ITEM 1. BUSINESS
Throughout this document Evans & Sutherland Computer Corporation may be referred to as “Evans & Sutherland,” “E&S,” “we,” “us,” “our” or the “Company.” All dollar amounts are in thousands unless otherwise indicated.
Evans & Sutherland was incorporated in the state of Utah on May 10, 1968. Our principal offices are located at 770 Komas Drive, Salt Lake City, Utah 84108, and our telephone number is (801) 588-1000. Through a link on our website, www.es.com, we make available, free of charge, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission (the “SEC”). We make our website content available for informational purposes only. The information provided on our website is not incorporated by reference into this Form 10-K and our website address is not intended to be a hyperlink. The above reports and other information are also available, free of charge, at www.sec.gov. Alternatively, the public may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330.
General
Evans & Sutherland focuses on the production of high-quality visual systems, advanced displays including the Evans & Sutherland Laser Projector (“ESLP”), dome projection screens, dome architectural treatments, and unique content for planetariums, science centers, other educational institutions, and entertainment venues. With a 40-year history in computer graphics, we are widely regarded as both a pioneer and a leader in providing the world’s most compelling visual systems. With our subsidiary, Spitz, Inc., and its over 60-year history as a leading supplier of planetarium systems and other dome displays, E&S supplies premier total system solutions for its digital theater markets as well as customized domes and other curved structures in the architectural market.
We continue to maintain a significant share of the overall planetarium and digital theater market. We estimate that our market share has ranged from 35% to 70%, depending on the specific market and time period. We estimate that the size of the market for digital theater and planetarium systems is approximately $65 million annually.
Description of Products
E&S offers a range of products and services for digital theater, planetarium, and educational institutions. These products include state of the art image generators, domes, and display systems some of which feature our ESLP that provides a seamless high resolution display from a single projector. Additionally, we produce unique content both for our own library which we license to customers and for specific customer requirements.
Description of Markets
We are an industry leader in providing visual systems to an international customer base in the digital theater, planetarium, and educational markets. We also supply dome projection screens and dome architectural treatments to major theme parks, casinos, world expositions, and military defense contractors. In each of these markets we face highly competitive conditions. In all our markets we compete on features, performance, and responsiveness to customer needs as well as on price. E&S is unique among its competitors by virtue of its capability as a single source that can directly supply and integrate all of the equipment in the planetarium theater, including the projection system, sound, lighting, computer control system and domed projection screen. We believe our range of visual systems and services at various price and performance levels, our research and development investments and capabilities, our responsiveness to customers, and our ability to design and manufacture value-added visual systems enable us to compete effectively.
Digital Theater
In the digital theater market our products compete with traditional optical-mechanical products and digital display systems offered by GOTO Optical Mfg. Co., Konica-Minolta Planetarium Co. Ltd., Carl Zeiss Inc., and Sky-Skan, Inc. The Company’s digital display systems can be configured with the proprietary ESLP or standard
commercial projectors similar to systems sold by our competitors. Our proprietary image generator, the Digistar 4 (“D4”), along with other customized software tools differentiates our digital theater systems and competes favorably with competitive digital display systems.
Advanced Displays
We began work in 1997 to build a new generation of projection technology with specifications beyond any other technology either available or likely in the foreseeable future. This goal evolved into the production of a revolutionary projector using lasers for illumination and micro-electro-mechanical systems (MEMS) to modulate the laser light and create an image. The result is our ESLP Systems, which were first delivered late in 2005, with additional units delivered in each year since. The first units have been supplied to our traditional simulation and digital theater customers who continue to order systems with the new projection technology. We believe that the ESLP also has application to other markets in the future where ultra-high resolution, high efficiency, excellent image quality, and low life-cycle cost are important considerations.
Domed Structures
Our Spitz subsidiary is the world’s leading producer of domed projection screens. Spitz designs, manufactures, and installs domed projection screens used in planetarium theaters and a variety of other applications such as ride simulators, special or large format film theaters, simulation training systems and architectural treatments. Spitz’s experience enables it to advise on the architectural integration of domed projection screens and solve complex optical problems involving reflectivity and image distortion on compound curved surfaces. The Company believes that these skills are important to buyers of domed projection screens. The principal customers in our dome business are entities in the entertainment, educational and commercial and military simulation markets. Customers include major theme parks, casinos, world expositions, museums, schools, and military defense contractors. There is currently one known domestic competitor that manufactures domed projection screens. In addition, construction or metal fabrication contractors will occasionally supply domed projection screens, particularly in foreign markets.
Intellectual Property
We own a significant number of patents and trademarks and we are a licensee under several others. Our portfolio of patents and trademarks is, as a whole, material to our business. However, no one piece of intellectual property is critical to our business, thus no individual piece of our intellectual property is separately discussed. In the U.S. and internationally, we hold active patents that cover many aspects of our visualization technology. Several patent applications are presently pending in the U.S., Japan and several European countries, and other patent applications are in preparation. We actively pursue patents on our new technology and we intend to vigorously protect our patent rights. We often trademark key product names and brand names to protect our equity in the marketplace. We routinely copyright software, documentation and chip masks designed by us and institute copyright registration when appropriate. Currently we retain a total of 33 active U.S. patents, and have licenses to an additional 25 U.S. patents.
Research & Development
We consider the timely development and improvement of our technology to be essential to maintain our competitive position and to capitalize on market opportunities. We continue to fund essentially all research and development (“R&D”) efforts internally.
A significant focus for our R&D in 2008 was the continued development of our laser projector, the ESLP. We first delivered ESLP’s in the fourth quarter of 2005 to the Air Force and have since delivered the ESLP to planetariums. Efforts to improve production process, performance and reliability of the laser projector continue. In addition we are exploring the potential application of the ESLP technology in new markets through partnering and licensing arrangements.
R&D efforts continue to improve the D4, the current generation of our popular image generator and a key component to our digital display systems. We are also exploring the possibility of other commercial applications for D4 technology.
Dependence on Suppliers
Most of our current parts and assemblies are readily available through multiple sources in the open market; however, a limited number are available only from a single source. In these cases, we either stock adequate inventory to cover future product demands, obtain the agreement of the vendor to maintain adequate stock for future
demands, or develop alternative components or sources where appropriate. As a result of the challenges in producing a key component of the ESLP, we have made a considerable effort to develop other components using alternative techniques and technology.
Employees
As of December 31, 2008, Evans & Sutherland and its subsidiaries employed a total of 126 persons of which 120 were employed fulltime.
Environmental Standards
We believe our facilities and operations are within standards fully acceptable to the Environmental Protection Agency and that all facilities and procedures are operated in accordance with environmental rules and regulations, and international, federal, state and local laws.
Strategic Relationships
In the normal course of business we develop and maintain various types of relationships with key customers and technology partners. The teaming agreements are with industry partners and are intended to improve our overall competitive position. The product development agreements enhance our products by the cooperative development of new features and capabilities necessary to maintain our industry leading position.
Forward-Looking Statements and Associated Risks
This annual report, including all documents incorporated herein by reference, includes certain “forward-looking statements” within the meaning of that term in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act of 1934, as amended, including, among others, those statements preceded by, followed by or including the words “estimates,” “believes,” “expects,” “anticipates,” “plans,” “projects,” “intends,” “predicts,” “may,” “will,” “could,” “would,” “potential” and similar expressions or the negative of such terms. See Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Part II of this annual report on Form 10-K for a list of some of the forward-looking statements included in this Form 10-K.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following sets forth certain information regarding the executive officers of E&S as of December 31, 2008.
David H. Bateman was appointed President and Chief Executive Officer of E&S in February 2007. Mr. Bateman joined E&S as Director of Business Operations in May 1998. He was appointed Vice President - Business Operations in March 2000 and Interim President and Chief Executive Officer and a member of the Board of Directors in June 2006.
Paul L. Dailey was appointed Chief Financial Officer and Corporate Secretary of E&S in February 2007. He became an executive officer of E&S in August 2006 when he was appointed Acting Chief Financial Officer and Corporate Secretary. Prior to his appointments at E&S, Mr. Dailey served as Executive Vice President, Chief Financial Officer and Corporate Secretary of E&S’s subsidiary, Spitz, Inc., where he started as Controller in 1983. Mr. Dailey is a Certified Public Accountant.
Bob Morishita was appointed Vice President of Human Resources in 2000. He joined E&S as Compensation Manager in 1982 and was appointed Human Resources Director in 1997.
Kirk Johnson was appointed Vice President and General Manager of Digital Theater in January 2002. He joined E&S in April 1990 and has held various engineering and management positions throughout his service at E&S.
Brett Winkler was appointed General Manager of Advanced Displays in September 2007. He has held various engineering and management positions throughout his service at E&S since 1996.
Jonathan A. Shaw was appointed President and Chief Executive Officer of E&S’s subsidiary, Spitz, Inc. in November 2001 where he held various management positions since 1985.
ITEM 2.
ITEM 2. PROPERTIES
Our principal executive, engineering, manufacturing and operations facilities are located in the University of Utah Research Park in Salt Lake City, Utah, where we own three buildings totaling approximately 68,000 square feet. The buildings are located on land leased from the University of Utah with an initial term of 40 years or longer.
Spitz owns and occupies an approximately 47,000 square-foot building on approximately 15.2 acres in Chadds Ford, Pennsylvania. The property serves as collateral under Spitz’s debt agreements through a mortgage granted to First Keystone Bank.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
In the normal course of business, we may have various legal claims and other contingent matters. We know of no legal claims or other contingent matters outstanding that would have a material adverse effect on our consolidated financial condition, liquidity or results of operations.
ITEM 4.
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 2008.
PART II
ITEM 5.
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock trades on the Nasdaq Stock Market under the symbol “ESCC.” On March 4, 2009 there were 617 holders of record of our common stock. Because brokers and other institutions hold many of our shares on behalf of shareholders, we are unable to estimate the total number of shareholders represented by these record holders.
We have never paid a cash dividend on our common stock and have used retained earnings for the operation and expansion of our business. Currently we have an accumulated deficit. For the foreseeable future, we intend to follow our policy of retaining any future earnings to finance the development and growth of our business.
Additional information required by this item is incorporated by reference to the table captioned Securities Authorized for Issuance Under Equity Compensation Plans as of December 31, 2008 in Item 12 “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” of Part III of this annual report on Form 10-K.
The table below presents the high and low sales prices per share on the Nasdaq Stock Market by quarter for 2008 and 2007. The quotations reflect inter-dealer prices, without retail mark-up, mark-down, or commission and may not necessarily represent actual transactions.
ITEM 6.
ITEM 6. NOT APPLICABLE
ITEM 7.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis provides information which management believes is relevant to an assessment and understanding of our consolidated results of operations and financial condition. The discussion should be read in conjunction with our consolidated financial statements and notes included in Item 8
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’
EQUITY (DEFICIT) AND COMPREHENSIVE LOSS
(In thousands)
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
See notes to consolidated financial statements.
notes to consolidated financial statements
All dollar amounts are in thousands except per share information or unless otherwise indicated.
Note 1 - Nature of Operations and Summary of Significant Accounting Policies
Nature of Operations
Evans & Sutherland Computer Corporation, referred to in these notes as “Evans & Sutherland,” “E&S,” “we,” “us,” “our” or the “Company,” produces visual systems used to rapidly and accurately display images. We design, manufacture, market and support our visual systems for various applications, including planetariums, science centers and entertainment venues. Our products and solutions range from the visual systems generated by a desktop PC to what we believe are the most advanced visual systems in the world. The Company operates as one segment, which is the visual simulation market.
Basis of Presentation
Evans & Sutherland’s fiscal year ends on December 31. The consolidated financial statements include the accounts of Evans & Sutherland and its wholly owned subsidiaries. All inter-company accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. The accounting estimates that require management’s most difficult and subjective judgments include revenue recognition based on the percentage-of-completion method, inventory reserves, allowance for doubtful accounts, income tax valuation allowance, impairment of long-lived assets, pension and retirement obligations and useful lives of depreciable assets. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original maturities of three or fewer months to be cash equivalents. The Company maintains cash balances in bank accounts that, at times, may exceed federally insured limits. The Company has not experienced any losses in these accounts and believes it is not exposed to any significant risk with respect to cash. As of December 31, 2008, cash deposits, including restricted cash, exceeded the federally insured limits by approximately $6,846.
Restricted Cash
Restricted cash that guarantees issued letters of credit that mature or expire within one year is reported as a current asset. Restricted cash that guarantees issued letters of credit that mature or expire in more than one year are reported as long-term other assets. Long-term restricted cash at December 31, 2008 and 2007 was $20 and $112, respectively, included in other assets.
Trade Accounts Receivable
In the normal course of business, we provide unsecured credit terms to our customers. Accordingly, we maintain an allowance for doubtful accounts for possible losses on uncollectible accounts receivable. We routinely analyze accounts receivable and costs and estimated earnings in excess of billings, and consider history, customer creditworthiness, facts and circumstances specific to outstanding balances, current economic trends, and payment term changes when evaluating adequacy of the allowance for doubtful accounts. Changes in these factors could result in material differences to bad debt expense. Past due balances are determined based on contractual terms and are reviewed individually for collectability. Uncollectible accounts receivable are charged against the allowance for doubtful accounts only after exhaustive efforts have been made to collect and with management’s approval.
The table below represents changes in our allowance for doubtful receivables during fiscal year:
notes to consolidated financial statements
Inventories
Inventory includes materials at standard costs, which approximate average costs, as well as inventoried costs on programs and long-term contracts. Inventoried costs include material, direct engineering and production costs, and applicable overhead, not in excess of estimated realizable value. Spare parts and general stock materials are stated at cost not in excess of realizable value. We periodically review inventories for excess supply, obsolescence, and valuations above estimated realizable amounts, and provide a reserve we consider sufficient to cover these items. Revisions of these estimates could result in the need for adjustments.
Inventories net of reserves at fiscal year-end were as follows:
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation is computed using the straight-line method based on the estimated useful lives of the related assets. Expenditures that materially increase values or capacities or extend useful lives of property and equipment are capitalized. Routine maintenance, repairs and renewal costs are expensed as incurred. When property is retired or otherwise disposed of, the book value of the property is removed from the fixed assets and the related accumulated depreciation accounts. Depreciation is included in cost of sales, research and development or selling, general and administrative expenses depending on the nature of the asset. The cost and estimated useful lives of property, plant and equipment and the total accumulated depreciation and amortization were as follows at December 31:
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 costs have not been material during the periods presented.
Investments
We classify our marketable debt and equity securities as available-for-sale. Available-for-sale securities are recorded at fair value. Unrealized holding gains and losses, net of the related tax effect, are excluded from earnings and are reported as a component of accumulated other comprehensive loss until realized. Dividend and interest income are recognized when earned. Realized gains and losses from the sale of securities are included in results of operations and are determined on the specific identification basis. A decline in the market value that is deemed other than temporary results in a charge to other income (expense) and the establishment of a new cost basis for the investment.
Impairment of Long- Lived Assets
Long-lived assets are reviewed for impairment when events or changes in circumstances indicate the book value of an asset may not be fully recoverable. When this occurs, we review the value assigned to long-lived assets by
notes to consolidated financial statements
analyzing the anticipated, undiscounted cash flows they generate. When the expected future undiscounted cash flows from these assets do not exceed their carrying balances, the Company determines the estimated fair value of such assets. An impairment is recognized to the extent the carrying amount of the assets exceeds their estimated fair value. Assets held for sale are reported at the lower of their carrying amount or fair value less costs to sell.
Warranty Reserve
We provide a warranty reserve for estimated future costs of servicing products under warranty agreements extending for periods from 90 days to one year. Anticipated costs for product warranties are based upon estimates derived from experience factors and are recorded at the time of sale or over the period revenues are recognized for long-term contracts. Warranty reserves are classified as accrued liabilities in the accompanying consolidated balance sheets.
Revenue Recognition
Our sales include revenue from system hardware, software, database products and service contracts. The following table provides information on revenue by recognition method applied during fiscal years:
Percentage-of-Completion. In arrangements that are longer in term and require significant production, modification or customization, revenue is recognized in accordance with the provisions of Statement of Position 81-1, “Accounting for Performance of Construction-Type and Certain Production-Type Contracts” (“SOP 81-1”), using the percentage-of-completion method. In applying the provisions of SOP 81-1, we utilize cost-to-cost methodology whereby we estimate the percent complete by calculating the ratio of costs incurred (consisting of material, labor and subcontracting costs, as well as an allocation of indirect costs) to management’s estimate of total anticipated costs. This ratio is then utilized to determine the amount of gross profit earned based on management’s estimate of total estimated gross profit at completion. We routinely review estimates related to percentage-of-completion contracts and adjust for changes in the period revisions are made. Billings on uncompleted percentage-of-completion 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.
In those arrangements where software is a significant component of the contract, the Company applies the guidance of Statement of Position 97-2 “Software Revenue Recognition,” which allows for use of the percentage-of-completion method as described above.
Completed Contract. Contract arrangements which typically require a relatively short period of time to complete the production, modification, and customization of our products are accounted for using the completed contract method. Accordingly, revenue is recognized upon delivery of the completed product, provided persuasive evidence of an arrangement exists, title and risk of loss has transferred, the fee is fixed and determinable, and collection is reasonably assured.
Other. Other revenue consists primarily of amounts earned under maintenance contracts that are generally sold as a single element to our customers. Revenue from product maintenance contracts, including separately priced extended warranty contracts, is deferred and recognized over the period of performance under the contract.
Anticipated Losses. For contracts with anticipated losses at completion, a provision is recorded when the loss becomes known. After an anticipated loss is recorded, subsequent revenue and cost of sales are recognized in equal, offsetting amounts as contract costs are incurred and do not generate further gross profits (losses).
Multiple Element Arrangements. Some of our contracts include multiple elements. Revenue earned on elements such as products, services and maintenance contracts are allocated to each element based on the relative fair values of the elements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Net Income (Loss) per Common Share
Net income (loss) per common share is computed based on the weighted-average number of common shares and, as appropriate, dilutive common stock equivalents outstanding during the period. Stock options are potentially common stock equivalents.
Basic income or loss per common share is based upon the average number of shares of common stock outstanding during the period. There were no dilutive shares in 2007 or 2008. Potentially dilutive securities from stock options are discussed in Note 10.
Income Taxes
We use the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred income tax assets and liabilities are recognized for the future income tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective income tax bases and operating loss and income tax credit carry-forwards. Deferred income 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 income tax assets and liabilities of a change in income tax rates is recognized in the period that includes the enactment date.
Other Comprehensive Loss
We have applied the provisions of Statement of Financial Accounting Standards (“SFAS”) SFAS No. 109, “Accounting for Income Taxes,” (“SFAS 109”) to our gains and losses included in other comprehensive loss but excluded them from our net income or loss. On a net basis for 2008 and 2007, there was a deferred income tax asset as a result of the items reflected in comprehensive loss. However, in applying SFAS 109 we determined that it is more likely than not that we will not realize such net deferred income tax assets and have therefore established a valuation allowance against the full amount of the net deferred income tax asset. Accordingly, the net income tax effect of the items included in other comprehensive loss is zero. Therefore, we have included no income tax expense or benefit in relation to items reflected in other comprehensive loss.
The components of accumulated other comprehensive loss were as follows as of December 31:
Leases
We recognize scheduled rent increases on a straight-line basis over the lease term, which may include optional lease renewal terms, and deferred rent income and expense are recognized to reflect the difference between the rent paid or received in the current period and the calculated straight-line amount.
Goodwill
In accordance with the provisions of SFAS No. 142, “Goodwill and Other Intangible Assets,” the Company tests its recorded goodwill for impairment on an annual basis during the fourth quarter, or more often if indicators of potential impairment exist, by determining if the carrying value of each reporting unit exceeds its estimated fair value. Factors that could trigger impairment include, but are not limited to, underperformance relative to historical or projected future operating results, significant changes in the manner of use of the acquired assets or the Company’s overall business and significant negative industry or economic trends. Future impairment reviews may require write-downs in the Company’s goodwill and could have a material adverse impact on the Company’s operating results for the periods in which such write-downs occur.
Fair Value of Financial Instruments
The carrying amount of cash and cash equivalents, receivables, accounts payable and accrued expenses approximates fair value because of their short maturity. The carrying value of the long-term debt discussed in Note 7 approximates its fair value because the interest rates of the debt approximate market interest rates at the reporting periods. The fair value of investments classified as prepaid retirement expenses are discussed in Note 6.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Recent Accounting Pronouncements
In March 2008, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 161, “Disclosures about Derivative Instruments and Hedging Activities, an Amendment of FASB Statement No. 133” (“SFAS 161”). SFAS 161 amends and expands the disclosure requirements of SFAS No. 133, “Accounting for Derivative Instruments and hedging Activities” (“SFAS 133”), with the intent to provide users of financial statements with an enhanced understanding of how and why an entity uses derivative instruments, how derivative instruments and related hedged items are accounted for under SFAS 133 and its related interpretations, and how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. The Company believes that the future requirements of SFAS 161 will not have a material effect on its consolidated financial statements.
In April 2008, the FASB issued Staff Position No. FAS 142-3, “Determination of the Useful Life of Intangible Assets” (“FSP FAS 142-3”). FSP FAS 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”). The intent of the position is to improve the consistency between the useful life of a recognized intangible asset under SFAS 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS No. 141(R), “Business Combinations,” and other generally accepted accounting principles. FSP FAS 142-3 is effective for fiscal years beginning after December 15, 2008. FSP FAS 142-3 is effective for us on January 1, 2009. The Company believes that the adoption of FSP FAS 142-3 will not have a material effect on its consolidated financial statements.
Reclassifications
Certain amounts in the prior year’s consolidated financial statements have been reclassified to conform to the current year’s presentation.
Note 2 - Discontinued Operations
The activity recorded for discontinued operations in 2007 and 2008 represents remaining transactions related to our commercial and military simulation businesses and related service operations (the “Simulation Business”) which we sold to Rockwell Collins, Inc. (“Rockwell”) in 2006.
The gain on the sale of the Simulation Business was recorded as follows:
The net gain on the sale of the Simulation Business was recorded in the following periods:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Summarized results of operations for the Simulation Business included as income (loss) from discontinued operations, net of tax, in the accompanying consolidated statements of operations for the years ended December 31 2008 and 2007 consisted of operating income (expense) of $(49) and $323, respectively.
In conjunction with the sale of the Simulation Business, the Company also entered into a series of agreements (the “Laser Agreements”) with Rockwell related to the development and supply of laser based products. The Laser Agreements provided that the Company be paid up to $5,000 upon the achievement of certain milestones related to the development of certain laser based products and provided Rockwell with exclusive distribution rights in certain markets. The achievement of the milestones and the obligations under the Laser Agreements were disputed in 2007 and 2008. On June 9, 2008, we entered into an agreement (the “Settlement Agreement”) with Rockwell that provided for a complete settlement of all the related agreements. The Settlement Agreement required that E&S receive $1,050. The Settlement Agreement also released both parties from all claims and further obligations under the Laser Agreements. We received the $1,050 of proceeds in the second quarter of 2008 and recorded the proceeds as sales in the accompanying consolidated financial statements.
Note 3 - Intangible Assets and Goodwill
Intangible assets and goodwill consisted of the following as of December 31, 2008 and 2007:
Amortization expense for the years ended December 31, 2008 and 2007 was $144 and $184, respectively.
Maintenance and legacy customers and planetarium shows represent the value of definite-lived intangibles that were identified in the acquisition of Spitz, Inc. (“Spitz”) in 2006. In November 2006, the Company acquired certain intellectual property rights to protect the application of certain processes in the use of its products for cash payments totaling $350.
Estimated future amortization expense is as follows:
Goodwill of $635 resulted from the acquisition of our wholly-owned subsidiary, Spitz, and was measured as the excess of the $2,884 purchase consideration paid over the fair value of the net assets acquired. The Company has made its annual assessment of impairment of goodwill and has concluded that goodwill is not impaired as of December 31, 2008.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4 - Costs and Estimated Earnings on Uncompleted Contracts
Comparative information with respect to uncompleted contracts at fiscal year-end:
The above amounts are reported in the consolidated balance sheets as follows:
Note 5 - Leases
We occupy real property and use certain equipment under lease arrangements that are accounted for as operating leases. Our real property leases contain escalation clauses. Rental expense for all operating leases for 2008 and 2007 was $300 and $364, respectively.
Future minimum lease payments under operating leases that have initial or remaining non-cancelable lease terms in excess of one year are as follows:
Note 6 - Employee Retirement Benefit Plans
Pension Plan
The Pension Plan is a qualified defined benefit pension plan funded by Company contributions. Our funding policy is to contribute amounts sufficient to satisfy regulatory funding standards, based upon independent actuarial valuations. The Pension Plan was frozen in 2002. Benefits at normal retirement age (65) are based upon the employee’s years of service as of the date of the curtailment for employees not yet retired, and the employee’s compensation prior to the curtailment.
Supplemental Executive Retirement Plan
We maintain an unfunded Supplemental Executive Retirement Plan (“SERP”). The SERP provides eligible executives defined pension benefits, outside our pension plan, based on average salary, years of service and age at retirement. The SERP was amended in 2002 to discontinue further SERP gains from future salary increases and close the SERP to new participants.
401(k) Deferred Savings Plan
We have a deferred savings plan that qualifies under Section 401(k) of the Internal Revenue Code. The 401(k) plan covers all employees of the Company who have at least one year of service and who are age 18 or older. We make matching contributions on employee contributions after the employee has achieved one year of service. We may also make extra matching contributions based on our profitability and other financial and operational considerations. No extra matching contributions have been made to date. Our contributions to the 401(k) plan for 2008 and 2007 were $216 and $210, respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Executive Savings Plan
The Executive Savings Plan (“ESP”) is an unfunded deferred compensation plan that allows tax-deferred retirement savings beyond the amount that can be contributed to the 401(k) plan. The ESP, a nonqualified plan that does not have the same protections as a qualified 401(k) plan, covers a portion of the management employees. Participants earn matching amounts on their contributions with the same percentage limit as the qualified 401(k) plan. Consistent with the curtailment of the SERP, the ESP was amended in 2002 to permit the Board of Directors to grant additional discretionary contributions.
We purchase Company-owned life insurance policies insuring the lives of participants in the ESP. The policies accumulate asset values and exist to cover the cost of employee supplemental retirement benefit liabilities. At December 31, 2008 and 2007, prepaid expenses and deposits included our investments in the policies of $711 and $953, respectively.
Obligations and Funded Status
E&S uses a December 31 measurement date for both the Pension Plan and SERP.
Information concerning the obligations, plan assets and funded status of employee retirement defined benefit plans are provided below:
Amounts recognized in the consolidated balance sheets consist of:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Components of net periodic benefit cost
Additional information
The increase to our unrecognized net actuarial loss recorded in other comprehensive loss for the Pension Plan of $11,707 and $1,137 during 2008 and 2007, respectively, arose from the difference between the funded status and the accrued pension expense at the end of each year.
The increase to our minimum liability recorded in other comprehensive income for the SERP of $125 and $68 during 2008 and 2007, respectively, arose from the difference between the funded status and the accrued pension expense at the end of each year.
Assumptions
The weighted average assumptions used to determine benefit obligations and net periodic cost at December 31, 2008 and 2007, included a discount rate of 6.0% in each period for the Pension Plan and SERP. The weighted average assumption used to determine an expected long-term rate of return on Pension Plan assets was 8.0%.
The long-term rate of return on plan assets was estimated as the weighted average of expected return of each of the asset classes in the target allocation of plan assets. The expected return of each asset class is based on historical market returns.
Pension Plan Assets
The Pension Plan’s weighted-average asset allocations at fiscal year-end and weighted-average planned targeted asset allocations going forward are as follows:
The asset allocation policy, consistent with the long-term growth objectives of the Pension Plan, is to invest on a diversified basis among various asset classes as determined by the Pension Plan Administrative Committee. Assets will be invested in a manner that will provide for long-term growth with a goal to achieve returns equal to or greater than applicable benchmarks. Investments will be managed by registered investment advisors. When investing Pension Plan assets, the investment managers of separately managed accounts shall not utilize derivative instruments for speculative purposes or to create leveraged positions.
No equity securities of the Company were part of the Pension Plan assets as of December 31, 2008 or 2007.
Cash Flow
Employer contributions
Our funding policy is to contribute amounts sufficient to satisfy regulatory funding standards, based upon independent actuarial valuations. No contributions are expected to be made to the Pension Plan in 2009.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
We are not currently required to fund the SERP. All benefit payments are made by us directly to those who receive benefits from the SERP. As such, these payments are treated as both contributions and benefits paid for reporting purposes.
The Company has debt and equity securities invested in a trust intended to fund the SERP obligations. These investments are classified and accounted for as available-for-sale securities. At December 31, 2008 and 2007, the investment was reported at its fair market value of $3,122 and $5,568, respectively, and was classified as prepaid retirement expenses. There was $(1,703) and $166 of unrealized gain (loss) relating to this asset recorded in accumulated other comprehensive income as of December 31, 2008 and 2007, respectively. Realized gains were $54 and $424 for the years ended December 31, 2008 and 2007. Unrealized losses were $1,867 and $106 for the years ended December 31, 2008 and 2007. The Company expects to contribute and pay benefits of approximately $655 related to the SERP in 2009. This contribution is expected to be made by liquidating the investments classified as prepaid retirement expenses.
Fair Value Measurements
Effective January 1, 2008, we adopted SFAS No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 clarifies that fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or a liability. As a basis for considering such assumptions, SFAS 157 establishes a three-tier value hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value:
Level 1-Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2-Observable inputs (other than Level 1) that are directly or indirectly observable in the marketplace.
Level 3-Unobservable inputs which are supported by little or no market activity.
In accordance with SFAS 157, we measured our investments classified as prepaid retirement expenses at fair value. Our cash equivalents and marketable securities are classified within Level 1 because the underlying investments have readily available market prices available, with the exception of one equity security for which current market prices are not readily available.
Assets and liabilities measured at fair value on a recurring basis are summarized below:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Estimated future benefit payments
The following benefit payments are expected to be paid based on actuarial estimates and prior experience:
Note 7 - Long-term Debt
Long-term debt consists of the following as of December 31:
Principal maturities on total debt are scheduled to occur in the following years:
Mortgage Notes
The first mortgage note payable represents the balance on a $3,200 note (“First Mortgage Note”) issued on January 14, 2004 by Spitz. The First Mortgage Note requires repayment in monthly installments of principal and interest over twenty years. On each third anniversary of the First Mortgage Note, the interest rate is adjusted to the greater of 5.75% or 3% over the Three-Year Constant Maturity Treasury Rate published by the United States Federal Reserve (“3YCMT”). The monthly installment is recalculated on the first month following a change in the interest rate. The recalculated monthly installment is equal to the monthly installment sufficient to repay the principal balance, as of the date of the change in the interest rate, over the remaining portion of the original twenty-year term. The monthly installment for the first three years was $23 and included interest at 5.75% per annum. On January 14,
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2007, the 3YCMT was 4.81% and the interest rate on the First Mortgage Note adjusted to 7.81% per annum. As a result of the interest rate adjustment, the monthly installment amount was adjusted to $26.
The second mortgage note payable represents the balance on a $500 note (“Second Mortgage Note”) issued on September 11, 2008 by Spitz. The Second Mortgage Note requires repayment in monthly installments of principal and interest over twenty years. On each fifth anniversary of the Second Mortgage Note, the interest rate is adjusted to the greater of 5.75% or 3% over 3YCMT. The monthly installment is recalculated on the first month following a change in the interest rate. The recalculated monthly installment is equal to the monthly installment sufficient to repay the principal balance, as of the date of the change in the interest rate, over the remaining portion of the original twenty-year term. The monthly installment for the first three years is $4 and includes interest at 5.75% per annum.
The index used to compute the future change in the interest rate for The First Mortgage Note and the Second Mortgage Note (the “ Mortgage Notes”), the 3YCMT, was 1.00% as of December 31, 2008. The Mortgage Notes are secured by the real property occupied by Spitz pursuant to a Mortgage and Security Agreements; the real property had a carrying value of $4,925 as of December 31, 2008. The Mortgage Notes are guaranteed by the Company.
Line of Credit
On August 24, 2007, the Company entered into an agreement to reinstate, under modified terms, a Line of Credit Agreement (the “Credit Agreement”) which had matured on June 30, 2007. The Credit Agreement permits borrowings of up to $1,100 which are used to fund Spitz’ working capital requirements. The primary modifications to the previous terms consist of a reduction in the per annum interest rate from one-half (0.5%) above the Wall Street Prime Rate to the amount equal to the Wall Street Prime Rate, the elimination of minimum balance deposit requirements and the removal of the limitation placed on borrowings by an asset based formula. Borrowings under the Credit Agreement are secured by Spitz real and personal property and all of the outstanding shares of Spitz common stock. The Credit Agreement and Mortgage Notes contain cross default provisions whereby the default of either agreement will result in the default of both agreements. As of December 31, 2008 there were no borrowings outstanding under the Credit Agreement.
Note 8 - Income Taxes
The income tax expense of $22 for 2008 included $38 of refunded foreign income tax withholding, the release of $97 of federal income tax contingency and state income tax expense of $157. The income tax benefit of $93 for 2007 represents adjustments to foreign income taxes accrued in 2006. The actual expense (benefit) differs from the expected tax expense (benefit) as computed by applying the U.S. federal statutory income tax rate of 35 percent, during fiscal year:
Income tax (expense) benefit consisted of the following:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities as of fiscal year-end:
Worldwide income (loss) before income taxes consisted of the following:
Income tax (expense) benefit consisted of the following:
We have total federal net operating loss carryforwards of approximately $154,500 which expire from 2009 through 2028. Approximately $176 of federal net operating loss carryforwards expired in 2008. We have various federal tax credit carryforwards of approximately $1,500, a portion of which expire between 2011 and 2016. We also have state net operating loss carryforwards of approximately $130,900 that expire depending on the rules of the various states to which the loss or credit is allocated.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During the year ended December 31, 2008, the valuation allowance on deferred income tax assets increased $812. During the year ended December 31, 2007 the valuation allowance on deferred income tax assets decreased by approximately $5,348. Valuation allowances were established according to our belief that it is more likely than not that these net deferred income tax assets will not be realized.
On January 1, 2007, the Company adopted the provisions of FASB Interpretation 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”), an interpretation of SFAS No. 109, “Accounting for Income Taxes,” . Previously, the Company had accounted for tax contingencies in accordance with SFAS No. 5, “Accounting for Contingencies.” As required by FIN 48, the Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority. At the adoption date, the Company applied FIN 48 to all tax positions for which the statute of limitations remained open. As a result of the implementation of FIN 48, the Company impaired approximately $6 million of deferred tax assets related to research and experimentation tax credits, which had a full valuation allowance and therefore did not result in a reduction to the January 1, 2007, balance of retained earnings. The amount of unrecognized tax benefits as of January 1, 2007, was $6 million. That amount includes unrecognized tax benefits which, if ultimately recognized would not have an impact to the Company’s annual effective tax rate due to the full valuation allowance. The Company is subject to audit by the IRS and various states for tax years dating back to 1992.
Note 9 - Commitments and Contingencies
Research and Development Arrangement
In December 2005, we entered into a research and development agreement (the “2005 R&D Agreement”) with a third party under which we paid $1,720 during the year ended December 31, 2007. The 2005 R&D Agreement was terminated in January 2008, when we entered into a new research and development agreement (the “2008 R&D Agreement”) with the same third party. Under the 2008 R&D Agreement, the Company paid $1,460 during the year ended December 31, 2008. The Company has a royalty obligation under the 2008 R&D Agreement of 4% of the net sales of the licensed product sold by the Company, with an annual minimum royalty of $400. Because the agreement relates to technology that is under development and has not reached technological feasibility, all payments made under the agreement are expensed as research and development as incurred.
Letters of Credit
The Company has finance arrangements which facilitate the issuance of letters of credit and bank guarantees. Under the terms of the arrangements, we are required to maintain a balance in a specific cash account equal to or greater than the outstanding value of all letters of credit or bank guarantees issued, plus other amounts necessary to adequately secure our obligations with the financial institution. As of December 31, 2008, we had outstanding letters of credit and bank guarantees of $1,642. Letters of credit that expire in 2009 and 2010 were $1,622 and $20, respectively.
Note 10 - Stock Option and Stock Purchase Plan
Stock Option Plan
In 2004, shareholders approved the adoption of the 2004 Stock Incentive Plan of Evans & Sutherland Computer Corporation (“2004 Plan”), which expires in 2014. The 2004 Plan is a stock incentive plan that provides for the grant of options and restricted stock awards to employees and for the grant of options to non-employee directors. Under the 2004 Plan non-employee directors receive an annual option grant for no more than 10,000 shares. New non-employee directors receive an option grant for no more than 10,000 shares upon their appointment or election. In addition, with the adoption of this plan no additional options can be issued under any of the prior stock-based plans. The 2004 Plan establishes a minimum exercise price for options of 110% of fair market value on the date of grant. Restricted stock awards may be qualified as a performance-based award that conditions a participant’s award
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
upon achievement by the Company or its subsidiaries of performance goals established by our Board of Directors’ Compensation Committee.
The number of shares, terms, and exercise period of option grants are determined by the Board of Directors on an option-by-option basis. Options generally vest ratably over three years and expire ten years from the date of grant. As of December 31, 2008, options to purchase 1,526,184 shares of common stock were authorized and reserved for future grant.
A summary of activity follows (shares in thousands):
As of December 31, 2008, options exercisable and options outstanding had a weighted average remaining contractual term of 4.2 and 5.4 years, respectively, and no aggregate intrinsic value.
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:
Expected option lives and volatilities are based on historical data of the Company. Our risk free interest rate is calculated as the average US Treasury bill rate that corresponds with the option life. Historically, the Company has not declared dividends and there are no future plans to do so.
As of December 31, 2008, there was approximately $87 of total unrecognized share-based compensation cost related to grants under our plans that will be recognized over a weighted-average period of one year.
Share-based compensation expense from awards under the 2004 Plan for the year ended December 31, 2008 and 2007 was $151 and $350, respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 11 - Preferred Stock
Class A Preferred Stock
We have 5,000,000 authorized shares of Class A Preferred Stock. As of December 31, 2008 and 2007, there were no Class A Preferred shares of stock outstanding. In November 1998, the Company adopted a shareholder rights plan and the Board of Directors declared a dividend of one preferred stock purchase right (“Right”) for each outstanding share of common stock of E&S as of November 19, 1998, and for all future issuances of common stock. Each Right entitled the registered holder to purchase from E&S one one-thousandth of a share of Preferred Stock at a price per share of $60.00, subject to adjustment. The Rights would have been exercisable ten business days following a public announcement of a person or group of persons acquiring beneficial ownership of 15% or more of our outstanding common shares or following the announcement of a tender offer or exchange offer, the consummation of which would result in the beneficial ownership by a person or group of persons of 15% or more of the outstanding E&S stock. The shareholder rights plan expired by its own terms on November 30, 2008. Accordingly, the consequences of an acquisition of our common stock, as prescribed by the shareholder rights plan, are no longer in effect.
Class B Preferred Stock
We have 5,000,000 authorized shares of Class B Preferred Stock. As of December 31, 2008 and 2007, no shares were outstanding.
Note 12 - Geographic Information
The table below presents sales by geographic location of sales. Sales within any individual country did not exceed 10% of consolidated sales:
Note 13 - Significant Customers
For the years ended December 31, 2008 and December 31, 2007, no individual customer represented 10% or more of total revenue. At December 31, 2008, accounts receivable from Customer A was 27% of total accounts receivable. At December 31, 2007, accounts receivable from Customers A and B were 40% and 11% of total accounts receivable, respectively. At December 31, 2008, Customer C represented 16% of total costs and estimated earnings in excess of billings. At December 31, 2007, Customer D represented 11% of total costs and estimated earnings in excess of billings.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Stockholders of Evans & Sutherland Computer Corporation
We have audited the accompanying consolidated balance sheets of Evans & Sutherland Computer Corporation (the Company) as of December 31, 2008 and 2007, and the related consolidated statements of operations, stockholders’ equity (deficit) and comprehensive loss, and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated 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 consolidated financial position of Evans & Sutherland Computer Corporation as of December 31, 2008 and 2007, and the consolidated results of their operations and their cash flows for the years then ended in conformity with U.S. generally accepted accounting principles.
Tanner LC
Salt Lake City, Utah
March 6, 2009
ITEM 9.
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A.
ITEM 9A.
CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures.
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)) as of the end of the period covered by this report. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures as of the end of the period covered by this report were effective at the reasonable assurance level such that the information required to be disclosed by us in reports filed under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission and (ii) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls system cannot provide absolute assurance, however, that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.
Management’s Annual Report on Internal Control over Financial Reporting.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes of accounting principles generally accepted in the United States. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance of achieving their control objectives. Further, because of changes in conditions, the effectiveness of internal control may vary over time.
Our management, with the participation of the Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Company’s internal control over financial reporting as of December 31, 2008. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control - Integrated Framework. Based on this evaluation, our management, with the participation of the Chief Executive Officer and Chief Financial Officer, concluded that, as of December 31, 2008, our internal control over financial reporting was effective based on those criteria.
This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.
Changes in Internal Control Over Financial Reporting.
During the quarter ended December 31, 2008, there has been no change in our internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act) ) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. Our process for evaluating controls and procedures is continuous and encompasses constant improvement of the design and effectiveness of established controls and procedures and the remediation of any deficiencies which may be identified during this process.
PART III
ITEM 10.
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Certain information required by Item 401 of Regulation S-K will be included under the caption “Election of Directors” in the Proxy Statement for our 2009 Annual Meeting of Shareholders and that information is incorporated herein by reference. Information required by Item 405 of Regulation S-K will be included under the caption “Compliance with Section 16(a) of the Securities Exchange Act of 1934” in the Proxy Statement for our 2009 Annual Meeting of Shareholders and that information is incorporated herein by reference. Certain information required by Item 401 of Regulation S-K is included in Part I of this Form 10-K under the caption “Executive Officers of the Registrant.” The information required by Item 407(a) of Regulation S-K will be included under the caption “Election of Directors” in the Proxy Statement for our 2009 Annual Meeting of Shareholders and that information is herein incorporated by reference.
Code of Ethics
Evans & Sutherland maintains a Code of Ethics and Business Conduct which is applicable to all employees, including all officers, and including our independent non-employee directors with regard to Evans & Sutherland related activities. The Code of Ethics and Business Conduct incorporates our guidelines designed to deter wrongdoing and to promote honest and ethical conduct and compliance with applicable laws and regulations. It also incorporates our expectations of our employees that enable us to provide accurate and timely disclosure in our filings with the Securities and Exchange Commission and other public communications. In addition, they incorporate our expectations of our employees concerning prompt internal reporting of violations of our Code of Ethics and Business Conduct.
The full text of the Evans & Sutherland Code of Ethics and Business Conduct is published on our Investors Relations website at www.es.com. We intend to disclose future amendments to certain provisions of our Code of Ethics and Business Conduct or waivers of such provisions granted to executive officers and directors, on this website within four business days following the date of such amendment or waiver.
ITEM 11.
ITEM 11.
EXECUTIVE COMPENSATION
The information required by this item will be included under the captions “Executive Compensation” and “Election of Directors” in the Proxy Statement for our 2009 Annual Meeting of Shareholders and that information is herein incorporated by reference.
ITEM 12.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required by Item 403 of Regulation S-K will be included under the caption “Security Ownership of Certain Beneficial Owners and Management” in the Proxy Statement for our 2009 Annual Meeting of Shareholders and that information is herein incorporated by reference.
Securities Authorized for Issuance Under Equity Compensation Plans as of December 31, 2008
ITEM 13.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 404 of Regulation S-K will be included under the caption “Certain Relationships and Related Party Transactions” in the Proxy Statement for our 2009 Annual Meeting of Shareholders and that information is herein incorporated by reference.
ITEM 14.
ITEM 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by Item 14 will be included under the caption “Report of the Audit Committee of the Board of Directors” in the Proxy Statement for our 2009 Annual Meeting of Shareholders and that information is herein incorporated by reference.
PART IV
ITEM 15.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) List of documents filed as part of this report
1. Financial Statements
The following consolidated financial statements are included in Part II, Item 8 of this report on Form 10-K.
· Consolidated Balance Sheets as of December 31, 2008 and 2007
· Consolidated Statement of Operations for each of the years ended December 31, 2008 and
· Consolidated Statements of Stockholders’ Equity and Comprehensive Loss for the years ended December 31, 2008 and 2007
· Consolidated Statement of Cash Flows for each of the years ended December 31, 2008 and
· Notes to Consolidated Financial Statements
2. Financial Statement Schedules
There are no schedules filed because of the absence of conditions under which they are required or because the required information is presented in the consolidated financial statements or the notes thereto.
3. Exhibits
Articles of Incorporation and Bylaws
3.1.1 Articles of Incorporation, as amended, filed as Exhibit 3.1 to Evans & Sutherland Computer Corporation’s Annual Report on Form 10-K, SEC File No. 000-08771, for the fiscal year ended December 25, 1987, and incorporated herein by this reference.
3.1.2 Amendments to Articles of Incorporation filed as Exhibit 3.1.1 to Evans & Sutherland Computer Corporation’s Annual Report on Form 10-K, SEC File No. 000-08771, for the fiscal year ended December 30, 1988, and incorporated herein by this reference.
3.1.3 Certificate of Designation, Preferences and Other Rights of the Class B-1 Preferred Stock of Evans & Sutherland Computer Corporation, filed as Exhibit 3.1 to Evans & Sutherland Computer Corporation’s Form 10-Q, SEC File No. 000-08771, for the quarter ended September 25, 1998, and incorporated herein by this reference.
3.2.1 Amended and Restated Bylaws of Evans & Sutherland Computer Corporation, filed as Exhibit 3.2 to Evans & Sutherland Computer Corporation’s Form 10-K for the year ended December 31, 2000, and incorporated herein by this reference.
3.2.2 Amendment No. 1 to the Amended and Restated Bylaws of Evans & Sutherland Computer Corporation, filed as Exhibit 3.3 to Evans & Sutherland Computer Corporation’s Form 10-K for the year ended December 31, 2000, and incorporated herein by this reference.
Instruments defining the rights of security holders
4.1 Form of Rights Agreement, dated as of November 19, 1998, between Evans & Sutherland Computer Corporation and American Stock Transfer Trust Company which includes as Exhibit A, the form of Certificate of Designation for the Rights, as Exhibit B, the form of Rights Certificate and as Exhibit C, a Summary of Rights, filed as Exhibit 1 to Evans & Sutherland Computer Corporation’s Registration Statement on Form 8-A filed December 8, 1998, and incorporated herein by this reference.
4.2 First Amendment to Rights Agreement dated as of June 7, 2000 between Evans & Sutherland Computer Corporation and American Stock Transfer & Trust Company, filed as Exhibit 10.14 to Evans & Sutherland Computer Corporation’s Form 10-Q for the quarter ended June 30, 2000, and incorporated herein by this reference.
4.3 Second Amendment to Rights Agreement dated as of August 13, 2004 between Evans & Sutherland Computer Corporation and American Stock Transfer & Trust Company, filed as Exhibit 4.1 to Evans & Sutherland Computer Corporation’s Form 8-K filed on August 16, 2004, and incorporated herein by this reference.
Material contracts
Management contracts and compensatory plans
10.1 Evans & Sutherland Computer Corporation 1998 Stock Option Plan, as amended as through May 17, 2000, filed as exhibit 4.1 to Evans & Sutherland Computer Corporation’s Post Effective Amendment No. 1 to Registration Statement on Form S-8, SEC File No. 333-58733, and incorporated herein by this reference.
10.2 Evans & Sutherland Computer Corporation’s 1995 Long-Term Incentive Equity Plan, filed as Exhibit 10.11 to Evans & Sutherland Computer Corporation’s Annual Report on Form 10-K, SEC File No. 000-08771, for the fiscal year ended December 29, 1995, and incorporated herein by this reference.
10.3 Evans & Sutherland Computer Corporation 2004 Stock Incentive Plan, filed as Annex A to Evans & Sutherland’s Form 14A, SEC File No. 001-14667, filed on April 19, 2004 and incorporated herein by this reference.
10.4 Amended and restated Evans & Sutherland Computer Corporation’s Supplemental Executive Retirement Plan (SERP), dated May 16, 2002, filed as Exhibit 10.38 to Evans & Sutherland Computer Corporation’s Form 10-K for the year ended December 31, 2002, and incorporated herein by reference.
10.5 Amended and restated Evans & Sutherland Computer Corporation’s Executive Savings Plan, dated May 16, 2002, filed as Exhibit 10.39 to Evans & Sutherland Computer Corporation’s Form 10-K for the year ended December 31, 2002, and incorporated herein by reference.
10.6 Employment agreement between Evans & Sutherland Computer Corporation and Kirk Johnson, dated August 26, 2002, filed as Exhibit 10.14 to Evans & Sutherland Computer Corporation’s Form 10-K for the year ended December 31, 2004, and incorporated herein by reference.
10.7 Employment Agreement, dated February 8, 2006, by and between Evans & Sutherland Computer Corporation and Jonathan Shaw, filed as Exhibit 10.1 to Evans & Sutherland Computer Corporation’s Form 10-Q for the quarter ended June 30, 2006, and incorporated herein by reference.
10.8 Employment Agreement dated February 8, 2006, by and between Evans & Sutherland Computer Corporation and Paul Dailey, filed as Exhibit 10.2 to Evans & Sutherland Computer Corporation’s Form 10-Q for the quarter ended June 30, 2006, and incorporated herein by reference.
10.9 Employment Agreement, dated August 26, 2002, by and between Evans & Sutherland Computer Corporation and David H. Bateman, filed as Exhibit 10.13 to Evans & Sutherland Computer Corporation’s Form 10-K for the year ended December 31, 2006, and incorporated herein by reference.
Other material contracts
10.10 Line of Credit Agreement, dated April 28, 2006, between Evans & Sutherland Computer Corporation, Spitz, Inc. and First Keystone Bank, filed as Exhibit 10.4 to Evans & Sutherland Computer Corporation’s Form 10-Q for the quarter ended June 30, 2006, and incorporated herein by reference.
10.11 Line of Credit Note, dated April 28, 2006, by and between Evans & Sutherland Computer Corporation, Spitz, Inc. and First Keystone Bank, filed here with filed as Exhibit 10.6 to Evans & Sutherland Computer Corporation’s Form 10-Q for the quarter ended June 30, 2006, and incorporated herein by reference.
10.12 Guaranty, dated April 28, 2006, by Evans and Sutherland Computer Corporation, filed as Exhibit 10.7 to Evans & Sutherland Computer Corporation’s Form 10-Q for the quarter ended June 30, 2006, and incorporated herein by reference.
10.13 Pledge Agreement, dated April 28, 2006, by and between Evans & Sutherland Computer Corporation, Spitz, Inc. and First Keystone Bank, filed as Exhibit 10.8 to Evans & Sutherland Computer Corporation’s Form 10-Q for the quarter ended June 30, 2006, and incorporated herein by reference.
10.14 Security Agreement, dated April 28, 2006, by and between Spitz, Inc. and First Keystone Bank, filed here with filed as Exhibit 10.9 to Evans & Sutherland Computer Corporation’s Form 10-Q for the quarter ended June 30, 2006, and incorporated herein by reference.
10.15 Open-end Mortgage and Security Agreement, dated April 28, 2006, by and between Spitz, Inc. and First Keystone Bank, filed as Exhibit 10.10 to Evans & Sutherland Computer Corporation’s Form 10-Q for the quarter ended June 30, 2006, and incorporated herein by reference.
10.16 First Modification Agreement to Line of Credit Agreements, dated July 28, 2006, by and between Evans & Sutherland Computer Corporation, Spitz, Inc. and First Keystone Bank, filed as Exhibit 10.11 to Evans & Sutherland Computer Corporation’s Form 10-Q for the quarter ended June 30, 2006, and incorporated herein by reference.
10.17 Credit Agreement between Evans & Sutherland Computer Corporation and Wells Fargo Bank, National Association effective December 1, 2006, filed as Exhibit 10.24 to Evans & Sutherland Computer Corporation’s Form 10-K for the year ended December 31, 2006, and incorporated herein by reference.
10.18 Mortgage Note dated January 14, 2004, of Transnational Industries, Inc. and Spitz, Inc. to First Keystone Bank filed as Exhibit 10.25 to Evans & Sutherland Computer Corporation’s Form 10-K for the year ended December 31, 2006, and incorporated herein by reference.
10.19 Open-End Mortgage and Security Agreement dated January 14, 2004, between Spitz, Inc. and First Keystone Bank filed as Exhibit 10.26 to Evans & Sutherland Computer Corporation’s Form 10-K for the year ended December 31, 2006, and incorporated herein by reference.
10.20 Loan Agreement dated as January 14, 2004, between First Keystone Bank, Transnational Industries, Inc. and Spitz, Inc filed as Exhibit 10.27 to Evans & Sutherland Computer Corporation’s Form 10-K for the year ended December 31, 2006, and incorporated herein by reference.
10.21 First Modification Agreement to Mortgage Loan Agreements, dated March 30 2007, by and between Evans & Sutherland Computer Corporation, Spitz, Inc. and First Keystone Bank, filed as Exhibit 10.28 to Evans & Sutherland Computer Corporation’s Form 10-K for the year ended December 31, 2006, and incorporated herein by reference.
10.22 Second Modification Agreement to Line of Credit Agreements, dated March 30 2007, by and between Evans & Sutherland Computer Corporation, Spitz, Inc. and First Keystone Bank, filed as Exhibit 10.29 to Evans & Sutherland Computer Corporation’s Form 10-K for the year ended December 31, 2006, and incorporated herein by reference.
10.23 Guaranty, dated March 30, 2007 by Evans and Sutherland Computer Corporation, filed as Exhibit 10.30 to Evans & Sutherland Computer Corporation’s Form 10-K for the year ended December 31, 2006, and incorporated herein by reference.
10.24 Third Modification Agreement to Line of Credit Agreements, dated August 24 2007, by and between Evans & Sutherland Computer Corporation, Spitz, Inc. and First Keystone Bank,
filed as Exhibit 10.31 to Evans & Sutherland Computer Corporation’s Form 10-K for the year ended December 31, 2007, and incorporated herein by reference.
Subsidiaries of the registrant
21.1 Subsidiaries of Registrant, filed as Exhibit 21.1 to Evans & Sutherland Computer Corporation’s Form 10-K for the year ended December 31, 2007, and incorporated herein by reference.
Consent of experts and counsel
23.1 Consent of Current Independent Registered Public Accounting Firm, filed herein.
Rule 13a-14(a)/15d-14(a) Certifications
31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended, filed herein.
31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended, filed herein.
Section 1350 Certifications
32.1 Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herein.
TRADEMARKS USED IN THIS FORM 10-K
E&S, ESLP, and Digistar 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.
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.
March 6, 2009
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.