EVANS & SUTHERLAND COMPUTER CORP - 10-K Annual Report

EVANS & SUTHERLAND
COMPUTER CORPORATION
(Exact Name of Registrant as Specified in Its Charter)

		Title of Class
Common Stock, $.20 par value 6% Convertible Debentures Due 2012 Preferred Stock Purchase Rights

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes o No ý

The aggregate market value of the voting and non-voting Common Stock held by non-affiliates of the registrant as of February 28, 2003 was approximately $23,076,204 based on the closing market price of the Common Stock on such date, as reported by The Nasdaq Stock Market.

The number of shares of the registrant's Common Stock outstanding at February 28, 2003 was 10,812,195.

Portions of the Proxy Statement for the 2003 Annual Meeting of Shareholders to be held on May 8, 2003 are incorporated by reference into Part III hereof.

EVANS & SUTHERLAND COMPUTER CORPORATION
FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2002

Evans & Sutherland Computer Corporation ("Evans & Sutherland", "E&S", "we", "our", or "the Company") produces high-quality visual systems used to display images of the real world rapidly and accurately. E&S is widely regarded as both the pioneer and the leader in providing the world's most realistic visual systems. We design, manufacture, market and support visual systems for simulation with solutions that meet the training requirements for a wide range of military and commercial applications. We also provide this leading-edge visual system technology and experience to planetariums, science centers, and entertainment venues. We develop and deliver a complete line of image generators, displays, databases, services and support products that match technology to customer requirements. Our products and solutions range from the desktop PC to what we believe are the most advanced visual systems in the world.

E&S was incorporated in the State of Utah on May 10, 1968. Our principal offices are located at 600 Komas Drive, Salt Lake City, Utah 84108, and our telephone number is (801) 588-1000. Our home page on the Internet is www.es.com. You can learn more about us by reviewing SEC filings on our Web site. The SEC also maintains a Web site at www.sec.gov that contains reports, proxy statements, and other information regarding SEC registrants, including E&S. We make our Web site content available for information purposes only. It should not be relied upon for investment purposes, nor is it incorporated by reference into this Form 10-K.

A high quality visual system includes three major components: a visual computer, a display and a visual database. The visual computer interprets data describing the real world and processes it for display. The display may be as simple as a standard computer monitor, or as complex as a very large optical system with many components. The visual database is a representation of real geographic features and terrain, and may include abstract data such as terrain elevations and various geographic coordinates of objects, as well as specific images such as photographs or drawings of desired features.

Most E&S visual systems are used as part of vehicle simulators, which are generally in the form of reconstructions of actual vehicles, such as aircraft cockpits. These simulators are used for training operators, such as pilots, as well as for practicing tactics or strategy, which may require the coordinated operation of multiple simulators. Simulators are used in both commercial and military settings and include all types of vehicles operating in space, air, ground, sea, or undersea locations. The simulator itself may be built by one of many companies, often the company that built the original or actual vehicle.

We also produce digital planetarium systems, which are based on the same technology as our simulation products. These systems are essentially simulators of the larger universe, and can create simulated trips through other worlds, or through parts of our own world not yet accessible to real vehicles.

E&S visual systems are exceptionally important components of a complete simulator, since by definition the visual scene is the part that can be seen. Since our inception, we have had a significant share of the overall market for visual systems. We believe our market share has ranged from 20% to 50% in this market. The market for visual systems varies from year to year, but we have estimated that it is generally in the range of $300 million to $500 million annually. Many visual systems providers serve the market, but our most important competitors are companies who build the entire simulator and may sometimes choose to follow a strategy of vertical integration by providing their own visual system. Other competitors include a number of smaller companies who generally offer components rather than complete visual systems.

The computer portion of an E&S visual system is made of hardware and software which may be designed and built by us, or may be based on commercially available components. For example, the hardware may be as simple as a standard PC with a commercial graphics card, or as complex as a connected system of multiple racks of sophisticated electronics. The software uses commercially available components (such as Microsoft Windows) where possible, but augments this with E&S-designed software to achieve the required image quality and system performance.

The displays offered by E&S also cover a broad range, from standard computer monitors, to domes up to 24 meters in diameter, to cockpit-type displays with complex mirrors and other optics. The image may be projected by different types of equipment, including multiple projector types. As with other elements of the system, we use commercial parts where available, but design and build our own where suitable components are not commercially available.

Visual databases are an important and growing part of our business. Conceptually, the visual database is the "content" that the system will display. Most customers have a desire for more "content" (visual databases) to provide greater richness and variety in their simulations. We have developed a rich set of tools to make the development of databases more efficient and less costly, whether built by E&S or by others. We have also created a business unit within E&S, "Strategic Visualization," to provide special forms of visual databases built specifically to allow visualization of a geographic area for mission planning, damage assessment, or other highly time-sensitive purposes. E&S has an extensive library of databases, including airports, vehicles, large geographic areas, oceans, and seas with accurate wave dynamics, special effects, and so forth.

During 2002, we introduced an entirely new technology called "EP®", or Environment Processor. The first product based on EP technology is the EP-1000CT, which is targeted for the commercial airline market and military markets where aircraft types utilize side-by-side seating in the cockpit. This revolutionary technology includes both hardware and software components and, consistent with our strategy, runs on any hardware from standard PC's to our high-end systems based on PC's, but augmented by additional hardware designed and built by E&S.

Our research and development ("R&D") funding for the advancement of visual systems technology is believed to be one of the largest in the industry. This allows us to design the components needed to produce high quality products to meet our customers demanding requirements. Specifically, we continue to design and build complex integrated circuits ("chips") where required, and we are the only company in the industry with this capability. Our R&D programs have generated over 60 patents, and we continue to file new applications at the rate of approximately 10 per year. Our philosophy is to build only those parts that offer significant value to our customers and to replace those with commercial parts wherever and whenever we can, so that our internal resources can be constantly focused on value-added activities in hardware or software.

Another focus for our R&D over the past five years is a revolutionary new type of projector. This projector uses lasers and grating light valves to create images never possible before, with unprecedented resolution, brightness, contrast, color, and saturation. We are under contract to deliver several prototypes of the laser projector in 2003, including deliveries to the US Air Force.

Both commercial and military markets have been changing rapidly during the past year, and continue to do so. In the commercial market, commercial airlines have reduced purchases of new aircraft compared to prior years. This has resulted in a reduction in the number of new simulators they require for training. However, many commercial airlines are upgrading their currently installed simulators. As a result, we have benefited from this change because E&S has a large share of the installed base of visual systems and because our newly introduced EP-1000CT product provides an attractive upgrade path due to its compatibility with the installed base. Military markets have continued to shrink as funds are diverted to more pressing military requirements. We believe this process of diverting funds will continue during 2003, but may result in some pent-up demand in 2004.

All of our products are supported by a comprehensive service and support capability. Since visual systems are integral parts of simulators that may have a lifetime of thirty years or more, customers are dependent on us for an unusually long time. E&S has been supporting our customers since our inception, and we maintain capabilities needed to support electronic products that have not been manufactured for many years. Accordingly, service and support is a growing part of our business.

As a result of the sale of the assets of the REALimage Solutions Group; the discontinuation of the RAPIDsite business, part of the Applications Group; and the consolidation of the planetarium equipment business of the Applications Group into the Simulation Group; at the beginning of 2002, E&S had one reportable segment: the development and marketing of visual simulation systems.

In 2002, we completed the process of focusing on our core competency, visual simulation solutions. This focus allowed us to nearly complete our remaining Harmony® 1 programs while we launched new visual system product lines for each of our three primary markets—military simulation, commercial simulation and digital theaters.

Our visual systems consist of the elements listed below. These elements are available as subsystems or sold together as a complete visual system solution delivered to an end-user or prime contractor.

We operate as one business; providing visual simulation solutions to an international customer base. Our customer base can be categorized into three customer markets: military simulation, commercial simulation and digital theater customers.

E&S is an industry leader in providing visual systems to government simulation customers, offering tailored solutions to meet a full range of training requirements. We offer a complete line of products, from low-cost desktop solutions to highly advanced visual systems, to the domestic and international military simulation market. In addition, we offer complete training solutions for tactical command and air traffic control, database development services, custom display systems, and long-term service and support. In the long-term, we anticipate growth in the military market as new vehicles come on line and the overall cost effectiveness of simulation training makes it an increasingly attractive alternative to other training methods.

During 2002, E&S moved toward successful completion of several significant Harmony® 1/Integrator® programs (referred to as the Big 6 Programs). These programs include the Medium Support Helicopter Aircrew Training Facility (UK), United Kingdom Attack Helicopter, GR4 Tornado (UK), Sea Harrier (UK), SimNTF(Germany), and H-60 (US). As we have neared completion of these programs, we have been able to refocus our resources on development of new products and pursuit of new opportunities.

E&S launched a new line of PC-based visual systems products in 2002. The top of the line product, Harmony 2, represents the next phase in the evolution of visual systems for the most demanding military training applications, such as helicopter and fixed wing aviation using advanced sensor, night vision, and radar technologies. Harmony 2 uses commercial off-the-shelf PC technology combined with simulation-specific rendering hardware and an enhanced version of E&S's Integrator® run-time and database construction software. These next-generation capabilities deliver a substantial improvement in price/performance as compared to our ESIG product line, as well as improved manufacturability, mission availability, and lower acquisition and life cycle costs. Harmony 2 is already installed in the UK Royal Air Force's Nimrod MRA4 Aircrew Synthetic Training Aids Program, and has also been selected for the Korean T-50 program.

E&S also introduced two new simFUSION products in 2002, the simFUSION 5000 and 6000. These products are based on industry leading graphics chip technology from ATI Technologies Inc. The simFUSION family of products provides low-cost, PC-based image generation for a variety of training applications, including ship's bridge, land based vehicles (such as motorcycles, automobiles and trucks), and aviation.

E&S continues to offer its ESIG® image generator for military training applications. In December 2002, we were awarded a follow-on contract with the US Army's PEO-STRI for the Close Combat Tactical Trainer.

Quest Flight Training Limited, a joint venture company formed by E&S and Quadrant Group, for the UK's E-3D Sentry Aircrew Training Service, received an award for the best UK Ministry of Defence private finance initiative project in its category.

E&S supplies very popular visual systems for commercial full flight simulators, providing what we estimate to be over 30% of the visual systems installed in full flight training simulators for commercial airlines, training centers, simulator manufacturers, and aircraft manufacturers. Developed to meet the exacting statutory requirements of the world's civil aviation authorities, our commercial simulation products have a solid reputation for both quality and reliability.

During 2002, E&S continued to perform well in the commercial simulation market, delivering our ESIG image generators and ESCP projectors to customers such as Lufthansa, Airborne Express, Qantas, and Emirates Airlines.

E&S also launched a new line of visual system products for commercial aviation training, the EP-1000CT. Designed specifically to meet the exacting requirements for FAA Level D (and equivalent) flight training, the EP (Environment Processor) line of products is targeted at turnkey commercial simulation applications. EP-1000CT offers high-end training-oriented features, including our Continuous Texture™ (CT), which provides a high-resolution, textured backdrop to a worldwide 3D training environment. This is a first for the simulation industry.

Software-centric and capable of running on a range of hardware platforms, EP products combine commercial off-the-shelf and in-house technologies to deliver high fidelity and cost-effective visual training environments. In addition to the capability of generating databases depicting the whole earth, EP provides rapid database generation and is compatible with E&S legacy products.

With FAA Level D and equivalent certification anticipated for early 2003, EP-1000CT has already been sold to Lufthansa Flight Training, Singapore Airlines, and KLM Royal Dutch Airlines.

E&S established a partnership with aviation training software provider SimAuthor in 2002. E&S is providing its EP technology to SimAuthor for use in its flight simulator debrief system. We believe this partnership exemplifies the potential for development of business relationships with companies marketing complementary technologies.

E&S has leveraged its visual simulation technology to provide state-of-the-art 360-degree and large format digital theater systems for planetariums, science centers, and themed entertainment venues. Products include the new Digistar 3 and Digistar 3 SP, which provide customers with complete show creation, production, and projection capabilities, as well as Digistar II, a digital dome projection system. Our digital theater products can be purchased with interactive capability, which allows audiences to participate and influence the outcome of the program.

E&S StarRider®, the predecessor to Digistar 3, is currently operating in planetariums, theaters, and science centers in China, Europe, and the US. Digistar 3 has been sold to the Sheila M. Clark Planetarium in Salt Lake City, Utah and the Adler Planetarium & Astronomy Museum in Chicago.

E&S continues to develop show content for planetariums, theaters, and science centers. In 2002, we released several shows for licensing, including Microcosm, and Cosmic Safari.

The primary competitive factors for our visual simulation products are performance, price, service, and product availability. Because competitors are constantly striving to improve their products, we work to offer products with the best performance possible at a competitive price. Prime contractors, including Lockheed Martin, Flight Safety International (FSI), Thales Training & Simulation Ltd., The Boeing Company and CAE Electronics, Ltd. (CAE), offer competing visual systems in the simulation market. We believe we are able to compete effectively in this environment and will continue to be able to do so in the foreseeable future. In 2002, E&S was awarded several highly competitive orders against FSI and CAE, the principal competitors in the commercial simulation market. In the military simulation market, the group competes primarily with Silicon Graphics, Inc. and CAE. In the low-cost, PC-based market, our simFUSION product competes against companies that focus on PC simulation using graphics accelerator cards. Management believes that the new line of E&S products introduced in 2002, as described above, will allow us to retain our industry-leading position in the marketplace.

The primary competitive factors in the digital theater market are functionality, performance, price, and access to customers and distribution channels. Our digital theater products compete with traditional optical-mechanical products and digital display systems offered by Minolta Planetarium Co. Ltd., GoTo Optical Mfg. Co., Carl Zeiss Inc., Spitz, Inc. and Sky-Skan, Inc.

On December 31, 2002 our backlog was $60 million compared with $107 million on December 31, 2001. We anticipate that approximately two-thirds of the 2002 backlog will be converted to sales in 2003.

Worldwide customers using E&S products include U.S. and international armed forces, aerospace companies, most major airlines, laboratories, museums, planetariums, and science centers. We measure and identify our significant customers based on direct sales. We no longer measure significant customers based on indirect sales through subcontractors or prime contractors. While we no longer measure indirect sales, the U.S. government and the United Kingdom Ministry of Defence have been considered significant customers based on indirect sales in prior years.

In 2002, direct sales to the U.S. government totaled $35.4 million or 29% of total sales, sales to Thales Training & Simulation Ltd. totaled $19.8 million or 16% of total sales, sales to The Boeing Company totaled $17.1 million or 14% of total sales, and sales to Lockheed Martin Corporation totaled $2.9 million or 2% of total sales.

In 2001, sales to the U.S. government totaled $35.1 million or 24% of total sales, sales to Thales Training & Simulation Ltd. totaled $23.9 million or 16% of total sales, sales to The Boeing Company totaled $15.1 million or 10% of total sales, and sales to Lockheed Martin Corporation totaled $1.8 million or 1% of total sales.

In 2000, sales to the U.S. government totaled $26.7 million or 16% of total sales, sales to Lockheed Martin Corporation totaled $22.5 million or 14% of total sales, sales to Thales Training & Simulation Ltd. totaled $19.6 million or 12% of total sales, and sales to The Boeing Company totaled $10.7 million or 6% of total sales.

We believe there is no inherent seasonal pattern to our business. Sales volume fluctuates quarter-to-quarter due to relatively large and nonrecurring individual sales and customer driven shipping dates.

We own a 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 discussed on its own. In the U.S. and internationally, we hold active patents that cover many aspects of our graphics technology. Several patent applications are presently pending in the U.S., Japan, and several European countries, and other patent applications are in preparation. We actively pursue patents on our new technology and we intend to vigorously protect our patent rights. We routinely copyright software, documentation, and chip masks designed by us and institute copyright registration for such software, documentation, and masks when appropriate.

We consider the timely development and introduction of new products to be essential to maintain a competitive position and capitalize on market opportunities. Our research and development expenses were $26.0 million, $28.8 million, and $44.3 million, in 2002, 2001 and 2000, respectively. As a percentage of sales, research and development expenses were 21%, 20% and 27%, in 2002, 2001 and 2000, respectively. We continue to fund essentially all research and development efforts internally. We anticipate that high levels of research and development will be needed to continue to ensure that we maintain technical excellence, leadership, and market competitiveness. As planned, E&S completed the next-generation PC-based Harmony 2 system and the simFUSION 5000 and 6000 PC image generator product line in 2002. In addition, we also substantially completed the development of the next-generation civil airline product, the EP-1000CT. The completion of these products will allow us to focus on the timely development of new products and additional product enhancements in 2003.

Most of our current parts and assemblies are readily available through multiple sources in the open market; however, a limited number are available only from a single source. In these cases, we stock a substantial inventory, or obtain the agreement of the vendor to maintain adequate stock for future demands, and/or attempt to develop alternative components or sources where appropriate.

Sales of products known to be ultimately installed outside the United States are considered international sales by E&S and were $48.4 million, $49.5 million and $60.9 million in 2002, 2001 and 2000, respectively. International sales represented 39%, 34% and 36% of total sales in 2002, 2001 and 2000, respectively. We believe that any inherent risk that exists in our foreign operations is not material. For additional information, see Note 19 of Notes to Consolidated Financial Statements included in Part II of this annual report.

As of February 28, 2003, Evans & Sutherland and its subsidiaries employed a total of 500 persons compared to 639 employees as of February 28, 2002. We believe our relations with our employees are good. None of our employees is subject to collective bargaining agreements.

We believe our facilities and operations are within standards fully acceptable to the Environmental Protection Agency and that all facilities and procedures are in accordance with environmental rules and regulations, and international, federal, state, and local laws.

In the normal course of business E&S develops and maintains various types of relationships with key customers and technology partners. These relationships include joint technology and product development agreements, research and development agreements, joint marketing agreements, teaming and joint venture agreements, value-added reseller agreements, and original equipment manufacturer (OEM) agreements. These agreements are of necessity somewhat dynamic in nature to enable us to rapidly address changes in market and customer needs and leverage key trends in related technology areas. It is anticipated that this philosophy will continue in 2003, and agreements will be continued or consummated as necessary to maintain our industry leading position.

During the fourth quarter of 2001, E&S entered into a multiyear agreement with graphics technology leader ATI Technologies Inc., under which ATI will provide graphics accelerator chips for our next-generation PC-based visual systems. ATI chips have replaced REALimage chips in our next-generation Ensemble and simFUSION image generators.

In August 2001, we completed an agreement to sell the assets of our REALimage Solutions Group to Real Vision, Inc., a Japanese company that had been a partner with E&S in the development of technology for professional video applications. The transaction formally closed on April 1, 2002. The sale was for a maximum value of $12 million, consisting of cash of $6.3 million plus future royalties, on a when and if earned basis, up to $6 million. As of December 31, 2002, we have not received royalty payments from Real Vision, Inc. As a result of this sale, we recorded gains on sale of business units of $0.8 million in 2001 and $0.3 million in 2002.

In December 2000, we completed the divestiture of our German subsidiary via a management-led buyout and recorded a loss of $0.3 million. The former subsidiary, which was called Evans & Sutherland Computer GmbH, now operates under a new name. The divested company has no remaining connection with E&S. We will continue to operate in Germany and throughout Europe under our own name, providing marketing, sales, and support for our growing visual systems business and traditional customer base. All close out activities have been in process for approximately two years.

On March 28, 2000, we sold certain assets of our Application Group relating to digital video products to RT-SET Real Time Synthesized Entertainment Technology Ltd. and its subsidiary, RT-SET America Inc., for $1.4 million in cash, common stock of RT-SET Real Time Synthesized Entertainment Technology Ltd. valued at approximately $1.0 million, and the assumption of certain liabilities. On June 15, 2000, we received additional common stock of RT-SET Real Time Synthesized Entertainment Technology Ltd. valued at $1.5 million related to the successful development of a product included in the purchased assets.

A significant portion of the visual simulation business is dependent on contracts and subcontracts associated with government business. The U.S. Government, and other governments, may terminate any of our government contracts and, in general, subcontracts, at their convenience as well as for default based on performance. If any of our government contracts were to be terminated for convenience, we generally would be entitled to receive payment for work completed and allowable termination or cancellation costs. Depending on the contract, if such an event was to occur, it could materially affect our sales, profits, and cash flow.

Upon termination for convenience of a fixed-price type contract, we normally are entitled, to the extent of available funding, to receive the purchase price for delivered items, reimbursement for allowable costs for work-in-progress and an allowance for profit on the contract or adjustment for loss if completion of performance would have resulted in a loss. Upon termination for convenience of a

cost reimbursement contract, we normally are entitled, to the extent of available funding, to reimbursement of allowable costs plus a portion of the fee. The amount of the fee recovered, if any, is related to the portion of the work accomplished prior to termination and is determined by negotiation.

U.S. government contracts also are conditioned upon the continuing availability of Congressional appropriations. Long-term government contracts and related orders are subject to cancellation if appropriations for subsequent performance periods become unavailable. Congress usually appropriates funds on a fiscal-year basis even though contract performance may extend over many years. Consequently, at the outset of a program, the contract is usually partially funded, and Congress annually determines if additional funds are to be appropriated to the contract.

In the second quarter of 2002, we recorded a restructuring charge of $1.9 million related to a reduction in force of approximately 90 employees. In the fourth quarter of 2002, we recorded a restructuring charge of $2.6 million related to a reduction in force of approximately 140 employees. We estimate that these restructurings will reduce expenses by approximately $14 million per year going forward. These restructurings were undertaken to reduce our operating cost structure as well as to create a cost structure in line with anticipated 2003 revenues.

At the beginning of 2002, the composition of our reportable segments changed and we had one reportable segment, the development and marketing of visual simulation systems. In prior years, we operated our business under the following business segments: the Simulation Group, REALimage Solutions Group, and the Applications Group. During the second half of 2001, the following events occurred that led to consolidating our business under one business segment. We sold the assets of the REALimage Solutions Group; we discontinued the RAPIDsite business (part of the Applications Group) and transferred the RAPIDsite assets to the Simulation Group; and we consolidated the remaining part of the Applications Group (the planetarium equipment business) into the Simulation Group.

In the third quarter of 2001, we completed a sales agreement for the REALimage Group to Real Vision, Inc. For more information, see the Acquisitions and Dispositions section contained within the Item 1 Business area of this Form 10-K.

This annual report, including all documents incorporated herein by reference, includes certain "forward-looking statements" within the meaning of that term in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act of 1934, as amended, including, among others, those statements preceded by, followed by or including the words "estimates," "believes," "expects," "anticipates," "plans," "projects," and similar expressions. See Item 7 Management's Discussion and Analysis of Financial Condition and Results from Operations, included in Part II of this annual report, for a list of forward-looking statements included, but not limited to, and factors that may affect these forward-looking statements.

Evans & Sutherland's principal executive, engineering, manufacturing and operations facilities are located in the University of Utah Research Park, in Salt Lake City, Utah, where we own six buildings totaling approximately 411,000 square feet. We occupy four buildings and the remaining two buildings are vacant. We plan to sell the two buildings we do not occupy. The buildings are located on land leased from the University of Utah (the "U of U Property") with an initial term of 40-years or longer. Five of the buildings are on land leases that expire in 2030, with a ten-year renewal option. The remaining building is on a land lease that expires in 2014, with a 40-year renewal option. All of our interests in the U of U Property are subject to a lien by Foothill Capital Corporation to secure

repayment of the borrowing facility as set forth in the Liquidity and Capital Resources section of the Management's Discussion and Analysis of Financial Condition and Results of Operations. We hold leases, including our subsidiaries, on several sales, operations, service and production facilities located throughout the United States, Europe and Asia, none of which is material to our manufacturing, engineering or operating facilities. We believe that these properties are suitable for our immediate needs and we do not currently plan to expand our facilities or relocate.

On March 6, 2003, E&S received notice from RealVision, Inc. of a dispute involving a transaction between the companies in 2001 and 2002. This transaction was the sale of assets of REALimage to RealVision, and the provision of services between the companies. In accordance with the contract, RealVision has called for negotiation to resolve the issues, and mediation if necessary, as defined under the contract. Further, RealVision has threatened legal action if agreement is not reached. E&S strongly disagrees with statements made by RealVision in its complaint, and we intend to defend ourselves vigorously, whether in negotiation, mediation, or by legal process, including possible legal action against RealVision.

In the normal course of business, E&S 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, we believe the ultimate disposition of these matters will not have a material adverse effect on our consolidated financial condition, liquidity or results of operations.

No matters were submitted to a vote of security holders during the fourth quarter of fiscal year 2002.

The following sets forth certain information regarding the executive officers of E&S as of February 28, 2003:

Name	Age	Position
James R. Oyler	56	President and Chief Executive Officer
William M. Thomas	48	Vice President, Chief Financial Officer, Treasurer and Corporate Secretary
David B. Figgins	54	Vice President and General Manager, Product Marketing
L. Eugene Frazier	57	Vice President and General Manager, Strategic Visualization
E. Thomas Atchison	54	Vice President, Manufacturing, Service, and Support
Nicholas P. Gibbs	44	Vice President and General Manager, Simulation Systems
Richard A. Flitton	40	Vice President and General Manager, Commercial Simulation
Kirk D. Johnson	41	Vice President and General Manager, Digital Theater

James R. Oyler was appointed President and Chief Executive Officer of E&S and a member of the Board of Directors in December 1994. Before joining Evans & Sutherland, Mr. Oyler served as President of AMG, Inc. from mid-1990 until December 1994, and a Senior Vice President for Harris Corporation from 1976 through mid-1990. He has eight years of service with E&S.

William M. Thomas was appointed Vice President and Chief Financial Officer in December 2000 and Corporate Secretary in February 2001. He became Treasurer in January 2002. He joined E&S in August 2000. From May 1998 to August 2000, Mr. Thomas served as Executive Vice President and Chief Financial Officer for Edge Technologies, Inc. From 1995 to 1998, Mr. Thomas was Chief

Financial Officer for Stanley Aviation Corporation. Mr. Thomas was employed by Hughes from 1982 to 1995. He has two years of service with E&S.

David B. Figgins joined E&S as a Vice President in April of 1998, and is now Vice President, Product Marketing. Before joining E&S, Mr. Figgins served as Vice President of Business Development and Marketing for Raytheon Training, where he was employed from May 1986 to April 1998. Mr. Figgins has over twenty-five years of experience in the simulation and training industry. Mr. Figgins is a graduate of Royal Air Force Halton and holds a M.S in Management from Purdue University. He has five years of service with E&S.

L. Eugene Frazier joined E&S in September 1997 as a Vice President, and is now Vice President and General Manager of Strategic Visualization. Prior to his assignment at E&S, he was Director, Technology Development and Advanced Programs at Lockheed Martin Tactical Defense Systems. Before working with Lockheed Martin, he held increasingly responsible assignments in Simulation for LORAL Corporation. He has five years of service with E&S.

E. Thomas Atchison joined E&S in 1998 as Director of Materials when E&S acquired Silicon Reality, Inc., and is now Vice President of Manufacturing, Service, and Support. At Silicon Reality, Mr. Atchison was Vice President, Operations, Chief Operating Officer, and Chief Financial Officer from October 1997 to June 1998. Prior to Silicon Reality, he was Vice President, Investor Relations and Business Development for Alphatec, and managed production control for National Semiconductor/Fairchild. He has four years of service with E&S.

Mr. Gibbs is the Vice President and General Manager of Simulation Systems. Prior to this role, he served as General Manager of the Service and Support Division. He has also held management positions in Supply Chain Management and Quality Assurance. Mr. Gibbs received a B.S. in Mathematics from the University of Utah. Mr. Gibbs has been with E&S for over 16 years.

Richard A. Flitton is Vice President and General Manager, Commercial Simulation, and Managing Director, Evans & Sutherland Computer Ltd. A veteran of the simulation industry with nearly twenty years of experience, Mr. Flitton joined E&S as a product manager in 1994. Before joining E&S, Mr. Flitton was employed by Rediffusion Simulation. Mr. Flitton holds a BEng Hons in Electro/Mechanical Engineering from the University of Brighton (UK) and an M.B.A. from the University of Warwick (UK). He is also a Member of The Royal Aeronautical Society (MRAeS). Mr. Flitton has eight years of service with E&S.

Kirk D. Johnson was appointed Vice President and General Manager of E&S Digital Theater in January 2002. He joined E&S in 1990 as a regulatory engineer, and he has held increasingly responsible management positions in service and support, program administration for commercial simulation, program management, and digital theater. Before he joined E&S, Mr. Johnson was an engineering manager for Communications Certification Laboratory. Mr. Johnson earned a B.S. in Electrical Engineering and an M.B.A. from the University of Utah. He has 13 years of service with E&S.

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Our common stock trades on The Nasdaq Stock Market under the symbol "ESCC." The following table sets forth the range of the high and low bids per share of our common stock for the fiscal quarters indicated, as reported by The Nasdaq Stock Market. Quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.

	HIGH		LOW
2002
First Quarter	$	7.35	$	5.83
Second Quarter	$	10.00	$	7.11
Third Quarter	$	8.35	$	3.72
Fourth Quarter	$	6.25	$	2.06
2001
First Quarter	$	8.00	$	6.38
Second Quarter	$	8.69	$	7.06
Third Quarter	$	8.31	$	5.88
Fourth Quarter	$	7.19	$	5.38

On February 28, 2003, there were 638 shareholders of record of our common stock. Because brokers and other institutions hold many of our shares on behalf of shareholders, we are unable to estimate the total number of shareholders represented by these record holders.

We have never paid a cash dividend on our common stock, retaining our earnings for the operation and expansion of our business. We intend for the foreseeable future to continue the policy of retaining our earnings to finance the development and growth of our business. The payment of dividends is restricted under the terms of our credit facilities. See "Item 7—Management's Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources."

Stock Purchase Plan—We have an employee stock purchase plan whereby qualified employees are allowed to have up to 10% of their gross pay withheld each pay period to purchase our common stock at 85% of the market value of the stock at the time of the sale. During the period of December 24, 2002, through December 31, 2002, the Employee Stock purchase Plan was inadvertently oversubscribed in the amount of 4,218 shares. On February 27, 2003, our Board of Directors increased the number of shares available under this plan from 500,000 to 800,000 shares, and ratified all prior issuances of shares under the plan. We will file an S-8 Registration Statement registering these shares. Information regarding the employee Stock Purchase Plan is not included in the above table.

The following selected financial data for the five fiscal years ended December 31, are derived from our Consolidated Financial Statements. The selected financial data should be read in conjunction with our Consolidated Financial Statements and related notes included elsewhere in this annual report. See also "Management's Discussion and Analysis of Financial Condition and Results of Operations."

QUARTERLY FINANCIAL DATA (Unaudited)
(In thousands, except per share amounts)

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The policies discussed below are considered by management to be critical to an understanding of E&S's financial statements. Their application places significant demands on management's judgment, with financial reporting results relying on estimates about the effect of matters that are inherently uncertain. Specific risks for these critical accounting policies are described in the following paragraphs. A summary of significant accounting policies can be found in Note 1 to the consolidated financial statements. For all of these policies, management cautions that future results rarely develop exactly as forecast, and the best estimates routinely require adjustment.

Revenue from long-term contracts requiring significant production, modification or customization is recorded using the percentage-of-completion method. This method uses the ratio of costs incurred to management's estimate of total anticipated costs. Our estimates of total costs include assumptions, such as man-hours to complete, estimated materials cost, and estimates of other direct and indirect costs. Actual results may vary significantly from our estimates. If the actual costs are higher than management's anticipated total costs, then an adjustment would be required to reduce the previously recognized revenue as the ratio of costs incurred to management's estimate was overstated. If actual costs are lower than management's anticipated total costs, then an adjustment would be required to increase the previously recognized revenue as the ratio of costs incurred to management's estimate is understated.

Costs and Estimated Earnings in Excess of Billings on Uncompleted Contracts and Billings in Excess of Costs and Estimated Earnings on Uncompleted Contracts

Billings on uncompleted long-term contracts may be greater than or less than incurred costs and estimated earnings. As a result, these differences are recorded as an asset or liability on the balance sheets. Since revenue recognized on these long-term contracts includes estimates of management's anticipated total costs, the amounts in costs and estimated earnings in excess of billings on uncompleted contracts and billings in excess of costs and estimated earnings on uncompleted contracts also include these estimates.

Inventory includes materials at standard costs, which approximates average costs, as well as inventoried costs on programs (including material, labor, subcontracting costs, as well as an allocation of indirect costs). We periodically review inventories for excess supply, obsolescence, and valuations above estimated realizable amounts, and then provide a reserve we consider sufficient to cover these items. Reserve adequacy is based on estimates of future sales, product pricing, and requirements to complete projects. Revisions of these estimates would result in adjustments to our operating results.

Accrued expenses include amounts for liquidated damages and late delivery penalties (See Note 8 to the consolidated financial statements). While current contracts could include additional liquidated damages and late delivery penalties, we have included all amounts management believes E&S is liable for as of December 31, 2002. These liquidated damages are based primarily on estimates of project completion dates. To the extent completion dates are not consistent with our estimates, these damage and penalty accruals may require additional adjustments.

The preparation of our financial statements requires us to make estimates and assumptions that affect the reported amount of assets at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. We specifically analyze accounts receivables and consider historic experience, 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 adjustments to the expense recognized for bad debts.

As part of the process of preparing our consolidated financial statements we are required to estimate our actual income taxes in each of the jurisdictions in which we operate. This involves estimating our actual current tax exposure together with assessing temporary differences resulting from differing treatments of items, such as accrued liabilities, for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included in our consolidated balance sheets. We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income and, to the extent we believe that recovery is not likely, we must establish a valuation allowance. To the extent we establish a valuation allowance or increase or decrease this allowance in a period, we must include a corresponding adjustment within the tax provision in the statement of operations. Significant management judgment is required to determine our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets.

The following discussions should be read in conjunction with our Consolidated Financial Statements contained herein under Item 8 of this annual report.

(Mark One)
ý	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year ended December 31, 2002
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to

Utah (State or Other Jurisdiction of Incorporation or Organization)		87-0278175 (I.R.S. Employer Identification No.)
600 Komas Drive, Salt Lake City, Utah (Address of Principal Executive Offices)		84108 (Zip Code)

PART I
	Item 1.	Business
	Item 2.	Properties
	Item 3.	Legal Proceedings
	Item 4.	Submission of Matters to a Vote of Security Holders
PART II
	Item 5.	Market For Registrant's Common Equity and Related Stockholder Matters
	Item 6.	Selected Consolidated Financial Data
	Item 7.	Management's Discussion and Analysis of Financial Condition and Results of Operations
	Item 7A.	Quantitative and Qualitative Disclosures About Market Risk
	Item 8.	Financial Statements and Supplementary Data
		Report of Management
		Report of Independent Auditors
		Consolidated Balance Sheets
		Consolidated Statements of Operations
		Consolidated Statements of Comprehensive Loss
		Consolidated Statements of Stockholders' Equity
		Consolidated Statements of Cash Flows
		Notes to Consolidated Financial Statements
	Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
PART III
	Item 10.	Directors and Executive Officers of the Registrant
	Item 11.	Executive Compensation
	Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
	Item 13.	Certain Relationships and Related Transactions
	Item 14.	Controls and Procedures
PART IV
	Item 15.	Exhibits, Financial Statement Schedules, and Reports on Form 8-K
	Signatures

	Number of securities to be issued upon exercise of outstanding options, warrants, and rights	Weighted average exercise price of outstanding options, warrants and rights	Number of securities remaining available for future issuance
Equity compensation plans approved by security holders	2,410,000	$11.58	367,000
Equity compensation plans not approved by security holders	—	N/A	—

Total	2,410,000	$11.58	367,000

		2002(1)			2001(2)			2000(3)			1999(4)			1998(5)
		(In thousands, except per share amounts)
For The Year
Sales		$	122,578		$	145,263		$	166,980		$	200,885		$	191,766
Net loss before accretion of preferred stock			(11,721	)		(27,457	)		(69,570	)		(23,454	)		(15,983	)
Net loss per common share:
	Basic		(1.12	)		(2.70	)		(7.45	)		(2.49	)		(1.70	)
	Diluted		(1.12	)		(2.70	)		(7.45	)		(2.49	)		(1.70	)
Average weighted number of common shares outstanding
	Basic		10,422			10,169			9,372			9,501			9,461
	Diluted		10,422			10,169			9,372			9,501			9,461
At End of Year
Total assets		$	127,576		$	177,353		$	216,078		$	258,464		$	275,668
Long-term debt, less current portion			20,685			18,086			25,563			18,015			18,062
Redeemable, preferred stock			—			—			24,000			23,772			23,544
Stockholders' equity			53,363			64,659			67,634			137,194			165,083

		Quarter Ended
		March 29			June 28(2)			Sep. 27			Dec. 31(3)
2002
Sales		$	32,563		$	34,221		$	26,592		$	29,202
Gross profit			9,594			12,185			11,268			10,087
Net loss before income taxes			(3,872	)		(649	)		(1,684	)		(5,979	)
Net loss applicable to common stock			(3,189	)		(724	)		(1,759	)		(6,049	)
Net loss per share(1):
	Basic		(0.31	)		(0.07	)		(0.17	)		(0.58	)
	Diluted		(0.31	)		(0.07	)		(0.17	)		(0.58	)

		Quarter Ended
		March 30			June 29			Sep. 28(4)			Dec. 31(5)
2001
Sales		$	39,632		$	48,097		$	29,601		$	27,933
Gross profit			13,215			11,973			1,793			2,459
Net loss before income taxes			(6,048	)		(5,208	)		(17,987	)		(1,386	)
Net income (loss) applicable to common stock			(6,124	)		(5,132	)		(16,309	)		108
Net income (loss) per share(1):
	Basic		(0.64	)		(0.50	)		(1.57	)		0.01
	Diluted		(0.64	)		(0.50	)		(1.57	)		0.01

	Year ended December 31,
	2002		2001		2000
Sales	100.0	%	100.0	%	100.0	%
Cost of sales	63.7		79.7		82.4
Inventory impairment	1.1</