 139,374 123,168 Less accumulated depreciation and amortization (85,681) (78,800) ------------ ----------- $ 53,693 $ 44,368 ============ ===========
All buildings and improvements owned by the Company are constructed on land leased from an unrelated third party. Such leases extend for a term of 40 years from 1986, with options to extend two of the leases for an additional 40 years and the remaining four leases for an additional ten years. At the end of the lease term, including any extension, the buildings and improvements revert to the lessor. (7) LEASES The Company leases certain of its buildings and related improvements to third parties under noncancelable operating leases. Cost and accumulated depreciation of the leased buildings and improvements at December 31, 1998 were $8.2 million and $2.9 million, respectively. Rental income for all operating leases for 1998, 1997 and 1996 was $1.5 million, $1.1 million and $0.8 million, respectively. The Company occupies real property and uses certain equipment under lease arrangements which are accounted for primarily as operating leases. Rental expenses for all operating leases for 1998, 1997 and 1996 were $2.3 million, $1.7 million and $1.5 million, respectively. At December 31, 1998, the future minimum rental income and lease payments under operating leases that have initial or remaining noncancelable lease terms in excess of one year are as follows (in thousands): Rental Rental income Commitment ------------ --------------- Year Ending December 31, 1999 $ 816 $ 2,438 2000 725 2,250 2001 682 1,825 2002 647 1,530 2003 647 1,547 Thereafter 1,940 10,123 ------------ --------------- $ 5,457 $ 19,713 ============ =============== (8) INVESTMENT SECURITIES The Company had the following investments in marketable equity securities, adjusted for unrealized holding gains and losses and other than temporary declines in fair value, and nonmarketable equity securities, adjusted for other than temporary declines in fair value (in thousands):
December 31, 1998 1997 ---------- ------------- Marketable securities: Iwerks Entertainment, Inc. (Iwerks) $ 225 $ 500 ----------- ------------- Nonmarketable securities: Silicon Light Machines (SLM) 2,655 3,500 Sense8 Corporation (Sense8) - 500 Total Graphics Solutions N.V. (TGS) 500 500 ----------- ------------- 3,155 4,500 ----------- ------------- Total investment securities $ 3,380 $ 5,000 =========== =============
Iwerks designs, engineers, manufactures, markets and services high-tech entertainment attractions which employ a variety of projection, show control, ride simulation and software technologies. SLM is a development-stage company engaged in research and development of high-resolution displays. Sense8 designs and markets software development tools for multimedia producers. TGS develops and markets portable graphics software tools which provide hardware independence for application developers. Each investment in non-marketable investment securities was made either to enhance a current technology of the Company or to complement the Company's strategic direction. The Company owns, including total shares purchased or available to purchase under warrants, less than 15% of the outstanding common stock and common stock equivalents of each company. The Company has one of six seats on both SLM's and TGS's board of directors. There are no intercompany transactions, technological dependencies, related guarantees, obligations, contingencies, interchange of personnel, nor ability to exercise significant influence on any of the companies in which the Company has investments. Accordingly, the Company accounts for each investment under the cost method. The Company had an additional investment of $3.0 million, made in 1995, that was deemed to be permanently impaired and written down to zero in 1997. This investment was disposed of during 1998 resulting in no gain or loss. During 1998, the Company made an additional net investment of $0.3 million in Sense8 and then sold all of its holdings in Sense8 for net proceeds of $3.3 million, recognizing a $2.5 million gain. (9) ACCRUED EXPENSES Accrued expenses consist of the following (in thousands): December 31, 1998 1997 ----------- ---------- Pension plan obligation (note 10) $ 8,611 $ 5,305 Compensation and benefits 11,256 7,497 Other 7,280 5,259 ----------- ---------- $ 27,147 $ 18,061 =========== ========== (10) EMPLOYEE BENEFIT PLANS Pension Plan (the "Plan") - The Company has a defined benefit pension plan covering substantially all employees who have attained age 21 with service in excess of one year. Benefits at normal retirement age (65) are based upon the employee's years of service and the employee's highest compensation for any consecutive five of the last ten years of employment. The Company's funding policy is to contribute amounts sufficient to satisfy regulatory funding standards, based upon independent actuarial valuations. Supplemental Executive Retirement Plan ("SERP") - The Company has a non-qualified SERP. The SERP, which is unfunded, provides eligible executives defined pension benefits, outside the Company's pension plan, based on average earnings, years of service, and age at retirement. The following provides a reconciliation of benefit obligations, plan assets, and funded assets of the Plan and SERP (dollars in thousands):
Pension Plan SERP ------------------------------ ----------------------------- 1998 1997 1998 1997 -------------- ------------ ------------- ----------- Change in benefit obligation: Beginning of year $ 36,212 $25,778 $ 5,262 $ 3,354 Service cost 2,601 2,025 828 497 Interest cost 2,501 2,007 355 234 Actuarial (gain) loss 2,344 7,394 (1,014) 1,177 Benefits paid (1,021) (992) - - ----------- --------- ---------- ---------- End of year 42,637 36,212 5,431 5,262 ----------- --------- ---------- ---------- Change in plan assets: Fair value at beginning of year 36,768 32,912 Actual return on plan assets 4,475 4,848 Benefits paid (1,022) (992) ----------- --------- Fair value at end of year 40,221 36,768 ----------- --------- Reconciliation of funded status: Funded status (2,416) 555 (5,431) (5,262) Unrecognized actuarial (gain) loss (2,805) (3,954) 1,391 2,548 Unrecognized prior service cost 161 165 874 1,294 Unrecognized transition obligation 238 317 - - ----------- --------- ---------- ---------- Net amount recognized $ (4,822) $(2,917) $(3,166) $(1,420) =========== ========= ========== ==========
Pension Plan SERP ------------------------------ ----------------------------- 1998 1997 1998 1997 -------------- ------------ ------------- ------------ Amounts recognized in the consolidated balance sheets: Accrued benefit liability $ (4,822) $ (2,917) $ (3,166) $ (1,420) Additional minimum liability - - (623) (968) ----------- --------- ---------- ---------- Net amount recognized $ (4,822) $ (2,917) $(3,789) $(2,388) =========== ========= ========== ========== Assumptions (weighted average): Discount rate 6.8% 7.0% 6.8% 7.0% Expected return on plan assets 9.0% 9.0% N/A N/A
Net periodic pension and other postretirement benefit costs include the following components (in thousands):
Pension Plan SERP -------------------------------- ------------------------------- 1998 1997 1996 1998 1997 1996 -------- -------- -------- -------- -------- -------- Components of net periodic benefit cost: Service cost $2,601 $2,025 $1,989 $ 828 $ 327 $ 265 Interest cost 2,501 2,007 1,776 355 252 98 Expected return on assets (3,264) (2,924) (2,584) - - - Amortization of actuarial (gain) loss (15) (300) (133) 143 115 46 Amortization of prior year service cost 4 5 (33) 73 106 40 Amortization of transition 79 79 79 - - - -------- -------- -------- -------- -------- -------- Net periodic benefit cost $1,906 $ 892 $1,094 $ 1,399 $ 800 $ 449 ======== ======== ======== ======== ======== ========
Deferred Savings Plan - The Company has a deferred savings plan which qualifies under Section 401(k) of the Internal Revenue Code. The plan covers all employees of the Company who have at least one year of service and who are age 18 or older. The Company makes matching contributions of 50 percent of each employee's contribution not to exceed six percent of the employee's compensation. The Company's contributions to this plan for 1998, 1997 and 1996 were $1.0 million, $1.0 million and $0.9 million respectively. Life Insurance - The Company purchases company-owned life insurance policies insuring the lives of certain employees. The policies accumulate asset values to meet future liabilities including the payment of employee benefits such as supplemental retirement benefits. At December 31, 1998 and 1997, the investment in the policies was $2.6 million and $1.1 million, respectively, and net life insurance expense was $0.5 million, $0.1 million and $0.1 million for 1998, 1997 and 1996, respectively. (11) LINES OF CREDIT The following is a summary of lines of credit (dollars in thousands):
1998 1997 ------------ ------------ Balance at end of year $ 4,298 $ 950 Weighted average interest rate at end of year 6.9% 8.0% Maximum balance outstanding during the year $ 4,298 $ 3,441 Average balance outstanding during the year $ 4,239 $ 1,845 Weighted average interest rate during the year 7.4% 7.6%
The average balance outstanding and weighted average interest rate are computed based on the outstanding balances and interest rates at month-end during each year. In November 1998, the Company entered into a revolving line of credit agreement with U.S. Bank National Association. The revolving line of credit provides for borrowings by the Company of up to $20.0 million. Borrowings bear interest at the prevailing prime rate minus 1.0% or the LIBOR rate plus 1.0%. The revolving line of credit expires on November 10, 1999. The revolving line of credit, among other things, (i) requires the Company to maintain certain financial ratios; (ii) restricts the Company's ability to incur debt or liens; sell, assign, pledge or lease assets; merge with another company; and (iii) restricts the payment of dividends and repurchase of any of the Company's outstanding shares without prior consent of the lender. The revolving line of credit is unsecured. There were no borrowings outstanding under this agreement as of December 31, 1998. In addition, the Company has a $7.5 million unsecured line for letters of credit with U.S. Bank National Association for which there were $6.6 million and $4.7 million outstanding as of December 31, 1998 and 1997, respectively. The Company also has unsecured revolving line of credit agreements with foreign banks totaling approximately $7.1 million as of December 31, 1998, of which approximately $2.8 million was unused and available. (12) LONG-TERM DEBT Long-term debt is comprised of approximately $18.0 million of 6% Convertible Subordinated Debentures due in 2012 (the "6% Debentures"). The 6% Debentures are unsecured and are convertible at each bondholder's option into shares of the Company's common stock at a conversion price of $42.10 or 428,000 shares of the Company's common stock subject to adjustment. The 6% Debentures are redeemable at the Company's option, in whole or in part, at par. (13) INCOME TAXES Components of income tax expense (benefit) attributable to earnings before income taxes (in thousands):
Share and stock option Current Deferred benefit Total ---------- ----------- ---------- ----------- At December 31, 1998: Federal $ 3,520 $ (2,336) $ 330 $ 1,514 State 761 (385) 54 430 Foreign 182 - - 182 ---------- ----------- ---------- ----------- $ 4,463 $ (2,721) $ 384 $ 2,126 ========== =========== ========== =========== At December 31, 1997: Federal $ 5,327 $ (4,476) $ 663 $ 1,514 State 858 (721) 107 244 ---------- ----------- ---------- ----------- $ 6,185 $ (5,197) $ 770 $ 1,758 ========== =========== ========== =========== At December 27, 1996: Federal $ 3,130 $ 1,200 $ 595 $ 4,925 State 474 182 96 752 ---------- ----------- ---------- ----------- $ 3,604 $ 1,382 $ 691 $ 5,677 ========== =========== ========== ===========
The actual tax expense differs from the expected tax expense (benefit) as computed by applying the U.S. federal statutory tax rate of 35 percent for 1998 and 34 percent for 1997 and 1996 as a result of the following (in thousands):
1998 1997 1996 --------- --------- --------- Tax (benefit) at U.S. federal statutory rate $ (4,850) $ 2,325 $ 5,450 In-process research and development 7,245 - - Losses (gains) of foreign subsidiaries (101) (115) (165) Earnings of foreign sales corporation (305) (228) (368) State taxes (net of federal income tax benefit) 280 161 496 Research and development and foreign tax credits (604) - - Foreign taxes 182 - - Other, net 279 (385) 264 ----------- ----------- ----------- $ 2,126 $ 1,758 $ 5,677 =========== =========== ===========
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities as of December 31, 1998 and 1997, are presented below (in thousands):
Domestic Foreign ----------------------- -------------------- 1998 1997 1998 1997 ----------- ---------- -------- -------- Deferred tax assets: Warranty, vacation, and other accruals $ 3,619 $ 1,740 $ - $ - Inventory reserves and other inventory-related temporary basis differences 3,478 944 - - Pension accrual 2,866 1,626 - - Long-term contract related temporary differences 537 496 - - Net operating loss carryforwards 1,997 111 - 721 Unrealized loss on marketable equity securities 89 41 - - Write-down of investment securities 1,341 3,591 - - Other 960 342 - - ----------- ---------- -------- -------- Total gross deferred tax assets 14,887 8,891 - 721 Less valuation allowance 117 153 - 721 ----------- ---------- -------- -------- Total deferred tax assets 14,770 8,738 - - ----------- ---------- -------- -------- Deferred tax liabilities: Intangible assets (1,893) - - - Plant and equipment, principally due to - - differences in depreciation (853) (652) - - Other (87) (60) - - ----------- ---------- -------- -------- Total gross deferred tax liabilities (2,833) (712) - - ----------- ---------- -------- -------- Net deferred tax asset $ 11,937 $ 8,026 $ - $ - =========== ========== ======== ======== Net current deferred tax asset $ 9,450 $ 4,224 Net non-current deferred tax asset 2,487 3,802 ----------- ---------- Net deferred tax asset $ 11,937 $ 8,026 =========== ==========
The 1998 domestic net deferred tax asset includes the deferred tax assets and liabilities resulting from the Company's acquisition of AccelGraphics, Inc. as described in note 2. The net tax effect of acquiring these deferred tax assets and liabilities of $1.0 million was credited against goodwill. Certain reclassifications have been made during 1998 between beginning deferred tax assets and liabilities and the current tax payable accounts. These reclassification entries were made to adjust the beginning deferred tax assets to the tax return amounts. Management believes the existing net deductible temporary differences will reverse during the periods in which the Company generates net taxable income. The Company has a strong taxable earnings history. To utilize 100% of the deferred tax assets, the Company and its subsidiaries will need to recognize approximately $18 million of future taxable income, net of loss carryback potential. A valuation allowance is provided when it is more likely than not that some portion of the deferred tax asset may not be realized. The Company has established a valuation allowance primarily for net operating loss and tax credit carryforwards from an acquired subsidiary as a result of the uncertainty of realization. The Company's beginning valuation allowance changed during 1998 for domestic purposes by $36,000. The change in the foreign valuation allowance is primarily attributable to the loss being eliminated as part of a recapitalization plan of the Company's foreign operations. The Company has a net operating loss and research credits carryover from its acquisition of AccelGraphics, Inc. of $5.0 million and $0.4 million respectively. These carryover credits begin to expire in 2010. (14) DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amount of cash and cash equivalents, receivables, line of credit agreements, accounts payable, and accrued expenses approximates fair value because of their short maturity. The fair value of the Company's long-term debt instruments ($16.3 million and $15.7 million as of December 31, 1998 and 1997, respectively) is based on quoted market prices. (15) COMMITMENTS AND CONTINGENCIES In the normal course of business, the Company has various legal claims and other contingent matters, including items raised by government contracting officers and auditors. Although the final outcome of such matters cannot be predicted, the Company believes the ultimate disposition of these matters will not have a material adverse effect on the Company's consolidated financial condition, liquidity, or results of operations. (16) STOCK OPTION AND STOCK PURCHASE PLANS Stock Option Plans - The Company has stock incentive plans which provide for the grant of options to officers and employees to acquire shares of the Company's common stock at a purchase price generally equal to the fair market value on the date of grant. Options generally vest ratably over three years and expire ten years from date of grant. The Company grants options to its directors under its Director Plan. Option grants are limited to 10,000 shares per director in each fiscal year. Options generally vest ratably over four years and expire ten years from the date of grant. A summary of activity follows (shares in thousands):
1998 1997 1996 --------------------- -------------------- --------------------- Weighted- Weighted- Weighted- Number average Number average Number average of exercise of exercise of exercise shares price shares price shares price -------- ---------- -------- --------- -------- --------- Outstanding at beginning of year 1,640 $ 20.38 1,309 $ 18.14 842 $ 14.45 Granted 2,105 16.80 570 24.55 724 21.32 Assumed in acquisitions 351 9.69 - - - - Exercised (116) 10.70 (159) 16.21 (169) 13.44 Canceled (1,896) 22.15 (80) 21.78 (88) 18.20 -------- -------- -------- Outstanding at end of year 2,084 13.80 1,640 20.38 1,309 18.14 ======== ======== ======== Exercisable at end of year 532 13.74 597 16.40 271 14.67 ======== ======== ======== Weighted-average fair value of options granted during the 5.82 8.81 7.15 year
Shareholders authorized an additional 400,000, 450,000 and 150,000 shares to be granted under the plans during 1998, 1997 and 1996, respectively. As of December 31, 1998, options to purchase 528,000 shares of common stock were authorized and reserved for future grant. On September 29, 1998, the Board of Directors approved a stock option repricing program whereby each eligible stock option could be amended to have an exercise price equal to $13.56 (the September 29, 1998 closing price of the Company stock) if the optionee agreed to reduce the amount of options repriced by 20% and to accept an amended vesting period. The vesting period for the repriced options was amended to vest in one year for all options that were vested as of September 29, 1998 and to vest ratably over three years for all options that were not yet vested as of September 29, 1998. As a result, approximately 1,698,000 options were surrendered by employees for approximately 1,354,000 repriced options. The repriced options expire ten years from the date of the repriced grant. The following table summarizes information about fixed stock options outstanding as of December 31, 1998 (options in thousands):
Options outstanding Options Exercisable --------------------------------------------- ---------------------------- Range of Number Weighted- Weighted- Number Weighted- Exercise Outstanding average average Exercisable average prices as of remaining exercise as of exercise 12/31/98 contractual price 12/31/98 price life ------------------------- ------------- ------------- ----------- ------------ ----------- $ 0.48 - $ 2.82 55 7.1 $ 1.03 40 $ 0.99 12.12 - 13.25 351 7.3 12.50 252 12.36 13.56 - 13.56 1,358 9.6 13.56 10 13.56 14.00 - 16.69 144 6.9 15.02 136 14.96 18.06 - 22.79 165 7.5 20.84 91 20.93 23.19 - 32.88 11 8.7 25.99 3 25.45 ------------- ------------ 0.48 - 32.88 2,084 8.8 13.80 532 13.74 ============= ============
The Company accounts for these plans under APB 25, under which no compensation cost has been recognized. Had compensation cost for these plans been determined consistent with SFAS 123, the Company's net earnings (loss) and earnings (loss) per common share would have been changed to the following pro forma amounts (in thousands, except per share data):
1998 1997 1996 ----------- ---------- ---------- Net earnings (loss) Pro forma $(21,093) $ 2,545 $ 8,570 Basic earnings (loss) per common share Pro forma (2.22) 0.28 0.96 Diluted earnings (loss) per commn share Pro forma (2.22) 0.27 0.93
Pro forma net earnings reflects only options granted subsequent to December 29, 1994. Therefore, the effect that calculating compensation cost for stock-based compensation under SFAS 123 has on the pro forma net earnings as shown above may not be representative of the effects on reported net earnings for future years. The fair value of each option grant is estimated on the date of the grant using the Black-Scholes option pricing model with the following weighted-average assumptions used for grants during 1998, 1997, and 1996:
1998 1997 1996 ------------ ---------- ----------- Expected life (in years) 2.3 2.6 2.3 Risk-free interest rate 4.6% 5.7% 6.1% Expected volatility 49% 47% 49% Dividend yield - - -
Stock Purchase Plan - The Company has an employee stock purchase plan whereby qualified employees are allowed to have up to 10% of their annual earnings withheld to purchase the company's common stock at 85 percent of the market value of the stock at the time of the sale. A total of 500,000 shares are authorized under the plan. Shares totaling 43,000, 26,000 and 31,000 were purchased under this plan in fiscal 1998, 1997 and 1996, and as of December 31, 1998, 255,000 shares were available for future issuance under this plan. (17) PREFERRED STOCK Preferred Stock - Class A The Company has 5,000,000 authorized shares of Class A Preferred Stock. Prior to 1998, the Company had reserved 300,000 shares of Class A Preferred Stock as Series A Junior Preferred Stock under a shareholder rights plan which expired in November 1998. In November 1998, the Board of Directors declared a dividend of one preferred stock purchase right ("Right") for each outstanding share of common stock, par value $0.20 per share of the Company for shareholders of record on November 19, 1998, and for all future issuances of common stock. The Rights are not currently exercisable or transferable apart from the common stock and have voting rights or rights to receive dividends. Each Right entitles the registered holder to purchase from the Company one thousandth of a share of Preferred Stock at a price per share of $60.00, subject to adjustment. The Rights will be exercisable ten business days following a public announcement of a person or group of affiliated persons acquiring beneficial ownership of 15% or more of the Company's outstanding common shares or following the announcement of a tender offer or exchange offer upon the consummation of which would result in the beneficial ownership by a person or group of affiliated persons of 15% or more of the outstanding Company's stock. The Rights may be redeemed by the Company at a price of $0.01 per Right before November 30, 2008. In the event that the Company is acquired in a merger or other business combination transaction, provision shall be made so that each holder of a Right, excluding the Rights beneficially owned by the acquiring persons, will have the right to receive, upon exercise thereof at the then current exercise price, that number of shares of common shares of the surviving company which at the time of such transaction will have a market value of two times the exercise price of the Right. In the event that a person or group of affiliated persons acquires beneficial ownership of 15% or more of the Company's outstanding common shares, provision shall be made so that each holder of a Right, excluding the Rights beneficially owned by the acquiring persons, shall have the right to receive, upon exercise thereof, a share of common stock at a purchase price equal to 50% of the then current exercise price. Preferred Stock - Class B The Company has 5,000,000 authorized shares of Class B Preferred Stock. During July 1998, the Company designated 1,500,000 of the 5,000,000 authorized shares as Class B-1 Preferred Stock. On July 22, 1998, Intel Corporation purchased 901,408 shares of this Class B-1 Preferred Stock, no par value, plus a warrant to purchase an additional 378,462 shares of Class B-1 Preferred Stock at an exercise price of $33.28125 per share for approximately $24.0 million, less transaction costs of approximately $0.5 million. These preferred shares have certain liquidation and conversion rights, in addition to other rights and preferences. Upon the occurrence of certain events, Intel has the right to sell to the Company any or all of the shares associated with the preferred stock. (18) EARNINGS (LOSS) PER COMMON SHARE Earnings (loss) per common share is computed based on the weighted-average number of common shares and, as appropriate, dilutive common stock equivalents outstanding during the period. Stock options are considered to be common stock equivalents. Basic earnings (loss) per common share is the amount of earnings (loss) for the period available to each share of common stock outstanding during the reporting period. Diluted earnings (loss) per share is the amount of earnings (loss) for the period available to each share of common stock outstanding during the reporting period and to each share that would have been outstanding assuming the issuance of common shares for all dilutive potential common shares outstanding during the period. In calculating earnings per common share, the earnings were the same for both the basic and diluted calculation. The diluted weighted average number of common shares outstanding during 1998 excludes common stock issuable pursuant to outstanding stock options, the 6% Convertible Debentures and the Class B-1 Preferred Stock because to do so would have had an anti-dilutive effect on earnings per common share. A reconciliation between the basic and diluted weighted average number of common shares is summarized as follows (in thousands):
1998 1997 1996 --------- -------- -------- Basic weighted average number of common shares 9,461 9,060 8,944 outstanding during the year Weighted average number of dilutive common - 442 278 stock options outstanding during the year --------- -------- -------- Diluted weighted average number of common shares outstanding during the year 9,461 9,502 9,222 ========= ======== ========
(19) SEGMENT AND RELATED INFORMATION During 1998, the Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" which changed the way the Company reports information about its operating segments. The Company's business units have been aggregated into three reportable segments: simulation, workstations products, and applications. These reportable segments offer different products and services and are managed and evaluated separately because each segment uses different technologies and requires different marketing strategies. The simulation segment provides a broad line of visual systems for flight and ground simulators for training purposes to government, aerospace and commercial airline customers. The workstations products segment provides graphics accelerator products, including graphics chips and subsystems, to the personal PC workstation marketplace. The applications segment provides digital video applications for entertainment, educational and multimedia industries. The accounting policies of the segments are the same as those described in the summary of significant accounting policies (Note 1). The Company evaluates segment performance based on earnings (loss) from operations before income taxes, interest income and expense, other income and expense and foreign exchange gains and losses. The Company's assets are not identifiable by segment.
Simulation Workstation Applications Other Total Products ----------- ------------ ------------ --------- ---------- Year ended December 31, 1998: Net sales $ 167,014 $ 17,453 $ 7,299 $ - $ 191,766 Operating earnings (loss) 22,094 (30,663) (7,417) - (15,986) Year ended December 31, 1997: Net sales 146,014 5,847 7,492 - 159,353 Operating earnings (loss) 23,263 (717) (8,157) - 14,389 Year ended December 27, 1996: Net sales 118,757 - 7,002 4,805 130,564 Operating earnings (loss) 17,955 - (1,676) (4,760) 11,519
The Workstation Products segment operating loss in 1998 includes a write-off of acquired in-process technology of approximately $20.8 million. (20) GEOGRAPHIC INFORMATION The following table presents revenues by geographic location based on the location of the use of the product or services. Sales to individual countries greater than 10% of consolidated net sales are shown separately (in thousands):
1998 1997 1996 ------------- ------------- ------------- United States $ 106,858 $ 64,711 $ 42,196 United Kingdom 41,029 12,008 13,913 Europe (excluding United Kingdom) 25,039 47,168 26,621 Pacific Rim 18,257 27,789 44,262 Other 583 7,677 3,572 ------------- ------------- ------------- $ 191,766 $ 159,353 $ 130,564 ============= ============= =============
The following table presents property, plant and equipment by geographic location based on the location of the assets (in thousands): 1998 1997 ----------- ------------- United States $ 52,876 $ 43,501 Europe 817 867 ----------- ------------- Total property, plant and equipment, net $ 53,693 $ 44,368 =========== ============= (21) SIGNIFICANT CUSTOMERS In 1998, sales to the U.S. government and the United Kingdom Ministry of Defense ("UK MOD"), either directly or indirectly through sales to prime contractors or subcontractors, accounted for $70.8 million, or 37% of total net sales, and $32.1 million, or 17% of total net sales, respectively. In 1997 and 1996, sales to the U.S. government, either directly or indirectly through sales to prime contractors or subcontractors, accounted for $45.5 million, or 29% of total net sales, and $25.8 million, or 20% of total net sales, respectively. In 1998, sales to The Boeing Company ("Boeing") were approximately $28.1 million, or 15% of total net sales, of which approximately 98% related to U.S. government and UK MOD contracts, and sales to Lockheed Corporation ("Lockheed") were approximately $22.0 million, or 11% of total net sales, of which approximately 91% related to U.S. government contracts. In 1997, sales to Thomson Training & Simulation Ltd. ("Thomson") were $19.3 million, or 12% of total net sales. In 1996, sales to Thomson were $15.8 million, or 12% of total net sales, sales to Hughes Training Incorporated ("Hughes") were $14.9 million, or 11% of total net sales, and sales to Rikei Corporation equaled $14.3 million, or 11% of total net sales. A portion of the Company's sales to Hughes was for U.S. government contracts. All sales to significant customers are within the simulation segment. Aggregated accounts receivable from agencies of the United States government, either directly or indirectly through prime or sub-contractors, was $14.0 million, or 29% of gross accounts receivable, at December 31, 1998 and $9.5 million, or 26% of gross accounts receivable, at December 31, 1997. Additionally, accounts receivable from Thomson was $3.5 million, or 7% of gross accounts receivable, at December 31, 1998 and $5.5 million, or 15% of gross accounts receivable, at December 31, 1997. The amount of costs and estimated earnings in excess of billings on uncompleted contracts from agencies of the United States government and the UK MOD, either directly or indirectly through prime or sub-contractors, was $9.4 million and $22.7 million, or 16% and 39%, of total costs and estimated earnings in excess of billings on uncompleted contracts, at December 31, 1998, respectively. The amount to the U.S. government was $21.4 million, or 41% of costs and estimated earnings in excess of billings on uncompleted contracts, at December 31, 1997. (22) RELATED PARTY TRANSACTIONS The Company had purchases of $1.4 million and $0.6 million during 1998 and 1997, respectively, from a supplier for which the Company's Chief Executive Officer serves as a director. Trade payables to the supplier were $0.4 million and $0.2 million at December 31, 1998 and 1997, respectively. ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE "None" FORM 10-K PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY Information regarding directors of the Company is incorporated by reference from "Election of Directors" in the Proxy Statement to be delivered to shareholders in connection with the 1999 Annual Meeting of Shareholders to be held on May 20, 1999. Information required by Item 405 of Regulation S-K is incorporated by reference from "Compliance with Section 16(a) of the Securities Exchange Act of 1934" in the Proxy Statement to be delivered to shareholders in connection with the 1999 Annual Meeting of Shareholders to be held on May 20, 1999. Information concerning current executive officers of the Company is incorporated by reference to the section in Part I hereof found under the caption "Executive Officers of the Registrant." ITEM 11. EXECUTIVE COMPENSATION Information regarding this item is incorporated by reference from "Executive Compensation" in the Proxy Statement to be delivered to shareholders in connection with the 1999 Annual Meeting of Shareholders to be held on May 20, 1999. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information regarding this item is incorporated by reference from "Security Ownership of Certain Beneficial Owners and Management" in the Proxy Statement to be delivered to shareholders in connection with the 1999 Annual Meeting of Shareholders to be held on May 20, 1999. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information regarding this item is incorporated by reference from "Executive Compensation - Summary Compensation Table," "Report of the Compensation and Stock Options Committee of the Board of Directors," and "Termination of Employment and Change of Control Arrangements," in the Proxy Statement to be delivered to shareholders in connection with the 1999 Annual Meeting of Shareholders to be held on May 20, 1999. FORM 10-K PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K The following constitutes a list of Financial Statements, Financial Statement Schedules, and Exhibits required to be used in this report: 1. Financial Statements - Included in Part II, Item 8 of this report: Report of Management Report of Independent Accountants Consolidated Balance Sheets as of December 31, 1998 and December 31, 1997 Consolidated Statements of Operations for the years ended December 31, 1998, December 31, 1997, and December 27, 1996 Consolidated Statements of Comprehensive Income for the years ended December 31, 1998, December 31, 1997 and December 27, 1996. Consolidated Statements of Stockholders' Equity for the years ended December 31, 1998, December 31, 1997, and December 27, 1996 Consolidated Statements of Cash Flows for the years ended December 31, 1998, December 31, 1997, and December 27, 1996 Notes to Consolidated Financial Statements for the years ended December 31, 1998, December 31, 1997, and December 27, 1996 2. Financial Statement Schedules - included in Part IV of this report: Schedule II - Valuation and Qualifying Accounts Schedules other than those listed above are omitted because of the absence of conditions under which they are required or because the required information is presented in the financial statements or notes thereto. Exhibits 2.1 Agreement and Plan of Merger, dated April 22, 1998, among the Company, E&S Merger Corp., and AccelGraphics, Inc., filed as Annex I to the Company's Registration Statement on Form S-4, SEC File No. 333-51041, and incorporated herein by this reference. 3.1 Articles of Incorporation, as amended, filed as Exhibit 3.1 to the Company's Annual Report on Form 10-K for the fiscal year ended December 25, 1987, and incorporated herein by this reference. 3.1.1 Amendments to Articles of Incorporation filed as Exhibit 3.1.1 to the Company's Annual Report on Form 10-K for the fiscal year ended December 30, 1988, and incorporated herein by this reference. 3.1.2 Certificate of Designation, Preferences and Other Rights of the Class B-1 Preferred Stock of the Company, filed as Exhibit 3.1 to the Company's Form 10-Q for the quarter ended September 25, 1998, and incorporated herein by this reference. 3.2 By-laws, as amended, filed as Exhibit 3.2 to the Company's Annual Report on Form 10-K for the fiscal year ended December 25, 1987, and incorporated herein by this reference. 4.1 Form of Rights Agreement, dated as of November 19, 1998, between Evans & Sutherland Computer Corporation and American Stock Transfer Trust Company which includes as Exhibit A, the form of Certificate of Designation for the Rights, as Exhibit B, the form of Rights Certificate and as Exhibit C, a Summary of Rights, filed as Exhibit 1 to the Company's Registration Statement on Form 8-A filed December 8, 1998, and incorporated herein by this reference. 10.1 1985 Stock Option Plan, filed as Exhibit 1 to the Company's Post-Effective Amendment No. 1 to Registration Statement on Form S-8, SEC File No. 2-76027, and incorporated herein by this reference. 10.2 1989 Stock Option Plan for Non-employee Directors, filed as Exhibit 10.5 to the Company's Annual Report on Form 10-K for the fiscal year ended December 29, 1989, and incorporated herein by this reference. 10.3 The Company's 1991 Employee Stock Purchase Plan, filed as Exhibit 4.1 to the Company's Registration Statement on Form S-8, SEC File No. 33-39632, and incorporated herein by this reference. 10.4 1998 Stock Option Plan, filed as Appendix A to the Company's Definitive Proxy Statement filed April 20, 1998, incorporated herein by this reference. 10.5 The Company's 1995 Long-Term Incentive Equity Plan, filed as Exhibit 10.11 to the Company's Annual Report on Form 10-K for the fiscal year ended December 29, 1995, and incorporated herein by this reference. 10.6 The Company's Executive Savings Plan, filed as Exhibit 10.14 to the Company's Annual Report on Form 10-K for the fiscal year ended December 29, 1995, and incorporated herein by this reference. 10.7 The Company's Supplemental Executive Retirement Plan (SERP), filed as Exhibit 10.15 to the Company's Annual Report on Form 10-K for the fiscal year ended December 29, 1995, and incorporated herein by this reference. 10.8 Business Loan Agreement by and between U.S. Bank National Association and Evans & Sutherland Computer Corporation as of November 13, 1998, and filed herein. 10.9 Addendum to Business Loan Agreement by and between U.S. Bank National Association and Evans & Sutherland Computer Corporation ("Borrower") as of February 5, 1999, and filed herein. 10.10 Form of Severance Agreement dated December 11, 1998, by and between Evans & Sutherland Computer Corporation and James R. Oyler, William C. Gibbs and John T. Lemley, and filed herein. 10.11 Severance Agreement dated December 11, 1998, by and between Evans & Sutherland Computer Corporation and Mark C. McBride, and filed herein. 10.12 Series B Preferred Stock and Warrant Purchase Agreement dated as of July 20, 1998, between the Company and Intel Corporation, filed as Exhibit 4.2 to the Company's Form 10-Q for the quarter ended September 25, 1998, and incorporated herein by this reference. 10.13 Warrant to Purchase Series B Preferred Stock dated as of July 22, 1998, between the Company and Intel Corporation, filed as Exhibit 4.3 to the Company's Form 10-Q for the quarter ended September 25, 1998, and incorporated herein by this reference. 21.1 Subsidiaries of Registrant, filed herein. 23.1 Consent of Independent Accountants, filed herein. 24.1 Powers of Attorney for Messrs. Stewart Carrell, Gerald Casilli, Peter O. Crisp, John T. Lemley, Mark C. McBride, James R. Oyler and Ivan E. Sutherland, filed herein. 27 Financial Data Schedule, filed herein. 4. Reports on 8-K: None TRADEMARKS USED IN THIS FORM 10-K AccelECLIPSE II, AccelGALAXY, AccelGMX, Digistar, DYNAMICgeometry, E&S, E&S Lightning 1200, Ensemble, ESIG, FuseBox, Harmony, iNTegrator, MindSet, REALimage, StarRider, Symphony and Virtual Studio System are trademarks or registered trademarks of Evans & Sutherland Computer Corporation. All other product, service, or trade names or marks are the properties of their respective owners. Schedule II EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS Years ended December 31, 1998, December 31, 1997, and December 27, 1996 (in thousands)
Additions Deductions ------------------------------ charged Balance at Charged to Through (recovered) Balance beginning of cost and business against at end of year expenses acquisitions allowance year ------------- ------------ ------------- ------------- ----------- Allowance for doubtful receivables - - ---------------------------------- December 31, 1998 $ 851 $ 496 $ 1,013 $ 744 $ 1,616 December 31, 1997 563 370 - 82 851 December 27, 1996 172 335 - (56) 563 Inventory Reserves - - ---------------------------------- December 31, 1998 $ 7,635 $ 1,987 $ 1,350 $ 4,009 $ 6,963 December 31, 1997 7,137 1,009 - 511 7,635 December 27, 1996 6,277 1,077 - 217 7,137 Warranty Reserves - - --------------------------------- December 31, 1998 $ 880 $ 872 $ 494 $ 810 $ 1,436 December 31, 1997 808 726 - 654 880 December 27, 1996 848 673 - 713 808
SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. EVANS & SUTHERLAND COMPUTER CORPORATION March 31, 1999 By: /S/ James R. Oyler ----------------------------------------- JAMES R. OYLER, PRESIDENT Pursuant to the requirements of the Securities and Exchange Act of 1934, this report signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. * Chairman of the March 31, 1999 STEWART CARRELL Board of Directors /S/ James R. Oyler Director and President March 31, 1999 - - -------------------------------------------- JAMES R. OYLER (Chief Executive Officer) /S/ John T. Lemley Vice President and Chief March 31, 1999 - - -------------------------------------------- JOHN T. LEMLEY Financial Officer (Principal Financial Officer) /S/ Mark C. McBride Vice President and March 31, 1999 - - -------------------------------------------- MARK C. MCBRIDE Corporate Controller (Principal Accounting Officer) * Director March 31, 1999 GERALD S. CASILLI * Director March 31, 1999 PETER O. CRISP * Director March 31, 1999 IVAN E. SUTHERLAND By: /S/ Mark C. McBride March 31, 1999 ----------------------------------------- MARK C. MCBRIDE *Attorney-in-Fact
EX-10.8 2 BUSINESS LOAN AGREEMENT BUSINESS LOAN AGREEMENT
- - ------------------- ------------------ ------------ ------------ ------- ------------- ---------------- ---------- ---------- Principal Loan Date Maturity Loan No Call Collateral Account Officer Initials $20,000,000.00 11-13-1998 2690431846 73644 ----------------------------------------------------------------------------------------------------------------------------- References in the shaded area are for Lender's use only and do not limit the applicability of this document to any particular loan or item -----------------------------------------------------------------------------------------------------------------------------
Borrower: EVANS & SUTHERLAND COMPUTER CORPORATION Lender: U.S. Bank National Association 600 KOMAS DRIVE International Banking SALT LAKE CITY, UT 84108 107 South Main Street Salt Lake City, UT 84111 ================================================================================ THIS BUSINESS LOAN AGREEMENT between EVANS & SUTHERLAND COMPUTER CORPORATION ("Borrower") and U.S. Bank National Association ("Lender") is made and executed on the following terms and conditions. Borrower has received prior commercial loans from Lender or has applied to Lender for a commercial loan or loans and other financial accommodations, including those which may be described on any exhibit or schedule attached to this Agreement. All such loans and financial accommodations, together with all future loans and financial accommodations from Lender to Borrower, are referred to in this Agreement individually as the "Loan" and collectively as the "Loans." Borrower understands and agrees that : (a) in granting, renewing, or extending any Loan, Lender is relying upon Borrower's representations, warranties, and agreements, as set forth in this Agreement; (b) the granting, renewing, or extending of any Loan by Lender at all times shall be subject to Lender's sole judgment and discretion; and (c) all such Loans shall be and shall remain subject to the following terms and conditions of this Agreement. TERM. This Agreement shall be effective as of November 13, 1998, and shall continue thereafter until all Indebtedness of Borrower to Lender has been performed in full and the parties terminate this Agreement in writing. DEFINITIONS. The following words shall have the following meanings when used in this Agreement. Terms not otherwise defined in this Agreement shall have the meanings attributed to such terms in the Uniform Commercial Code. All references to dollar amounts shall mean amounts in lawful money of the United States of America. Agreement. The word "Agreement" means this Business Loan Agreement, as this Business Loan Agreement may be amended or modified from time to time, together with all exhibits and schedules attached to this Business Loan Agreement from time to time. Borrower. The word "Borrower" means EVANS & SUTHERLAND COMPUTER CORPORATION. The word "Borrower" also includes, as applicable, all subsidiaries and affiliates of Borrower as provided below in the paragraph titled "Subsidiaries and Affiliates." CERCLA. The word "CERCLA" means the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended. Cash Flow. The words "Cash Flow" mean net income after taxes, and exclusive of extraordinary gains and income, plus depreciation and amortization. Collateral. The word "Collateral" means and includes without limitation all property and assets granted as collateral security for a Loan, whether real or personal property, whether granted directly or indirectly, whether granted now or in the future, and whether granted in the form of a security interest, mortgage, deed of trust, assignment, pledge, chattel mortgage, chattel trust, factor's lien, equipment trust, conditional sale, trust receipt, lien, charge, lien or title retention contract, lease or consignment intended as a security device, or any other security or lien interest whatsoever, whether created by law, contract, or otherwise. Debt. The word "Debt" means all of Borrower's liabilities excluding Subordinated Debt. ERISA. The word "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. Event of Default. The words "Event of Default" mean and include without limitation any of the Events of Default set forth below in the section titled "EVENTS OF DEFAULT." Grantor. The word "Grantor" means and includes without limitation each and all of the persons or entities granting a Security Interest in any Collateral for the Indebtedness, including without limitation all Borrowers granting such a Security Interest. Guarantor. The word "Guarantor" means and includes without limitation each and all of the guarantors, sureties, and accommodation parties in connection with any Indebtedness. Indebtedness. The word "Indebtedness" means and includes without limitation all Loans, together with all other obligations, debts and liabilities of Borrower to Lender, or any one or more of them, as well as all claims by Lender against Borrower, or any one or more of them; whether now or hereafter existing, voluntary or involuntary, due or not due, absolute or contingent, liquidated or unliquidated; whether Borrower may be liable individually or jointly with others; whether Borrower may be obligated as a guarantor, surety, or otherwise; whether recovery upon such Indebtedness may be or hereafter may become barred by any statute of limitations; and whether such Indebtedness may be or hereafter may become otherwise unenforceable. Lender. The word "Lender" means U.S. Bank National Association, its successors and assigns. Liquid Assets. The words "Liquid Assets" mean Borrower's cash on hand plus Borrower's readily marketable securities. Loan. The word "Loan" or "Loans" means and includes without limitation any and all commercial loans and financial accommodations from Lender to Borrower, whether now or hereafter existing, and however evidenced, including without limitation those loans and financial accommodations described herein or described on any exhibit or schedule attached to this Agreement from time to time. Note. The word "Note" means and includes without limitation Borrower's promissory note or notes, if any, evidencing Borrower's Loan obligations in favor of Lender, as well as any substitute, replacement or refinancing note or notes therefor. Permitted Liens. The words "Permitted Liens" means: (a) liens and security interests securing Indebtedness owned by Borrower to Lender; (b) liens for taxes, assessments, or similar charges either not yet due or being contested in good faith; (c) liens of materialmen, mechanics, warehousemen, or carriers, or other like liens arising in the ordinary course of business and securing obligations which are not yet delinquent; (d) purchase money liens or purchase money security interests upon or in any property acquired or held by Borrower in the ordinary course of business to secure indebtedness outstanding on the date of this Agreement or permitted to be incurred under the paragraph of this Agreement titled "Indebtedness and Liens"; (e) liens and security interests which, as of the date of this Agreement, have been disclosed to and approved by the Lender in writing; and (f) those liens and security interests which in the aggregate constitute an immaterial and insignificant monetary amount with respect to the net value of Borrower's assets. Related Documents. The words "Related Documents" mean and include without limitation all promissory notes, credit agreements, loan agreements, environmental agreements, guaranties, security agreements, mortgages, deeds of trust, and all other instruments, agreements and documents, whether now or hereafter existing, executed in connection with the Indebtedness. Security Agreement. The words "Security Agreement" mean and include without limitation any agreements, promises, covenants, arrangements, understandings or other agreements, whether created by law, contract, or otherwise, evidencing, governing, representing, or creating a Security Interest. Security Interest. The words "Security Interest" mean and include without limitation any type of collateral security, whether in the form of a lien, charge, mortgage, deed of trust, assignment, pledge, chattel mortgage, chattel trust, factor's lien, equipment trust, conditional sale, trust receipt, lien or title retention contract, lease or consignment intended as a security device, or any other security or lien interest whatsoever, whether created by law, contract, or otherwise. SARA. The word "SARA" means the Superfund Amendments and Reauthorization Act of 1986 as now or hereafter amended. Subordinated Debt. The words "Subordinated Debt" mean indebtedness and liabilities of Borrower which have been subordinated by written agreement to indebtedness owed by Borrower to Lender in form and substance acceptable to Lender. Tangible Net Worth. The words "Tangible Net Worth" mean Borrower's total assets excluding all intangible assets (i.e., goodwill, trademarks, patents, copyrights, organizational expenses, and similar intangible items, but including leaseholds and leasehold improvements) less total Debt. Working Capital. The words "Working Capital" mean Borrower's current assets, excluding prepaid expenses, less Borrower's current liabilities. CONDITIONS PRECEDENT TO EACH ADVANCE. Lender's obligation to make the initial Loan Advance and each subsequent Loan Advance under this Agreement shall be subject to the fulfillment to Lender's satisfaction of all of the conditions set forth in this Agreement and in the Related Documents. Loan Documents. Borrower shall provide to Lender in form satisfactory to Lender the following documents for the Loan: (a) the Note, (b) Security Agreements granting to Lender security interests in the Collateral, (c) Financing Statements perfecting Lender's Security Interests; (d) evidence of insurance as required below; and (e) any other documents required under this Agreement or by Lender or its counsel. Borrower's Authorization. Borrower shall have provided in form and substance satisfactory to Lender properly certified resolutions, duly authorizing the execution and delivery of this Agreement, the Note and the Related Documents, and such other authorizations and other documents and instruments as Lender or its counsel, in their sole discretion may require. Payment of Fees and Expenses. Borrower shall have paid to Lender all fees, charges, and other expenses which are then due and payable as specified in this Agreement or any Related Document. Representations and Warranties. The representations and warranties set forth in this Agreement, in the Related Documents, and in any document or certificate delivered to Lender under this Agreement are true and correct. No Event of Default. There shall not exist at the time of any advance a condition which would constitute an Event of Default under this Agreement. REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants to Lender, as of the date of this Agreement, as of the date of each disbursement of Loan proceeds, as of the date of any renewal, extension or modification of any Loan, and at all times any Indebtedness exists: Organization. Borrower is a corporation which is duly organized, validly existing, and in good standing under the laws of the State of Utah and is validly existing and in good standing in all states in which Borrower is doing business. Borrower has the full power and authority to own its properties and to transact the businesses in which it is presently engaged or presently proposes to engage. Borrower is also duly qualified as a foreign corporation and is in good standing in all states in which the failure to so qualify would have a material adverse effect on its businesses or financial condition. Authorization. The execution, delivery, and performance of this Agreement and all Related Documents by Borrower, to the extent to be executed, delivered or performed by Borrower, have been duly authorized by all necessary action by Borrower; do not require the consent or approval of any other person, regulatory authority or governmental body; and do not conflict with, result in a violation of, or constitute a default under (a) any provision of its articles of incorporation or organization, or bylaws, or any agreement or other instrument binding upon Borrower or (b) any law, governmental regulation, court decree, or order applicable to Borrower. Financial Information. Each financial statement of Borrower supplied to Lender truly and completely disclosed Borrower's financial condition as of the date of the statement, and there has been no material adverse change in Borrower's financial condition subsequent to the date of the most recent financial statement supplied to Lender. Borrower has no material contingent obligations except as disclosed in such financial statements. Legal Effect. This Agreement constitutes, and any instrument or agreement required hereunder to be given by Borrower when delivered will constitute, legal, valid and binding obligations of Borrower enforceable against Borrower in accordance with their respective terms. Properties. Except as contemplated by this Agreement or as previously disclosed in Borrower's financial statements or in writing to Lender and as accepted by Lender, and except for property tax liens for taxes not presently due and payable, Borrower owns and has good title to all of Borrower's properties free and clear of all Security Interests, and has not executed any security documents or financing statements relating to such properties. All of Borrower's properties are titled in Borrower's legal name, and Borrower has not used, or filed a financing statement under, any other name for at least the last five (5) years. Hazardous Substances. The terms "hazardous waste," "hazardous substance," "disposal," "release," and "threatened release," as used in this Agreement, shall have the same meanings as set forth in the "CERCLA," "SARA," the Hazardous Materials Transportation Act, 49 U.S.C. Section 1801, et seq., the Resource Conservation and Recovery Act, 42 U.S.C. Section 6901, et seq., or other applicable state or Federal laws, rules, or regulations adopted pursuant to any of the foregoing. Except as disclosed to and acknowledged by Lender in writing, Borrower represents and warrants that: (a) During the period of Borrower's ownership of the properties, there has been no use, generation, manufacture, storage, treatment, disposal, release or threatened release of any hazardous waste or substance by any person on, under, about or from any of the properties. (b) Borrower has no knowledge of, or reason to believe that there has been (i) any use, generation, manufacture, storage, treatment, disposal, release, or threatened release of any hazardous waste or substance, on, under, about or from the properties by any prior owners or occupants of any of the properties, or (ii) any actual or threatened litigation or claims of any kind by any person relating to such matters. (c) Neither Borrower nor any tenant, contractor, agent or other authorized user of any of the properties shall use, generate, manufacture, store, treat, dispose of, or release any hazardous waste or substance on, under, about or from any of the properties; and any such activity shall be conducted in compliance with all applicable federal, state, and local laws, regulations, and ordinances, including without limitation those laws, regulations and ordinances described above. Borrower authorizes Lender and its agents to enter upon the properties to make such inspections and tests as Lender may deem appropriate to determine compliance of the properties with this Section of the Agreement. Any inspections or tests made by Lender shall be at Borrower's expense and for Lender's purposes only and shall not be construed to create any responsibility or liability on the part of Lender to Borrower or to any other person. The representations and warranties contained herein are based on Borrower's due diligence in investigating the properties for hazardous waste and hazardous substances. Borrower hereby (a) releases and waives any future claims against Lender for indemnity or contribution in the event Borrower becomes liable for cleanup or other costs under any such laws, and (b) agrees to indemnify and hold harmless Lender against any and all claims, losses, liabilities, damages, penalties, and expenses which Lender may directly or indirectly sustain or suffer resulting from a breach of this section of the Agreement or as a consequence of any use, generation, manufacture, storage, disposal, release or threatened release of a hazardous waste or substance on the properties. The provisions of this section of the Agreement, including the obligation to indemnify, shall survive the payment of the Indebtedness and the termination or expiration of this Agreement and shall not be affected by Lender's acquisition of any interest in any of the properties, whether by foreclosure or otherwise. Litigation and Claims. No litigation, claim, investigation, administrative proceeding or similar action (including those for unpaid taxes) against Borrower is pending or threatened, and no other event has occurred which may materially adversely affect Borrower's financial condition or properties, other than litigation, claims, or other events, if any, that have been disclosed to and acknowledged by Lender in writing. Taxes. To the best of Borrower's knowledge, all tax returns and reports of Borrower that are or were required to be filed, have been filed, and all taxes, assessments and other governmental charges have been paid in full, except those presently being or to be contested by Borrower in good faith in the ordinary course of business and for which adequate reserves have been provided. Lien Priority. Unless otherwise previously disclosed to Lender in writing, Borrower has not entered into or granted any Security Agreements, or permitted the filing or attachment of any Security Interests on or affecting any of the Collateral directly or indirectly security repayment of Borrower's Loan and Note, that would be prior or that may in any way be superior to Lender's Security Interests and rights in and to such Collateral. Binding Effect. This Agreement, the Note, all Security Agreements directly or indirectly security repayment of Borrower's Loan and Note and all of the Related Documents are binding upon Borrower as well as upon Borrower's successors, representatives and assigns, and are legally enforceable in accordance with their respective terms. Commercial Purposes. Borrower intends to use the Loan proceeds solely for business or commercial related purposes. Employee Benefit Plans. Each employee benefit plan as to which Borrower may have any liability complies in all material respects with all applicable requirements of law and regulations, and (i) no Reportable Event nor Prohibited Transaction (as defined in ERISA) has occurred with respect to any such plan, (ii) Borrower has not withdrawn from any such plan or initiated steps to do so, (iii) no steps have been taken to terminate any such plan, and (iv) there are no unfunded liabilities other than those previously disclosed to Lender in writing. Location of Borrower's Offices and Records. Borrower's place of business, or Borrower's Chief executive office, if Borrower has more than one place of business, is located at 600 KOMAS DRIVE, SALT LAKE CITY, UT 84108. Unless Borrower has designated otherwise in writing this location is also the office or offices where Borrower keeps its records concerning the Collateral. Information. All information heretofore or contemporaneously herewith furnished by Borrower to Lender for the purposes of or in connection with this Agreement or any transaction contemplated hereby is, and all information hereafter furnished by or on behalf of Borrower to Lender will be, true and accurate in every material respect on the date as of which such information is dated or certified; and none of such information is or will be incomplete by omitting to state any material fact necessary to make such information not misleading. Survival of Representations and Warranties. Borrower understands and agrees that Lender, without independent investigation, is relying upon the above representations and warranties in extending Loan Advances to Borrower. Borrower further agrees that the foregoing representations and warranties shall be continuing in nature and shall remain in full force and effect until such time as Borrowers Indebtedness shall be paid in full, or until this Agreement shall be terminated in the manner provided above, whichever is the last to occur. AFFIRMATIVE COVENANTS. Borrower covenants and agrees with Lender that, while this Agreement is in effect, Borrower will: Litigation. Promptly inform Lender in writing of (a) all material adverse changes in Borrower's financial condition, and (b) all existing and all threatened litigation, claims, investigations, administrative proceedings or similar actions affecting Borrower or any Guarantor which could materially affect the financial condition of Borrower or the financial condition of any Guarantor. Financial Records. Maintain its books and records in accordance with generally accepted accounting principles, applied on a consistent basis, and permitted Lender to examine and audit Borrower's books and records at all reasonable times. Financial Statements. Furnish Lender with, as soon as available, but in no event later than one hundred twenty (120) days after the end of each fiscal year, Borrower's balance sheet and income statement for the year ended, audited by a certified public accountant satisfactory to Lender, and, as soon as available, but in no event later than sixty (60) days after the end of each fiscal quarter, Borrower's balance sheet and profit and loss statement for the period ended, prepared and certified as correct to the best knowledge and belief by Borrower's chief financial officer or other officer or person acceptable to Lender. All financial reports required to be provided under this Agreement shall be prepared in accordance with generally accepted accounting principles, applied on a consistent basis, and certified by Borrower as being true and correct. Additional Information. Furnish such additional information and statements, lists of assets and liabilities, agings of receivables and payables, inventory schedules, budgets, forecasts, tax returns, and other reports with respect to Borrower's financial condition and business operations as Lender may request from time to time. Financial Covenants and Ratios. Comply with the following covenants and ratios: Tangible Net Worth. Maintain a minimum Tangible Net Worth of not less than $162,000,000.00. Cash Flow Requirements. Maintain Cash Flow at not less than the following level: Debt Service Coverage (DSC) ratio of less than or equal to 3.50 to 1.00. DSC ratio is defined as earnings before interest, taxes, depreciation, amortization divided by current portion long term debt plus interest plus dividends. DSC ratio will be calculated on a rolling four quarter basis. Additionally, for calculation of this ratio, the $27,925,000 loss from the write-of of capitalized R & D expenses will be excluded through September of 1999. The following provisions shall apply for purposes of determining compliance with the foregoing financial covenants and ratios: shall be measured on a quarterly basis. Except as provided above, all computations made to determine compliance with the requirements contained in this paragraph shall be made in accordance with generally accepted accounting principles, applied on a consistent basis, and certified by Borrower as being true and correct. Insurance. Maintain fire and other risk insurance, public liability insurance, and such other insurance as Lender may require with respect to Borrower's properties and operations, in form, amounts, coverages and with insurance companies reasonably acceptable to Lender. Borrower, upon request of Lender, will deliver to Lender from time to time the policies or certificates of insurance in form satisfactory to Lender, including stipulations that coverages will not be cancelled or diminished without at least ten (10) days' prior written notice to Lender. Each insurance policy also shall include an endorsement providing that coverage in favor of Lender will not be impaired in any way by any act, omission or default of Borrower or any other person. In connection with all policies covering assets in which Lender holds or is offered a security interest for the Loans, Borrower will provide Lender with such loss payable or other endorsements as Lender may require. Insurance Reports. Furnish to Lender, upon request of Lender, reports on each existing insurance policy showing such information as Lender may reasonably request, including without limitation the following: (a) the name of the insurer; (b) the risks insured; (c) the amount of the policy; (d) the properties insured; (e) the then current property values on the basis of which insurance has been obtained, and the manner of determining those values; and (f) the expiration date of the policy. In addition, upon request of Lender (however not more often than annually), Borrower will have an independent appraiser satisfactory to Lender determine, as applicable, the actual cash value or replacement cost of any Collateral. The cost of such appraisal shall be paid by Borrower. Other Agreements. Comply with all terms and conditions of all other agreements, whether now or hereafter existing, between Borrower and any other party and notify Lender immediately in writing of any default in connection with any other such agreements. Loan Fees and Charges. In addition to all other agreed upon fees and charges, pay the following: Borrower agrees to pay Lender, prior to or contemporaneously with the initial advance of Loan proceeds, a nonrefundable loan fee in the amount of $25,000.00. Loan Proceeds. Use all Loan proceeds solely for Borrower's business operations, unless specifically consented to the contrary by Lender in writing. Taxes, Charges and Liens. Pay and discharge when due all of its indebtedness and obligations, including without limitation all assessments, taxes, governmental charges, levies and liens, of every kind and nature, imposed upon Borrower or its properties, income, or profits, prior to the date on which penalties would attach, and all lawful claims that, if unpaid, might become a lien or charge upon any of Borrower's properties, income or profits. Provided however, Borrower will not be required to pay and discharge any such assessment, tax, charge, levy, lien or claim so long as (a) the legality of the same shall be contested in good faith by appropriate proceedings, and (b) Borrower shall have established on its books adequate reserves with respect to such contested assessment, tax, charge, levy, lien, or claim in accordance with generally accepted accounting practices. Borrower, upon demand of Lender, will furnish to Lender evidence of payment of the assessments, taxes, charges, levies, liens and claims and will authorize the appropriate governmental official to deliver to Lender at any time a written statement of any assessments, taxes, charges, levies, liens and claims against Borrower's properties, income, or profits. Performance. Perform and comply with all terms, conditions, and provisions set forth in this Agreement and in the Related Documents in a timely manner, and promptly notify Lender if Borrower learns of the occurrence of any event which constitutes an Event of Default under this Agreement or under any of the Related Documents. Operations. Maintain executive and management personnel with substantially the same qualifications and experience as the present executive and management personnel; provide written notice to Lender of any change in executive and management personnel; conduct its business affairs in a reasonable and prudent manner and in compliance with all applicable federal, state and municipal laws, ordinances, rules and regulations respecting its properties, charters, businesses and operations, including without limitation, compliance with the Americans With Disabilities Act and with all minimum funding standards and other requirements of ERISA and other laws applicable to Borrower's employee benefit plans. Inspection. Permit employees or agents of Lender at any reasonable time to inspect any and all Collateral for the Loan or Loans and Borrower's other properties and to examine or audit Borrower's books, accounts, and records and to make copies and memoranda of Borrower's books, accounts, and records. If Borrower now or at any time hereafter maintains any records (including without limitation computer generated records and computer software programs for the generation of such records) in the possession of a third party, Borrower, upon request of Lender, shall notify such party to permit Lender free access to such records at all reasonable times and to provide Lender with copies of any records it may request, all at Borrower's expense. Compliance Certificate. Unless waived in writing by Lender, provide Lender QUARTERLY and at the time of each disbursement of Loan proceeds with a certificate executed by Borrower's chief financial officer, or other officer or person acceptable to Lender, certifying that the representations and warranties set forth in this Agreement are true and correct as of the date of the certificate and further certifying that, as of the date of the certificate, no Event of Default exists under this Agreement. Environmental Compliance and Reports. Borrower shall comply in all respects with all environmental protection federal, state and local laws, statutes, regulations and ordinances; not cause or permit to exist, as a result of an intentional or unintentional action or omission on its part or on the part of any third party, on property owned and/or occupied by Borrower, any environmental activity where damage may result to the environment, unless such environmental activity is pursuant to and in compliance with the conditions of a permit issued by the appropriate federal, state or local governmental authorities; shall furnish to Lender promptly and in any event within thirty (30) days after receipt thereof a copy of any notice, summons, lien, citation, directive, letter or other communication from any governmental agency or instrumentality concerning any intentional or unintentional action or omission on Borrower's part in connection with any environmental activity whether or not there is damage to the environment and/or other natural resources. Additional Assurances. Make, execute and deliver to Lender such promissory notes, mortgages, deeds of trust, security agreements, financing statements, instruments, documents and other agreements as Lender or its attorneys may reasonably request to evidence and secure the Loans and to perfect all Security Interests. RECOVERY OF ADDITIONAL COSTS. If the imposition of or any change in any law, rule, regulation or guideline, or the interpretation or application of any thereof by any court or administrative or governmental authority (including any request or policy not having the force of law) shall impose, modify or make applicable any taxes (except U.S. federal, state or local income or franchise taxes imposed on Lender), reserve requirements, capital adequacy requirements or other obligations which would (a) increase the cost to Lender for extending or maintaining the credit facilities to which this Agreement relates, (b) reduce the amounts payable to Lender under this Agreement or the Related Documents, or (c) reduce the rate of return on Lender's capital as a consequence of Lender's obligations with respect to the credit facilities to which this Agreement relates, then Borrower agrees to pay Lender such additional amounts as will compensate Lender therefor, within five (5) days after Lender's written demand for such payment, which demand shall be accompanied by an explanation of such imposition or charge and a calculation in reasonable detail of the additional amounts payable by Borrower, which explanation and calculations shall be conclusive in the absence of manifest error. NEGATIVE COVENANTS. Borrower covenants and agrees with Lender that while this Agreement is in effect, Borrower shall not, without the prior written consent of Lender: Indebtedness and Liens. (a) Except for trade debt incurred in the normal course of business and indebtedness to Lender contemplated by this Agreement, create, incur or assume indebtedness for borrowed money, including capital leases, (b) except as allowed as a Permitted Lien, sell, transfer, mortgage, assign, pledge, lease, grant a security interest in, or encumber any of Borrower's assets, or (c) sell with recourse any of Borrower's accounts, except to Lender. Continuity of Operations. (a) Engage in any business activities substantially different than those in which Borrower is presently engaged, (b) cease operations, liquidate, merge, transfer, acquire or consolidate with any other entity, change ownership, change its name, dissolve or transfer or sell Collateral out of the ordinary course of business, (c) pay any dividends on Borrower's stock (other than dividends payable in its stock), provided, however that notwithstanding the foregoing, but only so long as no Event of Default has occurred and is continuing or would result from the payment of dividends, if Borrower is a "Subchapter S Corporation" (as defined in the Internal Revenue Code of 1986, as amended), Borrower may pay cash dividends on its stock to its shareholders from time to time in amounts necessary to enable the shareholders to pay income taxes and make estimated income tax payments to satisfy their liabilities under federal and state law which arise solely from their status as Shareholders of a Subchapter S Corporation because of their ownership or shares of stock of Borrower, or (d) purchase or retire any of Borrower's outstanding shares or alter or amend Borrower's capital structure. Loans, Acquisitions and Guaranties. (a) Loan, invest in or advance money or assets, (b) purchase, create or acquire any interest in any other enterprise or entity, or (c) incur any obligation as surety or guarantor other than in the ordinary course of business. CESSATION OF ADVANCES. If Lender has made any commitment to make any Loan to Borrower, whether under this Agreement or under any other agreement, Lender shall have no obligation to make Loan Advances or to disburse Loan proceeds if: (a) Borrower or any Guarantor is in default under the terms of this Agreement or any of the Related Documents or any other agreement that Borrower or any Guarantor has with Lender; (b) Borrower or any Guarantor becomes insolvent, files a petition in bankruptcy or similar proceedings, or is adjudged a bankrupt; (c) there occurs a material adverse change in Borrower's financial condition, in the financial condition of any Guarantor, or in the value of any Collateral security any Loan; (d) any Guarantor seeks, claims or otherwise attempts to limit, modify or revoke such Guarantor's guaranty of the Loan or any other loan with Lender; or (e) Lender in good faith deems itself insecure, even though no Event of Default shall have occurred. ACCESS LAWS. Without limiting the generality of any provision of this agreement requiring Borrower to comply with applicable laws, rules and regulations, Borrower agrees that it will at all times comply with applicable laws relating to disabled access including, but not limited to, all applicable titles of the Americans with Disabilities Act of 1990. ADDITIONAL FINANCIAL COVENANTS AND RATIOS. NET WORTH RATIO. Maintain a ratio of Total Liabilities to Tangible Net Worth of less than .50 to 1.00. Net Worth Ratio is defined as total liabilities minus subordinated debt divided by tangible net worth plus subordinated debt. QUICK RATIO. Maintain a Quick ratio greater than or equal to 1.25 to 1.00. Quick Ratio is defined as current assets minus inventory divided by current liabilities. MISCELLANEOUS COVENANTS. If the Line of Credit will be used for the acquisition of a company, Evans and Sutherland will first demonstrate in proforma financial statements the impact of the acquisition and projected compliance to the ratio covenants before the advance is granted. RIGHT OF SETOFF. Borrower grants to Lender a contractual security interest in, and hereby assigns, conveys, delivers, pledges, and transfers to Lender all Borrower's right, title and interest in and to, Borrower's accounts with Lender (whether checking, savings, or some other account), including without limitation all accounts held jointly with someone else and all accounts Borrower may open in the future, excluding however all IRA and Keogh accounts, and all trust accounts for which the grant of a security interest would be prohibited by law. Borrower authorizes Lender, to the extent permitted by applicable law, to charge or setoff all sums owing on the indebtedness against any and all such accounts. EVENTS OF DEFAULT. Each of the following shall constitute an Event of Default under this Agreement: Default on Indebtedness. Failure of Borrower to make any payment when due on the Loans. Other Defaults. Failure of Borrower or any Grantor to comply with or to perform when due any other term, obligation, covenant or condition contained in this Agreement or in any of the Related Documents, or failure of Borrower to comply with or to perform any other term, obligation, covenant or condition contained in any other agreement between Lender and Borrower. False Statements. Any warranty, representation or statement made or furnished to Lender by or on behalf of Borrower or any Grantor under this Agreement or the Related Documents is false or misleading in any material respect at the time made or furnished, or becomes false or misleading at any time thereafter. Defective Collateralization. This Agreement or any of the Related Documents ceases to be in full force and effect (including failure of any Security Agreement to create a valid and perfected Security Interest) at any time and for any reason. Insolvency. The dissolution or termination of Borrower's existence as a going business, the insolvency of Borrower, the appointment of a receiver for any part of Borrower's property, any assignment for the benefit of creditors, any type of creditor workout, or the commencement of any proceeding under any bankruptcy or insolvency laws by or against Borrower. Creditor or Forfeiture Proceedings. Commencement of foreclosure or forfeiture proceedings, whether by judicial proceeding, self-help, repossession or any other method, by any creditor of Borrower, any creditor of any Grantor against any collateral securing the Indebtedness or by any governmental agency. This includes a garnishment, attachment, or levy on or of any of Borrower's deposit accounts with Lender. Events Affecting Guarantor. Any of the preceding events occurs with respect to any Guarantor of any of the Indebtedness or any Guarantor dies or becomes incompetent, or revokes or disputes the validity of, or liability under, any Guaranty of the Indebtedness. Change In Ownership. Any change in ownership of twenty-five percent (25%) or more of the common stock of Borrower. Adverse Change. A material adverse change occurs in Borrower's financial condition, or Lender believes the prospect of payment or performance of the Indebtedness is impaired. Insecurity. Lender, in good faith, deems itself insecure. EFFECT OF AN EVENT OF DEFAULT. If any Event of Default shall occur, except where otherwise provided in this Agreement or the Related Documents, all commitments and obligations of Lender under this Agreement or the Related Documents or any other agreement immediately will terminate (including any obligation to make Loan Advances or disbursements), and, at Lender's option, all Indebtedness immediately will become due and payable, all without notice of any kind to Borrower, except that in the case of an Event of Default of the type described in the "Insolvency" subsection above, such acceleration shall be automatic and not optional. In addition, Lender shall have all the rights and remedies provided in the Related Documents or available at law, in equity, or otherwise. Except as may be prohibited by applicable law, all of Lender's rights and remedies shall be cumulative and may be exercised singularly or concurrently. Election by Lender to pursue any remedy shall not exclude pursuit of any other remedy, and an election to make expenditures or to take action to perform an obligation of Borrower or of any Grantor shall not affect Lender's right to declare a default and to exercise its rights and remedies. MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of this Agreement: Amendments. This Agreement, together with any Related Documents, constitutes the entire understanding and agreement of the parties as to the matters set forth in this Agreement. No alteration of or amendment to this Agreement shall be effective unless given in writing and signed by the party or parties sought to be charged or bound by the alteration or amendment. Applicable Law. This Agreement has been delivered to Lender and accepted by Lender in the State of Utah. If there is a lawsuit, Borrower agrees upon Lender's request to submit to the jurisdiction of the courts of Salt Lake County, the State of Utah. Subject to the provisions on arbitration, this Agreement shall be governed by and construed in accordance with the laws of the State of Utah. Arbitration. Lender and Borrower agree that all disputes, claims and controversies between them, whether individual, joint, or class in nature, arising from this Agreement or otherwise, including without limitation contract and tort disputes, shall be arbitrated pursuant to the Rules of the American Arbitration Association, upon request of either party. No act to take or dispose of any Collateral shall constitute a waiver of this arbitration agreement or be prohibited by this arbitration agreement. This includes, without limitation, obtaining injunctive relief or a temporary restraining order; invoking a power of sale under any deed of trust or mortgage; obtaining a writ of attachment or imposition of a receiver; or exercising any rights relating to personal property, including taking or disposing of such property with or without judicial process pursuant to Article 9 of the Uniform Commercial Code. Any disputes, claims, or controversies concerning the lawfulness or reasonableness of any act, or exercise of any right, concerning any Collateral, including any claim to rescind, reform, or otherwise modify any agreement relating to the Collateral, shall also be arbitrated, provided however that no arbitrator shall have the right or the power to enjoin or restrain any act of any party. Judgment upon any award rendered by any arbitrator may be entered in any court having jurisdiction. Nothing in this Agreement shall preclude any party from seeking equitable relief from a court of competent jurisdiction. The statute of limitations, estoppel, waiver, laches, and similar doctrines which would otherwise be applicable in an action brought by a party shall be applicable in any arbitration proceeding, and the commencement of an arbitration proceeding shall be deemed the commencement of an action for these purposes. The Federal Arbitration Act shall apply to the construction, interpretation, and enforcement of this arbitration provision. Caption Headings. Caption headings in this Agreement are for convenience purposes only and are not to be used to interpret or define the provisions of this Agreement. Multiple Parties; Corporate Authority. All obligations of Borrower under this Agreement shall be joint and several, and all references to Borrower shall mean each and every Borrower. This means that each of the persons signing below is responsible for all obligations in this Agreement. Consent to Loan Participation. Borrower agrees and consents to Lender's sale or transfer, whether now or later, of one or more participation interests in the Loans to one or more purchasers, whether related or unrelated to Lender. Lender may provide, without any limitation whatsoever, to any one or more purchasers, or potential purchasers, any information or knowledge Lender may have about Borrower or about any other matter relating to the Loan, and Borrower hereby waives any rights to privacy it may have with respect to such matters. Borrower additionally waives any and all notices of sale of participation interests, as well as all notices of any repurchase of such participation interests. Borrower also agrees that the purchasers of any such participation interests will be considered as the absolute owners of such interests in the Loans and will have all the rights granted under the participation agreement or agreements governing the sale of such participation interests. Borrower further waives all rights of offset or counterclaim that it may have now or later against Lender or against any purchaser or such a participation interest and unconditionally agrees that either Lender or such purchaser may enforce Borrower's obligation under the Loans irrespective of the failure or insolvency of any holder of any interest in the Loans. Borrower further agrees that the purchaser of any such participation interests may enforce its interests irrespective of any personal claims or defenses that Borrower may have against Lender. Costs and Expenses. Borrower agrees to pay upon demand all of Lender's expenses, including without limitation reasonable attorneys' fees, incurred in connection with the preparation, execution, enforcement, modification and collection of this Agreement or in connection with the Loans made pursuant to this Agreement. Lender may pay someone else to help collect the Loans and to enforce this Agreement, and Borrower will pay that amount. This includes, subject to any limits under applicable law, Lender's reasonable attorneys' fees and Lender's legal expenses, whether or not there is a lawsuit, including reasonable attorneys' fees for bankruptcy proceedings (including efforts to modify or vacate any automatic stay or injunction), appeals, and any anticipated post-judgment collection services. Borrower also will pay any court costs, in addition to all other sums provided by law. Notices. All notices required to be given under this Agreement shall be given in writing, may be sent by telefacsimile (unless otherwise required by law), and shall be effective when actually delivered or when deposited with a nationally recognized overnight courier or deposited in the United States mail, first class, postage prepaid, addressed to the party to whom the notice is to be given at the address shown above. Any party may change its address for notices under this Agreement by giving formal written notice to the other parties, specifying that the purpose of the notice is to change the party's address. To the extent permitted by applicable law, if there is more than one Borrower, notice to any Borrower will constitute notice to all Borrowers. For notice purposes, Borrower will keep Lender informed at all times of Borrower's current address(es). Severability. If a court of competent jurisdiction finds any provision of this Agreement to be invalid or unenforceable as to any person or circumstance, such finding shall not render that provision invalid or unenforceable as to any other persons or circumstances. If feasible, any such offending provision shall be deemed to be modified to be within the limits of enforceability or validity; however, if the offending provision cannot be so modified, it shall be stricken and all other provisions of this Agreement in all other respects shall remain valid and enforceable. Subsidiaries and Affiliates of Borrower. To the extent the context of any provisions of this Agreement makes it appropriate, including without limitation any representation, warranty or covenant, the word "Borrower" as used herein shall include all subsidiaries and affiliates of Borrower. Notwithstanding the foregoing however, under no circumstances shall this Agreement be construed to require Lender to make any Loan or other financial accommodation to any subsidiary or affiliate of Borrower. Successors and Assigns. All covenants and agreements contained by or on behalf of Borrower shall bind its successors and assigns and shall inure to the benefit of Lender, its successors and assigns. Borrower shall not, however, have the right to assign its rights under this Agreement or any interest therein, without the prior written consent of Lender. Survival. All warranties, representations, and covenants made by Borrower in this Agreement or in any certificate or other instrument delivered by Borrower to Lender under this Agreement shall be considered to have been relied upon by Lender and will survive the making of the Loan and delivery to Lender of the Related Documents, regardless of any investigation made by Lender or on Lender's behalf. Time Is of the Essence. Time is of the essence in the performance of this Agreement. Waiver. Lender shall not be deemed to have waived any rights under this Agreement unless such waiver is given in writing and signed by Lender. No delay or omission on the part of Lender in exercising any right shall operate as a waiver of such right or any other right. A waiver by Lender of a provision of this Agreement shall not prejudice or constitute a waiver of Lender's right otherwise to demand strict compliance with that provision or any other provision of this Agreement. No prior waiver by Lender, nor any course of dealing between Lender and Borrower, or between Lender and any Grantor, shall constitute a waiver of any of Lender's rights or of any obligations of Borrower or of any Grantor as to any future transactions. Whenever the consent of Lender is required under this Agreement, the granting of such consent by Lender in any instance shall not constitute continuing consent in subsequent instances where such consent is required, and in all cases such consent may be granted or withheld in the sole discretion of Lender. FINAL AGREEMENT. Borrower understands that this Agreement and the related loan documents are the final expression of the agreement between Lender and Borrower and may not be contradicted by evidence of any alleged oral agreement. BORROWER ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS BUSINESS LOAN AGREEMENT, AND BORROWER AGREES TO ITS TERMS. THIS AGREEMENT IS DATED AS OF NOVEMBER 13, 1998. BORROWER: EVANS & SUTHERLAND COMPUTER CORPORATION X ____/S/ GRANT SCHULTZ______________________________ Authorized Officer LENDER: U.S. Bank National Association By: _______________________________________________ Authorized Officer EX-10.9 3 ADDENDUM TO BUSINESS LOAN AGREEMENT ADDENDUM TO BUSINESS LOAN AGREEMENT THIS ADDENDUM TO BUSINESS LOAN AGREEMENT ("Addendum") is made and entered into effective as of the 5th day of February 1999, by and between U.S. BANK NATIONAL ASSOCIATION ("Lender"), and EVANS AND SUTHERLAND COMPUTER CORPORATION ("Borrower"). RECITALS: A. Lender and Borrower entered into a Business Loan Agreement, dated November 13, 1998 (the "Loan Agreement") pursuant to which Lender agreed to advance to Borrower an unsecured revolving line of credit in the maximum line amount of $20,000,000.00 (the "Loan"). B. Lender and Borrower desire to amend certain provisions of the Loan Agreement and to make corresponding changes to the other documents evidencing Borrower's obligations to Lender under the Loan, as set forth below in this Addendum. NOW, THEREFORE, in consideration of the mutual promises contained in this Addendum, and for other good and valuable consideration. the receipt and legal sufficiency of which are hereby acknowledged, Lender and Borrower agree as follows: 1. Loan Documents. As used in this Addendum, the term "Loan Documents" refers to the following documents, dated effective as of November 13, 1998, signed by Borrower relating to the Loan: (a) The Loan Agreement; (b) The Alternative Rate Options Promissory Note (Prime Rate, LIBOR), in the maximum principal amount of $20,000,000.00; (c) The Negative Pledge Agreement (the "Negative Pledge Agreement"); (d) The Corporate Resolution to Borrow; and (e) The Loan Checklist. 2. Definition of Borrower. The definition of the term "Borrower" set forth in the Loan Agreement is deleted in its entirety and replaced by the following: Borrower. The word "Borrower" means EVANS AND SUTHERLAND COMPUTER CORPORATION. The foregoing definition shall amend all references to Borrower in all of the Loan Documents. 3. Actions by Lender. In the Loan Documents, whenever Lender is granted a right to take action against Borrower as a result of a default, act, or omission by or on the part of Borrower, or to otherwise exercise its judgment or discretion under the Loan Documents, unless Lender, under the express terms of the Loan Documents, is required to act under a higher standard of care, such as "good faith," Lender shall be required to act reasonably. 4. Materiality. In the event Borrower does not satisfy the requirements of any affirmative or negative covenant contained in any of the Loan Documents, or in the event a representation or warranty given by Borrower in any of the Loan Documents proves to be or to have been incorrect when made, such circumstance shall not be deemed an event of default under the Loan Documents: (a) so long as there is no outstanding balance under the Note; or (b) if there is a balance under the Note (1) so long as Borrower is in compliance with all covenants and financial ratios contained in the Loan Agreement both before and after giving effect to such circumstance, or (2) unless the same results in a material impairment of Borrower's ability to repay the Loan, or would disqualify Borrower From receiving credit from Lender based on Lender's then current underwriting standards. Nothing contained in this paragraph shall be deemed a waiver of any condition precedent to an advance of Loan proceeds as described in the Loan Agreement. 5. Grace Period. Upon the occurrence of an event of default under any of the Loan Documents, Lender shall give Borrower notice and an opportunity to cure the default in accordance with the following: (a) Monetary Default. Borrower shall not be entitled to any notice regarding defaults with respect to regularly scheduled payments of principal and accrued interest under the Note. However, in the event of any other monetary default, Borrower shall have 15 days following receipt of written notice from Lender in which to cure such default. (b) Nonmonetary Default. In the event of a nonmonetary default, Borrower shall have 30 days after receipt of written notice from Lender specifying the nonmonetary default in which to effect a cure. However, if the nonmonetary default cannot reasonably be corrected within such 30-day period, Borrower shall have an additional 30 days to remedy such nonmonetary default if Borrower notifies Lender of the manner in which the nonmonetary default shall be cured, and if appropriate corrective action is instituted within the original 30-day period and is diligently pursued thereafter. Occurrence of an event of default under any of the Loan Documents shall not entitle Lender to exercise its rights and remedies under the Loan Documents or applicable law, unless such event is not cured within the applicable notice and cure period. 6. Financial Covenants and Ratios. Unless otherwise expressly defined in the Loan Agreement, all financial covenants and ratios described in the Loan Agreement shall be calculated using Borrower's consolidated financial statements and the definitions and standards imposed by generally accepted accounting principles. Borrower's financial reporting requirements shall be satisfied by Borrower submitting consolidated financial statements and information as set forth in the Loan Agreement. 7. Cash Flow Requirements. The cash flow requirements covenant contained in the "Affirmative Covenants" section of the Loan Agreement is deleted in its entirety and replaced by the following: Cash Flow Requirements. Maintain Cash Flow at not less than the following level: Debt Service Coverage (DSC) ratio of greater than or equal to 3.50 to 1.00. DSC ratio is defined as earnings before interest, taxes, depreciation, amortization, and all other noncash expenses divided by current portion long-term debt plus interest plus dividends. DSC ratio will be calculated on a rolling four-quarter basis. Additionally, for calculation of this ratio, the $27,925,000 loss from the write-off of capitalized R&D expenses will be excluded through September of 1999. 8. Indebtedness and Liens. The negative covenant in the Loan Agreement regarding "Indebtedness and Liens" is deleted in its entirety and replaced by the following: Indebtedness and Liens. (a) Except for trade debts and capital leases incurred or entered into in the normal course of business and indebtedness to Lender contemplated by this Agreement, create, incur or assume indebtedness for borrowed money, (b) except as allowed as a Permitted Lien or otherwise accomplished in the normal course of business, sell, transfer, mortgage, assign, pledge, lease grant a security interest in, or encumber any of Borrower's assets, or (c) sell with recourse any of Borrower's accounts, except to Lender. 9. Net Worth Ratio. The net worth ratio covenant contained in the "Additional Financial Covenants and Ratios" section of the Loan Agreement is deleted in its entirety and replaced by the following: Net Worth Ratio. Maintain a ratio of Total Liabilities to Tangible Net Worth of less than .65 to 1.00. Net Worth Ratio is defined as total liabilities minus subordinated debt divided by tangible net worth plus subordinated debt. 10. Subsidiaries and Affiliates of Borrower. The miscellaneous provision in the Loan Agreement regarding "Subsidiaries and Affiliates of Borrower" is deleted in its entirety and replaced by the following: Subsidiaries and Affiliates of Borrower. Under no circumstances shall this Agreement be construed to require Lender to make any Loan or other financial accommodation to any subsidiary or affiliate of Borrower, nor shall any affirmative or negative covenant or any representation or warranty contained in the Loan Documents be construed to be separately applicable to any subsidiary or affiliate of Borrower. Negative Pledge Agreement. The Negative Pledge Agreement is hereby terminated, and neither Lender nor Borrower shall have any further duty or obligation under the Negative Pledge Agreement. 12. Unsecured Line of Credit. Lender and Borrower acknowledge and agree that the Loan is an unsecured revolving line of credit. All references in the Loan Documents to collateral, security interests and remedies with respect to collateral are inapplicable, except to the extent that any advance of credit to Borrower under the Loan Documents is actually secured by Borrower's grant of a security interest in favor of Lender. 13. Effect of Addendum. This Addendum amends all of the Loan Documents. In the event of a conflict in the provisions of this Addendum and any of the Loan Documents the provisions of this Addendum shall control, and the inconsistent Loan Document shall be deemed modified to be consistent here with. 14. Reaffirmation. Except as modified by this Addendum, Borrower reaffirms Borrower's obligations to Lender under the Loan Documents, and agrees to abide by the terms covenants and conditions thereof. 15. Successors and Assigns. This Addendum shall inure to the benefit of and shall be binding upon Lender, Borrower and their respective successors and assigns. DATED effective as of the date first above written. LENDER: /S/ GEORGE WHITMUR U.S. BANK NATIONAL ASSOCIATION BORROWER: /S/ JOHN T. LEMLEY EVANS AND SUTHERLAND COMPUTER CORPORATION EX-10.10 4 FORM OF SEVERANCE AGREEMENT SEVERANCE AGREEMENT THIS SEVERANCE AGREEMENT (the "Agreement") is made and entered into as of the 11th day of December, 1998, by and between EVANS & SUTHERLAND COMPUTER CORPORATION, a Utah corporation (the "Company") and ______________________. W I T N E S S E T H: WHEREAS, the Company has determined that is appropriate and in the best interests of the Company to provide to the Executive protection in the event of certain terminations of the Executive's employment relationship with the Company in accordance with the terms and conditions contained herein and the Executive desires to have such protection. NOW, THEREFORE, in consideration of the foregoing and of the mutual covenants and agreements hereinafter set forth, the Company and the Executive hereto mutually covenant and agree as follows: 1. DEFINITIONS. Whenever used in this Agreement, the following terms shall have the meanings set forth below: a. "Accrued Benefits" shall mean the amount payable not later than ten (10) days following an applicable Termination Date and which shall be equal to the sum of the following amounts: (i) All salary earned or accrued through the Termination Date; (ii) Reimbursement for any and all monies advanced in connection with the Executive's employment for reasonable and necessary expenses incurred by the Executive through the Termination Date; (iii) Any and all other cash benefits previously earned through the Termination Date and deferred at the election of the Executive or pursuant to any deferred compensation plans then in effect; (iv) All other payments and benefits to which the Executive may be entitled under the terms of any benefit plan of the Company. b. "Act" shall mean the Securities Exchange Act of 1934; c. "Affiliate" shall have the same meaning as given to that term in Rule 12b-2 of Regulation 12B promulgated under the Act; d. "Base Period Income" shall be an amount equal to the Executive's "annualized includable compensation" for the "base period" as defined in Sections 280G(d)(1) and (2) of the Code and the regulations adopted thereunder; e. "Beneficial Owner" shall have the same meaning as given to that term in Rule 13d-3 of the General Rules and Regulations of the Act, provided that any pledgee of Company voting securities shall not be deemed to be the Beneficial Owner thereof prior to its disposition of, or acquisition of voting rights with respect to, such securities; f. "Board" shall mean the Board of Directors of the Company; g. "Cause" shall mean any of the following: (i) The engaging by the Executive in fraudulent conduct, as evidenced by a determination in a binding and final judgment, order or decree of a court or administrative agency of competent jurisdiction, in effect after exhaustion or lapse of all rights of appeal, in an action, suit or proceeding, whether civil, criminal, administrative or investigative, which the Board determines, in its sole discretion, has a significant adverse impact on the Company in the conduct of the Company's business; (ii) Conviction of a felony, as evidenced by a binding and final judgment, order or decree of a court of competent jurisdiction, in effect after exhaustion or lapse of all rights of appeal, which the Board determines, in its sole discretion, has a significant adverse impact on the Company in the conduct of the Company's business; (iii) Neglect or refusal by the Executive to perform the Executive's duties or responsibilities (unless significantly changed without the Executive's consent); or (iv) A significant violation by the Executive of the Company's established policies and procedures; Notwithstanding the foregoing, Cause shall not exist under Sections 1(g)(iii) and (iv) herein unless the Company furnishes written notice to the Executive of the specific offending conduct and the Executive fails to correct such offending conduct within the thirty (30) day period commencing on the receipt of such notice. h. "Change of Control" shall mean a change in ownership or managerial control of the stock, assets or business of the Company resulting from one or more of the following circumstances: (i) A change of control of the Company, of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A promulgated under the Act, or any successor regulation of similar import, regardless of whether the Company is subject to such reporting requirement; (ii) A change in ownership of the Company through a transaction or series of transactions, such that any Person or Persons (other than any current officer of the Company or member of the Board) is (are) or become(s), in the aggregate, the Beneficial Owner(s), directly or indirectly, of securities of the Company representing twenty percent (20%) or more of the Company's then outstanding securities; (iii) Any consolidation or merger of the Company in which the Company is not the continuing or surviving corporation or pursuant to which shares of the common stock of the Company would be converted into cash (other than cash attributable to dissenters' rights), securities or other property provided by a Person or Persons other than the Company, other than a consolidation or merger of the Company in which the holders of the common stock of the Company immediately prior to the consolidation or merger have approximately the same proportionate ownership of common stock of the surviving corporation immediately after the consolidation or merger; (iv) The shareholders of the Company approve a sale, transfer, liquidation or other disposition of all or substantially all of the assets of the Company to a Person or Persons; (v) During any period of two (2) consecutive years, individuals who, at the beginning of such period, constituted the Board of Directors of the Company cease, for any reason, to constitute at least a majority thereof, unless the election or nomination for election of each new director was approved by the vote of at least two-thirds (2/3) of the directors then still in office who were directors at the beginning of the period; (vi) The filing of a proceeding under Chapter 7 of the Federal Bankruptcy Code (or any successor or other statute of similar import) for liquidation with respect to the Company; (vii) The filing of a proceeding under Chapter 11 of the Federal Bankruptcy Code (or any successor or other statute of similar import) for reorganization with respect to the Company if in connection with any such proceeding, this Agreement is rejected, or a plan of reorganization is approved an element of which plan entails the liquidation of all or substantially all the assets of the Company. A "Change of Control" shall be deemed to occur on the actual date on which any of the foregoing circumstances shall occur; provided, however, that in connection with a "Change of Control" specified in Section 1(h)(vii), a "Change of Control" shall be deemed to occur on the date of the filing of the relevant proceeding under Chapter 11 of the Federal Bankruptcy Code (or any successor or other statute of similar import). i. "Change of Control Period" shall mean the period commencing on the date a Change of Control occurs and ending on the second anniversary of such Change of Control; j. "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time; k. "Disability" shall mean a physical or mental condition whereby the Executive is unable to perform on a full-time basis the customary duties of the Executive under this Agreement; l. "Federal Short Term-Rate" shall mean the rate defined in Section 1274(d)(1)(C)(i) of the Code; m. "Good Reason" shall mean: (i) The required relocation of the Executive, without the Executive's consent, to an employment location which is more than seventy-five (75) miles from the Executive's employment location on the day preceding the date of this Agreement; (ii) The removal of the Executive from or any failure to reelect the Executive to any of the positions held by the Executive as of the date of this Agreement or any other positions to which the Executive shall thereafter be elected or assigned except in the event that such removal or failure to reelect relates to the termination by the Company of the Executive's employment for Cause or by reason of death, Disability or voluntary retirement; (iii) A significant adverse change, without the Executive's written consent, in the nature or scope of the Executive's authority, powers, functions, duties or responsibilities, or a material reduction in the level of support services, staff, secretarial and other assistance, office space and accoutrements available to a level below that which was provided to the Executive on the day preceding the date of this Agreement and that which is necessary to perform any additional duties assigned to the Executive following the date of this Agreement, which change or reduction is not generally effective for all executives employed by the Company (or its successor) in the Executive's class or category; or (iv) Breach or violation of any material provision of this Agreement by the Company; n. "Gross Income" shall mean the average compensation earned by the Executive for purposes of Section 61 of the Code for the prior two (2) taxable years, plus any other compensation payable to the Executive by the Company, whether taxable or non-taxable. o. "Notice of Termination" shall mean the notice described in Section 3 herein; p. "Person" shall mean any individual, partnership, joint venture, association, trust, corporation or other entity, other than an employee benefit plan of the Company or an entity organized, appointed or established pursuant to the terms of any such benefit plan; q. "Termination Date" shall mean, except as otherwise provided in Section 3 herein, (i) The Executive's date of death; (ii) Thirty (30) days after the delivery of the Notice of Termination if the Executive's employment is terminated by the Executive voluntarily; and (iii) Thirty (30) days after the delivery of the Notice of Termination if the Executive's employment is terminated by the Company for any reason other than death or Disability; r. "Termination Payment" shall mean the payment described in Section 2 herein; s. "Total Payments" shall mean the sum of the Termination Payment and any other "payments in the nature of compensation" (as defined in Section 280G of the Code and the regulations adopted thereunder) to or for the benefit of the Executive, the receipt of which is contingent on a Change of Control and to which Section 280G of the Code applies. 2. TERMINATION PAYMENT. a. If during a Change of Control Period, the Executive's employment is terminated by the Executive for Good Reason or by the Company for any reason other than death, Disability, or Cause, the Termination Payment payable to the Executive by the Company or an affiliate of the Company shall be two and one-half (2.5) times the Executive's Gross Income for the year preceding the Termination Date. b. If the Executive's employment is terminated by the Executive within one hundred eighty (180) days of a Change of Control, which has not been approved by a majority of the directors in office immediately preceding such Change of Control, the Termination Payment payable to the Executive by the Company or an affiliate of the Company shall be two and one-half (2.5) times the Executive 's Gross Income for the year preceding the Termination Date. c. It is the intention of the Company and the Executive that no portion of the Termination Payment and any other "payments in the nature of compensation" (as defined in Section 280G of the Code and the regulations adopted thereunder) to or for the benefit of the Executive under this Agreement, or under any other agreement, plan or arrangement, be deemed to be an "excess parachute payment" as defined in Section 280G of the Code. It is agreed that the present value of the Total Payments shall not exceed an amount equal to two and ninety-nine hundredths (2.99) times the Executive's Base Period Income, which is the maximum amount which the Executive may receive without becoming subject to the tax imposed by Section 4999 of the Code or which the Company may pay without loss of deduction under Section 280G(a) of the Code. Present value for purposes of this Agreement shall be calculated in accordance with the regulations issued under Section 280G of the Code. Within sixty (60) days following delivery of the Notice of Termination or notice by the Company to the Executive of its belief that there is a payment or benefit due the Executive which will result in an excess parachute payment as defined in Section 280G of the Code, the Executive and the Company shall, at the Company's expense, obtain such opinions as more fully described hereafter, which need not be unqualified, of legal counsel and certified public accountants or a firm of recognized executive compensation consultants. The Executive shall select said legal counsel, certified public accountants and executive compensation consultants; provided, however, that if the Company does not accept one (1) or more of the parties selected by the Executive, the Company shall provide the Executive with the names of such legal counsel, certified public accountants and/or executive compensation consultants as the Company may select; provided, further, however, that if the Executive does not accept the party or parties selected by the Company, the legal counsel, certified public accountants and/or executive compensation consultants selected by the Executive and the Company, respectively, shall select the legal counsel, certified public accountants and/or executive compensation consultants, whichever is applicable, who shall provide the opinions required by this Section 2(d). The opinions required hereunder shall set forth (a) the amount of the Base Period Income of the Executive, (b) the present value of Total Payments and (c) the amount and present value of any excess parachute payments. In the event that such opinions determine that there would be an excess parachute payment, the Termination Payment or any other payment determined by such counsel to be includable in Total Payments shall be reduced or eliminated as specified by the Executive in writing delivered to the Company within thirty (30) days of his or her receipt of such opinions or, if the Executive fails to so notify the Company, then as the Company shall reasonably determine, so that under the bases of calculation set forth in such opinions there will be no excess parachute payment. The provisions of this Section 2(d), including the calculations, notices and opinions provided for herein shall be based upon the conclusive presumption that the compensation and other benefits, including but not limited to the Accrued Benefits, earned on or after the date of Change of Control by the Executive pursuant to the Company's compensation programs if such payments would have been made in the future in any event, even though the timing of such payment is triggered by the Change of Control, are reasonable compensation for services rendered prior to the Change of Control; provided, however, that in the event legal counsel so requests in connection with the opinion required by this Section 2(d), a firm of recognized executive compensation consultants, selected by the Executive and the Company pursuant to the procedures set forth above, shall provide an opinion, upon which such legal counsel may rely, as to the reasonableness of any item of compensation as reasonable compensation for services rendered prior to the Change of Control by the Executive. In the event that the provisions of Sections 280G and 4999 of the Code are repealed without succession, this Section 2(d) shall be of no further force or effect; d. The Termination Payment shall be payable in a lump sum not later than ten (10) days following the Executive's Termination Date. Such lump sum payment shall not be reduced by any present value or similar factor. Further, the Executive shall not be required to mitigate the amount of such payment by securing other employment or otherwise and such payment shall not be reduced by reason of the Executive securing other employment or for any other reason. 3. TERMINATION NOTICE AND PROCEDURE. Any termination by the Company or the Executive of the Executive's employment during the Employment Period shall be communicated by written Notice of Termination to the Executive, if such Notice of Termination is delivered by the Company, and to the Company, if such Notice of Termination is delivered by the Executive, all in accordance with the following procedures: a. The Notice of Termination shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances alleged to provide a basis for termination; b. Any Notice of Termination by the Company shall be approved by a resolution duly adopted by a majority of the directors of the Company then in office; c. If the Executive shall in good faith furnish a Notice of Termination for Good Reason and the Company notifies the Executive that a dispute exists concerning the termination, within the fifteen (15) day period following the Company's receipt of such notice, the Executive shall continue the Executive's employment during such dispute. If it is thereafter determined that (i) Good Reason did exist, the Executive's Termination Date shall be the earlier of (A) the date on which the dispute is finally determined, by mutual written agreement of the parties, (B) the date of the Executive's death or (C) one day prior to the second (2nd) anniversary of a Change of Control, and the Executive's Termination Payment, if applicable, shall reflect events occurring after the Executive delivered the Executive's Notice of Termination; or (ii) Good Reason did not exist, the employment of the Executive shall continue after such determination as if the Executive had not delivered the Notice of Termination asserting Good Reason; d. If the Executive gives notice to terminate his employment for Good Reason and a dispute arises as to the validity of such dispute, and the Executive does not continue his employment during such dispute, and it is finally determined that the reason for termination set forth in such Notice of Termination did not exist, if such notice was delivered by the Executive, the Executive shall be deemed to have voluntarily terminated the Executive's employment other than for Good Reason. 4. REMEDIES AND JURISDICTION. a. The Executive hereby acknowledges and agrees that a breach of the agreements contained in this Agreement will cause irreparable harm and damage to the Company, that the remedy at law for the breach or threatened breach of the agreements set forth in this Agreement will be inadequate, and that, in addition to all other remedies available to the Company for such breach or threatened breach (including, without limitation, the right to recover damages), the Company shall be entitled to injunctive relief for any breach or threatened breach of the agreements contained in this Agreement; b. All claims, disputes and other matters in question between the parties arising under this Agreement, shall, unless otherwise provided herein, be decided by arbitration in Salt Lake City, Utah, in accordance with the Model Employment Arbitration Procedures of the American Arbitration Association (including such procedures governing selection of the specific arbitrator or arbitrators), unless the parties mutually agree otherwise. The Company shall pay the costs of any such arbitration. The award by the arbitrator or arbitrators shall be final, and judgment may be entered upon it in accordance with applicable law in any state or Federal court having jurisdiction thereof. 5. ATTORNEYS' FEES. In the event that either party hereunder institutes any legal proceedings in connection with its rights or obligations under this Agreement, the prevailing party in such proceeding shall be entitled to recover from the other party, all costs incurred in connection with such proceeding, including reasonable attorneys' fees, together with interest thereon from the date of demand at the rate of twelve percent (12%) per annum. 6. SUCCESSORS. This Agreement and all rights of the Executive shall inure to the benefit of and be enforceable by the Executive's personal or legal representatives, estates, executors, administrators, heirs and beneficiaries. In the event of the Executive's death, all amounts payable to the Executive under this Agreement shall be paid to the Executive's surviving spouse, or the Executive's estate if the Executive dies without a surviving spouse. This Agreement shall inure to the benefit of, be binding upon and be enforceable by, any successor, surviving or resulting corporation or other entity to which all or substantially all of the business and assets of the Company shall be transferred whether by merger, consolidation, transfer or sale. 7. ENFORCEMENT. The provisions of this Agreement shall be regarded as divisible, and if any of said provisions or any part hereof are declared invalid or unenforceable by a court of competent jurisdiction, the validity and enforceability of the remainder of such provisions or parts hereof and the applicability thereof shall not be affected thereby. 8. AMENDMENT OR TERMINATION. This Agreement may not be amended or terminated during its term, except by written instrument executed by the Company and the Executive. 9. ENTIRE AGREEMENT. This Agreement sets forth the entire agreement between the Executive and the Company with respect to the subject matter hereof, and supersedes all prior oral or written agreements, negotiations, commitments and understandings with respect thereto. 10. VENUE; GOVERNING LAW. This Agreement and the Executive's and Company's respective rights and obligations hereunder shall be governed by and construed in accordance with the laws of the State of Utah without giving effect to the provisions, principles, or policies thereof relating to choice or conflict laws. 11. NOTICE. Notices given pursuant to this Agreement shall be in writing and shall be deemed given when received, and if mailed, shall be mailed by United States registered or certified mail, return receipt requested, addressee only, postage prepaid, if to the Company, to: Company: Evans & Sutherland Computer Corporation 600 Komas Drive Salt Lake City, Utah 84108 Attn: Chief Financial Officer Fax: (801) 588-4500 Executive: James R. Oyler 600 Komas Drive Salt Lake City, Utah 84108 Fax: (801) 588-4500 or to such other address as the Company shall have given to the Executive or, if to the Executive, to such address as the Executive shall have given to the Company. 12. NO WAIVER. No waiver by either party at any time of any breach by the other party of, or compliance with, any condition or provision of this Agreement to be performed by the other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same time or any prior or subsequent time. 13. HEADINGS. The headings herein contained are for reference only and shall not affect the meaning or interpretation of any provision of this Agreement. 14. COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by its duly authorized officer, and the Executive has executed this Agreement, on the date and year first above written. "COMPANY" EVANS & SUTHERLAND COMPUTER CORPORATION, a Utah corporation By:___________________________________ Its:___________________________________ "EXECUTIVE" -------------------------------------- James R. Oyler EX-10.11 5 SEVERANCE AGREEMENT - MARK MCBRIDE SEVERANCE AGREEMENT THIS SEVERANCE AGREEMENT (the "Agreement") is made and entered into as of the 11th day of December, 1998, by and between EVANS & SUTHERLAND COMPUTER CORPORATION, a Utah corporation (the "Company") and MARK McBRIDE (the "Executive"). W I T N E S S E T H: WHEREAS, the Company has determined that is appropriate and in the best interests of the Company to provide to the Executive protection in the event of certain terminations of the Executive's employment relationship with the Company in accordance with the terms and conditions contained herein and the Executive desires to have such protection. NOW, THEREFORE, in consideration of the foregoing and of the mutual covenants and agreements hereinafter set forth, the Company and the Executive hereto mutually covenant and agree as follows: 1. DEFINITIONS. Whenever used in this Agreement, the following terms shall have the meanings set forth below: a. "Accrued Benefits" shall mean the amount payable not later than ten (10) days following an applicable Termination Date and which shall be equal to the sum of the following amounts: (i) All salary earned or accrued through the Termination Date; (ii) Reimbursement for any and all monies advanced in connection with the Executive's employment for reasonable and necessary expenses incurred by the Executive through the Termination Date; (iii) Any and all other cash benefits previously earned through the Termination Date and deferred at the election of the Executive or pursuant to any deferred compensation plans then in effect; (iv) All other payments and benefits to which the Executive may be entitled under the terms of any benefit plan of the Company. b. "Act" shall mean the Securities Exchange Act of 1934; c. "Affiliate" shall have the same meaning as given to that term in Rule 12b-2 of Regulation 12B promulgated under the Act; d. "Base Period Income" shall be an amount equal to the Executive's "annualized includable compensation" for the "base period" as defined in Sections 280G(d)(1) and (2) of the Code and the regulations adopted thereunder; e. "Beneficial Owner" shall have the same meaning as given to that term in Rule 13d-3 of the General Rules and Regulations of the Act, provided that any pledgee of Company voting securities shall not be deemed to be the Beneficial Owner thereof prior to its disposition of, or acquisition of voting rights with respect to, such securities; f. "Board" shall mean the Board of Directors of the Company; g. "Cause" shall mean any of the following: (i) The engaging by the Executive in fraudulent conduct, as evidenced by a determination in a binding and final judgment, order or decree of a court or administrative agency of competent jurisdiction, in effect after exhaustion or lapse of all rights of appeal, in an action, suit or proceeding, whether civil, criminal, administrative or investigative, which the Board determines, in its sole discretion, has a significant adverse impact on the Company in the conduct of the Company's business; (ii) Conviction of a felony, as evidenced by a binding and final judgment, order or decree of a court of competent jurisdiction, in effect after exhaustion or lapse of all rights of appeal, which the Board determines, in its sole discretion, has a significant adverse impact on the Company in the conduct of the Company's business; (iii) Neglect or refusal by the Executive to perform the Executive's duties or responsibilities (unless significantly changed without the Executive's consent); or (iv) A significant violation by the Executive of the Company's established policies and procedures; Notwithstanding the foregoing, Cause shall not exist under Sections 1(g)(iii) and (iv) herein unless the Company furnishes written notice to the Executive of the specific offending conduct and the Executive fails to correct such offending conduct within the thirty (30) day period commencing on the receipt of such notice. h. "Change of Control" shall mean a change in ownership or managerial control of the stock, assets or business of the Company resulting from one or more of the following circumstances: (i) A change of control of the Company, of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A promulgated under the Act, or any successor regulation of similar import, regardless of whether the Company is subject to such reporting requirement; (ii) A change in ownership of the Company through a transaction or series of transactions, such that any Person or Persons (other than any current officer of the Company or member of the Board) is (are) or become(s), in the aggregate, the Beneficial Owner(s), directly or indirectly, of securities of the Company representing twenty percent (20%) or more of the Company's then outstanding securities; (iii) Any consolidation or merger of the Company in which the Company is not the continuing or surviving corporation or pursuant to which shares of the common stock of the Company would be converted into cash (other than cash attributable to dissenters' rights), securities or other property provided by a Person or Persons other than the Company, other than a consolidation or merger of the Company in which the holders of the common stock of the Company immediately prior to the consolidation or merger have approximately the same proportionate ownership of common stock of the surviving corporation immediately after the consolidation or merger; (iv) The shareholders of the Company approve a sale, transfer, liquidation or other disposition of all or substantially all of the assets of the Company to a Person or Persons; (v) During any period of two (2) consecutive years, individuals who, at the beginning of such period, constituted the Board of Directors of the Company cease, for any reason, to constitute at least a majority thereof, unless the election or nomination for election of each new director was approved by the vote of at least two-thirds (2/3) of the directors then still in office who were directors at the beginning of the period; (vi) The filing of a proceeding under Chapter 7 of the Federal Bankruptcy Code (or any successor or other statute of similar import) for liquidation with respect to the Company; (vii) The filing of a proceeding under Chapter 11 of the Federal Bankruptcy Code (or any successor or other statute of similar import) for reorganization with respect to the Company if in connection with any such proceeding, this Agreement is rejected, or a plan of reorganization is approved an element of which plan entails the liquidation of all or substantially all the assets of the Company. A "Change of Control" shall be deemed to occur on the actual date on which any of the foregoing circumstances shall occur; provided, however, that in connection with a "Change of Control" specified in Section 1(h)(vii), a "Change of Control" shall be deemed to occur on the date of the filing of the relevant proceeding under Chapter 11 of the Federal Bankruptcy Code (or any successor or other statute of similar import). i. "Change of Control Period" shall mean the period commencing on the date a Change of Control occurs and ending on the second anniversary of such Change of Control; j. "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time; k. "Disability" shall mean a physical or mental condition whereby the Executive is unable to perform on a full-time basis the customary duties of the Executive under this Agreement; l. "Federal Short Term-Rate" shall mean the rate defined in Section 1274(d)(1)(C)(i) of the Code; m. "Good Reason" shall mean: (i) The required relocation of the Executive, without the Executive's consent, to an employment location which is more than seventy-five (75) miles from the Executive's employment location on the day preceding the date of this Agreement; (ii) The removal of the Executive from or any failure to reelect the Executive to any of the positions held by the Executive as of the date of this Agreement or any other positions to which the Executive shall thereafter be elected or assigned except in the event that such removal or failure to reelect relates to the termination by the Company of the Executive's employment for Cause or by reason of death, Disability or voluntary retirement; (iii) A significant adverse change, without the Executive's written consent, in the nature or scope of the Executive's authority, powers, functions, duties or responsibilities, or a material reduction in the level of support services, staff, secretarial and other assistance, office space and accoutrements available to a level below that which was provided to the Executive on the day preceding the date of this Agreement and that which is necessary to perform any additional duties assigned to the Executive following the date of this Agreement, which change or reduction is not generally effective for all executives employed by the Company (or its successor) in the Executive's class or category; or (iv) Breach or violation of any material provision of this Agreement by the Company; n. "Gross Income" shall mean the average compensation earned by the Executive for purposes of Section 61 of the Code for the prior two (2) taxable years, plus any other compensation payable to the Executive by the Company, whether taxable or non-taxable. o. "Notice of Termination" shall mean the notice described in Section 3 herein; p. "Person" shall mean any individual, partnership, joint venture, association, trust, corporation or other entity, other than an employee benefit plan of the Company or an entity organized, appointed or established pursuant to the terms of any such benefit plan; q. "Termination Date" shall mean, except as otherwise provided in Section 3 herein, (i) The Executive's date of death; (ii) Thirty (30) days after the delivery of the Notice of Termination if the Executive's employment is terminated by the Executive voluntarily; and (iii) Thirty (30) days after the delivery of the Notice of Termination if the Executive's employment is terminated by the Company for any reason other than death or Disability; r. "Termination Payment" shall mean the payment described in Section 2 herein; s. "Total Payments" shall mean the sum of the Termination Payment and any other "payments in the nature of compensation" (as defined in Section 280G of the Code and the regulations adopted thereunder) to or for the benefit of the Executive, the receipt of which is contingent on a Change of Control and to which Section 280G of the Code applies. 2. TERMINATION PAYMENT. a. If during a Change of Control Period, the Executive's employment is terminated by the Executive for Good Reason or by the Company for any reason other than death, Disability, or Cause, the Termination Payment payable to the Executive by the Company or an affiliate of the Company shall be two and one-half (2.5) times the Executive's Gross Income for the year preceding the Termination Date. b. It is the intention of the Company and the Executive that no portion of the Termination Payment and any other "payments in the nature of compensation" (as defined in Section 280G of the Code and the regulations adopted thereunder) to or for the benefit of the Executive under this Agreement, or under any other agreement, plan or arrangement, be deemed to be an "excess parachute payment" as defined in Section 280G of the Code. It is agreed that the present value of the Total Payments shall not exceed an amount equal to two and ninety-nine hundredths (2.99) times the Executive's Base Period Income, which is the maximum amount which the Executive may receive without becoming subject to the tax imposed by Section 4999 of the Code or which the Company may pay without loss of deduction under Section 280G(a) of the Code. Present value for purposes of this Agreement shall be calculated in accordance with the regulations issued under Section 280G of the Code. Within sixty (60) days following delivery of the Notice of Termination or notice by the Company to the Executive of its belief that there is a payment or benefit due the Executive which will result in an excess parachute payment as defined in Section 280G of the Code, the Executive and the Company shall, at the Company's expense, obtain such opinions as more fully described hereafter, which need not be unqualified, of legal counsel and certified public accountants or a firm of recognized executive compensation consultants. The Executive shall select said legal counsel, certified public accountants and executive compensation consultants; provided, however, that if the Company does not accept one (1) or more of the parties selected by the Executive, the Company shall provide the Executive with the names of such legal counsel, certified public accountants and/or executive compensation consultants as the Company may select; provided, further, however, that if the Executive does not accept the party or parties selected by the Company, the legal counsel, certified public accountants and/or executive compensation consultants selected by the Executive and the Company, respectively, shall select the legal counsel, certified public accountants and/or executive compensation consultants, whichever is applicable, who shall provide the opinions required by this Section 2(d). The opinions required hereunder shall set forth (a) the amount of the Base Period Income of the Executive, (b) the present value of Total Payments and (c) the amount and present value of any excess parachute payments. In the event that such opinions determine that there would be an excess parachute payment, the Termination Payment or any other payment determined by such counsel to be includable in Total Payments shall be reduced or eliminated as specified by the Executive in writing delivered to the Company within thirty (30) days of his or her receipt of such opinions or, if the Executive fails to so notify the Company, then as the Company shall reasonably determine, so that under the bases of calculation set forth in such opinions there will be no excess parachute payment. The provisions of this Section 2(d), including the calculations, notices and opinions provided for herein shall be based upon the conclusive presumption that the compensation and other benefits, including but not limited to the Accrued Benefits, earned on or after the date of Change of Control by the Executive pursuant to the Company's compensation programs if such payments would have been made in the future in any event, even though the timing of such payment is triggered by the Change of Control, are reasonable compensation for services rendered prior to the Change of Control; provided, however, that in the event legal counsel so requests in connection with the opinion required by this Section 2(d), a firm of recognized executive compensation consultants, selected by the Executive and the Company pursuant to the procedures set forth above, shall provide an opinion, upon which such legal counsel may rely, as to the reasonableness of any item of compensation as reasonable compensation for services rendered prior to the Change of Control by the Executive. In the event that the provisions of Sections 280G and 4999 of the Code are repealed without succession, this Section 2(d) shall be of no further force or effect; c. The Termination Payment shall be payable in a lump sum not later than ten (10) days following the Executive's Termination Date. Such lump sum payment shall not be reduced by any present value or similar factor. Further, the Executive shall not be required to mitigate the amount of such payment by securing other employment or otherwise and such payment shall not be reduced by reason of the Executive securing other employment or for any other reason. 3. TERMINATION NOTICE AND PROCEDURE. Any termination by the Company or the Executive of the Executive's employment during the Employment Period shall be communicated by written Notice of Termination to the Executive, if such Notice of Termination is delivered by the Company, and to the Company, if such Notice of Termination is delivered by the Executive, all in accordance with the following procedures: a. The Notice of Termination shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances alleged to provide a basis for termination; b. Any Notice of Termination by the Company shall be approved by a resolution duly adopted by a majority of the directors of the Company then in office; c. If the Executive shall in good faith furnish a Notice of Termination for Good Reason and the Company notifies the Executive that a dispute exists concerning the termination, within the fifteen (15) day period following the Company's receipt of such notice, the Executive shall continue the Executive's employment during such dispute. If it is thereafter determined that (i) Good Reason did exist, the Executive's Termination Date shall be the earlier of (A) the date on which the dispute is finally determined, by mutual written agreement of the parties, (B) the date of the Executive's death or (C) one day prior to the second (2nd) anniversary of a Change of Control, and the Executive's Termination Payment, if applicable, shall reflect events occurring after the Executive delivered the Executive's Notice of Termination; or (ii) Good Reason did not exist, the employment of the Executive shall continue after such determination as if the Executive had not delivered the Notice of Termination asserting Good Reason; d. If the Executive gives notice to terminate his employment for Good Reason and a dispute arises as to the validity of such dispute, and the Executive does not continue his employment during such dispute, and it is finally determined that the reason for termination set forth in such Notice of Termination did not exist, if such notice was delivered by the Executive, the Executive shall be deemed to have voluntarily terminated the Executive's employment other than for Good Reason. 4. REMEDIES AND JURISDICTION. a. The Executive hereby acknowledges and agrees that a breach of the agreements contained in this Agreement will cause irreparable harm and damage to the Company, that the remedy at law for the breach or threatened breach of the agreements set forth in this Agreement will be inadequate, and that, in addition to all other remedies available to the Company for such breach or threatened breach (including, without limitation, the right to recover damages), the Company shall be entitled to injunctive relief for any breach or threatened breach of the agreements contained in this Agreement; b. All claims, disputes and other matters in question between the parties arising under this Agreement, shall, unless otherwise provided herein, be decided by arbitration in Salt Lake City, Utah, in accordance with the Model Employment Arbitration Procedures of the American Arbitration Association (including such procedures governing selection of the specific arbitrator or arbitrators), unless the parties mutually agree otherwise. The Company shall pay the costs of any such arbitration. The award by the arbitrator or arbitrators shall be final, and judgment may be entered upon it in accordance with applicable law in any state or Federal court having jurisdiction thereof. 5. ATTORNEYS' FEES. In the event that either party hereunder institutes any legal proceedings in connection with its rights or obligations under this Agreement, the prevailing party in such proceeding shall be entitled to recover from the other party, all costs incurred in connection with such proceeding, including reasonable attorneys' fees, together with interest thereon from the date of demand at the rate of twelve percent (12%) per annum. 6. SUCCESSORS. This Agreement and all rights of the Executive shall inure to the benefit of and be enforceable by the Executive's personal or legal representatives, estates, executors, administrators, heirs and beneficiaries. In the event of the Executive's death, all amounts payable to the Executive under this Agreement shall be paid to the Executive's surviving spouse, or the Executive's estate if the Executive dies without a surviving spouse. This Agreement shall inure to the benefit of, be binding upon and be enforceable by, any successor, surviving or resulting corporation or other entity to which all or substantially all of the business and assets of the Company shall be transferred whether by merger, consolidation, transfer or sale. 7. ENFORCEMENT. The provisions of this Agreement shall be regarded as divisible, and if any of said provisions or any part hereof are declared invalid or unenforceable by a court of competent jurisdiction, the validity and enforceability of the remainder of such provisions or parts hereof and the applicability thereof shall not be affected thereby. 8. AMENDMENT OR TERMINATION. This Agreement may not be amended or terminated during its term, except by written instrument executed by the Company and the Executive. 9. ENTIRE AGREEMENT. This Agreement sets forth the entire agreement between the Executive and the Company with respect to the subject matter hereof, and supersedes all prior oral or written agreements, negotiations, commitments and understandings with respect thereto. 10. VENUE; GOVERNING LAW. This Agreement and the Executive's and Company's respective rights and obligations hereunder shall be governed by and construed in accordance with the laws of the State of Utah without giving effect to the provisions, principles, or policies thereof relating to choice or conflict laws. 11. NOTICE. Notices given pursuant to this Agreement shall be in writing and shall be deemed given when received, and if mailed, shall be mailed by United States registered or certified mail, return receipt requested, addressee only, postage prepaid, if to the Company, to: Company: Evans & Sutherland Computer Corporation 600 Komas Drive Salt Lake City, Utah 84108 Attn: Chief Financial Officer Fax: (801) 588-4500 Executive: Mark McBride 600 Komas Drive Salt Lake City, Utah 84108 Fax: (801) 588-4500 or to such other address as the Company shall have given to the Executive or, if to the Executive, to such address as the Executive shall have given to the Company. 12. NO WAIVER. No waiver by either party at any time of any breach by the other party of, or compliance with, any condition or provision of this Agreement to be performed by the other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same time or any prior or subsequent time. 13. HEADINGS. The headings herein contained are for reference only and shall not affect the meaning or interpretation of any provision of this Agreement. 14. COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by its duly authorized officer, and the Executive has executed this Agreement, on the date and year first above written. "COMPANY" EVANS & SUTHERLAND COMPUTER CORPORATION, a Utah corporation By:___/S/ JAMES R. OYLER_______________ Its:__CHIEF OPERATING OFFICER__________ "EXECUTIVE" /S/ MARK MCBRIDE -------------------------------------- MARK McBRIDE EX-21.1 6 SUBSIDIARIES OF THE REGISTRANT Exhibit 21.1 EVANS & SUTHERLAND COMPUTER CORPORATION SUBSIDIARIES OF THE REGISTRANT
Subsidiary Name State or Other Names Under Which Jurisdiction of Each Subsidiary Does Business Incorporation or Organization - - --------------------------------------------- ------------------- --------------------------------------------- Evans & Sutherland Graphics Corporation Utah Evans & Sutherland Graphics Corporation Xionix Simulation, Inc. Texas Xionix Simulation, Inc. Evans & Sutherland, Ltd. United Kingdom Evans & Sutherland, Ltd. Evans & Sutherland, GmbH Germany Evans & Sutherland, GmbH Evans & Sutherland SARL France Evans & Sutherland SARL E&S Foreign Sales Corporation Virgin Islands E&S Foreign Sales Corporation
EX-23.1 7 CONSENT OF INDEPENDENT ACCOUNTANTS Exhibit 23.1 Accountant's Consent The Board of Directors Evans & Sutherland Computer Corporation We consent to incorporation by reference in the Registration Statements Nos. 33-39632, 2-76027, 333-53305, 333-58735 and 333-58733 on Forms S-8 and Registration Statements Nos. 333-09657 and 333-67189 on Forms S-3 of Evans & Sutherland Computer Corporation of our report dated February 12, 1999, relating to the consolidated balance sheets of Evans & Sutherland Computer Corporation and subsidiaries as of December 31, 1998 and December 31, 1997, and the related consolidated statements of operations, comprehensive income, stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1998 and related schedule, which report appears in the December 31, 1998 Annual Report on Form 10-K of Evans & Sutherland Computer Corporation. KPMG LLP Salt Lake City, Utah March 31, 1999 EX-24 8 POWERS OF ATTORNEY Exhibit 24.1 POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each officer and/or director of Evans & Sutherland Computer Corporation whose signature appears below constitutes and appoints James R. Oyler, John T. Lemley, and Mark C. McBride, or any of them, as his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign in the name of or on behalf of the undersigned, as a director and/or officer of said corporation, the Annual Report on Form 10-K of Evans & Sutherland Computer Corporation for the year ended December 31, 1998, and any and all amendments to such Annual Report, and to file the same with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission granting unto said attorneys-in-fact and agents and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned have executed this Power of Attorney this 24th day of February, 1999.
Signature Title Date /S/ Stewart Carrell - - ------------------------------------ Stewart Carrell Chairman of the Board of Directors February 24, 1999 /S/ James R. Oyler - - ------------------------------------ James R. Oyler President and Chief Executive Officer February 24, 1999 (Principal Executive Officer) and Director /S/ John T. Lemley - - ------------------------------------ John T. Lemley Vice President and Chief Financial February 24, 1999 Officer (Principal Financial Officer) /S/ Mark C. McBride - - ------------------------------------ Mark C. McBride Vice President, Corporate Controller February 24, 1999 and Secretary (Principal Accounting Officer) /S/ Gerald S. Casilli - - ------------------------------------ Gerald S. Casilli Director February 24, 1999 /S/ Peter O. Crisp - - ------------------------------------ Peter O. Crisp Director February 24, 1999 /S/ Ivan E. Sutherland - - ------------------------------------ Ivan E. Sutherland Director February 24, 1999
EX-27 9 FINANCIAL DATA SCHEDULE
5 0000276283 EVANS & SUTHERLAND COMPUTER CORPORATION 1,000 12-MOS DEC-31-1998 JAN-01-1998 DEC-31-1998 1,834 25,907 48,482 (1,616) 53,319 203,336 139,374 (85,681) 275,668 68,979 18,062 23,544 0 1,920 163,163 275,668 191,766 191,766 110,320 110,320 97,432 496 1,335 (13,857) 2,126 (15,983) 0 0 0 (16,078) (1.70) (1.70)
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