ITEM 1. BUSINESS
GENERAL
Evans & Sutherland Computer Corporation (E&S or the Company) was incorporated under the laws of the State of Utah on May 10, 1968. The Company has its principal executive and operations facilities in Salt Lake City, Utah. The Company also has software and hardware design facilities in Austin and Dallas, Texas, Horsham, United Kingdom, and Munich, Germany, and has sales and service offices at various locations around the world.
Evans & Sutherland designs, develops, manufactures, and markets high- performance computer systems for various applications with demanding graphics requirements. The Company is a leading supplier of visual systems for flight training and simulation, is the supplier of high-performance graphics accelerators to major workstation manufacturers, and is a leading supplier of GL-based software development tools (a popular graphics language) used for advanced 3D (three-dimensional) graphics applications on the industry's leading workstation platforms. Evans & Sutherland's vision statement is to be a leader in profitably providing systems to generate high-quality real-time synthetic environments. These systems will include hardware, software, databases, and integration.
STRATEGIC ACTIVITIES
E&S follows a three-point growth strategy, consisting of growing existing businesses, developing new businesses internally, and selectively acquiring businesses. During the past 12 months, Evans and Sutherland acquired two businesses (Xionix, Inc. and Terabit Computer Specialty Company), invested in another business (Strata, Inc.), and divested one product group (CDRS). The Company expects to continue with this growth strategy. A summary of these strategic activities are summarized below:
E&S completed the sale of its Design Software group (CDRS) to Parametric Technology Corporation (PTC) on April 12, 1995 for a final net adjusted value of $31,500,000. The decision to sell the group was based on a desire to focus on the core businesses of the Company and to take advantage of an offer considered to be high relative to the earnings which could be realized inside the Company.
The Company announced a strategic agreement with Digital Equipment Corporation (DEC) on May 2, 1995 to develop high-end graphics accelerators for the newest members of DEC's workstation family, the AlphaStation line. Digital will sell and support the product worldwide. E&S now provides graphics hardware and software solutions that are sold and supported by DEC, Hewlett-Packard, IBM, and Sun Microsystems, as well as 3D graphics hardware and software products for the personal computer.
E&S and Strata, Inc., a leading developer and marketer of quality software tools, announced the formation of a strategic alliance on August 10, 1995, which includes a non-consolidated equity investment in Strata by E&S plus a technology cooperation agreement. The new relationship with Strata will aid E&S in the delivery of high-performance software and hardware for modeling and rendering on both PC and Macintosh machines, which will benefit the Company's customers in simulation, game development, and multimedia applications.
Evans & Sutherland, Hughes Training, Inc., and Thomson Training & Simulation Ltd. announced on September 14, 1995 the resolution of differences among them and their parent companies and the dismissal of any and all legal actions resulting from contractual disputes related to prior distribution agreements. The settlement allows each company to proceed to supply their products to the market, and it will make it possible for each party to work with one or more of the other parties in continuing to serve the market.
On October 9, 1995, E&S announced the purchase of Xionix Simulation Inc. of Dallas, Texas, a leading supplier of low-cost flight management system trainers used for training flight crews in the operation of the complex systems found in the computer-controlled cockpit. The acquisition further solidifies the Company's expansion into the civil airline training systems market. Xionix operates from its base near the Dallas/Fort Worth International Airport as a separate business unit within E&S' existing commercial simulation market.
E&S announced a working agreement on October 19, 1995 with United Artists Theatre Circuit Inc. to install the Company's Virtual Glider(TM) product in United Artists Theatres' Starport entertainment centers. The Company's alliance with United Artists Theatres complements both companies' strategies in terms of developing real-time, interactive high-tech entertainment products. E&S has installed Virtual Glider in the first two Starport Centres operated by United Artists Theatres, located in Dallas, Texas and Indianapolis, Indiana.
The Company and Mitsubishi Electronics America, Inc., a leading semiconductor supplier world-wide, announced on October 23, 1995 a technology development partnership to produce professional 3D graphics products for the personal computer market. The resulting products will be aimed at professionals requiring high-end, workstation-class graphics at a lower price point, for animation, entertainment, CAD, and visualization.
On March 20, 1996, E&S purchased Terabit Computer Specialty Company, Inc., based in Salt Lake City. Terabit supplies simulated cockpit instruments and other airborne electronics displays used in training simulators for military and commercial aircraft. Terabit will operate as a business unit within the Company.
PRODUCTS AND MARKETS
The Company's current products are of four basic types:
1. Visual systems which create and display computed images of stored digital models of various real-world environments that allow real-time interaction within databases that replicate specific geographic areas or imaginary worlds. Operators interact with the environment by means of an interface that has typically been integrated in flight training simulators, weapons training systems, simulators used for designing vehicles, digital planetarium systems, and virtual reality systems for entertainment applications. These include computer image generators, display systems, modeling tools, and other software products. Extensive use of custom VLSI design capability in-house improves performance, reliability, and maintainability of E&S products.
2. Graphics accelerators which are used as a component in high-performance, interactive graphics display systems for workstations. These machines allow users to make line drawings of the edges and vertices of models of 3D objects and also to generate shaded images of such models stored in computer memory. They are useful tools for computer-aided design, analysis, research, and simulation. These products may be systems which run alongside workstations, boards which plug into workstations, or integrated circuits (chips). They allow users of DEC, HP, IBM, and Sun machines to achieve high-performance 3D graphics similar to that available on other systems in the market.
3. Software Systems and development tools which are used with multi-platform interactive graphics systems to produce leading-edge 3D graphics software and hardware solutions to a broad customer base. Portable Graphics Inc. (PGI), a wholly-owned subsidiary, develops and markets GL-related libraries and toolkits for a variety of hardware platforms, which allow applications developed in the IRIS GL and Open GL programming interfaces to run on all the industry's leading workstation platforms.
4. Training Systems for flight management which are used within the commercial aviation training market for pilot training. Xionix Simulation Inc., a wholly- owned subsidiary, develops and markets training devices which range from low-end desktop trainers to more sophisticated free standing flight management systems trainers.
MARKETING
Evans & Sutherland products are marketed worldwide by the Company or its agents, including Rikei in Japan, directly to end-users, subcontractors, and prime contractors. The Company 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 STN Atlas Elektronik GmbH in Germany, and Mitsubishi Precision Co., Ltd. in Japan, OEM agreements for its Graphics Accelerator products with Digital Equipment, Hewlett Packard, IBM, and Sun Microsystems, and a technology development partnership with Mitsubishi Electronics. Sales, marketing, and product support are offered by the OEM suppliers. Software Systems (Portable Graphics Inc.) products are sold through a direct sales force, through distributors, and through some of the same OEM customers as the Graphics Accelerator products. Training Systems (Xionix Simulation Inc.) products are marketed and supported by the Company's sales and marketing staff.
SIGNIFICANT CUSTOMERS
Customers accounting for more than 10% of the Company's net sales in 1995 were the U.S. government and Loral Corporation. Sales to the U.S. government and prime contractors under government contracts were $54.7 million in 1995 (48% of total sales), $51.4 million in 1994 (45% of total sales), and $47.1 million in 1993 (33% of total sales). A portion of these sales are included in sales to Loral Corporation and Thomson Training Systems. Sales to Loral accounted for $34.3 million in 1995 (30% of total sales), $25.7 million in 1994 (23% of total sales), and $8.2 million in 1993 (6% of total sales). In prior years, Thomson accounted for more than 10% of the Company's sales. Sales through Thomson accounted for $10.7 million in 1995 (9% of total sales), $13.9 million in 1994 (12% of total sales), and $21.0 million in 1993 (15% of total sales).
COMPETITION
Primary competitive factors for the Company's products are performance and price. Because competitors are constantly striving to improve their products, E&S must assure that it continues to offer products with the best performance at a competitive price. The Company believes it is able to compete well in this environment and will continue to be able to do so. In 1995, the Company gained market share in the Government Simulation market. CAE Electronics, Ltd., Lockheed Martin, Silicon Graphics, Inc., and Thomson are the major competitors in this market. The Commercial Simulation business has been slow due to depressed market conditions in the civil airlines industry. However, conditions are improving and the Company was awarded several highly competitive orders in 1995. CAE and Flight Safety are the principal competitors in this market. Graphics Systems, for use with DEC, HP, IBM, and Sun workstations, sells into the competitive market for high-performance engineering workstations. Sale of these products depend on strong OEM partners. Stiff competition comes from Silicon Graphics, Inc. and products manufactured by the workstation manufacturers themselves. In the Education and Entertainment business, the Company's DIGISTAR II(R) digital planetarium product competes with traditional optical-mechanical products. Competitors include Minolta Planetarium Co. Ltd., Goto Optical Mfg. Co., Carl Zeiss Inc., and Spitz Inc. In entertainment systems, E&S is one of many companies in a highly competitive and fragmented market.
BACKLOG
The Company's backlog was $76,822,000 on December 29, 1995, compared with $67,133,000 on December 30, 1994, and $68,685,000 on December 31, 1993. The predominant portion of the backlog as of December 29, 1995, is for visual simulation products. It is anticipated that most of the 1995 backlog will be filled in 1996.
INTERNATIONAL SALES
Sales known to be ultimately installed outside the U.S. are considered international sales by the Company. Sales to foreign end-users were $44,503,000 or 39% of the Company's 1995 sales volume. To take full advantage of this sales pattern, the Company operated a wholly-owned Foreign Sales Corporation (FSC) subsidiary through fiscal year 1995, the use of which resulted in tax benefits in 1995 amounting to approximately $344,000. For additional information, see footnote 13 of "Notes to Consolidated Financial Statements" in Part II of this report.
DEPENDENCE ON SUPPLIERS
Most parts and assemblies used by E&S are readily available in the open market; however, a limited number are available only from a single vendor. In these instances the Company stocks a substantial inventory and attempts to develop alternative components or sources where appropriate.
PATENTS
Evans & Sutherland owns a number of patents and is a licensee under several others which were developed principally at the University of Utah. Several patent applications are presently pending in the United States, Japan, and several European countries. E&S is continuing the practice, begun in 1985, of copyrighting 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 ownership for its competitive position. Were any or all patents held to be invalid, management believes the Company would not suffer significant damage. However, E&S actively pursues patents on its new technology.
RESEARCH & DEVELOPMENT
In 1995, company-funded research and development decreased 30% to $19,406,000 from $27,890,000. As a percentage of sales, R&D decreased to 17% in 1995 from 25% in 1994. The Company continues to fund almost all R&D efforts internally. It is anticipated that high levels of R&D will continue in support of essential product development and research efforts to ensure the Company maintains technical excellence, leadership, and market competitiveness.
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 accord with environmental rules and regulations, as well as federal, state, and local laws.
EMPLOYEES
As of March 1, 1996, the Company and its subsidiaries employed 754 persons. The Company believes its relations with its employees are good.
SEASONALITY
The Company believes there is no inherent seasonal pattern to its business. However, sales volume fluctuates month-to-month or quarter-to-quarter due to relatively large individual sales and the random nature of customer-established shipping dates. Although the Company's volume has been skewed toward the fourth quarter in the past few years, the Company is working diligently to smooth quarter-to-quarter revenues and expects further success in achieving this goal.
ITEM 2.

ITEM 2. PROPERTIES
The Company's principal operations are located in the University of Utah Research Park, in Salt Lake City, Utah, where it owns six buildings of approximately 440,000 square feet. E&S occupies four buildings and leases out the remaining two buildings. The buildings are located on land leased from the University of Utah on 40-year land leases. Two buildings have options to renew for an additional 40 years, and four have options to renew 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 U. S. and in Europe.
ITEM 3.

ITEM 3. LEGAL PROCEEDINGS
On September 14, 1995, Evans & Sutherland, Hughes Training, Inc., and Thomson Training & Simulation Ltd. announced the resolution of differences among them and their parent companies and the dismissal of any and all legal actions resulting from contractual disputes related to prior distribution agreements. E&S has had a long history of working with both Hughes and Thomson to jointly provide high quality equipment and services to the pilot training market. The settlement allows all three companies to proceed to supply their products to the market, and will make it possible for each party to work with one or more of the other parties in continuing to serve the market.
Except as noted above, neither the Company, nor any of its subsidiaries, is a party to any material legal proceeding other than ordinary routine litigation incidental to its business.
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 1995.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following sets forth certain information regarding the executive officers of the Company as of March 29, 1996:
- -------- Mr. Carrell was elected Chairman of the Board of Directors of the Company on March 7, 1991. He has been a member of the Board for 12 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, a west coast based 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. Previously, Mr. Oyler served as Senior Vice President of Harris Corporation from 1976 through 1990 and also served as consultant with Booz, Allen & Hamilton. He has 1 year 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 Corporation. Previously, Mr. Lemley was with Medtronic, Inc., where he held several positions including 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 less than 1 year of service with the Company.
Mr. Meredith has been Senior Vice President and Secretary since 1995. He is also a director of Blue Cross Blue Shield of Utah and Tripos, Inc. Previously, Mr. Meredith served as Vice President and Chief Financial Officer and Secretary and in other capacities with E&S. He has 18 years of service with the Company.
Mr. Anderson has been Vice President, General Manager of Commercial Simulation since 1994. Prior to joining the Company, he served as General Manager Business Development for Hughes Rediffusion Simulation Ltd. from 1992 to 1994, and numerous other positions with Rediffusion Simulation beginning in 1961. He has 1 year of service with the Company.
Mr. Chidester has been Vice President of Manufacturing since 1994. He previously served as Director of Graphics Workstation Manufacturing and has 7 years of service with the Company.
Mr. Doenges has been Director of Strategic Development since 1994. He previously served as Vice President, Strategic Technology, and Manager of New Business Development. He has 22 years of service with the Company.
Mr. Horwood has been Vice President, General Manager of Entertainment & Education since 1994. Prior to joining the Company, he was Manager of Marketing and Sales with Hughes Training, Inc. He has 2 years of service with the Company.
Mr. Hurley has been Vice President of Shared Technology since 1994. He previously served as Vice President of Engineering in the Simulation Division. Mr. Hurley has 15 years of service with the Company.
Mr. Maule joined the Company in February 1996 as the Vice President, General Manager of Graphics Systems. Prior to joining the Company, Mr. Maule was Vice President of Marketing and Strategy for Concurrent Computer Corporation. Previously he served as Director of Business Development for Lockheed Missiles & Space Company. Mr. Maule has less than 1 year of service with the Company.
Mr. Schultz has been Controller since 1979 and has 20 years of service with the Company.
Mr. Sutherland has been Vice President, General Manager of Government Simulation since 1994. He previously served as Executive Vice President of the Government Sector, and Vice President of Simulation Products. Mr. Sutherland has 14 years of service with the Company.
Mr. Tanner joined the Company in March 1996 as the Vice President, General Manager of Display Systems. Prior to joining the Company, Mr. Tanner was President of Terabit Computer Specialty Company between 1979 and 1996. Terabit was merged with E&S in March. Mr. Tanner has less than 1 year of service with the Company.
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FORM 10-K
PART II
ITEM 5.

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER 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 calendar quarters indicated, as reported by Nasdaq. Quotations represent actual transactions in Nasdaq's quotation system but do not include retail markup, markdown, or commission.
APPROXIMATE NUMBER OF EQUITY SECURITY HOLDERS
On March 22, 1995, there were 933 holders 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.
Title of Class --------------
Common Stock, $0.20 Par Value
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.

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
(Dollars in thousands except per share amounts)
QUARTERLY FINANCIAL DATA (Unaudited)
(Dollars in thousands except per share amounts)
ITEM 7.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ITEMS FROM THE CONSOLIDATED STATEMENTS OF OPERATION (AS A PERCENT OF SALES)
NET SALES WORLDWIDE AND BY MAJOR MARKET SECTORS (IN THOUSANDS)
RESULTS OF OPERATIONS
OVERVIEW
The Company had a good year in 1995 in terms of revenue growth and profit growth from continuing operations. In 1995, E&S achieved net earnings of $20.8 million versus a net loss of $3.7 million in 1994, and sales from ongoing businesses were up nearly 14% (excluding CDRS and Tripos). Early in 1995, E&S completed its restructuring of operations that were begun the previous year, which included Company-wide reductions affecting every business group in the Company. As a result, expenses as a percent of sales have been significantly reduced (see table on the facing page, "Items from the Consolidated Statements of Operations"), and productivity increased 31% as measured by revenue per employee ($142 versus $108). In addition, several strategic transactions were completed during the year, including divesting CDRS, and acquiring Xionix, Inc. and Terabit Computer Specialty Company. The Company plans to continue these corporate development activities.
NET SALES
In 1995, net sales increased less than 1% ($113.2 million versus $113.1 million in 1994). International sales increased 17% ($44.5 million versus $37.9 million in 1994), which offset a 9% decrease in U.S. sales ($68.7 million compared to $75.2 million in 1994). Strong growth in the international markets was led by sales that nearly doubled in the Pacific Rim region ($13.9 million compared to $7.0 million in 1994) and a 26% sales increase in Great Britain ($11.6 million compared to $9.2 million in 1994). Sales in other European and foreign locations showed a slight decrease (see table on the facing page, "Net Sales Worldwide and by Major Market Sectors").
In 1994, sales decreased 20% ($113.1 million versus $142.2 million in 1993). International sales decreased 46% ($37.9 million compared to $69.9 million in 1993), which more than offset a 4% increase in U.S. sales ($75.2 million compared to $72.3 million in 1993). Results were below expectations in the international markets with significant reductions in each region served, reflecting the unsettled political and business environment in 1994 fueled by the end of the cold war, the worldwide recession, and low oil prices. At the end of 1994, however, signs indicated that these international markets were strengthening, which proved correct as reflected in the 1995 results.
Sales in the Government Simulation market segment increased 5% in 1995 ($85.7 million versus $81.4 million in 1994), compared to a 6% decrease in 1994 ($81.4 million versus $86.2 million in 1993). The improvement was led by increased market share and strong international activity. With a solid backlog of orders and excellent forward visibility, this business is expected to remain strong and continue to show good performance.
Graphics Systems sales increased 5% in 1995 ($11.6 million versus $11.1 million in 1994) compared to an 18% decrease in 1994 ($11.1 million versus $13.6 million in 1993). The business has been stabilized and it is expected to continue its rebuilding. Recent management changes are expected to have a positive impact in the coming year. The Company expects significant opportunities in the NT workstation market with graphics accelerator and simulation products.
Sales in the Commercial Simulation market (civil aviation) more than doubled from the prior year ($9.1 million versus $4.2 million in 1994), compared to a 73% decrease in 1994 ($4.2 million versus $15.5 million in 1993). Sales in 1995 included $3.7 million in the settlement with Thomson. The Company was awarded several highly competitive orders during the year, including a major order from Airbus Industrie for current and future simulators. In addition to the new relationship with Thomson, E&S continues to build a position as a supplier of complete visual systems, which include the acquisitions of Xionix and Terabit, further expanding both the Company's customer base and its range of products.
Education and Entertainment sales nearly tripled from the prior year ($6.0 million versus $2.2 million in 1994), compared to a 21% decrease in 1994 ($2.2 million versus $2.8 million in 1993). Strong performance by the Company's new DIGISTAR II planetarium system and other new entertainment orders both contributed to the growth. Virtual Hang Gliders, a virtual reality hang-glider ride, were installed in two Virtual Reality entertainment centers opened by United Artists Theatres. Growth of such centers is expected, and other E&S products are expected to be featured in these centers in the future.
CDRS sales in 1995 represent only three months of operations due to the divestiture of CDRS that occurred on April 13, 1995. Tripos, Inc. sales for 1994 represent five months of operations due to the spin-off of Tripos that occurred on June 1, 1994. CDRS and Tripos were included in Graphics Systems prior to disposition, but are classified separately in the table on the facing page for comparative purposes.
COSTS AND EXPENSES
Cost of Sales, as a percent of sales, were 56%, 54%, and 46%, respectively, in 1995, 1994, and 1993. The increases in the cost of sales percentages were anticipated. Increased competition with respect to nearly all of the Company's products added pressure on prices and margins. Also, the Company-wide restructuring included the elimination of non-profitable product lines, which resulted in a $7.4 million write-down of inventory in 1995.
Total operating expenses were 26% lower in 1995 compared to 1994, and 14% lower in 1994 compared to 1993 due to cost reductions resulting from restructuring the Company. As a percent of sales, total operating expenses, excluding the write-off of in-process R&D in 1995 and the cost of restructuring in 1994 and 1993, were 44%, 54%, and 51%, respectively, for 1995, 1994, and 1993.
Marketing, General, and Administrative expenses were 7% lower in 1995 compared to 1994, and also lower as a percent of sales (27% in 1995 versus 29% in 1994). In 1994, these expenses were 18% lower compared to 1993, but slightly higher as a percent of sales. The lower expenses in both 1995 and 1994 were expected due to the restructuring.
Research and Development expenses were 30% lower in 1995 compared to 1994, and 12% lower in 1994 compared to 1993 due to the restructuring. As a percent of sales, R&D was significantly lower than 1994 (17% in 1995 versus 25% in 1994). Management intends to reduce R&D, as a percent of sales, over the next few years. However, high levels of R&D will continue in support of essential product development to ensure that the Company maintains technical excellence and market competitiveness. The Company continues to fund nearly all R&D costs internally.
GAIN FROM SALE OF CDRS
The Company realized a one-time net gain of $23,506,000 from the sale of CDRS to Parametric Technology Corporation on April 13, 1995. The final transaction value net of expenses was $31,500,000.
OTHER INCOME, NET
Other income, net, increased 104% in 1995 from 1994, compared to a decrease of 16% in 1994 from 1993. This resulted from an increase in interest income of 75% in 1995 over 1994, compared to a decrease of 1% in 1994 from 1993. In 1995, higher cash balances were primarily the result of the sale of CDRS. Interest expense declined 22% and 27% respectively in 1995 from 1994 and in 1994 from 1993 due to a lower balance of the Company's outstanding convertible debentures during both 1995 and 1994. Sales of appreciated assets in 1995, 1994, and 1993 resulted in net realized gains of $7,126,000, $4,009,000 and $6,238,000 respectively. The underlying marketable securities comprising these sales were 399,500 shares, 295,000 shares, and 510,000 shares of VLSI common stock sold in each of those years.
EXTRAORDINARY GAIN
The Company realized extraordinary gains of $327,000 and $1,859,000 in 1995 and 1994, respectively. The gains resulted from repurchase by the Company of its 6% Subordinated Convertible Debentures at less than par. There were no repurchase of debentures by the Company in 1993. The current outstanding face amount of debentures outstanding is $18,015,000.
INCOME TAXES
Provision (benefit) for income taxes was 39%, (51%), and 36% of pre-tax earnings (loss) for 1995, 1994, and 1993 respectively. The rate increase in 1994's tax benefit results primarily from the closing of the Company's wholly- owned subsidiary in France. In 1993, the Company adopted FASB 109 Accounting for Income Taxes as described in footnote 1 of "Notes to Consolidated Financial Statements" in Part II of this report with the resulting tax effects shown as a separate line item in the Consolidated Financial Statements of Operations.
LIQUIDITY AND CAPITAL RESOURCES
Funds to support the Company's operations come from net cash provided by operating activities, sale of marketable securities held for investment, and proceeds from employee stock purchase and option plans. The Company also has cash equivalents and short-term marketable securities which can be used as needed.
During 1995, proceeds from the sale of CDRS provided $31,488,000, the sale of VLSI marketable securities contributed $7,930,000, net cash from operating activities provided $7,610,000, and employee stock purchases contributed $2,295,000. The major use of cash in 1995 was for the purchase of capital equipment for $5,846,000, the investment in Strata Inc. of $3,000,000, and the repurchase of convertible debentures of $1,831,000. The net result was an increase in cash and marketable securities to $91,741,000 at the end of 1995 from $51,810,000 in 1994. At the end of 1995, there were no material capital commitments.
The Company believes that through internal cash generation, plus the cash investments and marketable securities identified above, it has sufficient resources to cover its cash needs during fiscal year 1996.
EFFECTS OF INFLATION
The effects of inflation were not considered material during 1995.
FACTORS THAT MAY AFFECT FUTURE RESULTS
Evans & Sutherland's domestic and international businesses operate in highly competitive markets. The business of the Company is subject to national and worldwide economic and political influences such as recession, political instability, the economic strength of governments, and rapid changes in technology. The Company's operating results are dependent on its ability to rapidly develop, manufacture, and market innovative products that meet customers needs. Inherent in this process are a number of risks that the Company must manage in order to achieve favorable operating results. The process of developing new high technology products is complex and uncertain, requiring innovative designs and features that anticipate customer needs and technological trends. The products, once developed, must be manufactured and distributed in sufficient volumes at acceptable costs to meet demand. Furthermore, portions of the manufacturing operations are dependent on the ability of suppliers to deliver components and subassemblies in time to meet critical manufacturing and distribution schedules. Constraints in these supply lines may adversely affect E&S's operating results until alternate sourcing can be developed.
This report contains both historical facts and forward-looking statements. Any forward-looking statements involve risks and uncertainties, including but not limited to risk of product demand, market acceptance, economic conditions, competitive products and pricing, difficulties in product development, commercialization, and technology, and other risks detailed in this filing. Although the Company believes it has the product offerings and resources for continuing success, future revenue and margin trends cannot be reliably predicted. Factors external to the Company can result in volatility of the Company's common stock price. Because of the foregoing factors, recent trends should not be considered reliable indicators of future stock prices or financial performance.
ITEM 8.

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
* Independent Auditors' Report
* Consolidated Balance Sheets - December 29, 1995 and December 30, 1994.
* Consolidated Statements of Operations - Years ended December 29, 1995, December 30, 1994, and December 31, 1993.
* Consolidated Statements of Stockholders' Equity - Years ended December 29, 1995, December 30, 1994, and December 31, 1993.
* Consolidated Statements of Cash Flows - Years ended December 29, 1995, December 30, 1994, and December 31, 1993.
* Notes to Consolidated Financial Statements - Years ended December 29, 1995, December 30, 1994, and December 31, 1993.
The following constitutes a list of 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.
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 Peat Marwick LLP, independent public accountants. Management has made available all the Company's financial records and related data to allow KPMG Peat Marwick 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 and internal auditing, to review accounting, auditing, internal accounting control, and financial reporting matters.
James R. Oyler John T. Lemley President and Vice President and Chief Executive Officer Chief Financial Officer
REPORT OF INDEPENDENT ACCOUNTANTS
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 29, 1995 and December 30, 1994, and the results of their operations and their cash flows for each of the years in the three-year period ended December 29, 1995, 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.
As discussed in note 1 to the consolidated financial statements, the Company changed its method of accounting for investments to adopt the provisions of Statement of Financial Accounting Standards (SFAS) No. 115, Accounting for Certain Investments in Debt and Equity Securities effective January 1, 1994 and the Company changed its method of accounting for income taxes in 1993 to adopt the provisions of SFAS No. 109, Accounting for Income Taxes.
KPMG Peat Marwick LLP
February 13, 1996 Salt Lake City, Utah
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 29, 1995 and December 30, 1994
(Dollars in Thousands Except Share Amounts)
See accompanying notes to consolidated financial statements.
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 29, 1995, December 30, 1994, and December 31, 1993
(In thousands except per share amounts)
See accompanying notes to consolidated financial statements.
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended December 29, 1995, December 30, 1994, and December 31, 1993
(Dollars in thousands)
See accompanying notes to consolidated financial statements.
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended December 29, 1995, December 30, 1994, and December 31, 1993 (In thousands)
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Years ended December 29, 1995, December 30, 1994, and December 31, 1993
(In thousands)
See accompanying notes to consolidated financial statements.
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 29, 1995, December 30, 1994, and December 31, 1993
(Dollars in thousands except share and per share amounts)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ------------------------------------------
(A) DESCRIPTION OF BUSINESS -----------------------
Evans & Sutherland Computer Corporation (the Company) designs, develops, manufactures, and markets high-performance computer systems for various applications with demanding graphics requirements. The Company is a supplier of visual systems for flight training and simulation, high-performance graphics accelerators to major workstation manufacturers, and GL-based software development tools used for advanced three-dimensional (3D) graphics applications on the industry's leading workstation platforms. The Company's operations consist of a single line of business.
The Company's fiscal year ends the last Friday in December. The fiscal year ends for the years included in the accompanying consolidated financial statements are the periods ended December 29, 1995, December 30, 1994, and December 31, 1993. Unless otherwise specified, all references to a year are to the fiscal year ending in the year stated.
(B) PRINCIPLES OF CONSOLIDATION ---------------------------
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.
(C) REVENUE RECOGNITION -------------------
Net sales include revenue from system and software products, software license rights, and service contracts. Product revenues are generally recognized when the product is shipped and the Company has no additional performance obligations.
Revenue from long-term contracts 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.
Software license fees are recognized when the product has been delivered, provided that the Company has no additional performance obligations. Revenues from service contracts are recognized ratably over the related contract period.
(D) CASH AND CASH EQUIVALENTS -------------------------
The Company considers all highly liquid financial instruments purchased with an original maturity to the Company of three months or less to be cash equivalents. Cash equivalents consist of debt securities of $-0- and $21,997 at December 29, 1995 and December 31, 1994, respectively.
(E) 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).
(F) PROPERTY, PLANT, AND EQUIPMENT ------------------------------
Property, plant, and equipment are stated at cost. Depreciation and amortization are computed using the straight-line and double-declining balance methods based on the estimated useful lives of the related assets.
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(G) OTHER ASSETS ------------
Other assets include deferred bond offering costs and goodwill, and are being amortized on the straight-line basis over the bond term, and five years, respectively.
(H) SOFTWARE DEVELOPMENT COSTS --------------------------
Software development costs are capitalized from the date technological feasibility is achieved, if material; capitalization is discontinued when the product is available for general release to customers. Such deferrable costs have not been material during the periods presented.
(I) MARKETABLE SECURITIES ---------------------
The Company adopted the provisions of Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity Securities (Statement 115) at January 1, 1994. Under Statement 115, the Company classifies its debt and marketable 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. 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 the security. Dividend income is recognized when earned. Realized gains and losses are included in results of operations and are determined on the specific- identification basis.
(J) 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.
(K) EARNINGS (LOSS) PER SHARE -------------------------
Earnings (loss) per common share are computed based on the weighted average number of shares outstanding during the year totaling 8,638,665, 8,519,990, and 8,256,331 shares for 1995, 1994, and 1993, respectively. Fully diluted earnings per share reflect additional dilution related to stock options and warrants using the market price at the end of the period when higher than the average price for the period. Fully-diluted earnings per share are based on 9,000,710 shares outstanding for 1995.
(L) INCOME TAXES ------------
Effective December 26, 1992, the Company adopted Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes and reported the cumulative effect of the change in the method of accounting for income taxes in the 1993 consolidated statement of operations. Under the asset and liability method of Statement 109, 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.
(M) 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.
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(M) FOREIGN CURRENCY TRANSLATION (CONTINUED) ----------------------------
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 miscellaneous income (expense) for the period in which the transaction occurs and amounted to net gains (losses) of $(53) in 1995, $266 in 1994, and $(291) in 1993.
(N) ESTIMATES ---------
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and 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.
(O) RECLASSIFICATIONS -----------------
Certain reclassifications have been made in the 1994 and 1993 consolidated financial statements to conform with classifications adopted in 1995.
(2) MARKETABLE SECURITIES ---------------------
The amortized cost, gross unrealized holding gains, gross unrealized holding losses, and fair value for securities by major security type and class of security at 1995 and 1994, were as follows:
Proceeds from sales of securities during 1995 and 1994 were $85,147 and $16,062, respectively. Gross realized gains for 1995 and 1994 were $154 and $3 and gross realized losses for the same periods were $291 and $8, respectively.
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(2) MARKETABLE SECURITIES (CONTINUED) ---------------------
Long-term investment securities are summarized as follows:
Proceeds from sales of long-term securities during 1995 and 1994 were $7,930 and $4,502, respectively. Gross realized gains for 1995 and 1994 were $7,263 and $4,014 and there were no gross realized losses for the same periods.
On August 10, 1995, the Company purchased 109,259 common shares of Strata, Inc. (Strata) which represents less than 10% of the outstanding common shares. The shares are not marketable and are stated at cost. Strata is a developer of software tools for multimedia producers.
(3) INVENTORIES ----------- Inventories are summarized as follows:
Inventories totaling $10,767 were written off during 1995 of which $7,467 was charged to cost of sales and $3,300 to the CDRS sale (note 19).
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(4) LONG-TERM CONTRACTS ------------------- Comparative information with respect to uncompleted contracts follows:
(5) PROPERTY, PLANT, AND EQUIPMENT ------------------------------
The cost and estimated useful lives of property, plant, and equipment are summarized as follows:
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 10 years. At the end of the lease term, including any extension, the buildings and improvements revert to the lessor.
(6) NOTES PAYABLE TO BANKS ----------------------
The following is a summary of notes payable to banks:
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(6) NOTES PAYABLE TO BANKS (CONTINUED) ----------------------
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.
The Company has unsecured revolving line of credit agreements with foreign banks totaling $7,466 at December 29, 1995, of which approximately $3,693 was unused and available. The Company also has a $5,000 unsecured line of credit with a U.S. bank for which $-0- and $350 were outstanding at December 31, 1995 and 1994, respectively.
(7) ACCRUED EXPENSES ----------------
Accrued expenses consist of the following:
(8) LONG-TERM DEBT --------------
Long-term debt is comprised of six percent convertible subordinated debentures due in 2012. The six percent convertible subordinated debentures are convertible at the bondholders option at any time prior to maturity, subject to adjustments in certain events. The debentures are redeemable at the Company's option, in whole or in part, at declining redemption premiums until March 1, 1997, and at par on and after such date. The Company is required to provide a sinking fund balance of five percent of the applicable principal amount of the debentures annually beginning March 1, 1998. The debentures are subordinated to all existing and future superior indebtedness.
During 1995 and 1994, the Company repurchased $2,360 and $16,691, respectively, of convertible debentures on the open market. These purchases resulted in extraordinary gains of approximately $536 and $2,974, respectively. These extraordinary gains are shown net of income taxes in the accompanying consolidated statements of operations.
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(9) INCOME TAXES ------------ Components of income tax expense (benefit) attributable to income (loss):
The actual tax expense differs from the tax expense (benefit) as computed by applying the U.S. federal statutory tax rate of 35 percent for 1995, and 34 percent for 1994 and 1993, to earnings before income taxes as follows:
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(9) INCOME TAXES (CONTINUED) ------------
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 29, 1995 and December 30, 1994, are presented below:
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. 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 and foreign subsidiaries as a result of the uncertainty of realization.
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(10) STOCK OPTION, PURCHASE, AND BONUS PLANS ---------------------------------------
Stock Option Plans - The Company has granted options to officers, ------------------ directors, and employees to acquire shares of the Company's common stock. Substantially all options so granted provide for purchase prices equal to the fair market value on the date of grant. During 1995, shareholders authorized an additional 350,000 shares to be granted under the plans. In addition, 180,000 authorized shares from the stock bonus plan were transferred to the stock option plans and the stock bonus plan was eliminated. A summary of activity follows:
Under the terms of the stock option plans, 794,004 shares of common stock were authorized and reserved for issuance, but were not granted at December 29, 1995.
Stock Purchase Plan - The Company has an employee stock purchase plan ------------------- whereby qualified employees are allowed to purchase limited amounts of 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.
(11) LEASE COMMITMENTS -----------------
The Company occupies real property and uses certain equipment under lease arrangements, which are accounted for primarily as operating leases. A summary of lease expense under such arrangements follows:
A summary of noncancelable long-term operating lease commitments follows:
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(12) INDUSTRY SEGMENT AND FOREIGN OPERATIONS ---------------------------------------
A summary of operations by geographic area follows:
Transfers between geographic areas are accounted for at market price, and intercompany profit is eliminated in consolidation. Operating earnings (loss) are total sales, less operating expenses. Identifiable assets are those assets of the Company that are identified with the operations in each geographic area. Corporate assets are principally cash, marketable securities, and long-term investments.
(13) SALE TO FOREIGN AND MAJOR CUSTOMERS -----------------------------------
A summary of sales to foreign and major customers follows:
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(14) EMPLOYEE BENEFIT PLANS ----------------------
Pension Plan (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 annually the maximum amount that can be deducted for federal income tax purposes.
Supplemental Executive Retirement Plan (SERP) - Effective July 1, 1995, --------------------------------------------- the Company introduced a non-qualified SERP which will be phased in over three years. 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.
Net annual Plan and SERP expense is summarized as follows:
The following assumptions were used in accounting for the pension plan at the end of each year:
Since the SERP was established on July 1, 1995, the discount rate used in determining the 1995 expense was 7.0 percent.
The following summarizes the funded status and amounts recognized in the Company's consolidated financial statements:
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(14) EMPLOYEE BENEFIT PLANS (CONTINUED) ----------------------
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 1995, 1994, and 1993 were $836, $1,064, and $1,025, respectively.
Life Insurance - In 1995, the Company purchased company-owned life -------------- insurance policies insuring the lives of certain active employees. The policies accumulate asset values to meet future liabilities including the payment of employee benefits such as supplemental retirement. At December 29, 1995, the investment in the policies included in other assets was $294 and net life insurance expense was $57.
(15) PREFERRED STOCK ---------------
The Company has both Class A and Class B Preferred Stock with 5,000,000 shares authorized for each class. The Company has reserved 300,000 shares of the Class A Preferred Stock as Series A Junior Preferred Stock under a shareholder rights plan. This preferred stock entitles holders to 100 votes per share and to receive the greater of $2.00 per share or 100 times the common dividend declared. Upon voluntary or involuntary liquidation, dissolution, or winding up of the Company, holders of the preferred stock would be entitled to be paid, to the extent assets are available for distribution, an amount of $100 per share plus any accrued and unpaid dividends before payment is made to common stockholders.
In connection with this preferred stock, the Company issued one warrant to each common stockholder that would be exercisable contingent upon certain conditions and would allow the holder to purchase 1/100th of a preferred share per warrant. The warrants attached to the shares outstanding on November 30, 1988 and to all new shares issued after that date; the warrants outstanding at December 29, 1995 and December 30, 1994 are equal to the shares outstanding of 8,715,320, and 8,552,106, respectively. At December 29, 1995 and December 30, 1994, the warrants were not exercisable, and no shares of preferred stock have been issued.
(16) DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS ---------------------------------------------------------
The carrying amount of cash and cash equivalents, receivables, notes payable to bank, accounts payable, and accrued expenses approximates fair value because of their short maturity.
The fair value of the Company's long-term debt instruments ($16,214 at December 29, 1995) is based on quoted market prices.
(17) 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.
In September 1995, the Company reached a settlement agreement with Thomson Training & Simulation (Thomson). Under the agreement, the Company received $3,750 from lost revenues for breach of a working agreement by Thomson. The settled agreement allows the Company and Thomson to pursue opportunities in the civil pilot market on a nonexclusive basis. The amount paid to the Company under this settlement is classified as sales in the Company's consolidated statements of operations.
(18) RESTRUCTURING CHARGES ---------------------
In the fourth quarter of 1994, the Company incurred a restructuring charge of $8,212. 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. This restructuring eliminated approximately 200 jobs worldwide in the areas noted above or about 20 percent of the work force. Amounts expended in 1995 approximated the December 30, 1994 accrual balance.
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(18) RESTRUCTURING CHARGES (CONTINUED) ---------------------
In the fourth quarter of 1993, the Company incurred a restructuring charge of $7,900. The restructuring was undertaken to better serve the Company's changing markets and to more appropriately focus its resources on profitable opportunities. This restructuring eliminated approximately 170 jobs worldwide or about 13 percent of the work force. Amounts expended in 1994 approximated the December 31, 1993 accrual balance.
(19) BUSINESSES SOLD, ACQUIRED, AND SPIN-OFF ---------------------------------------
On April 12, 1995, the Company sold CDRS to Parametric Technology Corporation (PTC), a Massachusetts Corporation. The proceeds from the sale net of direct expenses of $1,591 was approximately $31,488 resulting in a gain of $23,506 summarized as follows:
On October 3, 1995 and on November 21, 1994, the Company acquired all of the outstanding common stock of Xionix Simulation, Inc. (Xionix) and Portable Graphics, Inc. (PGI) for $1,080 and $1,300, respectively. Xionix manufactures low-cost flight-system trainers and PGI is involved in software development. These business combinations were accounted for under the purchase method of accounting. Accordingly, the purchase price was allocated to assets and liabilities based on their estimated fair values as of the date of acquisition. Operations of Xionix and PGI are included in the accompanying consolidated financial statements from the date of acquisition, and are not material in relation to the Company's consolidated financial statements; pro forma financial information has therefore not been presented. The Company allocated $705 of the Xionix purchase price to in process research and development which has no alternative future use and this amount was written off during 1995.
Effective June 1, 1994 the Company's stockholders received a special dividend in the form of a spin-off of Tripos, Inc. (Tripos), a wholly-owned subsidiary of the Company at the time. Stockholders received one share of Tripos common stock for every three shares of E&S common stock held on May 25, 1994, the record date of the spin-off.
(20) ACCOUNTING STANDARDS ISSUED NOT YET ADOPTED -------------------------------------------
In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, Accounting for Stock Based Compensation (FASB 123). The Company is required to adopt the provisions of this statement for years beginning after December 15, 1995. This statement encourages all entities to adopt a fair value based method of accounting for employee stock options or similar equity instruments. However, it also allows an entity to continue to measure compensation cost for those plans using the intrinsic-value method of accounting prescribed by APB opinion No. 25, Accounting for Stock Issued to Employees (APB 25). Entities electing to remain with the accounting in APB 25 must make pro forma disclosures of net income and earnings per share as if the fair value based method of accounting defined in this statement had been applied. It is currently anticipated that the Company will continue to account for employee stock options or similar equity instruments in accordance with APB 25 and provide the disclosures required by FASB 123.
ITEM 9.

ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
"None"
[THIS SPACE INTENTIONALLY LEFT BLANK]
FORM 10-K
PART III
ITEM 10.

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 1995 Proxy Statement to be delivered to shareholders in connection with the Annual Meeting of Shareholders to be held on May 16, 1996.
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.

ITEM 11. EXECUTIVE COMPENSATION
Information regarding this item is incorporated by reference from "Executive Compensation" in the 1995 Proxy Statement to be delivered to shareholders in connection with the Annual Meeting of Shareholders to be held on May 16, 1996.
ITEM 12.

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 1995 Proxy Statement to be delivered to shareholders in connection with the Annual Meeting of Shareholders to be held on May 16, 1996.
ITEM 13.

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 1995 Proxy Statement to be delivered to shareholders in connection with the Annual Meeting of Shareholders to be held on May 16, 1996.
FORM 10-K
PART IV
ITEM 14.

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 included in this report:
1. FINANCIAL STATEMENTS - INCLUDED IN PART II, ITEM 8 OF THIS REPORT: --------------------
Report of Management
Report of Independent Auditors
Consolidated Balance Sheets - December 29, 1995 and December 30, 1994.
Consolidated Statements of Operations - Years ended December 29, 1995, December 30, 1994, and December 31, 1993.
Consolidated Statements of Stockholders' Equity - Years ended December 29, 1995, December 30, 1994, and December 31, 1993.
Consolidated Statements of Cash Flows - Years ended December 29, 1995, December 30, 1994, and December 31, 1993.
Notes to Consolidated Financial Statements - Years ended December 29, 1995, December 30, 1994, and December 31, 1993.
2. FINANCIAL STATEMENT SCHEDULES - INCLUDED IN PART IV OF THIS REPORT: -----------------------------
Schedule II - Valuation and Qualifying Accounts
Schedules other than those listed above are omitted because of the absence of conditions under which they are required or because the required information is presented in the Financial Statements or notes thereto.
3. EXHIBITS --------
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.
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.
3.2 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.
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 1981 Executive Stock Bonus Plan, filed as Exhibit 10.11 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1982, and incorporated herein by this reference.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (CONTINUED)
3. EXHIBITS (CONTINUED) --------
10.4 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.
10.5 Transition Employment and Separation Agreement dated January 19, 1994, between the Company and Mr. Richard F. Leahy, filed as Exhibit 10.7 to the Company's Annual Report on Form 10-K for the fiscal year ended December 26, 1994, and incorporated herein by this reference.
10.6 Terms of Employment Agreement dated June 23, 1994, between the Company and Mr. Steven C. Eror, filed as Exhibit 10.8 to the Company's Annual Report on Form 10-K for the fiscal year ended December 26, 1994, and incorporated herein by this reference.
10.7 Employment Agreement dated November 17, 1994, between the Company and Mr. Gary E. Meredith, filed as Exhibit 10.9 to the Company's Annual Report on Form 10-K for the fiscal year ended December 26, 1994, and incorporated herein by this reference.
10.8 Employment Agreement dated November 29, 1994, between the Company and Mr. James R. Oyler, filed as Exhibit 10.10 to the Company's Annual Report on Form 10-K for the fiscal year ended December 26, 1994, and incorporated herein by this reference.
10.9 Release and Separation Agreement dated January 6, 1995, between the Company and Mr. Robert A. Schumacker, filed as Exhibit 10.11 to the Company's Annual Report on Form 10-K for the fiscal year ended December 26, 1994, and incorporated herein by this reference.
10.10 Mutual Release and Separation Agreement dated January 27, 1995, between the Company and Mr. Rodney S. Rougelot, filed as Exhibit 10.12 to the Company's Annual Report on Form 10-K for the fiscal year ended December 26, 1994, and incorporated herein by this reference.
10.11 The Company's 1995 Long-Term Incentive Equity Plan.
10.12 Asset Purchase Agreement dated March 1, 1995, between the Company and Parametric Technology Corporation as to E&S' divestiture of its Design Software group (CDRS).
10.13 Settlement Agreement dated September 13, 1995, between the Company, Thomson Training and Simulation Limited, and Hughes Aircraft Company.
10.14 The Company's Executive Savings Plan.
10.15 The Company's Supplemental Executive Retirement Plan (SERP).
23.1 Consent of Independent Accountants.
24.1 Powers of Attorney for Messrs. Stewart Carrell, Henry N. Christiansen, Peter O. Crisp, John T. Lemley, Gary E. Meredith, James R. Oyler, Ivan E. Sutherland, and John E. Warnock.
No reports on Form 8-K were filed during the fourth quarter of the year ended December 29, 1995.
TRADEMARKS USED IN THIS FORM 10-K
DIGISTAR II and Virtual Glider are trademarks or registered trademarks of Evans & Sutherland Computer Corporation. CDRS is a registered trademark of Tripos, Inc. All other products or services mentioned in this Form 10-K are identified by the trademarks or service marks of their respective companies or organizations.
Schedule II -----------
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
Years ended December 29, 1995, December 30, 1994, and December 31, 1993
(In thousands)
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 28, 1996 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.
/s/ STEWARD CARRELL * Chairman of the March 28, 1996 ------------------------- STEWART CARRELL Board of Directors
/s/ JAMES R. OYLER Director and President March 28, 1996 -------------------------- JAMES R. OYLER (Chief Executive Officer)
/s/ JOHN T. LEMLEY Vice President and Chief March 28, 1996 -------------------------- JOHN T. LEMLEY Financial Officer (Principal Financial and Accounting Officer)
/s/ HENRY N. CHRISTIANSEN * Director March 28, 1996 -------------------------- HENRY N. CHRISTIANSEN
/s/ PETER O. CRISP * Director March 28, 1996 -------------------------- PETER O. CRISP
/s/ IVAN E. SUTHERLAND * Director March 28, 1996 -------------------------- IVAN E. SUTHERLAND
/s/ JOHN E. WARNOCK * Director March 28, 1996 -------------------------- JOHN E. WARNOCK
By: /s/ GARY E. MEREDITH * March 28, 1996 -------------------------- GARY E. MEREDITH Attorney-in-Fact