UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

x                               ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2006

or

o                                  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                                            to                                                       

Commission file number 0-8771

EVANS & SUTHERLAND COMPUTER CORPORATION

(Exact name of registrant as specified in its charter)

Utah

 

87-0278175

(State or other jurisdiction of

 

(I.R.S. Employer

Incorporation or organization)

 

Identification No.)

770 Komas Drive, Salt Lake City, Utah

 

84108

(Address of principal executive offices)

 

(Zip Code)

 

Registrant’s telephone number, including area code: 801-588-1000

Securities registered pursuant to Section 12(b) of the Act:

NONE

Securities registered pursuant to Section 12(g) of the Act:

Title of Each Class

 

 

 

Name of Exchange on Which Registered

 

Common Stock, $0.20 par value

 

The NASDAQ Global Market

Preferred Stock Purchase Plan Rights

 

The NASDAQ Global Market

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. o  Yes   x  No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. o  Yes   x  No

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. x  Yes   o  No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the 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 a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer  o

 

Accelerated filer  o

 

Non-accelerated filer  x

 

Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Act). o  Yes   x  No

The aggregate market value of the voting and non-voting common stock of the registrant held by non-affiliates of the registrant as of June 30, 2006, the last business day of the registrants most recently completed second fiscal quarter was approximately $28,455,655, 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 as of March 27, 2007 was 11,089,166.

 




EVANS & SUTHERLAND COMPUTER CORPORATION

FORM 10-K

FOR THE YEAR ENDED DECEMBER 31, 2006

PART I

ITEM 1.

 

BUSINESS

 

3

ITEM 1A.

 

RISK FACTORS

 

7

ITEM 2.

 

PROPERTIES

 

11

ITEM 3.

 

LEGAL PROCEEDINGS

 

11

ITEM 4.

 

SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS

 

11

PART II

ITEM 5.

 

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

12

ITEM 6.

 

SELECTED FINANCIAL DATA

 

14

ITEM 7.

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

16

ITEM 7A.

 

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

30

ITEM 8.

 

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

31

ITEM 9.

 

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS AND ACCOUNTING AND FINANCIAL DISCLOSURE

 

65

ITEM 9A.

 

CONTROLS AND PROCEDURES

 

65

ITEM 9B.

 

OTHER INFORMATION

 

65

PART III

ITEM 10.

 

DIRECTORS, EXECUTIVE OFFICERS AND CORPORTATE GOVERNANCE

 

66

ITEM 11.

 

EXECUTIVE COMPENSATION

 

66

ITEM 12.

 

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

 

66

ITEM 13.

 

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE

 

67

ITEM 14.

 

PRINCIPAL ACCOUNTANT FEES AND SERVICES

 

67

PART IV

ITEM 15.

 

EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

 

68

SIGNATURES

 

73

 

2




PART I

ITEM 1.                 BUSINESS

Throughout this document Evans & Sutherland Computer Corporation may be referred to as “Evans & Sutherland,” “E&S,” “we,” “us,” “our” or the “Company.”  All dollar amounts are in thousands unless otherwise indicated.

Evans & Sutherland was incorporated in the state of Utah on May 10, 1968. Our principal offices are located at 770 Komas Drive, Salt Lake City, Utah 84108, and our telephone number is (801) 588-1000. Through a link on our website, www.es.com, we make available, free of charge, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission (the “SEC”). We make our website content available for informational purposes only. The information provided on our website is not incorporated by reference into this Form 10-K. The above reports and other information are also available, free of charge, at www.sec.gov. Alternatively, the public may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330.

Sale of Business Unit

On May 26, 2006, we completed the sale of substantially all of the assets and certain liabilities primarily related to our commercial and military simulation businesses and related service operations (the “Simulation Business”) to certain subsidiaries of Rockwell Collins, Inc., a Delaware corporation (“Rockwell Collins”), pursuant to an asset purchase agreement (the “Asset Purchase Agreement”), dated as of February 7, 2006, by and between the Company and Rockwell Collins. In connection with the completion of the sale of the Simulation Business, on May 26, 2006 the Company entered into a laser projection systems agreement (the “Laser Agreement”) with Rockwell Collins and Rockwell Collins Simulation & Training Solutions LLC, pursuant to which the Company has agreed to provide, and grant exclusive and non-exclusive intellectual property licenses to use and sell, laser projection systems in connection with the Simulation Business and certain related businesses of Rockwell Collins.

Further information concerning the sale of the Simulation Businesses is provided in Note 2 of Item 8 “Financial Statements and Supplementary Data” and in Item 7 “Management’s Discussion and Analysis of Financial Position and Results of Operations” included in Part II of this annual report on Form 10-K.

Acquisition

On April 28, 2006, the Company completed the acquisition of Spitz, Inc. (“Spitz”) by acquiring all outstanding shares of Spitz common stock from Transnational Industries, Inc. (“Transnational”) pursuant to a stock purchase agreement (the “Stock Purchase Agreement”), dated as of February 7, 2006, by and between the Company and Transnational. Spitz  designs, manufactures and supports optical-mechanical and digital visual systems for planetariums, science centers and entertainment venues. Spitz also produces unique domes and curved structures for specialized architectural applications. We believe that the Spitz visual system products and domes along with its customer base complement the digital theater products of Evans & Sutherland and will enhance our capabilities to serve the markets we target.

Further information concerning the acquisition of Spitz is provided in Note 3 of Item 8 “Financial Statements and Supplementary Data” and in Item 7 “Management’s Discussion and Analysis of Financial Position and Results of Operations” included in Part II of this annual report on Form 10-K.

3




General

Since the sale of the Simulation Business and the acquisition of Spitz, Evans & Sutherland focuses on the production of high-quality visual systems, advanced displays including the laser projector (ESLP), dome projection screens, dome architectural treatments, and unique content for planetariums, science centers, other educational institutions, and entertainment venues. With a 38-year history in computer graphics, we are widely regarded as both a pioneer and a leader in providing the world’s most compelling visual systems. With the acquisition of Spitz and its over 50-year history as a leading supplier of planetarium systems and other dome displays, E&S now supplies premier total system solutions for its digital theater markets as well as customized domes and other curved structures in the architectural market.

We continue to maintain a significant share of the overall planetarium and digital theater market. We estimate that our market share has ranged from 35% to 70%, depending on the specific market and time period. We estimate that the size of the market for digital theater and planetarium systems is approximately $65 million annually.

Description of Products

E&S offers a range of products and services for digital theater, planetarium, and educational institutions. These products include state of the art image generators, domes, and display systems some of which feature our unique laser projector (ESLP) that provides a seamless high resolution display from a single projector. Additionally, we produce unique content both for our own library which we license to customers and for specific customer requirements.

Description of Markets

We are an industry leader in providing visual systems to an international customer base in the digital theater, planetarium, and educational markets. Through our Spitz subsidiary, we also supply dome projection screens and dome architectural treatments to major theme parks, casinos, world expositions, and military defense contractors. In each of these markets we face highly competitive conditions. In all our markets we compete on features, performance, and responsiveness to customer needs as well as on price. E&S is unique among its competitors by virtue of its capability as a single source that can directly supply and integrate all of the equipment in the planetarium theater, including the projection system, sound, lighting, computer control system and domed projection screen. We believe our range of visual systems and services at various price and performance levels, our research and development investments and capabilities, our responsiveness to customers, and our ability to design and manufacture value-added visual systems enable us to compete effectively.

Digital Theater

In the digital theater market our products compete with traditional optical-mechanical products and digital display systems offered by GOTO Optical Mfg. Co., Konica-Minolta Planetarium Co. Ltd., Carl Zeiss Inc., and Sky-Skan, Inc. During 2006 our share of this market increased modestly from revenue contributed by our newly acquired subsidiary Spitz. We expect this market share to increase as we complete the integration of Spitz and realize a full year of results for the new combined business.

Advanced Displays

We began work in 1997 to build a new generation of projection technology with specifications beyond any other technology either available or likely in the foreseeable future. This goal evolved into the production of a revolutionary projector using lasers for illumination and micro-electro-mechanical systems (MEMS) to modulate the laser light and create an image. The result is the Evans & Sutherland Laser

4




Projector (ESLP). The first ESLP systems were delivered late in 2005, with additional units delivered in 2006. The first units have been supplied to our traditional simulation  and digital theater customers who continue to order systems with the new projection technology. We believe that the ESLP also has application to other markets in the future where ultra-high resolution, high efficiency, excellent image quality, and low life-cycle cost are important considerations.

Domed Structures

Our subsidiary Spitz is the world’s leading producer of domed projection screens. Spitz designs, manufactures, and installs domed projection screens which are used in planetarium theaters and a variety of other applications such as ride simulators, special or large format film theaters, simulation training systems and architectural treatments. Spitz’s experience enables it to advise on the architectural integration of domed projection screens and solve complex optical problems involving reflectivity and image distortion on compound curved surfaces. The Company believes that these skills are important to buyers of domed projection screens. The principal customers in Spitz’s dome business are entities in the entertainment, educational and commercial and military simulation markets. Customers include major theme parks, casinos, world expositions, museums, schools, and military defense contractors. There is currently one known domestic competitor that manufactures domed projection screens. In addition, construction or metal fabrication contractors will occasionally supply domed projection screens, particularly in foreign markets.

Backlog

On December 31, 2006, our backlog was $20,408 compared with $16,548 on December 31, 2005 adjusted for the discontinued operations of the Simulation Business. We anticipate that approximately 85% of the 2006 backlog will be converted to sales in 2007.

Significant Customers

Worldwide customers using our products include museums, planetariums, science centers, theme parks, casinos, aerospace companies, and international armed forces. We measure and identify our significant customers based on direct sales.

Sales to no single customer represented more than 10% of total sales during 2006. Sales to two customers represented 12% and 11% of total sales during 2005. Sales to two customers represented 13% and 11% of total sales during 2004.

Intellectual Property

We own a significant number of patents and trademarks and we are a licensee under several others. Our portfolio of patents and trademarks is, as a whole, material to our business. However, no one piece of intellectual property is critical to our business, thus no individual piece of our intellectual property is separately discussed. In the U.S. and internationally, we hold active patents that cover many aspects of our visualization technology. Several patent applications are presently pending in the U.S., Japan and several European countries, and other patent applications are in preparation. We actively pursue patents on our new technology and we intend to vigorously protect our patent rights. We routinely copyright software, documentation and chip masks designed by us and institute copyright registration when appropriate. During the history of the Company we have been awarded 86 patents, of which 59 are still active. The sale of the Simulation Business transferred certain patents and other intellectual property rights primarily related to the Simulation Business to Rockwell Collins. Also, we acquired rights to the intellectual property of Elumens Corporation in its bankruptcy liquidation. The rights to the Elumens intellectual property protect the application of certain processes in the use of the Company’s visual display products.

5




Research & Development

We consider the timely development and improvement of our technology to be essential to maintain our competitive position and to capitalize on market opportunities. We continue to fund essentially all research and development (“R&D”) efforts internally.

A significant focus for our R&D in 2006 was the continued development of our laser projector, the ESLP. We delivered ESLP’s in the fourth quarter of 2005 to the Air Force and began delivery of the ESLP to planetariums in January 2006. Efforts to improve production process, performance and reliability of the laser projector will continue through 2007. In addition we are exploring the potential application of the ESLP technology in new markets through partnering and licensing arrangements.

Dependence on Suppliers

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

Foreign Sales

Foreign sales are calculated based on the location of the purchasing customer and were $7,984 in 2006, $5,814 in 2005, and $6,223 in 2004 adjusted for the discontinued operations of the Simulation Business. Foreign sales accounted for approximately 53%, 38%, and 66% of total sales in 2006, 2005 and 2004, respectively. We believe that any inherent risk that may exist in our foreign operations is not material.

Employees

As of December 31, 2006, Evans & Sutherland and its subsidiaries employed a total of 118 persons compared to 268 employees as of December 31, 2005. The change in number of employees was attributable principally to the discontinued operations of the Simulation Business and the acquisition of Spitz. Following the completion of the sale of the Simulation Business, we retained 64 employees and gained 54 employees from our Spitz acquisition. We believe our relations with our employees are good. None of our employees are subject to collective bargaining agreements.

Environmental Standards

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

Strategic Relationships

In the normal course of business we develop and maintain various types of relationships with key customers and technology partners. In 2006, we entered into a limited number of teaming agreements and product development agreements. The teaming agreements are with industry partners and are intended to improve our overall competitive position. The product development agreements enhance our products by the cooperative development of new features and capabilities necessary to maintain our industry leading position. These activities will continue in 2007.

6




Forward-Looking Statements and Associated Risks

This annual report, including all documents incorporated herein by reference, includes certain “forward-looking statements” within the meaning of that term in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act of 1934, as amended, including, among others, those statements preceded by, followed by or including the words “estimates,” “believes,” “expects,” “anticipates,” “plans,” “projects,” “intends,” “predicts,” “may,” “will,” “could,” “would,” “potential” and similar expressions or the negative of such terms. See Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Part II of this annual report on Form 10-K for a list of some of the forward-looking statements included in this Form 10-K. See Item 1A “Risk Factors” below for factors that may affect these forward-looking statements.

EXECUTIVE OFFICERS OF THE REGISTRANT

The following sets forth certain information regarding the executive officers of E&S as of March 28, 2007.

Name

 

 

 

Age

 

Position

David H. Bateman

 

64

 

President and Chief Executive Officer

Paul L. Dailey

 

50

 

Chief Financial Officer and Corporate Secretary

Bob Morishita

 

55

 

Vice President Human Resources

Kirk D. Johnson

 

45

 

Vice President and General Manager of Digital Theater

Allen H. Tanner

 

53

 

Vice President and General Manager of Advanced Displays

Jonathan A. Shaw

 

50

 

President and Chief Executive Officer of Spitz, Inc.

 

David H. Bateman was appointed President and Chief Executive Officer of E&S in February 2007. Mr. Bateman joined E&S as Director of Business Operations in May 1998. He was appointed Vice President—Business Operations in March 2000 and Interim President and Chief Executive Officer and a member of the Board of Directors in June 2006.

Paul L. Dailey was appointed Chief Financial Officer and Corporate Secretary of E&S in February 2007. He became an executive officer of E&S in August 2006 when he was appointed Acting Chief Financial Officer and Corporate Secretary. Prior to his appointments at E&S, Mr. Dailey served as Executive Vice President, Chief Financial Officer and Corporate Secretary of E&S subsidiary, Spitz Inc. where he started as Controller in 1983. Mr. Dailey is a Certified Public Accountant.

Bob Morishita was appointed Vice President of Human Resources in 2000. He joined E&S as Compensation Manager in 1982 and was appointed Human Resources Director in 1997.

Kirk Johnson was appointed Vice President and General Manager of Digital Theater in January 2002. He joined E&S in April 1990 and has held various engineering and management positions throughout his service at E&S.

Allen H. Tanner was appointed Vice President and General Manager of Advanced Displays in January 2000. He has held various engineering and management positions throughout his service at E&S since 1996.

Jonathan A. Shaw was appointed President and Chief Executive Officer E&S subsidiary, Spitz Inc. in November 2001 where he held various management positions since 1985.

ITEM 1A.         RISK FACTORS

 Our domestic and international businesses operate in highly competitive markets that involve a number of risks, some of which are beyond our control. The sale of the Simulation Business to Rockwell

7




Collins on May 26, 2006, has significantly changed our business. As a result, there are new risks and uncertainties that should be considered in evaluating our business. The following discussion highlights some risks and uncertainties that should be considered in evaluating our growth outlook.

Our Business Model Has Changed and May Not Produce Consistent Earnings Which Could Adversely Affect Our Business

With the sale of our Simulation Business to Rockwell Collins, our business model has significantly changed. Our business is now based on digital theaters and laser projectors. A significant portion of our future success will depend on completing and selling our laser projector, and future products based on this technology. There is no guarantee that the laser projector or any future products based on this technology will be successful in the market or that we can develop them. If we are unable to develop our laser projector, our business will be adversely affected.

We May Experience Difficulty in Identifying, Forming and Maintaining New Business Opportunities That Are Important To the Development of Our Business

We have invested, and expect to continue to invest, significant capital in new products, technologies, and business opportunities. We cannot assure you that we will be able to continue to identify suitable opportunities to expand our business in the future. The failure to form or maintain new business opportunities could significantly limit our ability to expand our operations and sales. Moreover, these new opportunities or investments require significant management time, involve a high degree of risk and will present significant challenges. We cannot assure you that these activities will be successful or that we will realize appropriate returns on these activities.

Our Laser Projectors are New and have Limited Market Penetration

Our laser projectors have limited market penetration. Our future success will depend in significant part on our ability to generate demand for our laser projectors and to develop additional commercial applications that incorporate our laser projector technology. We cannot be certain that our product will succeed in the market, and if we fail to generate increased sales, our future results of operations will be adversely affected.

We May be Unable to Adequately Respond to Rapid Changes in Technology

The market for our laser projectors is characterized by rapidly changing technology, evolving industry standards and frequent product introductions. The introduction of products and services embodying new technology and the emergence of new industry standards may render our existing laser projectors obsolete and unmarketable if we are unable to adapt to change. A significant factor in our ability to grow and to remain competitive is our ability to successfully introduce new products and services that embody new technology, anticipate and incorporate evolving industry standards and achieve levels of functionality and prices acceptable to the market. If our laser projectors are unable to meet our customers’ needs or we are unable to keep pace with technological changes in the industry, our laser projectors could eventually become obsolete. We may be unable to allocate the funds necessary to improve our current products or introduce new products to address our customers’ needs and respond to technological change. If other companies develop more technologically advanced products, our competitive position relative to such companies would be harmed.

Competitors or Third Parties May Infringe E&S Intellectual Property

Throughout its history E&S has been awarded numerous patents. While competitors or third parties have not materially infringed our patents, we are entering the production stage of a new product, the

8




ESLP. We have a number of patents either issued or pending on this technology, but it represents a new field for us and may attract competitors with a risk of infringement and costly legal processes to defend our intellectual property rights which could adversely affect our business.

Delays in New Product Introductions Could Negatively Affect Financial Performance

During 2006 and into 2007, we have introduced and intend to introduce several important new products, including the ESLP. Further delays in introducing and delivering these products could reduce planned sales and profit contribution.

Our Industry Is Undergoing Rapid Technological Changes, And Our Failure To Keep Up With Such Changes Could Cause Us To Lose Customers And Impede Our Ability To Attract New Customers

Our success depends on our ability to compete in an industry that is highly competitive, with rapid technological advances and products that require constant improvement in both price and performance. We expect this trend to continue. If our competitors are more successful than we are in developing technology and products, then our revenues and growth rates could decline.

Our industry is subject to rapid and significant changes in technology as well as customer requirements and preferences, and our failure to keep up with such changes could cause us to lose customers and impede our ability to attract new customers. New technologies could reduce the competitiveness of our theater and projector products. We may be required to select one technology over another, but at a time when it would be impossible to predict with any certainty which technology will prove to be the most economic, efficient or capable of attracting customer usage. Subsequent technological developments may reduce the competitiveness of our products and require upgrades or additional products that could be expensive or unfeasible. If we fail to adapt successfully to technological changes or customer preferences, we could lose market share or impede our ability to attract new customers and retain current customers.

Resistance By Potential New Customers To Accept Our Products May Reduce Our Ability To Increase Our Revenue

The expansion of our business will be dependent upon, among other things, the willingness of additional customers to accept our products and technologies. We cannot assure you that we will be successful in overcoming the resistance of potential customers to change their current projectors or theater technologies, and to expend the capital necessary to purchase and implement our products and technology. The lack of customer acceptance would reduce our ability to increase our revenue.

Our Sales Could Decline Substantially as a Result of Terrorist Attacks and Other Activities that Reduce the Willingness of Our Customers to Purchase Products

The demand for our products and services is dependent upon new orders from customers operating various public attractions. If terrorist attacks or other activities decrease the attendance for our customers’ venues, the demand or willingness of our customers to purchase our products may decline and our revenue may decline substantially.

Our Shareholders May Not Realize Certain Opportunities Because of the Anti-Takeover Effect of State Law

The Utah Control Shares Acquisition Act provides that any person who acquires 20% or more of the outstanding voting shares of a publicly held Utah corporation will not have voting rights with respect to the acquired shares unless a majority of the disinterested shareholders of the corporation votes to grant such rights. This could deprive shareholders of opportunities to realize takeover premiums for their shares or other advantages that large accumulations of stock would provide because anyone interested in acquiring

9




E&S could only do so with the cooperation of our board of directors and a majority of disinterested shareholders.

Your Ability to Sell Your Stock May be Substantially Limited

If we fail to meet any of the continued listing standards of the Nasdaq National Market, our common stock may be delisted from the Nasdaq National Market. If we are delisted from the Nasdaq National Market, we expect our common stock will be traded on the Nasdaq Capital Market if we meet the listing standards of that market or we will attempt to be traded on the OTC Bulletin Board or “pink sheets” maintained by the National Quotation Bureau, Inc. The OTC Bulletin Board and pink sheets are generally considered less efficient markets than the Nasdaq National Market and the Nasdaq Capital Market.

We May receive none or little of the remaining $5 Million in Escrow Related to the Sale of Assets to Rockwell Collins and the Laser Projector Agreement

As part of the Asset Purchase Agreement and Laser Agreement, a total $5,000 remains in an escrow account to secure our indemnification obligations under the Asset Purchase Agreement and our delivery obligations under the Laser Agreement. There is no guarantee that we will receive these funds and if Rockwell Collins becomes entitled to a penalty under the Laser Agreement or indemnification under the Asset Purchase Agreement, we may receive none or little of the $5,000 remaining in escrow, which will reduce the amount of cash we have available in the future.

If we do not deliver a motion-based ESLP to Rockwell Collins by December 31, 2007, Rockwell Collins has the right to begin accelerating monthly withdrawals from the escrow account in accordance with a formula prescribed by the Laser Agreement. Under the formula, the monthly withdrawals will total $1,000 over the year following December 31, 2007. If we do not deliver a motion-based ESLP by December 31, 2008, Rockwell Collins will have the right to withdraw up to an additional $2,000 from the escrow account.

We Continue to be Exposed to Contingent Liabilities Relating to the Sale of our Simulation Business, Which Could Adversely Affect Our Financial Condition

In connection with the sale of our Simulation Business, we agreed to indemnify Rockwell Collins for any losses from breaches of the representations, warranties or covenants we made in the Asset Purchase Agreement that occur within certain periods after the closing. We have also agreed that certain indemnification obligations will be capped at certain amounts. For example, an indemnification claim by Rockwell Collins could result if Rockwell Collins suffers any damages arising out of the inaccuracy of any of our representations or if we fail to comply with a covenant or other agreement in the Asset Purchase Agreement. In addition, we have agreed to retain all liabilities relating to the Simulation Business that are not being expressly assumed by Rockwell Collins, and to indemnify Rockwell Collins for any claims or damages arising from such retained liabilities. The payment of any such indemnification obligations could adversely impact our cash resources following the completion of the sale of our simulator business and our ability to pursue other opportunities, including the development of our digital theater and laser projector businesses.

We May Not Be Able to Fully Integrate Spitz into Our Operations Successfully

We may experience difficulties in fully integrating Spitz’s business with ours. This could result in additional costs and loss of productivity that could materially affect our operations and financial results.

10




If We are Unable to Retain Certain Key Personnel and Hire New Highly Skilled Personnel, We May Not Be Able to Execute Our Business Plan

We are substantially dependent on the continued services of certain key personnel. These individuals have acquired specialized knowledge and skills with respect to the Company and its operations. The loss of any of these individuals could harm our business. Our business is also dependent on our ability to retain, hire and motivate talented, highly skilled personnel. If we do not succeed in retaining and motivating our existing key employees and in attracting new key personnel, we may be unable to meet our business plan and as a result, our stock price may decline.

ITEM 2.                 PROPERTIES

Our principal executive, engineering, manufacturing and operations facilities are located in the University of Utah Research Park in Salt Lake City, Utah, where we own three buildings totaling approximately 68,000 square feet. The buildings are located on land leased from the University of Utah with an initial term of 40 years or longer.

Spitz owns and occupies an approximately 47,000 square-foot building on approximately 15.2 acres in Chadds Ford, Pennsylvania. The property serves as collateral under Spitz’s debt agreements through a mortgage granted to First Keystone Bank.

We believe that these properties are suitable for our immediate needs and we do not currently plan to expand our facilities or relocate to other facilities.

ITEM 3.                 LEGAL PROCEEDINGS

In the normal course of business, we may have various legal claims and other contingent matters. We know of no legal claims or other contingent matters outstanding that would have a material adverse effect on our consolidated financial condition, liquidity or results of operations.

ITEM 4.                 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 2006.

11




PART II

ITEM 5.                 MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our common stock trades on the Nasdaq Stock Market under the symbol “ESCC.”  On March 27, 2007, there were 666 holders of record of our common stock. Because brokers and other institutions hold many of our shares on behalf of shareholders, we are unable to estimate the total number of shareholders represented by these record holders.

We have never paid a cash dividend on our common stock and have used retained earnings for the operation and expansion of our business. Currently we have an accumulated deficit. For the foreseeable future, we intend to follow our policy of retaining any future earnings to finance the development and growth of our business.

Additional information required by this item is incorporated by reference to  the table captioned Securities Authorized for Issuance Under Equity Compensation Plans as of December 31, 2006 in Item 12 “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” of Part III of this annual report on Form 10-K.

The table below presents the high and low bids per share on the Nasdaq Stock Market by quarter for 2006, and 2005. The quotations reflect inter-dealer prices, without retail mark-up, mark-down, or commission and may not necessarily represent actual transactions.

 

 

2006

 

2005

 

 

 

High

 

Low

 

High

 

Low

 

First Quarter

 

$

7.91

 

$

4.69

 

$

7.99

 

$

5.50

 

Second Quarter

 

6.50

 

4.85

 

6.88

 

4.38

 

Third Quarter

 

5.60

 

4.06

 

6.22

 

4.50

 

Fourth Quarter

 

4.60

 

3.65

 

6.25

 

4.57

 

 

12




The following graph presents a five-year comparison of total cumulative shareholder return on Evans & Sutherland’s common stock for the period December 31, 2001 through December 31, 2006 with the total cumulative return on the (a) Russell 2000 Index,  (b) S&P Electronic Equipment & Instruments and (c) S&P Aerospace & Defense Index. As a result of the sale of the Simulation Business and our exit from the military and defense industry, we have determined that the S&P Aerospace & Defense Index is no longer applicable to our business, and we have determined to use the S&P Electronic Equipment & Instruments Index. In accordance with SEC rules, we are required to include below a comparison to the historic and new industry index. The comparison assumes the investment of $100 on December 31, 2001 in stock or index, including reinvestment of dividends. Total shareholder returns for prior periods are not an indication of future investment returns.

GRAPHIC

 

 

Cumulative Total Return

 

 

 

12/01

 

12/02

 

12/03

 

12/04

 

12/05

 

12/06

 

Evans & Sutherland Computer Corp.

 

$

100

 

 

$

94

 

 

$

68

 

$

105

 

$

74

 

$

63

 

Russell 2000

 

100

 

 

80

 

 

117

 

139

 

145

 

171

 

S & P Aerospace & Defense

 

100

 

 

95

 

 

117

 

135

 

157

 

197

 

S & P Electronic Equipment & Instruments

 

100

 

 

50

 

 

88

 

75

 

78

 

77

 

 

13




ITEM 6.                 SELECTED FINANCIAL DATA

The following selected consolidated financial data for the most recent five fiscal years ended December 31, 2006, have been derived from our consolidated financial statements. The financial information shown as of December 31, 2006 and 2005, and for the years ended December 31, 2006, 2005 and 2004, has been derived from our consolidated financial statements as of such dates and for such years. The financial information shown as of December 31, 2004, 2003 and 2002, and for the years ended December 31, 2003 and 2002, has not been audited and reflects our previously issued financial information reclassified to conform to our current presentation. The data presented below should be read in conjunction with Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Item 8 “Financial Statements and Supplementary Data” of this annual report on Form 10-K.

For the Years Ended December 31,

 

 

 

2006

 

2005

 

2004

 

2003

 

2002

 

 

 

 

 

 

 

 

 

(Unaudited)

 

(Unaudited)

 

 

 

(in thousands, except per share amounts)

 

Sales

 

$

15,048

 

$

15,111

 

 

$

9,479

 

 

 

$

7,428

 

 

 

$

3,421

 

 

Net loss from continuing operations

 

(9,480

)

(3,523

)

 

(7,277

)

 

 

(2,563

)

 

 

(5,061

)

 

Net income (loss)

 

21,985

 

(1,134

)

 

(8,729

)

 

 

(35,337

)

 

 

(12,050

)

 

Net income (loss) per common share—basic:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss per share from continuing operations

 

$

(0.88

)

$

(0.34

)

 

$

(0.69

)

 

 

$

(0.24

)

 

 

$

(0.49

)

 

Net income (loss) per share

 

$

2.03

 

$

(0.11

)

 

$

(0.83

)

 

 

$

(3.37

)

 

 

$

(1.16

)

 

Basic weighted average common shares outstanding

 

10,826

 

10,523

 

 

10,498

 

 

 

10,471

 

 

 

10,422

 

 

Net income (loss) per common share—diluted:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss per share from continuing operations

 

$

(0.87

)

$

(0.34

)

 

$

(0.69

)

 

 

$

(0.24

)

 

 

$

(0.49

)

 

Net income (loss) per share

 

$

2.03

 

$

(0.11

)

 

$

(0.83

)

 

 

$

(3.37

)

 

 

$

(1.16

)

 

Diluted weighted average common shares outstanding

 

10,847

 

10,523

 

 

10,498

 

 

 

10,471

 

 

 

10,422

 

 

 

As of December 31,

 

 

 

2006

 

2005

 

2004

 

2003

 

2002

 

 

 

 

 

 

 

 

(Unaudited)

 

(Unaudited)

 

(Unaudited)

 

 

 

 

(in thousands, except per share amounts)

 

 

Cash

 

$

15,549

 

$

14,606

 

 

$

10,147

 

 

 

$

9,714

 

 

 

$

7,375

 

 

Total assets

 

55,381

 

68,050

 

 

73,615

 

 

 

94,824

 

 

 

127,509

 

 

Long-term debt, less current portion

 

2,845

 

 

 

 

 

 

 

 

 

2,670

 

 

Stockholders’ equity (deficit)

 

22,382

 

(6,455

)

 

(948

)

 

 

10,717

 

 

 

47,863

 

 

 

14




Quarterly Financial Data (Unaudited)

The following selected consolidated quarterly financial data for the most recent two fiscal years ended December 31, 2006 reflects the presentation of discontinued operations and accordingly, some amounts presented have changed from previously reported amounts. Further information concerning the sale of the Simulation Businesses is provided in Note 2 of Item 8 “Financial Statements and Supplementary Data” and in Item 7 “Management’s Discussion and Analysis of Financial Position and Results of Operations” included in Part II of this annual report on Form 10-K.

(In thousands, except per share information)

 

 

Quarter Ended

 

2005

 

 

 

April 1

 

July 1

 

Sep. 30(3)

 

Dec. 31(2)

 

Sales

 

$

2,794

 

$

4,231

 

 

$

4,190

 

 

 

$

3,896

 

 

Gross profit

 

1,570

 

1,954

 

 

1,697

 

 

 

1,373

 

 

Net income (loss) from continuing operations before income taxes

 

(688

)

(437

)

 

(2,351

)

 

 

(41

)

 

Net income (loss)

 

(5,978

)

(1,494

)

 

(1,238

)

 

 

7,576

 

 

Basic and diluted income (loss) per share(1)

 

$

(0.57

)

$

(0.14

)

 

$

(0.12

)

 

 

$

0.72

 

 

 

 

 

Quarter Ended

 

2006

 

 

 

March 31

 

June 30

 

Sep. 29(4)

 

Dec. 31

 

Sales

 

 

$

3,767

 

 

$

2,546

 

 

$

4,427

 

 

$

4,308

 

Gross profit

 

 

1,343

 

 

437

 

 

1,619

 

 

207

 

Net income (loss) from continuing operations before income taxes

 

 

(1,569

)

 

(5,995

)

 

(3,352

)

 

(4,474

)

Net income (loss)

 

 

$

(5,869

)

 

$

35,136

 

 

$

(2,964

)

 

(4,318

)

Basic and diluted income (loss) per share(1)

 

 

$

(0.56

)

 

$

3.24

 

 

$

(0.27

)

 

$

(0.39

)


(1)           Net income (loss) per share is computed independently for each of the quarters presented and therefore may not sum to the total for the year.

(2)           In the fourth quarter of 2005, we recorded a gain of $8,000 on an insurance settlement and a gain of $2,745 on the sale of a building.

(3)           Net loss from continuing operations was previously reported as $1,550; the increase to the loss of $801 was due to reclassification of operating expense from continuing operations to discontinued operations.

(4)           Net loss from continuing operations was previously reported as $2,963; the increase of $389 was due to reclassification of a gain on sale of a building from continuing operations to discontinued operations.

15




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

The following discussion and analysis provides information which management believes is relevant to an assessment and understanding of our consolidated results of operations and financial condition. The discussion should be read in conjunction with our consolidated financial statements and notes included in Item 8 “Financial Statements and Supplementary Data” of this annual report on Form 10-K. Information set forth in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” includes forward-looking statements that involve risks and uncertainties. Many factors could cause actual results to differ materially from those contained in the forward-looking statements. See “Forward-Looking Statements” below and Item 1A “Risk Factors” in Part I of this annual report on Form 10-K for additional information concerning these items. All dollar amounts are in thousands unless otherwise indicated.

Executive Summary

The past year was a significant transition in the existence of Evans & Sutherland. On April 28, 2006, we completed the acquisition of Spitz, Inc. (“Spitz”) with the goal of enhancing our capabilities to serve the digital theater markets we target. On May 26, 2006, we sold our commercial and military simulation businesses (the “Simulation Business”) and entered into an agreement with the buyer to provide future products and intellectual property licenses to use and sell our laser projection systems in the Simulation Business. We realized a significant gain on the sale of the Simulation Business which improved our financial position and provided significant funding for the continued development of our laser projector products. These two events resulted in a major change in our focus, structure, and direction. Significant effort was expended during the year on dealing with post closing and transition matters related to the sale of the Simulation Business. These activities are largely completed along with the associated management distraction. In 2007 the Company expects to be better positioned to focus on current and future business opportunities.

We continued to make progress in the development for our laser projector and the delivery of these projectors to our digital theater customers; however, this continues to be a challenging endeavor. The transition to production of laser projectors has not been completed due to delays in delivery of certain key components and the need to refine other components. These factors delayed the recognition of revenue from some Digital Theater customers. Results for 2006 were negatively impacted by the delayed recognition of revenue and additional costs for support of pre-production laser projectors that have been delivered to initial customers. Some progress has been made on these component issues and deliveries of improved items are beginning. We expect these improvements will continue through 2007. We also made progress integrating Spitz into our company and harmonizing Spitz products with the digital theater products.

Late in the year we began to explore potential opportunities for our laser technology in new markets. These activities have shown some promising opportunities and efforts will continue in this area in 2007.

We expect 2007 to provide a better opportunity to operate and assess the new business in a steady state. The ongoing activities will be focused on completion of the laser projector and assuring timely customer deliveries. Parallel with product development activities will be efforts aimed at identifying opportunities for this technology in new markets. The success of our new technology will also ensure that we maintain our lead and provide growth opportunities in our traditional digital theater markets. Improving financial performance and reducing costs, where practicable, are key areas of management focus.

16




Acquisition of Spitz, Inc.

On April 28, 2006, the Company completed the acquisition of Spitz, Inc. (“Spitz”) by acquiring all outstanding shares of Spitz common stock from Transnational Industries, Inc. (“Transnational”) pursuant to a stock purchase agreement (the “Stock Purchase Agreement”), dated as of February 7, 2006, by and between the Company and Transnational. Consideration under the Stock Purchase Agreement consisted of 412,500 unregistered shares of the Company’s Common Stock, $0.20 par value, subject to a post-closing share adjustment depending on the average trading price of the Company’s common stock for the 60-day period prior to registration of the shares issued at closing. Pursuant to a Registration Rights Agreement between the Company, Spitz, and Transnational, E&S was required to use its best efforts to register those shares of stock issued as consideration for the outstanding stock of Spitz. Registration of the shares issued to Transnational became effective on November 9, 2006 and the Company issued an additional 84,948 shares in accordance with the post-closing adjustment. Based on the average closing price of the Company’s common stock for the period two days prior and two days after the day the agreement was announced, the value of the total shares issued is $2,814. Transaction costs were $70 and stock registration costs were $30. The purchase price was determined in arms-length negotiations between the Company and Transnational and we believe it is a nontaxable transaction. The Company plans to continue to operate Spitz as a wholly owned subsidiary. Spitz designs, manufactures and supports visual systems for planetariums, science centers and entertainment venues and provides unique domes and similarly shaped structures for specialized architectural applications.

Sale of Simulation Business

On May 26, 2006, we sold substantially all of the assets and certain liabilities primarily related to our commercial and military simulation businesses and related service operations (the “Simulation Business”) to certain subsidiaries of Rockwell Collins, Inc., a Delaware corporation (“Rockwell Collins”), pursuant to an asset purchase agreement (the “Asset Purchase Agreement”), dated as of February 7, 2006, by and between the Company and Rockwell Collins. In connection with the completion of the sale of the Simulation Business, on May 26, 2006 the Company entered into a laser projection systems agreement (the “Laser Agreement”) with Rockwell Collins and Rockwell Collins Simulation & Training Solutions LLC, pursuant to which the Company has agreed to provide, and grant exclusive and non-exclusive intellectual property licenses to use and sell, laser projection systems in connection with the Simulation Business and certain related businesses of Rockwell Collins. The transaction contemplated by the Asset Purchase Agreement and the Laser Agreement (the “Transaction”) was approved by the Company’s shareholders at a combined annual and special meeting of shareholders held on May 25, 2006.

The aggregate consideration contemplated in the Transaction was $71,500 in cash, consisting of the $66,500 purchase price under the Asset Purchase Agreement (the “Asset Purchase Price”) for the assets primarily related to the Simulation Business and $5,000 under the Laser Agreement. On May 26, 2006, the closing of the sale of the Simulation Business, Rockwell Collins paid the Company $59,500 under the terms of the Asset Purchase Agreement, and deposited $10,000 (consisting of the remaining $7,000 of the Asset Purchase Price and $3,000 under the Laser Agreement) in escrow pursuant to an escrow agreement (the “Escrow Agreement”), dated as of May 26, 2006, by and between the Company, Rockwell Collins and U.S. Bank National Association, as escrow agent. The Laser Agreement requires Rockwell Collins to pay the remaining $2,000 of consideration in the Transaction directly to the Company upon the completion of certain performance milestones by the Company. Under the terms of the Escrow Agreement, the deposited amount will be held in escrow to secure (i) any post-closing reduction in the Asset Purchase Price under the Asset Purchase Agreement, (ii) the Company’s indemnification obligations under the Asset Purchase Agreement and (iii) the Company’s obligations (not to exceed $3,000 of the escrowed funds) to meet specified milestones under the Laser Agreement. The escrowed funds will be released in installments as set forth in the Escrow Agreement, subject to the passage of time and the Company

17




fulfilling requirements of the Escrow Agreement. In connection with the sale of our Simulation Business, we agreed to indemnify Rockwell Collins for any losses from breaches of the representations, warranties or covenants we made in the Asset Purchase Agreement that occur within certain periods after the closing.

The Asset Purchase Agreement provides for an adjustment to the Asset Purchase Price based on the value, calculated in accordance with the terms of the Asset Purchase Agreement, of the net assets delivered at the closing date (the “Closing Net Assets”). Based on the value of the Closing Net Assets calculated by the Company and Rockwell Collins under the procedures set forth in the Asset Purchase Agreement, the Asset Purchase Price has been adjusted by $4,800 resulting in  an  adjusted Asset Purchase Price of $61,700. In accordance with the terms of the Escrow Agreement, in March 2007, $200 of the $7,000 held for the Asset Purchase Price was released to the Company and $4,800 was released to Rockwell Collins. The remaining $2,000 held for the Asset Purchase Price is scheduled to be released under the Escrow Agreement on July 1, 2007.

As of December 31, 2006, the Company has recorded proceeds of $59,700 from the Transaction, representing the funds it received through March 2007. We will record additional gain on the Transaction when and to the extent that the remaining amounts to be paid by Rockwell Collins and the remaining amounts held in escrow are released to the Company.

The sale of assets by the Company pursuant to the Asset Purchase Agreement was a taxable transaction for income tax purposes. Accordingly, we recognized a gain with respect to the sale of assets pursuant to the Asset Purchase Agreement in an amount equal to the difference between the amount of the consideration received for each asset over the adjusted tax basis in the asset sold. As all tax information is not yet available we have made estimates for certain items in computing the tax gain until final information becomes available. Although the asset sale resulted in taxable gain to the Company, a substantial portion of the taxable gain will be offset by current year losses from operations, and available net operating loss and tax credit carryforwards. As a result in 2006 we have recorded a net gain of $35,643 from the sale of the Simulation Business.

Results of Operations

Consolidated Sales

The following table summarizes our consolidated sales for fiscal year:

 

 

2006

 

2005

 

2004

 

Sales

 

$

15,048

 

$

15,111

 

$

9,479

 

 

Sales remained relatively flat from 2005 to 2006 decreasing less than 1%. This resulted from a decrease in revenue from the Evans & Sutherland Laser Projector (ESLP) which was mostly offset by the revenue reported by Spitz since being acquired on April 28, 2006. The decrease in ESLP revenue was caused by supply delays relating to certain system components, the need to refine other components, and the resulting unexpected increases in project costs which negatively impacted revenue recognition on percent complete contracts. Efforts continue to resolve the issues related to delivery of the ESLP and we expect ESLP revenue to recover in 2007, although there is no assurance that we will achieve the desired results.

Sales in 2005 increased 59% from 2004. This was primarily the result of revenue on the ESLP.

While our overall sales decreased in 2006, year end backlog increased by 23% from $16,548 to $20,408. The increase in the backlog was attributable to backlog acquired through Spitz. New bookings started strong in 2007 for all digital theater products as well as Spitz domes. This is expected to lead to higher sales levels in 2007; however, much will depend on the success of the ESLP.

18




Gross Margin

The following table summarizes our gross margin and the percentage to total sales during fiscal year:

 

 

2006

 

2005

 

2004

 

Gross margin

 

$

3,606

 

$

6,594

 

$

3,134

 

Gross margin percentage

 

24

%

44

%

33

%

 

The decrease in gross margin from 2005 to 2006 was driven primarily by additional costs to complete ongoing ESLP projects that are accounted for under the percentage of completion method. Also, 2006 gross margin was reduced by lower than normal gross margin due to an increase in under absorbed overhead from lower manufacturing volume. The increase in gross margin from 2004 to 2005 was attributable to a higher volume of successful digital theater projects.

Selling, General & Administrative Expenses

 

 

2006

 

2005

 

2004

 

Selling, general and administrative (“SG&A”)

 

$

10,129

 

$

6,128

 

$

5,198

 

 

SG&A expenses increased 65% from 2006 compared to 2005 due primarily to $1,394 of charges related to the separation agreement entered into with our prior Chief Executive Officer, $1,650 in increases due to the acquisition of Spitz and $982 of charges related to options being expensed under Statement of Financial Accounting Standards No. 123(R) (see discussion of stock compensation in Note 1 “Nature of Operations and Summary of Significant Accounting Policies” of Item 8 “Financial Statements and Supplementary Data” in this annual report on Form 10-K. No such costs were incurred in the 2005. SG&A expenses increased 18% from 2005 compared to 2004 due to increased legal fees due to the sale of the Simulation Business of $1,462 partially offset by collection of a $435 receivable we had previously reserved. We expect SG&A to run about 13% lower in 2007 as a result of reductions in the overall corporate infrastructure.

Research and Development Expenses

 

 

2006

 

2005

 

2004

 

Research and development (“R&D”)

 

$

9,071

 

$

7,233

 

$

5,410

 

 

R&D expense increased 25% in 2006 compared to 2005 primarily due to $1,720 of expense under a contract for outside R&D services related to the laser projector. R&D expenses increased 34% in 2005 compared to 2004 primarily due to the consumption of an additional $1,144 of laser projector materials over the prior year, $310 of expense under a contract for outside R&D services related to the laser projector and $528 increase in labor over 2004. We expect R&D expense to increase about 15% in 2007 due to efforts to improve and expand the capabilities of our laser projection technology with the goal of reaching new markets.

Gains

The following table summarizes other accounting gains during fiscal year:

 

 

2006

 

2005

 

2004

 

Gain on sale of assets

 

$

 

$

 

$

155

 

Gain (loss) on assets held for sale

 

(12

)

2,745

 

 

 

19




In 2004, we recognized additional gain on the sale of assets of our REALimage Solutions Group that closed in 2002. In 2005, we recognized a gain on the sale of a building and its related asset group of $2,745. In 2006, we adjusted the gain on the sale of a building recognized in 2005 for additional costs incurred in 2006.

Other Income and Expense

The following table summarizes our other income and expense during fiscal year:

 

 

2006

 

2005

 

2004

 

Interest income

 

926

 

31

 

6

 

Interest expense

 

(370

)

(159

)

 

Other income (expense)

 

(340

)

633

 

112

 

Total other income (expense), net

 

$

216

 

$

505

 

$

118

 

 

Interest income in 2006 increased $895 compared to 2005 due to the significant increase of cash we received from the proceeds of the sale of the Simulation Business. Interest expense in 2006 increased $211 compared to 2005, primarily due to the interest expense from Spitz mortgage note and line of credit. In 2006, other expense included $366 of loss on disposal of property, plant and equipment, banking fees of $177 and proceeds from class action lawsuit of $23. In 2005 other income included gain on sale of a marketable security of $691, loss on the write-down of a non-marketable security of $37, loss on disposal of property, plant and equipment of $28, proceeds from class action lawsuit of $23 and banking fees of $33. In 2004 other income included a gain on disposal of property, plant and equipment of $105.

Income Taxes

Income tax (expense) consisted of the following:

 

 

2006

 

2005

 

2004

 

Income tax (expense) benefit from continuing operations

 

$

5,910

 

$

(6

)

$

(76

)

Income tax (expense) benefit from discontinued operations

 

2,775

 

436

 

(36

)

Income tax expense from gain on sale of discontinued operations

 

(9,057

)

 

 

Tax expense (benefit)

 

$

(372

)

$

430

 

$

(112

)

 

The income tax expense of $372 for 2006 is primarily attributable to estimated tax on the gain from the sale of the Simulation Business. The income tax benefit of $430 for 2005 is primarily attributable to favorable resolution of certain income tax contingencies. The income tax expense of $112 for 2004 is primarily attributable to foreign income taxes.

Liquidity and Capital Resources

Summary information concerning our financial position as of fiscal year-end:

 

 

2006

 

2005

 

Cash and cash equivalents

 

$

15,549

 

$

14,606

 

Restricted cash

 

633

 

1,099

 

Capitalized lease obligations

 

(8

)

 

Current portion of long-term debt

 

(85

)

 

Line of credit

 

(700

)

 

Net short term cash

 

$

15,389

 

$

15,705

 

Stockholders’ equity (deficit)

 

$

22,382

 

$

(6,455

)

 

20




Outlook

In 2006, we significantly improved our liquidity and maintained our ability to issue letters of credit, mainly due to proceeds from the sale of the Simulation Business.

In July 2007, we expect to receive additional proceeds escrowed from the sale of the Simulation Business. We expect these escrowed proceeds and our existing cash to fund our cash requirements in 2007. Receipt of these escrowed funds is subject to our agreement to indemnify Rockwell Collins for any losses from breaches of the representations, warranties or covenants we made in the Asset Purchase Agreement that occur within the escrow period.

Circumstances that could materially affect liquidity in 2007 include, but are not limited to: (i) failure to receive the remaining escrowed funds from the sale of the Simulation Business (ii) successfully delivering new technologies and products, (iii) meeting 2007 forecasted sales levels, and (iv) our ability to continue to reduce costs and expenses.

We expect cash  from operations and  the sale of the Simulation Business to fund our planned needs in the short term as we invest in research and development related to our laser projector products. For the long term, we believe that improved cash from operations will fund our planned needs. However, we operate in a rapidly evolving and often unpredictable business environment that may change the timing or amount of expected future cash receipts and expenditures. Accordingly, there can be no assurance that our sources of funds will be sufficient to meet our liquidity needs or that we will not be required to raise additional funds to meet those needs, including future business expansion, through the sale of equity or debt securities or from credit facilities with lending institutions.

Cash Flow

 

 

Year ended December 31

 

 

 

2006

 

2005

 

2004

 

Net cash provided by (used in):

 

 

 

 

 

 

 

Operating activities

 

$

21,345

 

$

(467

)

$

(3,541

)

Investing activities

 

(1,017

)

4,830

 

11,535

 

Financing activities

 

(19,385

)

96

 

(7,562

)

Increase in cash and cash equivalents

 

$

943

 

$

4,459

 

$

432

 

 

Cash and cash equivalents increased $943 to $15,549 during fiscal year 2006, primarily as a result of cash provided by operating activities. Cash of $15,549 as of December 31, 2006 was due to cash proceeds from the sale of the Simulation Business of $59,093 less $18,015 for the redemption of convertible subordinated notes, $11,348 of funding for the pension plan, and $5,550 to establish a trust to fund future SERP benefit payments. Cash of $14,606 as of December 31, 2005, was due to the sale of a building which had been held for sale and the receipt of an insurance settlement and the release of additional cash that was restricted at the end of 2004.

Operating Activities

Operating activities provided $21,345 of cash during 2006. This resulted primarily from net cash provided by discontinued operations of $48,719. Net cash used by continuing operating activities was $27,374, which is primarily attributable to the following: the decrease in prepaid pension and retirement asset of $9,178  and the increase in the accrued pension and retirement liability of $9,230 (which reflected $11,348 of funding for the pension plan and $5,550 of funding  for the SERP with proceeds from the sale of the Simulation Business), net loss from continuing operations of $6,229 (decreased for non-cash items of $3,251), and a decrease in working capital of $2,737. Accounts receivable increased due to several large contract billings outstanding as of the end of 2006. Inventories have increased due to costs incurred on

21




several customer contracts at the end of the year and an increase in purchases of laser projector components in 2006. Accounts payable decreased in 2006 due to non-recurring accounts payable outstanding at 2005 including legal fees related to the sale of the Simulation Business, the net settlement of a sales tax audit and significant contract costs incurred at the end of 2005. Accrued liabilities increased primarily due to accrued contractual damages and accrued severance for the former CEO. Customer deposits also increased in 2006 due to the timing of contract payments received during the year.

Operating activities used $467 of cash during 2005, primarily due to $668 of cash provided by discontinued operating activities offset by net cash used in continuing operating activities of $1,135. Net cash used in continuing operating activities was primarily due to net loss from continuing operations of $5,766 (increased for non-cash items of $2,243), an increase in accrued pension and retirement liabilities of $940 due to recognition of net periodic pension cost, and an increase in working capital of $3,691. Accounts receivable decreased due to improved collections. Inventories increased due to purchases related to our ESLP for deliveries to our digital theater customers that occurred in 2006. Net costs and estimated earnings in excess of billings on uncompleted contracts increased due to decreased revenue recognition on percent complete contracts compared to billings on percent complete contracts. Customer deposits increased due to the excess of cash received on completed contracts compared to revenue recognized during the period.

Operating activities used $3,541 of cash during 2004 due to $1,740 of cash provided by discontinued operating activities offset by net cash used in continuing operating activities of $5,281. Net cash used in continuing operating activities was primarily due to net loss from continuing operations of $6,252 (decreased for non-cash items of $1,025), an increase in accrued pension and retirement liabilities of $702 due to recognition of net periodic pension cost, and an increase in working capital of $269. Accounts receivable increased due to several large contract billings outstanding as of the end of 2004. Inventory decreased due to timing of shipments on customer contracts and a decrease in purchases. Net costs and estimated earnings in excess of billings on uncompleted contracts decreased due to increased revenue recognition on percent complete contracts compared to billings on percent complete contracts. Prepaid expenses and deposits decreased due to receipt of a reimbursable settlement charge in 2004 recorded in prepaids in  2003. Accounts payable increased due to an increase in certain general and administrative expenses as well as material purchases at the end of 2004. Accrued liabilities decreased due to the satisfaction of an accrued settlement fee related to the sale of assets in 2002, a decrease in the executive savings plan liability of $745, a decrease in accrued commissions and a decrease in a liability related to an operating lease. Customer deposits increased due to the excess of cash received on completed contracts compared to revenue recognized during the period.

Investing Activities

Investing activities used $1,017 of cash during 2006 primarily due to purchases of property, plant and equipment of $2,024, partially offset by cash provided by discontinued investing activities of $1,056. The purchases of property, plan and equipment of $2,024 included acquisition of information technology infrastructure and software and remodeling of the new corporate offices.

Investing activities provided $4,830 of cash during 2005. This resulted primarily from the sale of one of our office buildings for proceeds of $6,277, as well as proceeds from the sale of a marketable security of $778. These cash inflows were partly offset by property, plant and equipment purchases of $1,417 and cash used by discontinued investing activities of $650.

Investing activities provided $11,535 of cash during 2004. This resulted primarily from cash provided by discontinued investing activities of $11,459. Also, we sold an investment for $633 in cash, offset by purchases of property, plant and equipment of $620.

22




Financing Activities

Financing activities used $19,385 of cash during 2006 primarily due to discontinued financing activities of $18,015, which reflects the redemption of convertible subordinated notes with proceeds from the sale of the Simulation Business. Other financing activities included $1,525 of net repayments on the line of credit and long-term debt partially offset by $251 of proceeds of common stock from the exercise of stock options.

Financing activities provided $96 of proceeds from issuance of common stock due to the exercise of stock options during 2005.

Financing activities used $7,562 of cash during 2004 primarily due to the pay down of our lines of credit during 2004.

Credit Facilities

On April 28, 2006, Spitz entered into a Line of Credit Agreement (the “Credit Agreement”) and a Line of Credit Note (the “Note”) with a commercial bank continuing a $3,000 line of credit for working capital purposes, with E&S executing as a co-borrower and guarantor of both agreements. Under the Note, the outstanding balance will bear a per annum interest rate of one-half percent (0.5%) above the Wall Street Prime rate and the Note matures June 30, 2007. The Note is secured by Spitz real and personal property, a guaranty agreement (the “Guaranty Agreement”) entered into by E&S on April 28, 2006, and a pledge agreement (the “Pledge Agreement”) entered into by E&S and the commercial bank on April 28, 2006. Two business days after entering into the Credit Agreement, the maximum line of credit decreased to $2,500 per the Credit Agreement. Under the Credit Agreement, Spitz is required to, among other terms and conditions: maintain a minimum tangible net worth of $1,700, determined quarterly; maintain a $200 average daily balance, measured quarterly, in its deposit accounts; and maintain an aggregate daily balance of Spitz deposit accounts with the commercial bank of not less than $100 for any consecutive five day period. Under the Guaranty Agreement, E&S has guaranteed the payment and performance of the conditions of the Note. Under the Pledge Agreement E&S has granted to the commercial bank a first priority security interest and lien in and to all of the outstanding shares of Spitz common stock to secure the Note. On July 28, 2006, the Credit Agreement was modified. Among other changes, the maximum line of credit was reduced to $1,100; the first measurement date of the Tangible Net Worth covenant was moved to September 29, 2006; and amounts E&S loans to Spitz are not counted in the Tangible Net Worth covenant. As of December 31, 2006, the Company was in compliance with the tangible net worth covenant and other covenants of the line of credit.  As of December 31, 2006, the outstanding balance of the line of credit was $700.

The ability to issue letters of credit and bank guarantees is important to our business as sales in countries other than in North America and Western Europe have increased. In many countries, letters of credit and bank guarantees are required as part of all sales contract. Letters of credit and bank guarantees are issued to ensure our performance to third parties.

The Company has a finance arrangement which facilitates the issuance of letters of credit and bank guarantees. Under the terms of the arrangement, we are required to maintain a balance in a specific cash account equal to or greater than the outstanding value of all letters of credit issued, plus other amounts necessary to adequately secure our obligations with the financial institution. The arrangement provides a first priority security interest in the specific cash account. Certain of the terms of the arrangement prohibit us from creating, incurring, assuming or permitting to exist any indebtedness or liabilities resulting from borrowings, loans or advances; merging into, consolidating with any other entity, or making any substantial change in the nature of our business; or making new loans or advances to or investments in any other entity without prior written consent from the financial institution. We received written consent from the financial institution for both the acquisition and disposition completed in the second quarter of 2006. In addition,

23




Spitz has the capability of issuing letters of credit through their financial institution which requires a cash-secured guarantee.

As of December 31, 2006, we had outstanding letters of credit and bank guarantees of $633. Letters of credit that expire in 2007 total $633.

Mortgage Note

As of December 31, 2006 there was a $2,930 obligation under a mortgage note payable (“Mortgage Note”) issued on January 14, 2004 by Spitz. The Mortgage Note requires repayment in monthly installments of principal and interest over twenty years. The monthly installment for the first three years was $23 and included interest at 5.75% per annum. On January 14, 2007 and each third year thereafter, the interest rate will be adjusted to the greater of 5.75% or 3% over the Three-Year Constant Maturity Treasury Rate published by the United States Federal Reserve (“3YCMT”). The 3YCMT as of January 14, 2007 was 4.83%. The monthly installment will be recalculated on the first month following a change in the interest rate. The recalculated monthly installment will be equal to the monthly installment sufficient to repay the principal balance, as of the date of the change in the interest rate, over the remaining portion of the original twenty-year term. As of February 2007, the new monthly installment amount is $26.The Mortgage Note is secured by the real property acquired with the proceeds of the note pursuant to a Mortgage and Security Agreement. The Mortgage Note and Credit Agreement contain cross default provisions whereby the default of either agreement will result in the default of both agreements. On March 30, 2007, E&S executed a Guarantee of Spitz’ obligation under the Mortgage Note in consideration for the replacement of the requirement of annual audited financial statements of Spitz under the Mortgage Note and Credit Agreement with the annual audited financial statements of E&S.

6% Convertible Subordinated Debentures

As of December 31, 2005, there was $18,015 of 6% Convertible Subordinated Debentures outstanding (the “6% Debentures”), classified as long-term liabilities related to discontinued operations. The 6% Debentures, due in 2012, were unsecured and were convertible at each bondholder’s option into shares of our common stock at a conversion price of $42.10 per share for an aggregate of 428,000 shares of our common stock if all outstanding 6% Debentures were converted, subject to adjustment. Prior to the sale of the Simulation Business, the 6% Debentures were redeemable at our option, in whole or in part, at par. The 6% Debentures required redemption upon the sale of the Simulation Business. Accordingly, all of the 6% Debentures were redeemed on June 26, 2006.

Rental Guarantees

In December 2005, E&S sold a building with a net book value of $3,820, for proceeds of $6,277, net of closing costs. We recognized a gain on the sale of $2,745 in 2005. As part of the sale, we entered into a 21 month lease agreement with the buyer obligating us to make certain monthly payments through September 2007 depending on the remaining space available for lease in the building sold. Evans & Sutherland is required to pay a monthly pro rata share of operating expenses not to exceed $319 over the twenty-one month lease term. As of December 31, 2006, we had a maximum remaining guarantee related to these obligations of $468 recorded as an accrued liability. The maximum rental guarantee may decrease as available space is leased, based on terms of the rental guarantee. To the extent the maximum rental guarantee is reduced, additional gain will be realized.

24




Other

In 2007, we expect capital expenditures to be slightly less than 2006, or approximately $1,500 to $2,000. There were no material capital expenditure commitments at the end of 2006, nor do we anticipate any over the next several years.

Our Board of Directors has authorized the repurchase of 1,600,000 shares of our common stock. As of March 16, 2007, 463,500 shares remained available for repurchase under the plans approved by the Board of Directors. No shares were repurchased during 2006, 2005, or 2004. Stock may be acquired on the open market or through negotiated transactions depending on market conditions, share price and other factors.

We also maintain trade credit arrangements with certain of our suppliers. The unavailability of a significant portion of, or the loss of, these trade credit arrangements from suppliers would have a material adverse effect on our financial condition and operations.

If we were unable to make timely deliveries of products pursuant to the terms of various agreements with third parties or certain of our contracts were adversely impacted for failure to meet delivery requirements, we may be unable to meet our anticipated working capital needs, routine capital expenditures, and current debt service obligations on a short-term and long-term basis.

We believe our existing cash, restricted cash, letter of credit availability under our current arrangement, and expected cash from future operations will be sufficient to meet our anticipated working capital needs, routine capital expenditures and current debt service obligations. At December 31, 2006, our total indebtedness was $3,638 consisting of $2,938 due on a mortgage note and $700 due on a line of credit agreement. Our cash and restricted cash, subject to various restrictions set forth in this annual report on Form 10-K, are available for working capital needs, capital expenditures, strategic investments, mergers and acquisitions, stock repurchases and other potential cash needs as they may arise

Effects of Inflation

The effects of inflation were not considered material during fiscal years 2006, 2005, or 2004, and are not expected to be material for fiscal year 2007.

Contractual Obligations

The impact that our contractual obligations as of December 31, 2006 are expected to have on our liquidity and cash flow in future periods is as follows:

 

 

Payments due by period

 

 

 

 

 

Less than

 

 

 

 

 

More than

 

 

 

Total

 

1 year

 

1-3 years

 

3-5 years

 

5 years

 

Long-term debt, including current portion(1)

 

$

6,114

 

 

$

1,008

 

 

 

$

622

 

 

 

$

622

 

 

 

$

3,862

 

 

Capital lease obligations

 

8

 

 

8

 

 

 

 

 

 

 

 

 

 

 

Operating lease obligations(2)

 

6,614

 

 

778

 

 

 

367

 

 

 

382

 

 

 

5,087

 

 

Purchase obligations(3)

 

3,450

 

 

3,320

 

 

 

130

 

 

 

 

 

 

 

 

Total

 

$

16,186

 

 

$

5,114

 

 

 

$

1,119

 

 

 

$

1,004

 

 

 

$

8,949

 

 


(1)           Amounts represent the expected cash payments on our long-term debt, including interest payments, and do not include any fair value adjustments.

(2)           The majority of the operating lease obligations are land leases for periods up to 40 years on the land underlying our buildings. Our maximum rental guarantee payments are included in operating lease obligations.

25




(3)           Purchase obligations include agreements to purchase goods or services that are enforceable and legally binding on E&S and that specify all significant terms, including fixed or minimum quantities to be purchased and the approximate timing of the transaction. Purchase obligations exclude agreements that are cancelable without penalty.

Application of Critical Accounting Estimates

The application of the accounting estimates discussed below are considered by management to be critical to an understanding of our 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 estimates are described in the following paragraphs. A summary of significant accounting policies can be found in Note 1 “Nature of Operations and Summary of Significant Accounting Policies” of Item 8 “Financial Statements and Supplementary Data” in this annual report on Form 10-K. For all of these policies, management cautions that future results rarely develop exactly as forecast, and the best estimates routinely require adjustment.

Revenue Recognition

Revenue from long-term contracts requiring significant production, modification and 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 is required to reduce the previously recognized revenue as the ratio of costs incurred to management’s estimate was overstated. If actual costs are lower than management’s anticipated total costs, then an adjustment is required to increase the previously recognized revenue as the ratio of costs incurred to management’s estimate is understated. Adjustments for revisions of previous estimates are made in the period they become known.

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 sheet. Since revenue recognized on these long-term contracts includes management’s estimates of total anticipated costs, the amounts in costs and estimated earnings in excess of billings on uncompleted contracts and billings in excess of costs and estimated earnings on uncompleted contracts also include these estimates.

Inventories

Inventory 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.

Allowance for Doubtful Accounts

We specifically analyze accounts receivable and consider historical experience, customer creditworthiness, facts and circumstances specific to outstanding balances, current economic trends, and

26




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.

Income Taxes

As part of the process of preparing our consolidated financial statements we are required to estimate our actual income taxes in each of the jurisdictions in which we operate. This involves estimating our actual current tax exposure together with assessing temporary differences resulting from differing treatments of items, such as accrued liabilities, for tax and accounting purposes. These differences result in deferred income tax assets and liabilities, which are included in our consolidated balance sheets. We must then assess the likelihood that our deferred income 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 income tax provision in the statement of operations. Significant judgment by management is required to determine our provision for income taxes, our deferred income tax assets and liabilities and any valuation allowance recorded against our net deferred income tax assets.

Impairment of Long- Lived Assets

Long-lived assets are reviewed for impairment when events or changes in circumstances indicate the book value of an asset may not be fully recoverable. When this occurs, we review the value assigned to long-lived assets by analyzing the anticipated, undiscounted cash flows they generate. When the expected future undiscounted cash flows from these assets do not exceed their carrying balances, we determine the estimated fair value of such assets. The amount of impairment recognized is the amount by which the carrying amount of the assets exceeds their estimated fair value. Assets held for sale are reported at the lower of their carrying amount or fair value less costs to sell.

Straight Line Rent and Contingent Obligation

We recognize scheduled rent increases on a straight-line basis over the lease term, which may include optional lease renewal terms, and deferred rent income and expense is recognized to reflect the difference between the rent paid or received in the current period and the calculated straight-line amount.

Recent Accounting Pronouncements

In June 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation Number 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109.” The interpretation contains a two step approach to recognizing and measuring uncertain tax positions accounted for in accordance with SFAS No. 109. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount which is more than 50% likely of being realized upon ultimate settlement. The provisions are effective for the Company beginning in the first quarter of 2007. The Company is evaluating the impact of FIN 48 on its consolidated financial statements.

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157 (“SFAS No. 157”), “Fair Value Measurements.” SFAS No. 157 defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles (“GAAP”) and expands disclosures about fair value measurements. This statement will be adopted by the Company for its fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. The Company is currently evaluating the impact of SFAS No. 157 on its consolidated financial statements.

27




In September 2006, the FASB issued Statement of Financial Accounting Standards No. 158 (“SFAS No. 158”), “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106 and 132-R.”  SFAS No. 158 requires employers to recognize on their balance sheets the funded status of pension and other postretirement benefit plans as of the end of the fiscal year ending after December 15, 2006, for public companies. SFAS No. 158 requires that companies recognize actuarial gains and losses, prior service costs, and any remaining transition amounts from the initial application of Statements 87 and 106 when recognizing a plan’s funded status, with the offset to accumulated other comprehensive income. SFAS No. 158 will also require fiscal-year-end measurements of plan assets and benefit obligations, eliminating the use of earlier measurement dates currently permissible. The new measurement-date requirement will not be effective until fiscal years ending after December 15, 2008. The Company has adopted the provisions of this statement as of December 31, 2006. The adoption did not have a material impact on the Company’s consolidated financial statements.

Forward-Looking Statements

The foregoing contains “forward-looking statements” within the meaning of that term in Section 27A of the Securities Act of 1933, as amended, and section 21E of the Securities Exchange Act of 1934, as amended, including among others, those statements preceded by, followed by or including the words “estimates,” “believes,” “expects,” “plans,” “projects,” and similar expressions.

These forward looking statements include, but are not limited to, the following statements:

·        Our belief that we will continue to receive orders for sales of our laser projectors to Rockwell Collins

·        Our belief that the acquisition of Spitz and the continued success of our ESLP product will allow us to gain market share in digital theaters and that we may be able to grow the Spitz dome business in 2007 and future years.

·        Our belief that our range of visual systems and services at various price and performance levels, our research and development investments and capabilities, and our ability to design and manufacture value-added visual systems will enable us to compete effectively.

·        Our belief that the ESLP also has application to other markets in the future where ultra-high resolution, high efficiency, excellent image quality, and low life-cycle cost are important considerations, which will ultimately result in future revenues.

·        Our belief that our products are performing well, that we will meet all our delivery requirements, and as a result we will incur no damages or penalties for late deliveries in 2007.

·        Our belief that capital expenditures during 2007 will be less than the capital expenditures incurred during 2006.

·        Our belief there is no consistent, inherent seasonal pattern to our business.

·        Our belief that any inherent risk that may exist in our foreign operations is not material.

·        Our belief that our properties are suitable for our immediate needs.

·        Our belief that the ultimate disposition of any legal claims asserted against us or other contingent matters will not have a material adverse effect on our consolidated financial condition, liquidity or results of operations.

·        Our belief that we will perform under the conditions of our letters of credit and therefore incur no losses with respect to these letters of credit in 2007 or future years.

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·        Our belief that the effects of inflation will not be material for fiscal year 2007.

·        Our belief that any inherent risk that may exist in our in our foreign transactions is not material.

·        Our belief that approximately 85% of our backlog will be converted to sales in 2007.

·        Our belief that we will see improvements in our 2007 orders.

·        Our belief that our SG&A expenses will be reduced from their 2006 levels.

·        Our belief that the sale of the Simulation Business and the Spitz transactions will materially affect our future financial performance and position as we have sold a significant percentage of operational assets related to the Simulation Business and acquired additional operational assets related to the digital theater simulation group.

·        Our belief that the net cash from the sale of the Simulation Business along with cash from operations will fund our requirements in 2007.

·        Our belief that for years beyond 2007 cash from operations and net cash from the sale to Rockwell Collins will fund our planned needs in the short term as we invest in research and development related to our laser projector products and our belief that for the long term, our cash from operations will fund our planned needs.

·        Our belief that existing cash, restricted cash, letter of credit availability under our current arrangement, and expected cash from future operations will be sufficient to meet our anticipated working capital needs, routine capital expenditures and current debt service obligations.

Forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified. Future events and actual results could differ materially from those set forth in, contemplated by, or underlying the forward-looking statements. Our actual results could differ materially from these forward-looking statements. In addition to the other risks described in Item 1A “Risk Factors” in Part I of this annual report on Form 10-K, important factors to consider in evaluating such forward-looking statements include risks of product demand, market acceptance, economic conditions, competitive products and pricing, difficulties in product development, and product delays. In light of these risks and uncertainties, there can be no assurance that the events contemplated by the forward-looking statements contained in this annual report will, in fact, occur.

29




ITEM 7A.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The principal market risks to which we are exposed are changes in foreign currency exchange rates and changes in interest rates. Foreign sales accounted for approximately 53%, 38%, and 66% of total sales in 2006, 2005 and 2004, respectively. Our foreign sales are concentrated in the United Kingdom, Europe, Asia and North America (excluding the United States). In general, we enter into sale agreements with our foreign customers denominated in U.S. dollars. Foreign currency purchase and sale contracts may be entered into for periods consistent with related underlying exposures and do not constitute positions independent of those exposures. We do not enter into foreign currency contracts for trading purposes and do not use leveraged contracts. As of December 31, 2006, we had sales contracts in Euros with approximately 112 remaining to collect.

30




ITEM 8.                 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)

 

December 31,

 

 

 

2006

 

2005

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash

 

$

15,549

 

$

14,606

 

Restricted cash

 

633

 

1,099

 

Accounts receivable, net

 

5,698

 

1,170

 

Costs and estimated earnings in excess of billings on uncompleted contracts

 

1,366

 

2,850

 

Inventories, net

 

6,713

 

1,886

 

Prepaid expenses and deposits

 

1,644

 

1,408

 

Current assets related to discontinued operations

 

 

27,919

 

Total current assets

 

31,603

 

50,938

 

Property, plant and equipment, net

 

12,689

 

6,637

 

Prepaid pension and retirement

 

9,449

 

 

Goodwill

 

635

 

 

Intangible assets, net

 

950

 

10

 

Other assets

 

55

 

619

 

Long-term assets related to discontinued operations

 

 

9,846

 

Total assets

 

$

55,381

 

$

68,050

 

LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

2,104

 

$

2,911

 

Accrued liabilities

 

6,260

 

3,603

 

Billings in excess of costs and estimated earnings on uncompleted contracts

 

1,976

 

2,116

 

Customer deposits

 

4,234

 

1,919

 

Current portion of long-term debt

 

793

 

 

Current liabilities related to discontinued operations

 

 

17,667

 

Total current liabilities

 

15,367

 

28,216

 

Deferred rent obligation

 

1,727

 

1,668

 

Long-term debt

 

2,845

 

 

Pension and retirement obligations

 

13,060

 

24,596

 

Long-term liabilities related to discontinued operations

 

 

20,025

 

Total liabilities

 

32,999

 

74,505

 

Stockholders’ equity (deficit):

 

 

 

 

 

Preferred stock, no par value: 10,000,000 shares authorized; no shares issued and outstanding

 

 

 

Common stock, $0.20 par value: 30,000,000 shares authorized; 11,441,666 and 10,884,848 shares issued, respectively

 

2,288

 

2,177

 

Additional paid-in-capital

 

53,759

 

49,814

 

Common stock in treasury, at cost, 352,500 shares

 

(4,709

)

(4,709

)

Accumulated deficit

 

(21,875

)

(43,860

)

Accumulated other comprehensive loss

 

(7,081

)

(9,877

)

Total stockholders’ equity (deficit)

 

22,382

 

(6,455

)

Total liabilities and stockholders’ equity (deficit)

 

$

55,381

 

$

68,050

 

 

See notes to consolidated financial statements.

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CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)

 

Year ended December 31

 

 

 

2006

 

2005

 

2004

 

Sales

 

$

15,048

 

$

15,111

 

$

9,479

 

Cost of sales

 

11,442

 

8,517

 

6,345

 

Gross profit

 

3,606

 

6,594

 

3,134

 

Expenses:

 

 

 

 

 

 

 

Selling, general and administrative

 

10,129

 

6,128

 

5,198

 

Research and development

 

9,071

 

7,233

 

5,410

 

Operating expenses

 

19,200

 

13,361

 

10,608

 

Gain on sale of assets

 

 

 

155

 

Gain (loss) on sale of assets held for sale

 

(12

)

2,745

 

 

Operating loss

 

(15,606

)

(4,022

)

(7,319

)

Interest income

 

926

 

31

 

6

 

Interest expense

 

(370

)

(159

)

 

Other income (expense)

 

(340

)

633

 

112

 

Total other income

 

216

 

505

 

118

 

Loss from continuing operations before income taxes

 

(15,390

)

(3,517

)

(7,201

)

Income tax (expense) benefit

 

5,910

 

(6

)

(76

)

Net loss from continuing operations

 

(9,480

)

(3,523

)

(7,277

)

Income (loss) from discontinued operations, net of tax

 

(4,178

)

2,389

 

(1,452

)

Gain on sale of discontinued operations, net of tax

 

35,643

 

 

 

Net income (loss) from discontinued operations

 

31,465

 

2,389

 

(1,452

)

Net income (loss)

 

$

21,985

 

$

(1,134

)

$

(8,729

)

Net income (loss) per common share—basic:

 

 

 

 

 

 

 

Loss per common share from continuing operations

 

$

(0.88

)

$

(0.34

)

$

(0.69

)

Income (loss) per common share from discontinued operations

 

2.91

 

0.23

 

(0.14

)

Net income (loss) per common share

 

$

2.03

 

$

(0.11

)

$

(0.83

)

Basic weighted average common shares outstanding

 

10,826

 

10,523

 

10,498

 

Net income (loss) per common share—diluted:

 

 

 

 

 

 

 

Loss per common share from continuing operations

 

$

(0.87

)

$

(0.34

)

$

(0.69

)

Income (loss) per common share from discontinued operations

 

2.90

 

0.23

 

(0.14

)

Net income (loss) per common share

 

$

2.03

 

$

(0.11

)

$

(0.83

)

Diluted weighted average common shares outstanding

 

10,847

 

10,523

 

10,498

 

 

See notes to consolidated financial statements.

32




CONSOLIDATED STATEMENTS OF STOCKHOLDERS’

EQUITY (DEFICIT) AND COMPREHENSIVE INCOME (LOSS)

(In thousands)

 

 

 

 

 

 

 

 

 

Retained

 

Accumulated

 

 

 

 

 

Common

 

Additional

 

 

 

Earnings

 

Other

 

 

 

 

 

Stock

 

Paid-in

 

Treasury

 

(Accumulated

 

Comprehensive

 

 

 

 

 

Shares

 

Amount

 

Capital

 

Stock

 

Deficit)

 

Income (Loss)

 

Total

 

Balance at January 1, 2004

 

10,836

 

 

$

2,167

 

 

 

$

49,575

 

 

 

$

(4,709

)

 

 

$

(33,997

)

 

 

$

(2,319

)

 

$

10,717

 

Components of comprehensive loss:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

(8,729

)

 

 

 

 

(8,729

)

Unrealized gains on marketable securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

99

 

 

99

 

Foreign currency translation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

244

 

 

244

 

Additional minimum pension liability

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(3,417

)

 

(3,417

)

Total comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(11,803

)

Issuance of common stock

 

28

 

 

6

 

 

 

132

 

 

 

 

 

 

 

 

 

 

 

138

 

Balance at December 31, 2004

 

10,864

 

 

2,173

 

 

 

49,707

 

 

 

(4,709

)

 

 

(42,726

)

 

 

(5,393

)

 

(948

)

Components of comprehensive loss:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

(1,134

)

 

 

 

 

(1,134

)

Unrealized gains on marketable securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(568

)

 

(568

)

Foreign currency translation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(96

)

 

(96

)

Additional minimum pension liability

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(3,820

)

 

(3,820

)

Total comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(5,618

)

Issuance of common stock

 

21

 

 

4

 

 

 

107

 

 

 

 

 

 

 

 

 

 

 

111

 

Balance at December 31, 2005

 

10,885

 

 

2,177

 

 

 

49,814

 

 

 

(4,709

)

 

 

(43,860

)

 

 

(9,877

)

 

(6,455

)

Components of comprehensive loss:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

21,985

 

 

 

 

 

21,985

 

Unrealized gains on marketable securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

271

 

 

271

 

Foreign currency translation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

220

 

 

220

 

Decrease in minimum pension liability

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,305

 

 

2,305

 

Total comprehensive income  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

24,781

 

Issuance of common stock

 

60

 

 

12

 

 

 

241

 

 

 

 

 

 

 

 

 

 

 

253

 

Issuance of shares to acquire Spitz  

 

497

 

 

99

 

 

 

2,684

 

 

 

 

 

 

 

 

 

 

 

2,783

 

Stock-based compensation

 

 

 

 

 

 

1,020

 

 

 

 

 

 

 

 

 

 

 

1,020

 

Balance at December 31, 2006

 

11,442

 

 

$

2,288

 

 

 

$

53,759

 

 

 

$

(4,709

)

 

 

$

(21,875

)

 

 

$

(7,081

)

 

$

22,382

 

 

See notes to consolidated financial statements.

33




CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)

 

Years Ended December 31,

 

 

 

2006

 

2005

 

2004

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net loss from continuing operations

 

$

(9,480

)

$

(3,523

)

$

(7,277

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

1,486

 

952

 

1,018

 

Stock compensation

 

1,020

 

15

 

15

 

(Gain) loss on disposal of property, plant and equipment

 

551

 

132

 

(55

)

Provision for (recovery of) losses on accounts receivable

 

142

 

(424

)

167

 

Provision for excess and obsolete inventory

 

6

 

376

 

27

 

Gain on sale of investments

 

 

(654

)

(133

)

Gain on sale of assets

 

 

 

(155

)

Gain on sale of assets held for sale

 

12

 

(2,745

)

 

Other

 

34

 

105

 

141

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

Decrease (increase) in restricted cash

 

1,204

 

2,315

 

(3,057

)

Decrease (increase) in accounts receivable

 

(2,752

)

2,384

 

(1,378

)

Decrease (increase) in inventories

 

(3,731

)

(761

)

3,003

 

Decrease (increase) in costs and estimated earnings in excess of billings on uncompleted contracts, net       

 

527

 

(1,902

)

674

 

Decrease (increase) in prepaid expenses and deposits

 

(5

)

738

 

1,589

 

Decrease (increase) in prepaid pension and retirement

 

(9,178

)

 

 

(Decrease) increase in accounts payable

 

(1,530

)

(164

)

1,469

 

(Decrease) increase in accrued liabilities

 

1,669

 

203

 

(2,578

)

(Decrease) increase in accrued pension and retirement liabilities

 

(9,230

)

940

 

702

 

(Decrease) increase in customer deposits

 

1,881

 

878

 

547

 

Net cash used in continuing operating activities

 

(27,374

)

(1,135

)

(5,281

)

Net cash provided by discontinued operating activities

 

48,719

 

668

 

1,740

 

Net cash provided by (used in) operating activities

 

21,345

 

(467

)

(3,541

)

Cash flows from investing activities:

 

 

 

 

 

 

 

Purchases of property, plant and equipment

 

(2,024

)

(1,417

)

(620

)

Proceeds from sale of property, plant and equipment

 

30

 

85

 

63

 

Proceeds from sale of assets held for sale

 

 

6,277

 

633

 

Proceeds from sale of investments

 

 

778

 

 

Purchase of available for sale investment

 

 

(37

)

 

Cash acquired in Spitz acquisition

 

149

 

 

 

Purchase of intangible assets

 

(350

)

 

 

Increase in other assets

 

122

 

(206

)

 

Net cash provided by (used in) continuing investing activities

 

(2,073

)

5,480

 

76

 

Net cash provided by (used in) discontinued investing activities

 

1,056

 

(650

)

11,459

 

Net cash provided by (used in) investing activities

 

(1,017

)

4,830

 

11,535

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Net repayments on line of credit agreement

 

(1,526

)

 

(7,685

)

Principal payments on long-term debt and capital leases

 

(97

)

 

 

Proceeds from issuance of common stock

 

253

 

96

 

123

 

Net cash provided by (used in) continuing financing activities

 

(1,370

)

96

 

(7,562

)

Net cash used in discontinued financing activities

 

(18,015

)

 

 

Net cash provided by (used in) financing activities

 

(19,385

)

96

 

(7,562

)

Net change in cash and cash equivalents

 

943

 

4,459

 

432

 

Cash and cash equivalents at beginning of year

 

14,606

 

10,147

 

9,715

 

Cash and cash equivalents at end of year

 

$

15,549

 

14,606

 

10,147

 

Supplemental Disclosure of Cash Flow Information

 

 

 

 

 

 

 

Cash paid during the year for:

 

 

 

 

 

 

 

Interest

 

$

950

 

$

141

 

$

120

 

Income taxes

 

72

 

19

 

4

 

 

See notes to consolidated financial statements.

34




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

All dollar amounts are in thousands unless otherwise indicated.

Note 1—Nature of Operations and Summary of Significant Accounting Policies

Nature of Operations

Evans & Sutherland Computer Corporation, referred to in these notes as “Evans & Sutherland,” “E&S,” “we,” “us,” “our” or the “Company,” produces visual systems used to rapidly and accurately display images. We design, manufacture, market and support our visual systems for various applications, including planetariums, science centers and entertainment venues. Our products and solutions range from the visual systems generated by a desktop PC to what we believe are the most advanced visual systems in the world. The Company operates as one segment, which is the visual simulation market.

Basis of Presentation

Evans & Sutherland’s fiscal year ends on December 31. The consolidated financial statements include the accounts of Evans & Sutherland and its wholly owned subsidiaries. All inter-company accounts and transactions have been eliminated in consolidation.

Use of Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. The accounting estimates that require management’s most difficult and subjective judgments include revenue recognition based on the percentage-of completion method, inventory reserves, accruals for liquidated damages and late penalties, allowance for doubtful accounts, income tax valuation allowance, restructuring charges, impairment of long-lived assets, pension and retirement obligations and useful lives of depreciable assets. Actual results could differ from those estimates.

Cash and Cash Equivalents

The Company considers all highly liquid investments with original maturities of three or fewer months to be cash equivalents. The Company maintains cash balances in bank accounts that, at times, may exceed federally insured limits. The Company has not experienced any losses in these accounts and believes it is not exposed to any significant risk with respect to cash. As of December 31, 2006, cash deposits exceeded the federally insured limits by approximately $15,874.

Restricted Cash

Restricted cash that guarantees issued letters of credit that mature or expire within one year is reported as a current asset. Restricted cash that guarantees issued letters of credit that mature or expire in more than one year are reported as long-term other assets. Long-term restricted cash at December 31, 2006 and 2005 was $0 and $396, respectively.

Trade Accounts Receivable

In the normal course of business, we provide unsecured credit terms to our customers. Accordingly, we maintain an allowance for doubtful accounts for possible losses on uncollectible accounts receivable. We routinely analyze accounts receivable and costs and estimated earnings in excess of billings, and consider history, customer creditworthiness, facts and circumstances specific to outstanding balances,

35




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

current economic trends, and payment term changes when evaluating adequacy of the allowance for doubtful accounts. Changes in these factors could result in material differences to bad debt expense. Past due balances are reviewed individually for collectibility.

Uncollectible accounts receivable are charged against the allowance for doubtful accounts only after exhaustive efforts have been made to collect and with management’s approval.

The table below represents changes in our allowance for doubtful receivables during fiscal year:

 

 

2006

 

2005

 

2004

 

Beginning balance

 

$

62

 

$

365

 

$

93

 

Acquisition of Spitz

 

138

 

 

 

Provision for (reduction in) losses on accounts receivable

 

142

 

(424

)

167

 

Charges against the reserve

 

(14

)

121

 

105

 

Ending balance

 

$

328

 

$

62

 

$

365

 

 

Inventories

Inventory includes materials at standard costs, which approximate average costs, as well as inventoried costs on programs and long-term contracts. Inventoried costs include material, direct engineering and production costs, and applicable overhead, not in excess of estimated realizable value. Spare parts and general stock materials are stated at cost not in excess of realizable value. We periodically review inventories for excess supply, obsolescence, and valuations above estimated realizable amounts, and provide a reserve we consider sufficient to cover these items. Revisions of these estimates could result in the need for adjustments.

Inventories net of reserves at fiscal year-end were as follows:

 

 

2006

 

2005

 

Raw materials

 

$3,990

 

$864

 

Work-in-process

 

2,723

 

1,022

 

Total inventories, net

 

$6,713

 

$1,886

 

 

36




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Property, Plant and Equipment

Property, plant and equipment are stated at cost. Depreciation is computed using the straight-line method based on the estimated useful lives of the related assets. Expenditures that materially increase values or capacities or extend useful lives of property and equipment are capitalized. Routine maintenance, repairs and renewal costs are expensed as incurred. When property is retired or otherwise disposed of, the book value of the property is removed from the fixed assets and the related accumulated depreciation accounts. Depreciation is included in cost of sales, research and development or selling, general and administrative expenses depending on the nature of the asset. The cost and estimated useful lives of property, plant and equipment and the total accumulated depreciation and amortization were as follows at December 31:

 

 

Estimated
useful lives

 

2006

 

2005

 

Land

 

n/a

 

$

2,250

 

$

 

Buildings and improvements

 

35-40 years

 

10,945

 

9,362

 

Manufacturing machinery and equipment

 

3 to 8 years

 

5,726

 

5,255

 

Office furniture and equipment

 

8 years

 

812

 

937

 

Total

 

 

 

19,733

 

15,554

 

Less accumulated depreciation and amortization

 

 

 

(7,044

)

(8,917

)

Total property, plant and equipment, net

 

 

 

$

12,689

 

$

6,637

 

 

Software Development Costs

Software development costs, if material, are capitalized from the date technological feasibility is achieved until the product is available for general release to customers. Such costs have not been material during the periods presented.

Investments

We classify our marketable debt and equity securities as available-for-sale. Available-for-sale securities are recorded at fair value. Unrealized holding gains and losses, net of the related tax effect, are excluded from earnings and are reported as a component of accumulated other comprehensive income (loss) until realized. Dividend and interest income are recognized when earned. Realized gains and losses from the sale of securities are included in results of operations and are determined on the specific identification basis. A decline in the market value that is deemed other than temporary results in a charge to other income (expense) and the establishment of a new cost basis for the investment.

We account for investments in nonmarketable securities using the cost and equity methods. In assessing the fair value cost method of such investments, we consider recent equity transactions that investees have entered into, the status of each investee’s technology and strategies in place to achieve their objectives, as well as the investee’s financial condition and results of operations. To the extent there are changes in these assessments, adjustments may need to be recorded. For investments accounted for using the equity method, adjustments are made to the carrying amount of the investment to account for our equity in undistributed earnings (losses) of the investee. Investments are periodically evaluated for a decline in value considered other-than-temporary. Any such decline is recognized as a loss in the statement of operations.

37




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Impairment of Long- Lived Assets

Long-lived assets are reviewed for impairment when events or changes in circumstances indicate the book value of an asset may not be fully recoverable. When this occurs, we review the value assigned to long-lived assets by analyzing the anticipated, undiscounted cash flows they generate. When the expected future undiscounted cash flows from these assets do not exceed their carrying balances, the Company determines the estimated fair value of such assets. An impairment is recognized to the extent the carrying amount of the assets exceeds their estimated fair value. Assets held for sale are reported at the lower of their carrying amount or fair value less costs to sell.

Warranty Reserve

We provide a warranty reserve for estimated future costs of servicing products under warranty agreements extending for periods from 90 days to one year. Anticipated costs for product warranties are based upon estimates derived from experience factors and are recorded at the time of sale or over the period revenues are recognized for long-term contracts. Warranty reserves are classified as accrued liabilities in the accompanying consolidated balance sheets.

Revenue Recognition

Our sales include revenue from system hardware, software, database products and service contracts. The following table provides information on revenue by recognition method applied during fiscal years:

 

 

2006

 

2005

 

2004

 

Percentage-of-completion

 

$

6,883

 

$

10,053

 

$

3,262

 

Completed contract

 

6,706

 

4,759

 

5,824

 

Other

 

1,459

 

299

 

393

 

Total sales

 

$

15,048

 

$

15,111

 

$

9,479

 

 

Percentage-of-Completion.    In arrangements that are longer in term and require significant production, modification or customization, revenue is recognized in accordance with the provisions of Statement of Position 81-1, “Accounting for Performance of Construction-Type and Certain Production-Type Contracts” (“SOP 81-1”), using the percentage-of-completion method. In applying the provisions of SOP 81-1, we utilize cost-to-cost methodology whereby we estimate the percent complete by calculating the ratio of costs incurred (consisting of material, labor and subcontracting costs, as well as an allocation of indirect costs) to management’s estimate of total anticipated costs.  This ratio is then utilized to determine the amount of gross profit earned based on management’s estimate of total estimated gross profit at completion. We routinely review estimates related to percentage-of-completion contracts and adjust for changes in the period revisions are made. Billings on uncompleted percentage-of-completion contracts may be greater than or less than incurred costs and estimated earnings and are recorded as an asset or liability in the accompanying consolidated balance sheets.

In those arrangements where software is a significant component of the contract, the Company applies the guidance of Statement of Position 97-2 “Software Revenue Recognition,” which allows for use of the percentage-of-completion method as described above.

Completed Contract.    Contract arrangements which typically require a relatively short period of time to complete the production, modification, and customization of our products are accounted for using the completed contract method. Accordingly, revenue is recognized upon delivery of the completed product,

38




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

provided persuasive evidence of an arrangement exists, title and risk of loss has transferred, the fee is fixed and determinable, and collection is reasonably assured.

Other.    Other revenue consists primarily of amounts earned under maintenance contracts that are generally sold as a single element to our customers. Revenue from product maintenance contracts, including separately priced extended warranty contracts, is deferred and recognized over the period of performance under the contract.

Anticipated Losses.    For contracts with anticipated losses at completion, a provision is recorded when the loss becomes known. After an anticipated loss is recorded, subsequent revenue and cost of sales are recognized in equal, offsetting amounts as contract costs are incurred and do not generate further gross profits (losses).

Multiple Element Arrangements.    Some of our contracts include multiple elements. Revenue earned on elements such as products, services and maintenance contracts are allocated to each element based on the relative fair values of the elements.

Stock-Based Compensation

Prior to December 31, 2005, as permitted under Statement of Financial Accounting Standards (“SFAS”) No. 123, the Company accounted for its stock option plans following the recognition and measurement principles of Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. Accordingly, no stock-based compensation expense from the issuance of stock options was reflected in the Company’s statements of operations as all options granted had an exercise price equal to the market value of the underlying common stock on the date of grant and the related number of shares granted was fixed at that point in time.

In December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123(R), “Share Based Payment.” This Statement revised SFAS No. 123 by eliminating the option to account for employee stock options under APB No. 25 and required companies to recognize the cost of employee services received in exchange for awards of equity instruments based on the grant-date fair value of those awards.

On January 1, 2006 the Company adopted the provisions of SFAS No. 123(R) using the modified prospective application method. Using this modified prospective application method, compensation cost is recognized on a straight-line basis for (1) all awards granted, modified, cancelled, or repurchased after the date of adoption and (2) the unvested portion of previously granted awards for which the requisite service has not yet been rendered as of the date of adoption, based on the fair value of those awards on the grant-date. In accordance with the modified prospective application method, operating results for the years ended December 31, 2005 and 2004 have not been restated.

Share-based compensation expense included in the statement of operations for the year ended December 31, 2006 was approximately $1,020. Option grants accounted for $317 of the 2006 share-based compensation expense while $228 was due to modifications to our former chief executive officer’s option grants as a result of his separation agreement discussed in Note 10, and $474 was due to the accelerated vesting of options on February 7, 2006 as a result of the Asset Purchase Agreement executed on February 7, 2006 as discussed in Note 2.

The following table illustrates the effect on net loss and loss per common share if the Company had applied the fair value recognition provisions of SFAS No. 123, Accounting for Stock-Based Compensation,

39




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

to stock-based employee compensation for periods presented prior to the Company’s adoption of SFAS No. 123(R):

 

 

2005

 

2004

 

Net loss:

 

$

(1,134

)

$

(8,729

)

Stock-based compensation under fair value method

 

(550

)

(397

)

Pro forma net loss

 

$

(1,684

)

$

(9,126

)

Net loss per basic and diluted common share:

 

 

 

 

 

As reported

 

$

(0.11

)

$

(0.83

)

Pro forma

 

(0.16

)

(0.87

)

 

Income Taxes

We use the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred income tax assets and liabilities are recognized for the future income tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective income tax bases and operating loss and income tax credit carry-forwards. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred income tax assets and liabilities of a change in income tax rates is recognized in the period that includes the enactment date.

Other Comprehensive Loss

We have applied the provisions of SFAS No. 109, “Accounting for Income Taxes,” to our gains and losses included in other comprehensive loss but excluded them from our net income or loss. On a net basis for 2006, 2005 and 2004, there was a deferred income tax asset as a result of the items reflected in comprehensive loss. However, in applying SFAS No. 109 we determined that it is more likely than not that we will not realize such net deferred income tax assets and have therefore established a valuation allowance against the full amount of the net deferred income tax asset. Accordingly, the net income tax effect of the items included in other comprehensive loss is zero. Therefore, we have included no income tax expense or benefit in relation to items reflected in other comprehensive loss.

The components of accumulated other comprehensive loss was as follows as of December 31:

 

 

2006

 

2005

 

Additional minimum pension liability

 

$

(7,352

)

$

(9,657

)

Net unrealized holding gains on investments

 

271

 

(220

)

Total accumulated other comprehensive loss

 

$

(7,081

)

$

(9,877

)

 

Leases

We recognize scheduled rent increases on a straight-line basis over the lease term, which may include optional lease renewal terms, and deferred rent income and expense are recognized to reflect the difference between the rent paid or received in the current period and the calculated straight-line amount.

40




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Goodwill

In accordance with the provisions of SFAS No. 142, “Goodwill and Other Intangible Assets,” the Company tests its recorded goodwill for impairment on an annual basis, or more often if indicators of potential impairment exist, by determining if the carrying value of each reporting unit exceeds its estimated fair value. Factors that could trigger an impairment include, but are not limited to, underperformance relative to historical or projected future operating results, significant changes in the manner of use of the acquired assets or the Company’s overall business and significant negative industry or economic trends. Future impairment reviews may require write-downs in the Company’s goodwill and could have a material adverse impact on the Company’s operating results for the periods in which such write-downs occur.

Fair Value of Financial Instruments

The carrying amount of cash and cash equivalents, receivables, accounts payable and accrued expenses approximates fair value because of their short maturity. The fair values of marketable securities available for sale are based on quoted market prices. For non-marketable securities classified as long-term assets related to discontinued operations as of December 31, 2005, a reasonable estimate of fair value was impractical. The fair value of the 6% Debentures classified as Long-term liabilities related to discontinued operations was $11,530 as of December 31, 2005, based on quoted market prices. The carrying value of the long-term debt discussed in Note 8 equates to its carrying value because the interest rates of the debt approximate market interest rates at the reporting periods.

Recent Accounting Pronouncements

In June 2006, the FASB issued Interpretation Number 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109.” The interpretation contains a two step approach to recognizing and measuring uncertain tax positions accounted for in accordance with SFAS No. 109. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount which is more than 50% likely of being realized upon ultimate settlement. The provisions are effective for the Company beginning in the first quarter of 2007. The Company is evaluating the impact of FIN 48 on its consolidated financial statements.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” SFAS No. 157 defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles (“GAAP”) and expands disclosures about fair value measurements. This statement will be adopted by the Company for its fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. The Company is currently evaluating the impact of SFAS No. 157 on its consolidated financial statements.

In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106 and 132-R.” SFAS No. 158 requires employers to recognize on their balance sheets the funded status of pension and other postretirement benefit plans as of the end of the fiscal year ending after December 15, 2006, for public companies. SFAS No. 158 requires that companies recognize actuarial gains and losses, prior service costs, and any remaining transition amounts from the initial application of Statements 87 and 106 when recognizing a plan’s funded status, with the offset to accumulated other comprehensive income. SFAS No. 158 will also require fiscal-year-end measurements of plan assets and benefit obligations, eliminating

41




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

the use of earlier measurement dates currently permissible. The new measurement-date requirement will not be effective until fiscal years ending after December 15, 2008. The Company has adopted the provisions of this statement as of December 31, 2006. The adoption did not have a material impact on the Company’s consolidated financial statements.

Note 2—Discontinued Operations

On May 26, 2006, we sold substantially all of the assets and certain liabilities primarily related to our commercial and military simulation businesses and related service operations (the “Simulation Business”) to certain subsidiaries of Rockwell Collins, Inc., a Delaware corporation (“Rockwell Collins”), pursuant to an asset purchase agreement (the “Asset Purchase Agreement”), dated as of February 7, 2006, by and between the Company and Rockwell Collins. In connection with the completion of the sale of the Simulation Business, on May 26, 2006 the Company entered into a laser projection systems agreement (the “Laser Agreement”) with Rockwell Collins and Rockwell Collins Simulation & Training Solutions LLC, pursuant to which the Company has agreed to provide, and grant exclusive and non-exclusive intellectual property licenses to use and sell, laser projection systems in connection with the Simulation Business and certain related businesses of Rockwell Collins. The transaction contemplated by the Asset Purchase Agreement and the Laser Agreement (the “Transaction”) was approved by the Company’s shareholders at a combined annual and special meeting of shareholders held on May 25, 2006.

The aggregate consideration contemplated in the Transaction was $71,500 in cash, consisting of the $66,500 purchase price under the Asset Purchase Agreement (the “Asset Purchase Price”) for the assets primarily related to the Simulation Business and $5,000 under the Laser Agreement. On May 26, 2006, the closing of the sale of the Simulation Business, Rockwell Collins paid the Company $59,500 under the terms of the Asset Purchase Agreement, and deposited $10,000 (consisting of the remaining $7,000 of the Asset Purchase Price and $3,000 under the Laser Agreement) in escrow pursuant to an escrow agreement (the “Escrow Agreement”), dated as of May 26, 2006, by and between the Company, Rockwell Collins and U.S. Bank National Association, as escrow agent. The Laser Agreement requires Rockwell Collins to pay the remaining $2,000 of consideration in the Transaction directly to the Company upon the completion of certain performance milestones by the Company. Under the terms of the Escrow Agreement, the deposited amount will be held in escrow to secure (i) any post-closing reduction in the Asset Purchase Price under the Asset Purchase Agreement, (ii) the Company’s indemnification obligations under the Asset Purchase Agreement and (iii) the Company’s obligations (not to exceed $3,000 of the escrowed funds) to meet specified milestones under the Laser Agreement. The escrowed funds will be released in installments as set forth in the Escrow Agreement, subject to the passage of time and the Company fulfilling requirements of the Escrow Agreement. In connection with the sale of our Simulation Business, we agreed to indemnify Rockwell Collins for any losses from breaches of the representations, warranties or covenants we made in the Asset Purchase Agreement that occur within certain periods after the closing.

The Asset Purchase Agreement provides for an adjustment to the Asset Purchase Price based on the value, calculated in accordance with the terms of the Asset Purchase Agreement, of the net assets delivered at the closing date (the “Closing Net Assets”). Based on the value of the Closing Net Assets calculated by the Company and Rockwell Collins under the procedures set forth in the Asset Purchase Agreement, the Asset Purchase Price has been adjusted by $4,800 resulting in an adjusted Asset Purchase Price of $61,700. In accordance with the terms of the Escrow Agreement, in March 2007, $200 of the $7,000 held for the Asset Purchase Price was released to the Company and $4,800 was released to Rockwell Collins. The remaining $2,000 held for the Asset Purchase Price is scheduled to be released under the Escrow Agreement on July 1, 2007.

42




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

As of December 31, 2006, the Company has recorded proceeds of $59,700 from the Transaction, representing the funds it received through March 2007. We will record additional gain on the Transaction when and to the extent that the remaining amounts to be paid by Rockwell Collins and the remaining amounts held in escrow are released to the Company.

The sale of assets by the Company pursuant to the Asset Purchase Agreement was a taxable transaction for income tax purposes. Accordingly, we recognized a gain with respect to the sale of assets pursuant to the Asset Purchase Agreement in an amount equal to the difference between the amount of the consideration received for each asset over the adjusted tax basis in the asset sold. As all tax information is not yet available we have made estimates for certain items in computing the tax gain until final information becomes available. Although the asset sale resulted in taxable gain to the Company, a substantial portion of the taxable gain will be offset by current year losses from operations, and available net operating loss and tax credit carryforwards. The gain on the sale of the Simulation Business is comprised of:

Cash consideration under Asset Purchase Agreement

 

 

 

$

66,500

 

Adjustment to Asset Purchase Price due to Closing Net Asset computation

 

(4,800

)

 

 

Amount in escrow under Asset Purchase Agreement

 

(2,000

)

 

 

Transaction costs

 

(607

)

 

 

Net proceeds

 

 

 

59,093

 

Book value of assets acquired by Rockwell Collins

 

 

 

(33,115

)

Book value of liabilities assumed by Rockwell Collins

 

 

 

18,722

 

Gain before income taxes

 

 

 

44,700

 

Income taxes

 

 

 

(9,057

)

Net gain

 

 

 

$

35,643

 

 

43




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

As a result of the sale of the Simulation Business, the consolidated balance sheet as of December 31, 2005 and the consolidated statements of operations for the years ended December 31, 2005 and 2004 have been restated to record the necessary adjustments required to reflect the assets, liabilities, and operations of the Simulation Business as discontinued operations. Assets and liabilities of the Simulation Business included as assets or liabilities related to discontinued operations in the accompanying condensed consolidated balance sheet as of December 31, 2005 consisted of the following:

 

 

December 31,

 

 

 

2005

 

Current assets:

 

 

 

 

 

Accounts receivable

 

 

$

9,600

 

 

Costs and estimated earnings in excess of billings on uncompleted contracts

 

 

6,659

 

 

Inventories

 

 

9,300

 

 

Prepaid expenses and deposits

 

 

2,360

 

 

Current assets related to discontinued operations

 

 

27,919

 

 

Long-term assets:

 

 

 

 

 

Investments

 

 

1,223

 

 

Property, plant and equipment, net

 

 

8,257

 

 

Other assets

 

 

366

 

 

Long-term assets related to discontinued operations

 

 

$

9,846

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

 

$

4,677

 

 

Accrued liabilities

 

 

5,730

 

 

Billings in excess of costs and estimated earnings on uncompleted contracts

 

 

3,906

 

 

Customer deposits

 

 

3,354

 

 

Current liabilities related to discontinued operations

 

 

17,667

 

 

Long-term liabilities:

 

 

 

 

 

Convertible subordinated notes

 

 

18,015

 

 

Deferred rent obligation

 

 

2,010

 

 

Long-term liabilities related to discontinued operations

 

 

$

20,025

 

 

 

44




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Summarized results of operations for the Simulation Business included as income (loss) from discontinued operations, net of tax, in the accompanying condensed consolidated statements of operations for the years ended December 31 were as follows:

 

 

2006

 

2005

 

2004

 

Sales

 

$

18,661

 

$

58,456

 

$

58,380

 

Cost of sales

 

13,515

 

37,771

 

36,871

 

Gross profit

 

5,146

 

20,685

 

21,509

 

Operating expenses

 

12,023

 

17,447

 

29,656

 

Gain on assets held for sale

 

407

 

 

4,298

 

Gain on sale of assets

 

 

 

3,662

 

Operating income (loss)

 

(6,470

)

3,238

 

(187

)

Other income (expense), net

 

(483

)

(1,285

)

(1,229

)

Income (loss) before income taxes

 

(6,953

)

1,953

 

(1,416

)

Income tax (expense) benefit

 

2,775

 

436

 

(36

)

Net income (loss) from discontinued operations

 

$

(4,178

)

$

2,389

 

$

(1,452

)

 

Note 3—Acquisition

On April 28, 2006, the Company completed the acquisition of Spitz, Inc. (“Spitz”) by acquiring all outstanding shares of Spitz common stock from Transnational Industries, Inc. (“Transnational”) pursuant to a stock purchase agreement (the “Stock Purchase Agreement”), dated as of February 7, 2006, by and between the Company and Transnational. Consideration under the Stock Purchase Agreement consisted of 412,500 unregistered shares of the Company’s Common Stock, $0.20 par value, subject to a post-closing share adjustment depending on the average trading price of the Company’s common stock for the 60-day period prior to registration of the shares issued at closing. Pursuant to a Registration Rights Agreement between the Company, Spitz, and Transnational, the Company was required to use its best efforts to register those shares of stock issued as consideration for the outstanding stock of Spitz. Registration of the shares issued to Transnational became effective on November 9, 2006 and the Company issued an additional 84,948 shares in accordance with the post-closing adjustment. Based on the average closing price of the Company’s Common Stock for the period two days prior and two days after the day the agreement was announced, the value of the total shares issued is $2,814. Transaction costs were $70 and stock registration costs were $30. The purchase price was determined in arms-length negotiations between the Company and Transnational and we believe it is a nontaxable transaction. The Company plans to continue to operate Spitz as a wholly owned subsidiary. Spitz designs, manufactures and supports visual systems for planetariums, science centers and entertainment venues and provides unique domes and similarly shaped structures for specialized architectural applications.

45




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The transaction has been accounted for as a purchase and the operations of Spitz have been consolidated with the operations of the Company effective May 1, 2006 in the accompanying consolidated financial statements. The following pro forma information gives effect to this acquisition as if it had been completed as of the beginning of the Company’s fiscal periods presented. The Company’s fiscal year end is December 31 and Spitz’ fiscal year end was January 31. Because historical results of operations for Spitz are not available for the fiscal periods presented, results from Spitz fiscal periods are presented as if they covered the same periods as the Company’s fiscal periods. The pro forma information is presented for illustrative purposes only. Such information is not necessarily indicative of the operating results had the acquisition taken place as of the beginning of the Company’s fiscal periods presented, nor is it indicative of the results that may be expected for future periods.

 

 

2006

 

2005

 

2004

 

Sales

 

$

17,910

 

$

26,548

 

$

20,241

 

Net loss from continuing operations

 

$

(10,594

)

$

(4,935

)

$

(8,189

)

Net income (loss)

 

$

20,872

 

$

(2,546

)

$

(9,855

)

Basic and diluted net loss per common share from continuing operations

 

$

(0.98

)

$

(0.47

)

$

(0.78

)

Basic net income (loss) per common share

 

$

1.93

 

$

(0.24

)

$

(0.94

)

Diluted net income (loss) per common share

 

$

1.92

 

$

(0.24

)

$

(0.94

)

 

The purchase consideration has been allocated based on an assessment of the fair market values of the acquired assets and liabilities assumed. The consideration paid by the Company was $2,884, including transaction costs of $70. The excess of the purchase price over the fair value of the net assets of Spitz gives rise to goodwill which reflects value resulting from the marketing advantages and operating efficiencies created by the business combination. The following table sets forth the allocation of the purchase consideration to the tangible and intangible assets acquired and liabilities assumed as of April 28, 2006 based upon an independent valuation.

Cash and restricted cash

 

$

491

 

Accounts receivable

 

1,919

 

Costs and estimated earnings in excess of billings on uncompleted contracts

 

388

 

Inventories

 

1,015

 

Prepaid expenses and deposits

 

192

 

Property, plant and equipment

 

5,745

 

Other assets

 

87

 

Accounts payable

 

(722

)

Accrued liabilities

 

(917

)

Deferred revenue

 

(435

)

Billings in excess of costs and estimated earnings on uncompleted projects

 

(1,205

)

Loans and other long-term debt, less current portion

 

(5,259

)

Definite-lived intangibles (see Note 4)

 

950

 

Goodwill

 

635

 

Total consideration including estimated acquisition costs

 

$

2,884

 

 

46




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 4—Intangible Assets and Goodwill

Intangible assets and goodwill consisted of the following as of December 31, 2006:

Class

 

 

 

Amortization
Period in
Years

 

Gross
Carrying
Amount

 

Accumulated
Amortization

 

Net
Carrying
Value

 

Amortization for
the 12 months
ended
December 31,
2006

 

Customer backlog

 

 

1

 

 

 

$

320

 

 

 

$

(285

)

 

 

$

35

 

 

 

$

285

 

 

Maintenance and legacy customers

 

 

10

 

 

 

350

 

 

 

(29

)

 

 

321

 

 

 

29

 

 

Planetarium shows

 

 

10

 

 

 

280

 

 

 

(24

)

 

 

256

 

 

 

24

 

 

Intellectual property rights

 

 

5

 

 

 

350

 

 

 

(12

)

 

 

338

 

 

 

12

 

 

Total

 

 

 

 

 

 

$

1,300

 

 

 

$

(350

)

 

 

$

950

 

 

 

$

350

 

 

Goodwill

 

 

 

 

 

 

 

 

 

 

 

 

 

 

635

 

 

 

 

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

1,585

 

 

 

 

 

 

Weighted average amortization period in years

 

 

7.9

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Goodwill of $635 consists of the excess of the purchase consideration paid in the acquisition of Spitz (see Note 3) over the fair value of the net assets acquired. We have determined that the assumptions used in computing the valuation of goodwill as of April 28, 2006, the date of the acquisition of Spitz, have not materially changed and therefore there is no impairment of goodwill as of December 31, 2006.

Customer backlog, maintenance and legacy customers and planetarium shows represent the value of definite-lived intangibles that were identified in the acquisition of Spitz.

In November 2006, the Company acquired certain intellectual property rights to protect the application of certain processes in the use of its products for cash payments totaling $350.

Estimated future amortization expense is as follows:

 

 

December 31,

 

Class

 

 

 

2007

 

2008

 

2009

 

2010

 

2011

 

Thereafter

 

Customer backlog

 

$

35

 

$

 

$

 

$

 

$

 

 

$

 

 

Maintenance and legacy customers

 

43

 

39

 

39

 

35

 

35

 

 

130

 

 

Planetarium shows

 

36

 

36

 

34

 

31

 

25

 

 

94

 

 

Intellectual property rights

 

70

 

70

 

70

 

70

 

58

 

 

 

 

Total

 

$

184

 

$

145

 

$

143

 

$

136

 

$

118

 

 

$

224

 

 

 

Note 5—Costs and Estimated Earnings on Uncompleted Contracts

Comparative information with respect to uncompleted contracts at fiscal year-end:

 

 

2006

 

2005

 

Total accumulated costs and estimated earnings on uncompleted contracts

 

$

20,833

 

$

16,426

 

Less total billings on completed contracts

 

(21,443

)

(15,692

)

 

 

$

(610

)

$

734

 

 

47




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The above amounts are reported in the consolidated balance sheets as follows:

 

 

2006

 

2005

 

Costs and estimated earnings in excess of billings on uncompleted contracts

 

$

1,366

 

$

2,850

 

Billings in excess of costs and estimated earnings on uncompleted contracts

 

(1,976

)

(2,116

)

 

 

$

(610

)

$

734

 

 

Note 6—Leases

We occupy real property and use certain equipment under lease arrangements that are accounted for as operating leases. Our real property leases contain escalation clauses. Rental expenses for all operating leases for 2006, 2005, and 2004 were $265, $228 and $228, respectively.

Future minimum lease payments under operating leases that have initial or remaining non-cancelable lease terms in excess of one year are as follows:

Fiscal year

 

 

 

 

 

2007

 

$

680

 

2008

 

215

 

2009

 

186

 

2010

 

186

 

2011

 

197

 

Thereafter

 

5,087

 

Total

 

$

6,551

 

 

Sub-lease rental income for all operating leases for 2006, 2005 and 2004 was $7, $117 and $357, respectively. At December 31, 2006, we had no future lease rental income from operating leases that have initial or remaining noncancelable lease terms.

Note 7—Employee Retirement Benefit Plans

Pension Plan

The Pension Plan is a qualified defined benefit pension plan funded by Company contributions. Our funding policy is to contribute amounts sufficient to satisfy regulatory funding standards, based upon independent actuarial valuations. The Pension Plan was frozen in 2002. Benefits at normal retirement age (65) are based upon the employee’s years of service, as of the date of the curtailment for employees not yet retired, and the employee’s compensation prior to the curtailment.

Supplemental Executive Retirement Plan

We maintain an unfunded Supplemental Executive Retirement Plan (“SERP”). The SERP provides eligible executives defined pension benefits, outside our pension plan, based on average salary, years of service and age at retirement. The SERP was amended in 2002 to discontinue further SERP gains from future salary increases and close the SERP to new participants.

401(k) Deferred Savings Plan

We have a deferred savings plan that qualifies under Section 401(k) of the Internal Revenue Code. The 401(k) plan covers all employees of the Company who have at least one year of service and who are

48




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

age 18 or older. We make matching contributions on employee contributions after the employee has achieved one year of service. We may also make extra matching contributions based on our profitability and other financial and operational considerations. No extra matching contributions have been made to date. Our contributions to the 401(k) plan for 2006, 2005 and 2004 were $240, $591 and $625, respectively.

Executive Savings Plan

The Executive Savings Plan (“ESP”) is an unfunded deferred compensation plan that allows tax-deferred retirement savings beyond the amount that can be contributed to the 401(k) plan. The ESP, a nonqualified plan that does not have the same protections as a qualified 401(k) plan, covers a portion of the management employees. Participants earn matching amounts on their contributions with the same percentage limit as the qualified 401(k) plan. Consistent with the curtailment of the SERP, the ESP was amended in 2002 to permit the Board of Directors to grant additional discretionary contributions.

We purchase Company-owned life insurance policies insuring the lives of participants in the ESP. The policies accumulate asset values and exist to cover the cost of employee supplemental retirement benefit liabilities. At December 31, 2006 and 2005, prepaid expenses and deposits included our investments in the policies of $955 and $957, respectively. At December 31, 2005, an additional $1,224 of investment in the policies was classified as long-term assets related to discontinued operations. Net insurance expense from these policies was $50, $96 and $160 for the years ended December 31, 2006, 2005 and 2004, respectively.

Obligations and Funded Status

E&S uses a December 31 measurement date for both the Pension Plan and SERP.

49




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

As of December 31, 2006 and 2005, the projected benefit obligations related to our defined benefit plans were equal to the accumulated benefit obligations, and therefore there were no adjustments to the recorded pension liabilities and accumulated other comprehensive income balances upon adoption of SFAS No. 158. Information concerning the obligations, plan assets and funded status of employee retirement defined benefit plans are provided below:

 

 

Pension Plan

 

SERP

 

 

 

2006

 

2005

 

2006

 

2005

 

Changes in benefit obligation

 

 

 

 

 

 

 

 

 

Projected benefit obligation at beginning of year

 

$

43,290

 

$

41,327

 

$

8,919

 

$

8,303

 

Service cost

 

 

 

63

 

146

 

Interest cost

 

2,400

 

2,401

 

475

 

486

 

Actuarial (gain) loss

 

(213

)

2,711

 

239

 

465

 

Benefits paid

 

(242

)

(236

)

(560

)

(481

)

Settlement payments

 

(5,287

)

(2,913

)

(3,052

)

 

Projected benefit obligation at end of year

 

$

39,948

 

$

43,290

 

$

6,084

 

$

8,919

 

Changes in plan assets

 

 

 

 

 

 

 

 

 

Fair value of plan assets at beginning of year

 

$

27,613

 

$

29,916

 

$

 

$

 

Actual return on plan assets

 

3,157

 

846

 

 

 

Contributions

 

11,348

 

 

3,612

 

481

 

Benefits paid

 

(5,529

)

(3,149

)

(3,612

)

(481

)

Fair value of plan assets at end of year

 

$

36,589

 

$

27,613

 

$

 

$

 

Net Amount Recognized

 

 

 

 

 

 

 

 

 

Unfunded status

 

$

(3,359

)

$

(15,677

)

$

(6,084

)

$

(8,919

)

Unrecognized net actuarial loss

 

6,976

 

9,255

 

824

 

1,158

 

Unrecognized prior service cost

 

 

 

(448

)

(756

)

Net amount recognized

 

$

3,617

 

$

(6,422

)

$

(5,708

)

$

(8,517

)

 

Amounts recognized in the consolidated balance sheets consist of:

 

 

Pension Plan

 

SERP

 

 

 

2006

 

2005

 

2006

 

2005

 

Accrued liability

 

$

(3,359

)

$

(15,677

)

$

(6,084

)

$

(8,919

)

Accumulated other comprehensive income

 

6,976

 

9,255

 

376

 

402

 

Net amount recognized

 

$

3,617

 

$

(6,422

)

$

(5,708

)

$

(8,517

)

 

Components of net periodic benefit cost

 

 

Pension Plan

 

SERP

 

 

 

2006

 

2005

 

2004

 

2006

 

2005

 

2004

 

Service cost

 

$

 

$

 

$

 

$

63

 

$

146

 

$

519

 

Interest cost

 

2,400

 

2,401

 

2,498

 

475

 

485

 

508

 

Expected return on assets

 

(2,350

)

(2,288

)

(2,362

)

 

 

 

Amortization of actuarial loss

 

335

 

112

 

67

 

58

 

 

 

Amortization of prior year service cost

 

 

 

 

(53

)

(59

)

(59

)

Settlement charge

 

923

 

623

 

 

5

 

 

 

Net periodic benefit cost (benefit)

 

$

1,308

 

$

848

 

$

203

 

$

548

 

$

572

 

$

968

 

 

50




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Additional information

The increase (decrease) to our unrecognized net actuarial loss recorded in other comprehensive income for the Pension Plan of $(2,279) and $3,418 during 2006 and 2005, respectively, arose from the difference between the accumulated benefit obligation and the accrued pension expense at the end of each year.

The increase (decrease) to our minimum liability recorded in other comprehensive income for the SERP of $(26) and $402 during 2006 and 2005, respectively, arose from the difference between the accumulated benefit obligation and the accrued pension expense at the end of each year.

Assumptions

The weighted average assumptions used to determine benefit obligations at December 31, 2006 and 2005, included discount rates of 6.00% and 5.75%, respectively, for the Pension Plan and SERP. The weighted average assumptions used to determine net periodic cost for years ended December 31, 2006 and 2005 included a discount rate of 5.75% and 6.00%, respectively, for the Pension and SERP. The weighted average assumption used to determine an expected long-term rate of return on Pension Plan assets was 8.00%.

The long-term rate of return on plan assets was estimated as the weighted average of expected return of each of the asset classes in the target allocation of plan assets. The expected return of each asset class is based on historical market returns.

Pension Plan Assets

The Pension Plan’s weighted-average asset allocations at fiscal year-end, weighted-average planned targeted asset allocations going forward, and expected long-term returns on plan assets are as follows:

Asset allocation category of plan assets

 

 

 

Target %

 

2006 
Actual %

 

2005 
Actual %

 

Expected
Return %

 

Cash and cash equivalents

 

 

0

 

 

 

0.7

 

 

 

57

 

 

 

 

 

Fixed income

 

 

40

 

 

 

39.6

 

 

 

 

 

 

2

 

 

Domestic equities

 

 

50

 

 

 

49.4

 

 

 

35

 

 

 

5

 

 

International equities

 

 

10

 

 

 

10.3

 

 

 

8

 

 

 

1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

8

 

 

 

The asset allocation policy, consistent with the long-term growth objectives of the Pension Plan, is to invest on a diversified basis among various asset classes as determined by the Pension Plan Administrative Committee. Assets will be invested in a manner that will provide for long-term growth with a goal to achieve returns equal to or greater than applicable benchmarks. Investments will be managed by registered investment advisors. When investing Pension Plan assets, the investment managers of separately managed accounts shall not utilize derivative instruments for speculative purposes or to create leveraged positions.

No equity securities of the Company were part of the Pension Plan assets as of December 31, 2006 or 2005.

51




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Cash Flow

Employer contributions

Our funding policy is to contribute amounts sufficient to satisfy regulatory funding standards, based upon independent actuarial valuations. We are not required to fund the SERP. All benefit payments are made by us directly to those who receive benefits from the SERP. As such, these payments are treated as both contributions and benefits paid for reporting purposes.

No contributions are expected to be made to the Pension Plan in 2007. On May 26, 2006, the Company entered an asset purchase agreement with Rockwell Collins, Inc. (see Note 2). Using proceeds from the sale, the Company contributed $11,348 to pension assets during September 2006 in order to meet a funding obligation for plan years 2005 and 2006.

Also using proceeds from the sale, the Company contributed $5,550 to the SERP plan to meet its change of control provision. The Company invested these funds in debt and equity securities that have been classified and accounted for as available-for-sale securities. At December 31, 2006, the investment was reported at its fair market value of $5,832 and was classified as prepaid pension and retirement. There was $271 of unrealized gain recorded in accumulated other comprehensive income as of December 31, 2006. The Company expects to contribute and pay benefits of approximately $560 related to the SERP in 2007. This contribution is expected to be made by liquidating the prepaid pension and retirement investments. As a result of the change in control and termination of certain employees, the Company recorded a termination charge of $255.

Estimated future benefit payments

The following benefit payments are expected to be paid based on actuarial estimates and prior experience:

Fiscal years

 

 

 

Pension
Plan

 

SERP

 

2007

 

$

2,137

 

$

560

 

2008

 

1,448

 

574

 

2009

 

2,269

 

589

 

2010

 

2,161

 

568

 

2011

 

2,574

 

535

 

2012-2016

 

15,081

 

2,514

 

 

52




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 8—Long-term Debt

Long-term debt consists of the following as of December 31:

 

 

2006

 

2005

 

Mortgage note payable due in monthly installments of $23 including interest at 5.75% through January 1, 2024; payment and rate subject to adjustment every 3 years, starting January 17, 2007

 

$

2,930

 

 

$

 

 

Revolving credit note payable, due June 30, 2007 with monthly interest at prime plus 0.5% (8.75% at December 31, 2006)

 

700

 

 

 

 

Capitalized lease obligations

 

8

 

 

 

 

Total debt

 

3,638

 

 

 

 

Less current portion

 

(793

)

 

 

 

Long term debt, less current portion

 

$

2,845

 

 

 

 

 

Principal maturities on total debt are scheduled to occur in the following years:

2007

 

$

793

 

2008

 

88

 

2009

 

96

 

2010

 

104

 

2011

 

113

 

Thereafter

 

2,444

 

Total debt

 

$

3,638

 

 

Line of Credit

On April 28, 2006, Spitz entered into a Line of Credit Agreement (the “Credit Agreement”) and a Line of Credit Note (the “Note”) with a commercial bank, continuing a $3,000 line of credit for working capital purposes. Under the Note, the outstanding balance will bear a per annum interest rate of one-half percent (0.5%) above the Wall Street Prime rate. The Note matures June 30, 2007. The Note is secured by Spitz real and personal property, a guaranty agreement (the “Guaranty Agreement”) entered into by the Company, and a pledge agreement (the “Pledge Agreement”) entered into by the Company and the commercial bank. Three days after entering into the Credit Agreement, the maximum line of credit decreased to $2,500 per the Credit Agreement. Under the Credit Agreement, Spitz is required to, among other terms and conditions: maintain a minimum tangible net worth of $1,700, determined quarterly; maintain a $200 average daily balance, measured quarterly, in its deposit accounts; and maintain an aggregate daily balance of Spitz deposit accounts with a commercial bank of not less than $100 for any consecutive five day period. Under the Guaranty Agreement, the Company has guaranteed the payment and performance of the conditions of the Note. Under the Pledge Agreement the Company has granted to the commercial bank a first priority security interest and lien in and to all of the outstanding shares of Spitz common stock to secure the Note.

On July 28, 2006, the Company and Spitz entered into an agreement to modify and amend the Credit agreement (“Modification Agreement”). The Modification Agreement reduced the borrowing limit to $1,100 and made certain changes to the terms of the Credit Agreement regarding the reporting for compliance of the tangible net worth covenant. As of December 31, 2006, the Company was in compliance with the tangible net worth covenant and other covenants of the line of credit.

53




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Mortgage Note

The mortgage note payable represents the balance on a $3,200 note (“Mortgage Note”) issued on January 14, 2004 by Spitz. The Mortgage Note requires repayment in monthly installments of principal and interest over twenty years. The monthly installment for the first three years is $23 and includes interest at 5.75% per annum. On January 14, 2007 and each third year thereafter, the interest rate will be adjusted to the greater of 5.75% or 3% over the Three-Year Constant Maturity Treasury Rate published by the United States Federal Reserve (“3YCMT”). The 3YCMT as of January 14, 2007 was 4.83%. The monthly installment will be recalculated on the first month following a change in the interest rate. The recalculated monthly installment will be equal to the monthly installment sufficient to repay the principal balance, as of the date of the change in the interest rate, over the remaining portion of the original twenty-year term. As of February 2007, the new monthly installment amount is $26.The Mortgage Note is secured by the real property acquired with the proceeds of the note pursuant to a Mortgage and Security Agreement. The Mortgage Note and Credit Agreement contain cross default provisions whereby the default of either agreement will result in the default of both agreements. On March 30, 2007, the Company executed a Guarantee of Spitz’ obligation under the Mortgage Note in consideration for the replacement of the requirement of annual audited financial statements of Spitz under the Mortgage Note and Credit Agreement with the annual audited financial statements of the Company.

Lease Obligations

With the acquisition of Spitz, the Company acquired certain capital leases for equipment. Future annual rentals reflect interest rates ranging from 8.1% to 9.6%. Equipment related to such leases has been capitalized at its estimated fair value in connection with the purchase price allocation and is reflected in property, plant and equipment in the amount of $187 net of accumulated amortization of $18 as December 31, 2006.

6% Convertible Subordinated Debentures

As of December 31, 2005, there was $18,015 of 6% Convertible Subordinated Debentures outstanding (the “6% Debentures”) that were classified as long-term liabilities related to discontinued operations. The 6% Debentures, due in 2012, were unsecured and were convertible at each bondholder’s option into shares of our common stock at a conversion price of $42.10 per share for an aggregate of 428,000 shares of our common stock if all outstanding 6% Debentures were converted, subject to adjustment. Prior to the sale of the Simulation Business, the 6% Debentures were redeemable at our option, in whole or in part, at par. The Debentures required redemption upon the sale of the Simulation Business. Accordingly, all of the Debentures were redeemed on June 26, 2006.

Note 9—Income Taxes

The income tax expense of $372 for 2006 is primarily attributable to estimated tax on the gain from the sale of the Simulation Business. The income tax benefit of $430 for 2005 is primarily attributable to favorable resolution of certain income tax contingencies. The income tax expense of $112 for 2004 is primarily attributable to foreign income taxes.

54




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The actual expense (benefit) differs from the expected tax expense (benefit) as computed by applying the U.S. federal statutory income tax rate of 35 percent, during fiscal year:

 

 

2006

 

2005

 

2004

 

Tax (expense) benefit at U.S. federal statutory rate

 

$

(7,798

)

$

547

 

$

3,016

 

Gains of foreign subsidiaries

 

(450

)

 

 

Adjustment for resolution of tax contingency

 

147

 

430

 

 

State taxes (net of federal income tax benefit)

 

(620

)

 

 

Change in valuation allowance attributable to operations

 

8,605

 

(489

)

(2,987

)

Other, net

 

(256

)

(58

)

(141

)

Tax expense (benefit)

 

$

(372

)

$

430

 

$

(112

)

 

Income tax (expense) benefit consisted of the following:

 

 

2006

 

2005

 

2004

 

Income tax (expense) benefit from continuing operations

 

$

5,910

 

$

(6

)

$

(76

)

Income tax (expense) benefit from discontinued operations

 

2,775

 

436

 

(36

)

Income tax expense from gain on sale of discontinued operations

 

(9,057

)

 

 

Tax expense (benefit)

 

$

(372

)

$

430

 

$

(112

)

 

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities as of fiscal year-end:

 

 

2006

 

2005

 

Deferred income tax assets:

 

 

 

 

 

Plant and equipment, principally due to differences in depreciation

 

$

211

 

$

1,597

 

Inventory reserves and other inventory related temporary basis differences

 

633

 

5,717

 

Warranty, vacation, deferred rent and other liabilities

 

1,894

 

4,287

 

Pension accrual

 

2,373

 

5,948

 

Net operating loss carryforwards

 

58,996

 

55,938

 

Credit carryforwards

 

6,408

 

6,015

 

Other

 

1,046

 

739

 

Total deferred income tax assets

 

71,561

 

80,241

 

Less valuation allowance

 

(71,324

)

(80,220

)

Net deferred income tax assets

 

237

 

21

 

Deferred income tax liabilities:

 

 

 

 

 

Intangible assets

 

(237

)

 

Other

 

 

(21

)

Total deferred income tax liabilities

 

(237

)

(21

)

Net deferred income tax assets and liabilities

 

$

 

$

 

 

55




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Worldwide income (loss) before income taxes consisted of the following:

 

 

2006

 

2005

 

2004

 

United States

 

$

19,856

 

$

(1,565

$

(8,618

)

Foreign

 

2,501

 

1

 

1

 

Total

 

$

22,357

 

$

(1,564

$

(8,617

)

 

Income tax (expense) benefit consisted of the following:

 

 

2006

 

2005

 

2004

 

Current

 

 

 

 

 

 

 

U.S. federal

 

$

 

$

 

$

 

State

 

(20

)

(6

)

 

Foreign

 

(352

)

436

 

(112

)

Total

 

$

(372

)

$

430

 

$

(112

)

Deferred

 

 

 

 

 

 

 

U.S. federal

 

(7,583

)

706

 

5,588

 

State

 

(1,116

)

103

 

822

 

Foreign

 

(197

)

(32

)

24

 

 

 

(8,896

)

777

 

6,434

 

Valuation allowance increase (decrease)

 

8,896

 

(777

)

(6,434

)

Total

 

$

 

$

 

$

 

 

We have total federal net operating loss carryforwards of approximately $154,080 of which $176 begins to expire in 2007. We have various federal tax credit carryforwards of approximately $3,700 that expire between 2007 and 2021. We also have state net operating loss carryforwards of approximately $130,400 and state tax credit carryforwards of approximately $2,700 that expire depending on the rules of the various states to which the loss or credit is allocated.

During the year ended December 31, 2006, we decreased the valuation allowance on deferred income tax assets by approximately $8,896. During the years ended December 31, 2005 and 2004, we increased the valuation allowance on deferred income tax assets by approximately $777 and $6,434, respectively. Valuation allowances were established according to our belief that it is more likely than not that these net deferred income tax assets will not be realized.

Note 10—Commitments and Contingencies

CEO Resignation

On June 8, 2006, we announced the resignation of James R. Oyler as the Company’s Chief Executive Officer, President, and member of the Board of Directors, effective June 7, 2006. In connection with the resignation of Mr. Oyler, the Company and Mr. Oyler entered into a Separation and Release Agreement (the “Separation Agreement”), which provided, in part, that Mr. Oyler receive his base salary through July 7, 2006; lump sum severance in an amount equal to two times Mr. Oyler’s “Gross Income” (as defined and determined in accordance with Mr. Oyler’s employment agreement) on January 10, 2007; payment of the Company’s obligations to Mr. Oyler under its compensation plans; payment of Mr. Oyler’s medical, dental and vision premiums under COBRA until July 7, 2008; acceleration of the vesting of any stock options issued and not

56




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

vested as of June 7, 2006; and miscellaneous other terms. The Company has made all required payments to Mr. Oyler as of the date of this filing.

Research and Development Arrangement

In December 2005, we entered into a research and development agreement with a third party to pay $60 a month for 24 months in return for design and development services to be provided by the third party, and $2 million in quarterly payments over a two year period in exchange for future exclusive rights to the application of the results of the research and development efforts to be provided by the third party. We also agreed to pay $400 in cash or freely tradable common stock upon the earlier of 2 years or a public announcement of a product utilizing the results of the research and development efforts. We had $1,810 remaining to pay as of December 31, 2006. Because the agreement relates to technology that is under development and has not reached technological feasibility, all payments made under the agreement are expensed as research and development as incurred. As of December 31, 2006, the Company had paid $2,030 of research and development costs under the agreement.

Other

In December 2005, the Company sold a building with a net book value of $3,820, for proceeds of $6,277, net of closing costs. We recognized a gain on the sale of $2,745 in 2005. As part of the sale, we entered into a 21 month lease agreement with the buyer obligating us to make certain monthly payments through September 2007 depending on the remaining space available for lease in the building sold. The Company is required to pay a monthly pro rata share of operating expenses not to exceed $319 over the twenty-one month lease term. As of December 31, 2006, we had a maximum remaining guarantee related to these obligations of $468 recorded as an accrued liability. The maximum rental guarantee may decrease as available space is leased, based on terms of the rental guarantee. To the extent the maximum rental guarantee is reduced, additional gain will be realized.

As of December 31, 2006, we had outstanding letters of credit and bank guarantees of $633. Letters of credit that expire in 2007 total $633.

Note 11—Legal Proceedings

In December 2005, we settled a lawsuit previously filed by the Company against an insurance company with respect to an insurance claim made by the Company for losses incurred due to the cancellation of a significant contract by a customer. Under the terms of the settlement, the Company received a payment of $8,000 and agreed to dismiss the lawsuit and to provide a release of claims against the insurance company. The insurance settlement proceeds of $8,000 were recorded as gain on insurance settlement and included with the loss from discontinued operations for the year ended December 31, 2005.

In the normal course of business, we may have various legal claims and other contingent matters. 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.

Note 12—Stock Option and Stock Purchase Plans

Stock Option Plans

In 2004, shareholders approved the adoption of the 2004 Stock Incentive Plan of Evans & Sutherland Computer Corporation (“2004 Plan”), which expires in 2014. The 2004 Plan is a stock incentive plan that

57




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

provides for the grant of options and restricted stock awards to employees and for the grant of options to non-employee directors. Under the 2004 Plan non-employee directors receive an annual option grant for no more than 10,000 shares. New non-employee directors receive an option grant for no more than 10,000 shares upon their appointment or election. In addition, with the adoption of this plan no additional options can be issued under any of the prior stock-based plans. The 2004 Plan establishes a minimum exercise price for options of 110% of fair market value on the date of grant. Restricted stock awards may be qualified as a performance-based award that conditions a participant’s award upon achievement by the Company or its subsidiaries of performance goals established by our Board of Directors’ Compensation Committee.

The number of shares, terms, and exercise period of option grants are determined by the Board of Directors on an option-by-option basis. Options generally vest ratably over three years and expire ten years from the date of grant. As of December 31, 2006, options to purchase 487,022 shares of common stock were authorized and reserved for future grant.

Upon execution of the Asset Purchase Agreement (see Note 2 ), all options outstanding under the 2004 Plan on February 7, 2006 were subject to accelerated vesting and became fully vested by their terms.

A summary of activity follows (shares in thousands):

 

 

2006

 

2005

 

2004

 

 

 

Number
of shares

 

Weighted-
Average
Exercise
Price

 

Number
of shares

 

Weighted-
average
exercise
price

 

Number
of shares

 

Weighted-
Average
Exercise
Price

 

Outstanding at beginning of year

 

 

2,226

 

 

 

$

10.38

 

 

 

2,183

 

 

 

$

10.68

 

 

 

2,344

 

 

 

$

11.33

 

 

Granted

 

 

315

 

 

 

6.59

 

 

 

257

 

 

 

7.30

 

 

 

288

 

 

 

4.79

 

 

Exercised

 

 

(57

)

 

 

4.27

 

 

 

(3

)

 

 

3.52

 

 

 

(2

)

 

 

4.56

 

 

Cancelled

 

 

(567

)

 

 

11.61

 

 

 

(211

)

 

 

9.81

 

 

 

(447

)

 

 

10.24

 

 

Outstanding at end of year

 

 

1,917

 

 

 

9.59

 

 

 

2,226

 

 

 

10.38

 

 

 

2,183

 

 

 

10.68

 

 

Exercisable at year end

 

 

1,609

 

 

 

10.17

 

 

 

1,775

 

 

 

11.43

 

 

 

1,758

 

 

 

12.00

 

 

Weighted average fair value of options granted during the year

 

 

2.39

 

 

 

 

 

 

 

2.79

 

 

 

 

 

 

 

1.99

 

 

 

 

 

 

 

58




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

As of December 31, 2006, options exercisable and options outstanding had a weighted average remaining contractual term of 4.0 and 4.8 years, respectively, and an aggregate intrinsic value of $6 and $6, respectively.

The fair value of each option grant is estimated on the date of the grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants:

 

 

2006

 

2005

 

2004

 

Expected life (in years)

 

 

2.6

 

 

 

2.6

 

 

 

2.6

 

 

Risk free interest rate

 

 

4.8

%

 

 

3.8

%

 

 

1.8

%

 

Expected volatility

 

 

65

%

 

 

71

%

 

 

69

%

 

Dividend yield

 

 

 

 

 

 

 

 

 

 

 

Expected option lives and volatilities are based on historical data of the Company. Our risk free interest rate is calculated as the average US Treasury bill rate that corresponds with the option life. Historically, the Company has not declared dividends and there are no future plans to do so.

During the years ended December 31, 2006, 2005, and 2004, the total intrinsic value of options exercised was $72, $7, and $4 , respectively. As of December 31, 2006, there was approximately $394 of total unrecognized share-based compensation cost related grants under our plans that will be recognized over a weighted-average period of 1.2 years.

Stock Purchase Plan

The Company also had an employee stock purchase plan under which a maximum of 800,000 shares of common stock could be purchased by eligible employees. This plan allowed employees to have up to 10% of their gross pay withheld each pay period to purchase the Company’s common stock at 85% of the market value of the stock at the time of the sale. Under this plan, 2,253 shares in 2006, 17,702 shares in 2005, and 26,132 shares in 2004 were purchased. The employee stock purchase plan expired on February 20, 2006.

Note 13—Preferred Stock

Class A Preferred Stock

We have 5,000,000 authorized shares of Class A Preferred Stock. As of December 31, 2006 and 2005, there were no Class A Preferred shares of stock outstanding. Prior to 1998, we had reserved 300,000 shares of Class A Preferred Stock as Series A Junior Preferred Stock under a shareholder rights plan which expired in November 1998. In November 1998, the Board of Directors declared a dividend of one preferred stock purchase right (“Right”) for each outstanding share of common stock of E&S for shareholders of record on November 19, 1998, and for all future issuances of common stock. The Rights are not currently exercisable or transferable apart from the common stock and do not have voting rights or rights to receive dividends. Each Right entitles the registered holder to purchase from E&S one thousandth of a share of Preferred Stock at a price per share of $60.00, subject to adjustment. The Rights will be exercisable ten business days following a public announcement of a person or group of affiliated persons acquiring beneficial ownership of 15% or more of our outstanding common shares or following the announcement of a tender offer or exchange offer upon the consummation of which would result in the beneficial ownership by a person or group of affiliated persons of 15% or more of the outstanding E&S stock. The Rights may be redeemed by E&S at a price of $0.01 per Right before November 30, 2008.

59




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

In the event that we are acquired in a merger or other business combination transaction, provision shall be made so that each holder of a Right, excluding the Rights beneficially owned by the acquiring persons, will have the right to receive, upon exercise thereof at the then current exercise price, that number of common shares of the surviving company which at the time of such transaction will have a market value of two times the exercise price of the Right. In the event that a person or group of affiliated persons acquires beneficial ownership of 15% or more of our outstanding common shares, provision shall be made so that each holder of a Right, excluding the Rights beneficially owned by the acquiring persons, shall have the right to receive, upon exercise thereof, a share of common stock at a purchase price equal to 50% of the then current exercise price.

On August 13, 2004, E&S and American Stock Transfer & Trust Company amended the Rights to allow Peter R. Kellog to acquire beneficial ownership up to 19.9% of our outstanding common shares without triggering the exercisability of the Rights. On June 7, 2000, E&S and American Stock Transfer & Trust Company amended the Rights to allow the State of Wisconsin Investment Board to acquire beneficial ownership up to 19.9% of our outstanding common shares without triggering the exercisability of the Rights.

Class B Preferred Stock

We have 5,000,000 authorized shares of Class B Preferred Stock. As of December 31, 2006 and 2005, no shares were outstanding.

Note 14—Net Income (Loss) per Common Share

Net income (loss) per common share is computed based on the weighted-average number of common shares and, as appropriate, dilutive common stock equivalents outstanding during the period. Stock options are potentially common stock equivalents.

Basic income or loss per common share is based upon the average number of shares of common stock outstanding during the period. Diluted net income per common share in 2006 includes the effect of 21 dilutive shares from stock options deemed to be common stock equivalents under SFAS No. 123(R). The effect of 26 and 11 shares from stock options were excluded from the computation in 2005 and 2004, respectively, because the net loss in each year made the inclusion of such shares anti-dilutive. Other potentially dilutive securities from stock options are discussed in Note 12.

Note 15—Geographic Information

The table below presents sales by geographic location of our customers during the fiscal year. Sales within individual countries greater than 10% of consolidated sales are shown separately:

Region or Country

 

 

 

2006

 

2005

 

2004

 

United States

 

$

7,064

 

$

9,297

 

$

3,256

 

Europe

 

3,719

 

1,466

 

3,041

 

Asia

 

2,624

 

3,375

 

3,178

 

North America (excluding U.S.)

 

1,291

 

146

 

4

 

Other

 

350

 

827

 

 

Total sales

 

$

15,048

 

$

15,111

 

$

9,479

 

 

60




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 16—Significant Customers

For the year ended December 31, 2006, no individual customer provided 10% or more of total revenue. For the year ended December 31, 2005, revenue from Customers A and B were 12% and 11% of total revenue, respectively. For the year ended December 31, 2004, revenue from Customers B and C were 13% and 11% of total revenue, respectively.

At December 31, 2006, accounts receivable from Customers A, B and G were 19%, 14% and 14%, of total accounts receivable, respectively. At December 31, 2005, accounts receivable from Customers A and D were 41% and 12% of total accounts receivable, respectively.

At December 31, 2006, Customers A and E had costs and estimated earnings in excess of billings that represented 21% and 14% of total costs and estimated earnings in excess of billings, respectively. At December 31, 2005, Customers A and F had costs and estimated earnings in excess of billings that represented 49% and 26% of total costs and estimated earnings in excess of billings, respectively.

Note 17—Restatement of Quarterly Financial Statements

During the fiscal 2006 year-end closing process, we reviewed our  classifications of the assets and liabilities of our discontinued Simulation Business that was sold to Rockwell Collins during the second quarter of 2006 and determined that certain items previously reported related to the reclassification of discontinued operations had been classified incorrectly between assets and liabilities from continuing operations and assets and liabilities of discontinued operations for the balance sheet at December 31, 2005, as previously filed on Form 10-Q as of June 30, 2006 and September 29, 2006. In addition, we found that the statement of operations for the nine months ended September 30, 2005 required a reclassification of selling and marketing expenses between continuing and discontinued operations. The amounts as filed and as restated are presented below:

Selected Balance Sheet Data (Unaudited)

December 31, 2005

 

 

 

As Previously
Reported

 

Adjustment

 

As Restated

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts receivable, net

 

 

$

1,216

 

 

 

$

(46

)

 

 

$

1,170

 

 

Prepaid expenses and deposits

 

 

3,285

 

 

 

(1,877

)

 

 

1,408

 

 

Current assets related to discontinued operations

 

 

25,995

 

 

 

1,924

 

 

 

27,919

 

 

Property, plant and equipment

 

 

6,631

 

 

 

6

 

 

 

6,637

 

 

Intangible assets

 

  

 

 

 

10

 

 

 

10

 

 

Other assets

 

 

959

 

 

 

(340

)

 

 

619

 

 

Long-term assets related to discontinued operations

 

 

9,523

 

 

 

323

 

 

 

9,846

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

 

3,095

 

 

 

(184

)

 

 

2,911

 

 

Accrued liabilities

 

 

7,288

 

 

 

(3,685

)

 

 

3,603

 

 

Current liabilities related to discontinued operations

 

 

13,798

 

 

 

3,869

 

 

 

17,667

 

 

Convertible subordinated notes

 

 

18,015

 

 

 

(18,015

)

 

 

 

 

Long-term liabilities related to discontinued operations

 

 

2,011

 

 

 

18,015

 

 

 

20,025

 

 

 

61




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

Selected Statement of Operations Data (Unaudited)

For the nine months ended September 30, 2005

 

 

 

As Previously
Reported

 

Adjustment

 

As Restated

 

Selling, general and administrative expense

 

 

$

3,525

 

 

 

$

801

 

 

 

$

4,326

 

 

Operating loss

 

 

(3,054

)

 

 

(801

)

 

 

(3,855

)

 

Net loss from continuing operations

 

 

(2,675

)

 

 

(801

)

 

 

(3,476

)

 

Loss from discontinued operations

 

 

(6,035

)

 

 

801

 

 

 

(5,234

)

 

Basic and diluted:

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss from continuing operations

 

 

$

(0.25

)

 

 

$

(0.08

)

 

 

$

(0.33

)

 

Loss from discontinued operations

 

 

$

(0.57

)

 

 

$

0.08

 

 

 

$

(0.49

)

 

 

For the nine months ended September 30, 2006

 

 

 

As Previously
Reported

 

Adjustment

 

As Restated

 

Gain on assets held for sale

 

 

389

 

 

 

(401

)

 

 

(12

)

 

Operating loss

 

 

(10,617

)

 

 

(401

)

 

 

(11,018

)

 

Net loss from continuing operations

 

 

(6,566

)

 

 

(401

)

 

 

(6,967

)

 

Net income from discontinued operations

 

 

32,869

 

 

 

401

 

 

 

33,270

 

 

Basic and diluted:

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss from continuing operations

 

 

$

(0.61

)

 

 

$

(0.04

)

 

 

$

(0.65

)

 

Loss from discontinued operations

 

 

$

3.06

 

 

 

$

0.04

 

 

 

$

3.10

 

 

 

62




REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and
Stockholders of Evans & Sutherland Computer Corporation

We have audited the accompanying consolidated balance sheet of Evans & Sutherland Computer Corporation (the Company) as of December 31, 2006, and the related consolidated statements of operations, stockholders’ equity (deficit) and comprehensive income (loss), and cash flows for the year then ended.  These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. The consolidated financial statements as of December 31, 2005 and for the two years then ended, before the adjustments described in Note 2 to the consolidated financial statements, were audited by other auditors whose report, dated March 31, 2006, expressed an unqualified opinion on those statements.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Evans & Sutherland Computer Corporation as of December 31, 2006, and the consolidated results of their operations and their cash flows for the year then ended in conformity with U.S. generally accepted accounting principles.

We also audited the adjustments described in Note 2 that were applied to restate the 2005 and 2004 consolidated financial statements for the discontinued operations. In our opinion, such adjustments are appropriate and have been properly applied. We were not engaged to audit, review, or apply any procedures to the 2005 and 2004 consolidated financial statements of the Company other than with respect to the adjustments and, accordingly, we do not express an opinion or any other form of assurance on the 2005 and 2004 consolidated financial statements taken as a whole.

/s/ Tanner LC

Salt Lake City, Utah
April 2, 2007

63




Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders
Evans & Sutherland Computer Corporation:

We have audited, before the effects of adjustments to restate for discontinued operations described in Note 2, the accompanying consolidated balance sheet of Evans & Sutherland Computer Corporation and subsidiaries as of December 31, 2005, and the related consolidated statements of operations, stockholders’ equity and comprehensive loss, and cash flows for the years ended December 31, 2005 and 2004 (the 2005 and 2004 consolidated financial statements before the effects of the adjustments discussed in Note 2 are not presented herein). The 2005 and 2004 consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the 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 2005 and 2004 consolidated financial statements referred to above, before the effects of adjustments to restate for discontinued operations described in Note 2, present fairly, in all material respects, the financial position of Evans & Sutherland Computer Corporation and subsidiaries as of December 31, 2005, and the results of their operations and their cash flows for the years ended December 31, 2005 and 2004, in conformity with U.S. generally accepted accounting principles.

We were not engaged to audit, review, or apply any procedures to the adjustments to restate for discontinued operations described in Note 2 and, accordingly, we do not express an opinion or any other form of assurance about whether such adjustments are appropriate and have been properly applied. Those adjustments were audited by Tanner LC.

/s/ KPMG LLP

Salt Lake City, Utah
March 31, 2006

64




ITEM 9.                 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A.         CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in its reports under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

As required by Securities and Exchange Commission Rule 13a-15(b), we carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based on the foregoing, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective at the reasonable assurance level.

Changes in Internal Controls

There have been no changes in our internal control over financial reporting that may have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Our process for evaluating controls and procedures is continuous and encompasses constant improvement of the design and effectiveness of established controls and procedures and the remediation of any deficiencies which may be identified during this process.

ITEM 9B.        OTHER INFORMATION

Entry into a Material Definitive Agreement

On March 30, 2007, E&S executed a Guarantee of Spitz’ obligation under a mortgage loan agreement First Keystone Bank (“FKB”) dated January 14, 2004. Also on March 30, 2007 E&S, Spitz, and FKB amended the $3,000,000 Line of Credit Agreement (“Credit Agreement”) between Spitz and FKB, and the Mortgage Loan Agreement (“Mortgage Agreement”) between Spitz and FKB to replace the requirement that we provide annual audited financial statements of Spitz with a requirement to provide annual audited financial statements of E&S. The Modification to the Credit Agreement, Modification to the Mortgage Agreement, and Guarantee are filed as Exhibits 10.28, 10.29 and 10.30 to this Form 10-K and incorporated herein by reference

65




PART III

ITEM 10.          DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

Certain information required by Item 401 of Regulation S-K will be included under the caption “Election of Directors” in the Proxy Statement for our 2007 Annual Meeting of Shareholders and that information is incorporated herein by reference. Information required by Item 405 of Regulation S-K will be included under the caption “Compliance with Section 16(a) of the Securities Exchange Act of 1934” in the Proxy Statement for our 2007 Annual Meeting of Shareholders and that information is incorporated herein by reference. Certain information required by Item 401 of Regulation S-K is included in Part I of this Form 10-K under the caption “Executive Officers of the Registrant.” The information required by Item 407(a) of Regulation S-K will be included under the caption “Election of Directors” in the Proxy Statement for our 2007 Annual Meeting of Shareholders and that information is herein incorporated by reference.

Code of Ethics

Evans & Sutherland maintains a Code of Ethics and Business Conduct which is applicable to all employees, including all officers, and including our independent non-employee directors with regard to Evans & Sutherland related activities. The Code of Ethics and Business Conduct incorporates our guidelines designed to deter wrongdoing and to promote honest and ethical conduct and compliance with applicable laws and regulations. It also incorporates our expectations of our employees that enable us to provide accurate and timely disclosure in our filings with the Securities and Exchange Commission and other public communications. In addition, they incorporate our expectations of our employees concerning prompt internal reporting of violations of our Code of Ethics and Business Conduct.

The full text of the Evans & Sutherland Code of Ethics and Business Conduct is published on our Investors Relations website at www.es.com. We intend to disclose future amendments to certain provisions of our Code of Ethics and Business Conduct or waivers of such provisions granted to executive officers and directors, on this website within four business days following the date of such amendment or waiver.

ITEM 11.          EXECUTIVE COMPENSATION

The information required by this item will be included under the captions “Executive Compensation” and “Election of Directors” in the Proxy Statement for our 2007 Annual Meeting of Shareholders and that information is herein incorporated by reference.

ITEM 12.          SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The information required by Item 403 of Regulation S-K will be included under the caption “Security Ownership of Certain Beneficial Owners and Management” in the Proxy Statement for our 2007 Annual Meeting of Shareholders and that information is herein incorporated by reference.

66




Securities Authorized for Issuance Under Equity Compensation Plans as of December 31, 2006

 

 

 

 

 

 

Number of securities

 

 

 

Number of securities

 

 

 

remaining available for

 

 

 

to be issued upon

 

Weighted average

 

future issuance

 

 

 

exercise of

 

exercise price of

 

under equity compensation

 

 

 

outstanding options,

 

outstanding options,

 

plans (excluding securities

 

 

 

warrants and rights

 

warrants and rights

 

reflected in column (a))

 

 

 

(a)

 

(b)

 

(c)

 

Equity compensation plans approved by security holders

 

 

1,917,695

 

 

 

$

9.59

 

 

 

487,022

 

 

Equity compensation plans not approved by security holders

 

 

 

 

 

 

 

 

 

 

Total

 

 

1,917,695

 

 

 

$

9.59

 

 

 

487,022

 

 

 

ITEM 13.          CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by Item 404 of Regulation S-K will be included under the caption “Certain Relationships and Related Party Transactions” in the Proxy Statement for our 2007 Annual Meeting of Shareholders and that information is herein incorporated by reference.

ITEM 14.          PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information required by Item 14 will be included under the caption “Report of the Audit Committee of the Board of Directors” in the Proxy Statement for our 2007 Annual Meeting of Shareholders and that information is herein incorporated by reference.

67




PART IV

ITEM 15.          EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a)           List of documents filed as part of this report

1.                 Financial Statements

The following consolidated financial statements are included in Part II, Item 8 of this report on Form 10-K.

·         Consolidated Balance Sheets as of December 31, 2006 and 2005

·         Consolidated Statement of Operations for each of the years in the three-year period ended December 31, 2006

·         Consolidated Statements of Stockholders’ Equity and Comprehensive Loss for each of the years in the three-year period ended December 31, 2006

·         Consolidated Statement of Cash Flows for each of the years in the three-year period ended December 31, 2006

·         Notes to Consolidated Financial Statements

2.                 Financial Statement Schedules

There are no schedules filed because of the absence of conditions under which they are required or because the required information is presented in the consolidated financial statements or the notes thereto.

3.                 Exhibits

Articles of Incorporation and Bylaws

3.1.1

 

Articles of Incorporation, as amended, filed as Exhibit 3.1 to Evans & Sutherland Computer Corporation’s Annual Report on Form 10-K, SEC File No. 000-08771, for the fiscal year ended December 25, 1987, and incorporated herein by this reference.

3.1.2

 

Amendments to Articles of Incorporation filed as Exhibit 3.1.1 to Evans & Sutherland Computer Corporation’s Annual Report on Form 10-K, SEC File No. 000-08771, for the fiscal year ended December 30, 1988, and incorporated herein by this reference.

3.1.3

 

Certificate of Designation, Preferences and Other Rights of the Class B-1 Preferred Stock of Evans & Sutherland Computer Corporation, filed as Exhibit 3.1 to Evans & Sutherland Computer Corporation’s Form 10-Q, SEC File No. 000-08771, for the quarter ended September 25, 1998, and incorporated herein by this reference.

3.2.1

 

Amended and Restated Bylaws of Evans & Sutherland Computer Corporation, filed as Exhibit 3.2 to Evans & Sutherland Computer Corporation’s Form 10-K for the year ended December 31, 2000, and incorporated herein by this reference.

3.2.2

 

Amendment No. 1 to the Amended and Restated Bylaws of Evans & Sutherland Computer Corporation, filed as Exhibit 3.3 to Evans & Sutherland Computer Corporation’s Form 10-K for the year ended December 31, 2000, and incorporated herein by this reference.

68




 

Instruments defining the rights of security holders

4.1

 

Form of Rights Agreement, dated as of November 19, 1998, between Evans & Sutherland Computer Corporation and American Stock Transfer Trust Company which includes as Exhibit A, the form of Certificate of Designation for the Rights, as Exhibit B, the form of Rights Certificate and as Exhibit C, a Summary of Rights, filed as Exhibit 1 to Evans & Sutherland Computer Corporation’s Registration Statement on Form 8-A filed December 8, 1998, and incorporated herein by this reference.

4.2

 

First Amendment to Rights Agreement dated as of June 7, 2000 between Evans & Sutherland Computer Corporation and American Stock Transfer & Trust Company, filed as Exhibit 10.14 to Evans & Sutherland Computer Corporation’s Form 10-Q for the quarter ended June 30, 2000, and incorporated herein by this reference.

4.3

 

Second Amendment to Rights Agreement dated as of August 13, 2004 between Evans & Sutherland Computer Corporation and American Stock Transfer & Trust Company, filed as Exhibit 4.1 to Evans & Sutherland Computer Corporation’s Form 8-K filed on August 16, 2004, and incorporated herein by this reference.

Material contracts

Management contracts and compensatory plans

10.1

 

Evans & Sutherland Computer Corporation 1998 Stock Option Plan, as amended as through May 17, 2000, filed as exhibit 4.1 to Evans & Sutherland Computer Corporation’s Post Effective Amendment No. 1 to Registration Statement on Form S-8, SEC File No. 333-58733, and incorporated herein by this reference.

10.2

 

Evans & Sutherland Computer Corporation’s 1995 Long-Term Incentive Equity Plan, filed as Exhibit 10.11 to Evans & Sutherland Computer Corporation’s Annual Report on Form 10-K, SEC File No. 000-08771, for the fiscal year ended December 29, 1995, and incorporated herein by this reference.

10.3

 

Evans & Sutherland Computer Corporation 2004 Stock Incentive Plan, filed as Annex A to Evans & Sutherland’s Form 14A, SEC File No. 001-14667, filed on April 19, 2004 and incorporated herein by this reference.

10.4

 

Amended and restated Evans & Sutherland Computer Corporation’s Supplemental Executive Retirement Plan (SERP), dated May 16, 2002, filed as Exhibit 10.38 to Evans & Sutherland Computer Corporation’s Form 10-K for the year ended December 31, 2002, and incorporated herein by reference.

10.5

 

Amended and restated Evans & Sutherland Computer Corporation’s Executive Savings Plan, dated May 16, 2002, filed as Exhibit 10.39 to Evans & Sutherland Computer Corporation’s Form 10-K for the year ended December 31, 2002, and incorporated herein by reference.

69




 

10.6

 

Employment agreement between Evans & Sutherland Computer Corporation and James R. Oyler, dated May 16, 2000, filed as Exhibit 10.6 to Evans & Sutherland Computer Corporation’s Form 10-Q for the quarter ended June 30, 2000, and incorporated herein by this reference.

10.7

 

Amendment to employment agreement between Evans & Sutherland Computer Corporation and James R. Oyler, dated September 22, 2000, filed as Exhibit 10.1 to Evans & Sutherland Computer Corporation’s Form 10-Q for the quarter ended September 29, 2000, and incorporated herein by this reference.

10.8

 

Employment agreement between Evans & Sutherland Computer Corporation and Kirk Johnson, dated August 26, 2002, filed as Exhibit 10.14 to Evans & Sutherland Computer Corporation’s Form 10-K for the year ended December 31, 2004, and incorporated herein by reference.

10.9

 

Employment Agreement, dated February 8, 2006, by and between Evans & Sutherland Computer Corporation and Jonathan Shaw, filed as Exhibit 10.1 to Evans & Sutherland Computer Corporation’s Form 10-Q for the quarter ended June 30, 2006, and incorporated herein by reference.

10.10

 

Employment Agreement dated February 8, 2006, by and between Evans & Sutherland Computer Corporation and Paul Dailey, filed as Exhibit 10.2 to Evans & Sutherland Computer Corporation’s Form 10-Q for the quarter ended June 30, 2006, and incorporated herein by reference.

10.11

 

Separation and Release Agreement, dated June 8, 2006, by and between Evans & Sutherland Computer Corporation and James R. Oyler, filed as Exhibit 10.3 to Evans & Sutherland Computer Corporation’s Form 10-Q for the quarter ended June 30, 2006, and incorporated herein by reference.

10.12

 

Agreement and Release of ADEA Claims, dated June 8, 2006, by and between Evans & Sutherland Computer Corporation and James R. Oyler, filed as Exhibit 10.4 to Evans & Sutherland Computer Corporation’s Form 10-Q for the quarter ended June 30, 2006, and incorporated herein by reference.

10.13

 

Employment Agreement, dated August 26, 2002, by and between Evans & Sutherland Computer Corporation and David H. Bateman, filed herein.

Other material contracts

10.14

 

Confidential Settlement Agreement and Mutual Release, dated December 28, 2005, by and between Evans & Sutherland Computer Corporation and Federal Insurance Company, filed as Exhibit 10.21 to Evans & Sutherland Computer Corporation’s Form 10-K for the year ended December 31, 2005, and incorporated herein by reference.

10.15

 

Asset Purchase Agreement, dated February 7, 2006, by and between Evans & Sutherland Computer Corporation and Rockwell Collins, Inc. filed as Exhibit 10.1 to Evans & Sutherland Computer Corporation’s Form 8-K filed February 9, 2006, and incorporated herein by this reference.

70




 

10.16

 

Stock Purchase Agreement, dated February 7, 2006, by and among Evans & Sutherland Computer Corporation, Spitz, Inc., and Transnational Industries, Inc. filed as Exhibit 10.2 to Evans & Sutherland Computer Corporation’s Form 8-K filed February 9, 2006, and incorporated herein by this reference.

10.17

 

Line of Credit Agreement, dated April 28, 2006, between Evans & Sutherland Computer Corporation, Spitz, Inc. and First Keystone Bank, filed as Exhibit 10.4 to Evans & Sutherland Computer Corporation’s Form 10-Q for the quarter ended June 30, 2006, and incorporated herein by reference.

10.18

 

Line of Credit Note, dated April 28, 2006, by and between Evans & Sutherland Computer Corporation, Spitz, Inc. and First Keystone Bank, filed here with filed as Exhibit 10.6 to Evans & Sutherland Computer Corporation’s Form 10-Q for the quarter ended June 30, 2006, and incorporated herein by reference.

10.19

 

Guaranty, dated April 28, 2006, by Evans and Sutherland Computer Corporation, filed as Exhibit 10.7 to Evans & Sutherland Computer Corporation’s Form 10-Q for the quarter ended June 30, 2006, and incorporated herein by reference.

10.20

 

Pledge Agreement, dated April 28, 2006, by and between Evans & Sutherland Computer Corporation, Spitz, Inc. and First Keystone Bank, filed as Exhibit 10.8 to Evans & Sutherland Computer Corporation’s Form 10-Q for the quarter ended June 30, 2006, and incorporated herein by reference.

10.21

 

Security Agreement, dated April 28, 2006, by and between Spitz, Inc., filed here with filed as Exhibit 10.9 to Evans & Sutherland Computer Corporation’s Form 10-Q for the quarter ended June 30, 2006, and incorporated herein by reference.

10.22

 

Open-end Mortgage and Security Agreement, dated April 28, 2006, by and between Spitz, Inc., filed as Exhibit 10.10 to Evans & Sutherland Computer Corporation’s Form 10-Q for the quarter ended June 30, 2006, and incorporated herein by reference.

10.23

 

First Modification Agreement to Line of Credit Agreements, dated July 28, 2006, by and between Evans & Sutherland Computer Corporation, Spitz, Inc. and First Keystone Bank, filed as Exhibit 10.11 to Evans & Sutherland Computer Corporation’s Form 10-Q for the quarter ended June 30, 2006, and incorporated herein by reference.

10.24

 

Credit Agreement between Evans & Sutherland Computer Corporation and Wells Fargo Bank, National Association effective December 1, 2006, filed herein.

10.25

 

Mortgage Note dated January 14, 2004, of Transnational Industries, Inc. and Spitz, Inc. to First Keystone Bank filed herein.

10.26

 

Open-End Mortgage and Security Agreement dated January 14, 2004, between Spitz, Inc. and First Keystone Bank filed herein.

10.27

 

Loan Agreement dated as January 14, 2004, between First Keystone Bank, Transnational Industries, Inc. and Spitz, Inc filed herein.

71




 

10.28

 

First Modification Agreement to Mortgage Loan Agreements, dated March 30 2007, by and between Evans & Sutherland Computer Corporation, Spitz, Inc. and First Keystone Bank, filed herein.

10.29

 

Second Modification Agreement to Line of Credit Agreements, dated March 30 2007, by and between Evans & Sutherland Computer Corporation, Spitz, Inc. and First Keystone Bank, filed herein.

10.30

 

Guaranty, dated March 30, 2007 by Evans and Sutherland Computer Corporation, filed herein.

Letter re change in certifying accountant

16.1

 

Letter from KPMG, LLP to the United States Securities and Exchange Commission dated October 12, 2006, filed as Exhibit 16.1 to Evans & Sutherland Computer Corporation’s Form 8-K filed October 12, 2006, and incorporated herein by this reference herein.

Subsidiaries of the registrant

21.1

 

Subsidiaries of Registrant, filed herein.

Consent of experts and counsel

23.1

 

Consent of Current Independent Registered Public Accounting Firm, filed herein.

23.2

 

Consent of Prior Independent Registered Public Accounting Firm, filed herein

Rule 13a-14(a)/15d-14(a) Certifications

31.1

 

Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended, filed herein.

31.2

 

Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended, filed herein.

Section 1350 Certifications

32.1

 

Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herein.

 

TRADEMARKS USED IN THIS FORM 10-K

E&S, ESLP, and Digistar are trademarks or registered trademarks of Evans & Sutherland Computer Corporation. All other product, service, or trade names or marks are the properties of their respective owners.

72




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

 

 

By

 

/s/ DAVID H. BATEMAN

 

 

 

 

David H. Bateman

 

 

 

 

Chief Executive Officer and Director

 

March 30, 2007

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

Signature

 

 

 

Title

 

 

 

Date

 

/s/      DAVID H. BATEMAN

 

Chief Executive Officer
and Director

 

March 30, 2007

           David H. Bateman

 

(Principal Executive Officer)

 

 

/s/      PAUL L. DAILEY

 

Chief Financial Officer
(Principal Financial Officer and

 

March 30, 2007

           Paul L. Dailey

 

Principal Accounting Officer)

 

 

/s/      DAVID J. COGHLAN

 

Chairman of the Board

 

March 30, 2007

           David J. Coghlan

 

 

 

 

/s/      WILLIAM SCHNEIDER, JR.

 

Director

 

March 30, 2007

           William Schneider, Jr.

 

 

 

 

/s/      JAMES P. MCCARTHY

 

Director

 

March 30, 2007

           James P. McCarthy

 

 

 

 

 

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EXHIBIT 10.13

EMPLOYMENT AGREEMENT

THIS EMPLOYMENT AGREEMENT (the “ Agreement ”) is made and entered into as of the 26th day of August, 2002, by and between EVANS & SUTHERLAND COMPUTER CORPORATION, a Utah corporation (the “ Company ”) and David H. Bateman (the “ Executive ”).

W I T N E S S E T H:

WHEREAS, the Executive has been providing services to the Company in an executive capacity and desires to continue to provide such services;

WHEREAS, the Company desires to have the benefit of the Executive’s efforts and services;

WHEREAS, the Company and Executive desire to terminate all prior employment agreements with the Company, if any; and

WHEREAS, the Company has determined that it is appropriate and in the best interests of the Company to provide to the Executive protection in the event of certain terminations of the Executive’s employment relationship with the Company in accordance with the terms and conditions contained herein and the Executive desires to have such protection.

NOW, THEREFORE, in consideration of the foregoing and of the mutual covenants and agreements hereinafter set forth, the Company and the Executive hereto mutually covenant and agree as follows:

1.              DEFINITIONS.

Whenever used in this Agreement, the following terms shall have the meanings set forth below:

(a)            Accrued Benefits ” shall mean the amount equal to the sum of the following to the extent not previously paid:

(i)             All salary earned or accrued through the Termination Date;

(ii)            Reimbursement pursuant to Section 6(d) for any and all monies advanced in connection with the Executive’s employment for reasonable and necessary expenses incurred by the Executive through the Termination Date;

(iii)           Any and all other cash benefits of deferred compensation plans previously earned through the Termination Date unless deferred at the election of




the Executive for payment at another time or the applicable deferred compensation plan provides for payment at another time;

(iv)           The full amount of any bonus earned in a prior period and payable to the Executive in accordance with Section 6(b) herein, subject to the limitations in Section 10 and Section 12; and

(v)            All other payments and benefits to which the Executive may be entitled under the terms of any benefit plan of the Company, which as of the Termination Date, is applicable to all regular full-time employees of the Company generally.

(b)            Act ” shall mean the Securities Exchange Act of 1934;

(c)            Affiliate ” shall have the same meaning as given to that term in Rule 12b-2 of Regulation 12B promulgated under the Act;

(d)            Base Period Income ” shall be an amount equal to the Executive’s “annualized includable compensation” for the “base period” as defined in Sections 280G(d)(1) and (2) of the Code and the regulations adopted thereunder;

(e)            Beneficial Owner ” shall have the same meaning as given to that term in Rule 13d-3 of the Act, provided that any pledgee of Company voting securities shall not be deemed to be the Beneficial Owner thereof prior to its disposition of, or acquisition of voting rights with respect to, such securities;

(f)             Board ” shall mean the Board of Directors of the Company;

(g)            Cause ” shall mean any of the following:

(i)             The engaging by the Executive in fraudulent conduct, as evidenced by a determination in a binding and final judgment, order or decree of a court or administrative agency of competent jurisdiction, in effect after exhaustion or lapse of all rights of appeal, in an action, suit or proceeding, whether civil, criminal, administrative or investigative, which the Chief Executive Officer of the Company determines, in his sole discretion, has a significant adverse impact on the Company or on the performance of the Executive’s duties to the Company;

(ii)            Conviction of a felony, as evidenced by a binding and final judgment, order or decree of a court of competent jurisdiction, in effect after exhaustion or lapse of all rights of appeal, which the Chief Executive Officer of the Company determines, in his sole discretion, has a significant adverse impact on the Company or on the performance of the Executive’s duties to the Company;

(iii)           Neglect or refusal by the Executive to perform the Executive’s duties or responsibilities; or

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(iv)           A significant violation by the Executive of the Company’s established policies and procedures;

Notwithstanding the foregoing, Cause shall not exist under Sections 1(g)(iii) and (iv) herein unless the Company furnishes written notice to the Executive of the specific offending conduct and the Executive fails to correct such offending conduct within the thirty (30) day period commencing on the receipt of such notice.

(h)            Change of Control ” shall mean a change in ownership or managerial control of the stock, assets or business of the Company resulting from one or more of the following circumstances:

(i)             A change of control of the Company, of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A promulgated under the Act, or any successor regulation of similar import, regardless of whether the Company is subject to such reporting requirement;

(ii)            A change in ownership of the Company through a transaction or series of transactions, such that any Person or Persons (other than any current officer of the Company or member of the Board) become(s), in the aggregate, the Beneficial Owner(s), directly or indirectly, of securities of the Company representing thirty percent (30%) or more of the Company’s then outstanding securities;

(iii)           Any consolidation or merger of the Company in which the Company is not the continuing or surviving corporation or pursuant to which shares of the common stock of the Company would be converted into cash (other than cash attributable to dissenters’ rights), securities or other property provided by a Person or Persons other than the Company, other than a consolidation or merger of the Company in which the holders of the common stock of the Company immediately prior to the consolidation or merger have approximately the same proportionate ownership of common stock of the surviving corporation immediately after the consolidation or merger;

(iv)           The shareholders of the Company approve a sale, transfer, liquidation or other disposition of all or substantially all of the assets of the Company to a Person or Persons;

(v)            During any period of two (2) consecutive years, individuals who, at the beginning of such period, constituted the Board of Directors of the Company cease, for any reason, to constitute at least a majority thereof, unless the election or nomination for election of each new director was approved by the vote of at least two-thirds (2/3) of the directors then still in office who were directors at the beginning of the period;

(vi)           The filing of a proceeding under Chapter 7 of the Federal Bankruptcy Code (or any successor or other statute of similar import) for liquidation with respect to the Company; or

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(vii)          The filing of a proceeding under Chapter 11 of the Federal Bankruptcy Code (or any successor or other statute of similar import) for reorganization with respect to the Company if in connection with any such proceeding, this Agreement is rejected, or a plan of reorganization is approved an element of which plan entails the liquidation of all or substantially all the assets of the Company.

A “Change of Control” shall be deemed to occur on the actual date on which any of the foregoing circumstances shall occur; provided, however, that in connection with a “Change of Control” specified in Section 1(h)(vii), a “Change of Control” shall be deemed to occur on the date of the filing of the relevant proceeding under Chapter 11 of the Federal Bankruptcy Code (or any successor or other statute of similar import).  Notwithstanding the foregoing, a “Change of Control” shall not include any transaction that constitutes a “Rule 13e-3 transaction” under Rule 13e-3 of the Act or an “issuer tender offer” under Rule 13e-4 of the Act.

(i)             Change of Control Period ” shall mean the period commencing 180 days immediately prior to the date a Change of Control is deemed to occur pursuant to Section 1(h), herein, and ending on the second anniversary of such date;

(j)             Code ” shall mean the Internal Revenue Code of 1986, as amended from time to time;

(k)            Disability ” shall mean a physical or mental condition whereby the Executive is unable to perform on a full-time basis the customary duties of the Executive under this Agreement;

(l)             Federal Short Term-Rate ” shall mean the rate defined in Section 1274(d)(1)(C)(i) of the Code;

(m)           Good Reason ” shall mean any of the following:

(i)             The required relocation of the Executive, without the Executive’s consent, to an employment location which is more than seventy-five (75) miles from the Executive’s employment location on the day preceding the date of this Agreement; or

(ii)            Breach or violation of any material provision of this Agreement by the Company, which is not remedied within five business days following notice to the Company by the Executive.

(n)            Good Reason During a Change of Control ” shall mean any of the following events occurring during a Change of Control Period:

(i)             The required relocation of the Executive, without the Executive’s consent, to an employment location which is more than seventy-five (75) miles from the Executive’s employment location on the day preceding the date of this Agreement;

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(ii)            The removal of the Executive from or any failure to reelect the Executive to any of the positions held by the Executive during the 180-day period immediately preceding the Change of Control Period, except in the event that such removal or failure to reelect relates to the termination by the Company of the Executive’s employment for Cause or by reason of death, Disability or voluntary retirement;

(iii)           A significant adverse change, without the Executive’s written consent, in the nature or scope of the Executive’s authority, powers, functions, duties or responsibilities that existed during the 180-day period immediately preceding the Change of Control Period, or a material reduction in the level of support services, staff, secretarial and other assistance, office space and accoutrements available to a level below that which was provided to the Executive during the 180-day period immediately preceding the Change of Control Period, and that which is necessary to perform any duties assigned to the Executive during the 180-day period immediately preceding the Change of Control Period; or

(iv)           Breach or violation of any material provision of this Agreement by the Company, which is not remedied within five business days following notice to the Company by the Executive;

(o)            Gross Income ” shall mean the Executive’s current calendar year targeted compensation under Sections 6(a)-(b) of this Agreement;

(p)            Notice of Termination ” shall mean the notice described in Section 14 herein;

(q)            Person ” shall mean any individual, partnership, joint venture, association, trust, corporation or other entity, other than an employee benefit plan of the Company or an entity organized, appointed or established pursuant to the terms of any such benefit plan;

(r)             Termination Date ” shall mean, except as otherwise provided in Section 14 herein,

(i)             The Executive’s date of death;

(ii)            Thirty (30) days after the delivery of the Notice of Termination terminating the Executive’s employment on account of Disability pursuant to Section 9 herein, unless the Executive returns on a full-time basis to the performance of his or her duties prior to the expiration of such period;

(iii)           Thirty (30) days after the delivery of the Notice of Termination if the Executive’s employment is terminated by the Executive voluntarily;

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(iv)           Thirty (30) days after the delivery of the Notice of Termination if the Executive’s employment is terminated by the Company for any reason other than death or Disability; or

(v)            The date the Executive is terminated for Cause.

(s)            Termination Payment ” shall mean the payment described in Section 13 herein;

(t)             Total Payments ” shall mean the sum of the Termination Payment and any other “payments in the nature of compensation” (as defined in Section 280G of the Code and the regulations adopted thereunder) to or for the benefit of the Executive, the receipt of which is contingent on a Change of Control and to which Section 280G of the Code applies.

2.              EMPLOYMENT.

The Company hereby agrees to employ the Executive and the Executive hereby agrees to serve the Company, on the terms and conditions set forth herein.

3.              TERM.

The employment of the Executive by the Company pursuant to the provisions of this Agreement shall commence on the date hereof and end on that date employment of the Executive is terminated pursuant to the terms and conditions of either Section 8, 9, 10, 11 or 12, herein.

4.              POSITIONS AND DUTIES.

The Executive shall serve as Vice President, Business Operations of the Company and in such additional capacities as set forth in Section 7 herein.  In connection with the foregoing positions, the Executive shall have such duties, responsibilities and authority as may from time to time be assigned to the Executive by the Chief Executive Officer.  The Executive shall devote substantially all the Executive’s working time and efforts to the business and affairs of the Company.  The Chief Executive Officer, in his or her sole discretion, may alter, modify, or change the Executive’s duties, offices, positions, responsibilities and obligations set forth in this Agreement at any time, consistent with the status of a senior executive of the Company.

5.              PLACE OF PERFORMANCE.

In connection with the Executive’s employment by the Company, the Executive shall be based at the principal executive offices of the Company in Salt Lake City, Utah except for required travel on Company business.

6.              COMPENSATION AND RELATED MATTERS.

(a)            Salary .  The Company shall pay to the Executive an annualized base salary at a rate of $150,045.00 in equal installments as nearly as practicable on the Company’s regular payroll dates, in arrears.  Such annualized base salary may be

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increased from time to time in accordance with normal business practices of the Company.  The annualized base salary of the Executive shall not be decreased below its then existing amount during the term of this Agreement;

(b)            MIP and MIP-Q .  Subject to the Company’s right to terminate or amend, at any time with or without notice to the Executive, the Evans & Sutherland Management Incentive Plan (MIP) and the Evans & Sutherland Quarterly Management Incentive Plan (MIP-Q), the Executive shall be entitled to participate in the Evans & Sutherland MIP and MIP-Q as agreed in writing in a MIP and a MIP-Q document;

(c)            Executive Savings Plan .  Subject to the Company’s right to terminate or amend, at any time with or without notice to the Executive, the Company’s Executive Savings Plan, the Executive shall be entitled to participate in the Executive Savings Plan according to the terms and conditions of the Executive Savings Plan.

(d)            Expenses .  The Executive shall be entitled to receive prompt reimbursement for all reasonable expenses incurred by the Executive in performing services hereunder, including all expenses for travel and living expenses while away from home on business or at the request of and in the service of the Company, provided that such expenses are incurred and accounted for in accordance with the policies and procedures established by the Company at the time incurred;

(e)            Other Benefits .  The Company shall provide the Executive with all other benefits normally provided to an employee of the Company similarly situated to the Executive, including being added as a named officer on the Company’s existing directors’ and officers’ liability insurance policy;

(f)             Vacations .  The Executive shall be entitled to the number of vacation days in each calendar year, and to compensation in respect of earned but unused vacation days, determined in accordance with the Company’s vacation plan as in effect from time to time.  The Executive shall also be entitled to all paid holidays given by the Company to its executives; and

(g)            Services Furnished .  The Company shall furnish the Executive with office space, and such other facilities and services as shall be suitable to the Executive’s position and adequate for the performance of the Executive’s duties as set forth in Section 4 hereof.

7.              OFFICES.

The Executive agrees to serve without additional compensation, if elected or appointed thereto, in one or more executive offices of the Company, or any affiliate or subsidiary of the Company, or as a member of the board of directors of any subsidiary or affiliate of the Company; provided, however, that the Executive is indemnified for serving in any and all such capacities on a basis no less favorable than is currently provided in the Company’s bylaws, or otherwise.

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8.              TERMINATION AS A RESULT OF DEATH.

If the Executive shall die during the term of this Agreement, the Executive’s employment shall terminate on the Executive’s date of death and the Executive’s surviving spouse, or the Executive’s estate if the Executive dies without a surviving spouse, shall be entitled to the Executive’s Accrued Benefits as of the Termination Date and the applicable Termination Payment.

9.              TERMINATION FOR DISABILITY.

If, as a result of the Executive’s Disability, the Executive shall have been unable to perform the Executive’s duties hereunder on a full-time basis for four (4) consecutive months and within thirty (30) days after the Company provides the Executive with a Termination Notice, the Executive shall not have returned to the performance of the Executive’s duties on a full-time basis, the Company may terminate the Executive’s employment, subject to Section 14 herein.  During the term of the Executive’s Disability prior to termination, the Executive shall continue to receive all salary and other benefits payable under Section 6 herein, including participation in all employee benefit plans, programs and arrangements in which the Executive was entitled to participate immediately prior to the Disability; provided, however, that the Executive’s continued participation is permitted under the terms and provisions of such plans, programs and arrangements.  In the event that the Executive’s participation in any such plan, program or arrangement is barred as the result of such Disability, the Executive shall be entitled to receive an amount equal to the contributions, payments, credits or allocations which would have been paid by the Company to the Executive, to the Executive’s account or on the Executive’s behalf under such plans, programs and arrangements.  In the event the Executive’s employment is terminated on account of the Executive’s Disability in accordance with this Section 9, the Executive shall receive the Executive’s Accrued Benefits as of the Termination Date and shall remain eligible for all benefits provided by any long-term disability programs of the Company in effect at the time of such termination.  The Executive shall also be entitled to the Termination Payment described in Section 13(a).

10.            TERMINATION FOR CAUSE.

If the Executive’s employment with the Company is terminated by the Company for Cause, subject to the procedures set forth in Section 14 herein, the Executive shall be entitled to receive the Executive’s Accrued Benefits as of the Termination Date, however, the Executive’s Accrued Benefits will not include any amount for bonus under Section 1(a)(iv).  The Executive shall not be entitled to receipt of any Termination Payment.

11.            OTHER TERMINATION BY COMPANY.

If the Executive’s employment with the Company is terminated by the Company other than by reason of death, Disability or Cause, subject to the procedures set forth in Section 14 herein, the Executive (or in the event of the Executive’s death following the Termination Date, the Executive’s surviving spouse or the Executive’s estate if the Executive dies without a surviving spouse) shall receive the Executive’s Accrued Benefits and the applicable Termination Payment.  The Executive shall not, in connection with any consideration receivable in

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accordance with this Section 11, be required to mitigate the amount of such consideration by securing other employment or otherwise and such consideration shall not be reduced by reason of the Executive securing other employment or for any other reason.

12.            VOLUNTARY TERMINATION BY EXECUTIVE.

From and after the date of this Agreement, provided that the Executive furnishes thirty (30) days prior written notice to the Company, the Executive shall have the right to voluntarily terminate this Agreement at any time.  If the Executive’s voluntary termination is without Good Reason or without Good Reason During a Change of Control, the Executive shall receive the Executive’s Accrued Benefits as of the Termination Date and shall not be entitled to any Termination Payment, however, the Executive’s Accrued Benefits will not include any amount for bonus under Section 1(a)(iv).  If the Executive’s voluntary termination is for Good Reason or Good Reason During a Change of Control, the Executive (or in the event of the Executive’s death following the Termination Date, the Executive’s surviving spouse or the Executive’s estate if the Executive dies without a surviving spouse) shall receive the Executive’s Accrued Benefits and the applicable Termination Payment.  The Executive shall not, in connection with any consideration receivable in accordance with this Section 12, be required to mitigate the amount of such consideration by securing other employment or otherwise and such consideration shall not be reduced by reason of the Executive securing other employment or for any other reason.

13.            TERMINATION PAYMENT.

(a)            If the Executive’s employment is terminated as a result of death or Disability, the Executive shall receive a Termination Payment equal to one (1.0) times the Executive’s Gross Income.  The Company will also pay the full medical, dental and vision premiums for continuation coverage under COBRA for the Executive and dependents who qualify for continuation coverage under COBRA for one year following Termination Date.

(b)            If, prior to a Change of Control Period, the Executive’s employment is terminated by the Executive for Good Reason or by the Company for any reason other than death, Disability or Cause, the Termination Payment payable to the Executive by the Company or an affiliate of the Company shall be equal to one (1.0) times the Executive’s Gross Income.  The Company will pay the full medical, dental and vision premiums for continuation coverage under COBRA for the Executive and dependents who qualify for continuation coverage under COBRA for one year following the Termination Date.

(c)            If, during a Change of Control Period, the Executive’s employment is terminated by the Executive for Good Reason During a Change of Control or by the Company for any reason other than death, Disability, or Cause, the Termination Payment payable to the Executive by the Company or an affiliate of the Company shall be one (1.0) times the Executive’s Gross Income.  The Company will pay the full medical, dental and vision premiums for continuation coverage under COBRA for the Executive and dependents who qualify for continuation coverage under COBRA for one (1) year following the Termination Date.

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(d)            It is the intention of the Company and the Executive that the benefits under this Agreement shall be capped such that no portion of the Termination Payment and any other “payments in the nature of compensation” (as defined in Section 280G of the Code and the regulations adopted thereunder) to or for the benefit of the Executive under this Agreement, or under any other agreement, plan or arrangement, shall be deemed to be an “excess parachute payment” as defined in Section 280G of the Code.  It is agreed that the present value of the Total Payments shall not exceed an amount equal to two and ninety-nine hundredths (2.99) times the Executive’s Base Period Income, which is the maximum amount which the Executive may receive without becoming subject to the tax imposed by Section 4999 of the Code or which the Company may pay without loss of deduction under Section 280G(a) of the Code.  Present value for purposes of this Agreement shall be calculated in accordance with the regulations issued under Section 280G of the Code.  Within sixty (60) days following delivery of the Notice of Termination or notice by the Company to the Executive of its belief that there is a payment or benefit due the Executive which will result in an excess parachute payment as defined in Section 280G of the Code, the Executive and the Company shall, at the Company’s expense, obtain such opinions as more fully described hereafter, which need not be unqualified, of legal counsel and certified public accountants or a firm of recognized executive compensation consultants.  The Executive shall select said legal counsel, certified public accountants and executive compensation consultants; provided, however, that if the Company does not accept one (1) or more of the parties selected by the Executive, the Company shall provide the Executive with the names of such legal counsel, certified public accountants and/or executive compensation consultants as the Company may select; provided, further, however, that if the Executive does not accept the party or parties selected by the Company, the legal counsel, certified public accountants and/or executive compensation consultants selected by the Executive and the Company, respectively, shall select the legal counsel, certified public accountants and/or executive compensation consultants, whichever is applicable, who shall provide the opinions required by this Section 13(d).  The opinions required hereunder shall set forth (a) the amount of the Base Period Income of the Executive, (b) the present value of Total Payments and (c) the amount and present value of any excess parachute payments.  In the event that such opinions determine that there would be an excess parachute payment, the Termination Payment or any other payment determined by such counsel to be includable in Total Payments shall be reduced or eliminated as specified by the Executive in writing delivered to the Company within thirty (30) days of his or her receipt of such opinions or, if the Executive fails to so notify the Company, then as the Company shall reasonably determine, so that under the bases of calculation set forth in such opinions there will be no excess parachute payment.  The provisions of this Section 13(d), including the calculations, notices and opinions provided for herein shall be based upon the conclusive presumption that the compensation and other benefits, including but not limited to the Gross Income, earned on or after the date of a Change of Control by the Executive pursuant to the Company’s compensation programs if such payments would have been made in the future in any event, even though the timing of such payment is triggered by the Change of Control, are reasonable compensation for services rendered prior to the Change of Control; provided, however, that in the event legal counsel so requests in connection with the opinion required by this Section 13(d), a firm of recognized

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executive compensation consultants, selected by the Executive and the Company pursuant to the procedures set forth above, shall provide an opinion, upon which such legal counsel may rely, as to the reasonableness of any item of compensation as reasonable compensation for services rendered prior to the Change of Control by the Executive.  In the event that the provisions of Sections 280G and 4999 of the Code are repealed without succession, this Section 13(d) shall be of no further force or effect.

(e)            The Termination Payment shall be payable as follows:

(i)             In the event the Executive’s Termination Date is during a Change of Control Period, any Termination Payment shall be paid to the Executive in a lump sum not later than ten (10) days following the Executive’s Termination Date.  Such lump sum payment shall not be reduced by any present value, interest rate, or similar factor.  Further, the Executive shall not be required to mitigate the amount of such payment by securing other employment or otherwise and such payment shall not be reduced by reason of the Executive securing other employment or for any other reason.

(ii)            In the event the Executive’s Termination Date is prior to or after a Change of Control Period, any Termination Payment shall be paid to the Executive in equal installments on the Company’s twenty-six (26) regular bi-weekly paydays over the twelve-month period following the Termination Date.  Such payments shall not be reduced or increased by any present value, interest rate, or similar factor.  Further, the Executive shall not be required to mitigate the amount of such payment by securing other employment or otherwise and such payment shall not be reduced by reason of the Executive securing other employment or for any other reason.

(f)             Notwithstanding anything to the contrary herein, in no event will a termination of Executive’s employment with the Company be deemed to trigger a right to receive a Termination Payment if the termination is effected by the mutual agreement of the Company and Executive to accommodate a reassignment of Executive to an entity created or acquired by the Company, or to which the Company has contributed rights to technology, assets or business plans, if at the time of such termination the Company owns or is acquiring a minimum of a 19% equity interest in such entity.  In the event of any such termination, the Executive shall only be entitled to receive the Executive’s Accrued Benefits as of the Termination Date.

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14.            TERMINATION NOTICE AND PROCEDURE.

Any termination by the Company or the Executive of the Executive’s employment during the employment period shall be communicated by written Notice of Termination (“Notice of Termination”) to the Executive, if such Notice of Termination is delivered by the Company, and to the Company, if such Notice of Termination is delivered by the Executive, all in accordance with the following procedures:

(a)            The Notice of Termination shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances alleged to provide a basis for termination;

(b)            Any Notice of Termination by the Company shall be approved by a resolution duly adopted by a majority of the Board, or a majority of the Board may delegate such authority to approve any Notice of Termination to the Chief Executive Officer of the Company;

(c)            If the Executive shall in good faith furnish a Notice of Termination for Good Reason or for Good Reason During a Change of Control and the Company notifies the Executive that a dispute exists concerning the existence of Good Reason or Good Reason During a Change of Control, within the fifteen (15) day period following the Company’s receipt of such notice, the Executive shall continue the Executive’s employment during such dispute.  If it is thereafter determined that (i) Good Reason or Good Reason During a Change of Control did exist, the Executive’s Termination Date shall be the earlier of (A) the date on which the dispute is finally determined, either by mutual written agreement of the parties or pursuant to Section 16, (B) the date of the Executive’s death or (C) one day prior to the second (2nd) anniversary of a Change of Control, if any, and the Executive’s Termination Payment, if applicable, shall reflect events occurring after the Executive delivered the Executive’s Notice of Termination; or (ii) Good Reason or Good Reason During a Change of Control did not exist, the employment of the Executive shall continue after such determination as if the Executive had not delivered the Notice of Termination asserting Good Reason or Good Reason During a Change of Control; and

(d)            If the Executive gives Notice of Termination of his or her employment for Good Reason or Good Reason During a Change of Control and a dispute arises as to the existence of Good Reason or Good Reason During a Change of Control, and the Executive does not continue his employment during such dispute, and it is finally determined that the reason for termination set forth in such Notice of Termination did not exist, if such notice was delivered by the Executive, the Executive shall be deemed to have voluntarily terminated the Executive’s employment other than for Good Reason or Good Reason During a Change of Control.

15.            NON-COMPETE.

The Executive hereby agrees that during the term of this Agreement and for the period of one year from the termination hereof, that the Executive will not:

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(a)            Within any jurisdiction or marketing area in the United States in which the Company or any subsidiary thereof is doing business, own, manage, operate or control any business of the type and character engaged in and competitive with the Company or any subsidiary thereof.  For purposes of this Section 15, ownership of securities of not in excess of five percent (5%) of any class of securities of a public company shall not be considered to be competition with the Company or any subsidiary thereof; or

(b)            Within any jurisdiction or marketing area in the United States in which the Company or any subsidiary thereof is doing business, act as, or become employed as, an officer, director, employee, consultant or agent of any business of the type and character engaged in and competitive with the Company or any of its subsidiaries; or

(c)            Solicit any similar business to that of the Company’s for, or sell any products that are in competition with the Company’s products to, any company in the United States, which is, as of the date hereof or through the Termination Date, a customer or client of the Company or any of its subsidiaries, or was such a customer or client thereof within two years prior to the Termination Date; or

(d)            Solicit the employment of (i) any employee of the Company or its subsidiaries that is an employee at anytime during this term of this Agreement or during the one year period following the termination of this Agreement, or (ii) any former employee of the Company or its subsidiaries who was employed by the Company or its subsidiaries during the one (1) year period preceding the Termination Date.

For purposes of this Section 15, any business in the 3D visualization simulation market shall be deemed to be competitive with the Company.

16.            REMEDIES AND JURISDICTION.

(a)            The Executive hereby acknowledges and agrees that a breach of the agreements contained in this Agreement will cause irreparable harm and damage to the Company, that the remedy at law for the breach or threatened breach of the agreements set forth in this Agreement will be inadequate, and that, in addition to all other remedies available to the Company for such breach or threatened breach (including, without limitation, the right to recover damages), the Company shall be entitled to injunctive relief for any breach or threatened breach of the agreements contained in this Agreement.  To enforce the provisions of this Section 16(a), the Company may seek relief from any court with proper jurisdiction and the provisions of Section 16(b)-(d) shall not be applicable for purposes of this Section 16(a).

(b)            All claims, disputes and other matters in question between the parties arising under this Agreement, shall, unless otherwise provided herein, be decided by binding arbitration before a single independent arbitrator selected pursuant to Section 16(d).  TO THE EXTENT ALLOWABLE UNDER APPLICABLE LAW, ALL DISPUTES INVOLVING ALLEGED UNLAWFUL EMPLOYMENT DISCRIMINATION, BREACH OF CONTRACT OR POLICY, OR EMPLOYMENT TORT COMMITTED BY THE COMPANY OR A REPRESENTATIVE OF THE

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COMPANY, INCLUDING CLAIMS OF VIOLATIONS OF FEDERAL OR STATE DISCRIMINATION STATUTES OR PUBLIC POLICY, SHALL BE RESOLVED PURSUANT TO THIS POLICY AND THERE SHALL BE NO RECOURSE TO COURT, WITH OR WITHOUT A JURY TRIAL.  The arbitration hearing shall occur at a time and place convenient to the parties in Salt Lake County, Utah, within thirty (30) days of selection or appointment of the arbitrator.  If the Company has adopted a policy that is applicable to arbitration with employees, the arbitration shall be conducted in accordance with said policy to the extent that the policy is consistent with this Agreement and the Federal Arbitration Act, 9 U.S.C. §§ 1-16.  If no such policy has been adopted, the arbitration shall be governed by the National Rules for the Resolution of Employment Disputes of AAA in effect on the date of the first notice of demand for arbitration.  The arbitrator shall issue written findings of fact and conclusions of law, and an award, within fifteen (15) days of the date of the hearing unless the parties otherwise agree.

(c)            In cases of breach of contract or policy, damages shall be limited to contract damages.  In cases of discrimination claims prohibited by statute, the arbitrator may direct payment consistent with the applicable statute.  Issues of procedure, arbitrability, or confirmation of award shall be governed by the Federal Arbitration Act, 9 U.S.C. §§ 1-16, except that court review of the arbitrator’s award shall be that of an appellate court reviewing a decision of a trial judge sitting without a jury.

(d)            The parties shall select the arbitrator from a panel list made available by the AAA.  If the parties are unable to agree to an arbitrator within ten (10) days of receipt of a demand for arbitration, the arbitrator will be chosen by alternatively striking from a list of five (5) arbitrators obtained by the Company from AAA.  The Executive shall have the first strike.

17.            ATTORNEYS’ FEES.

In the event that either party hereunder institutes any legal proceedings in connection with its rights or obligations under this Agreement, each party in such proceeding shall be responsible for all of its own costs incurred in connection with such proceeding, including attorneys’ fees and any other fees, expenses, or costs.

18.            SUCCESSORS.

This Agreement and all rights of the Executive shall inure to the benefit of and be enforceable by the Executive’s personal or legal representatives, estates, executors, administrators, heirs and beneficiaries.  In the event of the Executive’s death, all amounts payable to the Executive under this Agreement shall be paid to the Executive’s surviving spouse, or the Executive’s estate if the Executive dies without a surviving spouse.  This Agreement shall inure to the benefit of, be binding upon and be enforceable by, any successor, surviving or resulting corporation or other entity to which all or substantially all of the business and assets of the Company shall be transferred whether by merger, consolidation, transfer or sale.

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19.            ENFORCEMENT.

The provisions of this Agreement shall be regarded as divisible, and if any of said provisions or any part hereof are declared invalid or unenforceable by a court of competent jurisdiction, the validity and enforceability of the remainder of such provisions or parts hereof and the applicability thereof shall not be affected thereby.

20.            AMENDMENT OR TERMINATION.

This Agreement may not be amended or terminated during its term, except by written instrument executed by the Company and the Executive.

21.            SURVIVABILITY.

The provisions of Sections 15, 16, 17, 18 and 19 shall survive termination of this Agreement.

22.            ENTIRE AGREEMENT.

Except for the Confidentiality, Proprietary Information, and Inventions Agreement between the Executive and the Company, this Agreement sets forth the entire agreement between the Executive and the Company with respect to the subject matter hereof, and supersedes all prior oral or written agreements, negotiations, commitments and understandings with respect thereto.   Prior Employment Agreements between the Executive and the Company are hereby terminated in their entirety and superceded by this Agreement.

23.            VENUE; GOVERNING LAW.

This Agreement and the Executive’s and Company’s respective rights and obligations hereunder shall be governed by and construed in accordance with the laws of the State of Utah without giving effect to the provisions, principles, or policies thereof relating to choice or conflicts of laws.

24.            NOTICE.

All notices, requests, instructions or other documents to be given under this Agreement shall be in writing and shall be deemed given (i) three business days following sending by registered or certified mail, postage prepaid, (ii) when sent if sent by facsimile; provided, however, that the facsimile is promptly confirmed by telephone confirmation thereof, (iii) when delivered, if delivered personally to the intended recipient, and (iv) one business day following sending by overnight delivery via a national courier service, and in each case, addressed to a party at the following address for such party:

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Company:

Evans & Sutherland Computer Corporation

 

 

600 Komas Drive

 

 

Salt Lake City, Utah 84108

 

 

Attn:  Vice President of Human Resources

 

 

Fax:  (801) 588-4517

 

 

Tel:  (801) 588-1609

 

 

 

 

 

 

 

Executive:

David H. Bateman

 

 

3404 W. Cedar Drive

 

 

Park City, Utah 84098

 

 

 

 

 

Fax:  (      )       -      

 

 

Tel:  (435) 615-7324

 

or to such other address as the Company shall have given to the Executive or, if to the Executive, to such address as the Executive shall have given to the Company or facsimile number as the party to whom notice is given may have previously furnished to the other in writing in the manner set forth above.

25.            NO WAIVER.

No waiver by either party at any time of any breach by the other party of, or compliance with, any condition or provision of this Agreement to be performed by the other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same time or any prior or subsequent time.

26.            HEADINGS.

The headings herein contained are for reference only and shall not affect the meaning or interpretation of any provision of this Agreement.

27.            COUNTERPARTS.

This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument.

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IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by its duly authorized officer, and the Executive has executed this Agreement, on the date and year first above written.

 

“COMPANY”

 

 

 

 

 

 

 

EVANS & SUTHERLAND COMPUTER

 

CORPORATION, a Utah Corporation

 

 

 

 

 

 

 

By:

 

/s/ James R. Oyler

 

 

 

     James R. Oyler

 

 

President and Chief Executive Officer

 

 

 

 

 

 

 

“EXECUTIVE”

 

 

 

 

 

 

 

 

 

/s/ David H. Bateman

 

 

 

     David H. Bateman

 

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Exhibit 10.24

CREDIT AGREEMENT

THIS CREDIT AGREEMENT (this “Agreement”) is entered into as of December 1, 2006 by and between EVANS & SUTHERLAND COMPUTER CORPORATION, a Utah corporation (“Borrower”), and WELLS FARGO BANK, NATIONAL ASSOCIATION (“Bank”).

RECITALS

Borrower has requested that Bank extend or continue credit to Borrower as described below, and Bank has agreed to provide such credit to Borrower on the terms and conditions contained herein.

NOW, THEREFORE, for valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Bank and Borrower hereby agree as follows:

ARTICLE I

CREDIT TERMS

SECTION 1.1.         STANDBY LETTER OF CREDIT A.

(a)            Standby Letter of Credit A.  Bank has made or cause an affiliate to issue a standby letter of credit for the account of Borrower and for the benefit of Guangdong Provincial Machinery and Electric Equipment Tendering Co. Guangzhou, China to finance a planetarium playback system (the “Standby Letter of Credit A”) in the principal amount of Three Hundred Twenty Eight Thousand Seven Hundred Fifty Dollars ($328,750.00).  The Standby Letter of Credit A has an expiration date of March 31, 2007 and is subject to the additional terms of the Letter of Credit agreement, application and any related documents required by Bank in connection with the issuance thereof (the “Letter of Credit Agreement”).

(b)            Repayment of Drafts.  Each drawing paid under the Standby Letter of Credit A shall be repaid by Borrower in accordance with the provisions of the Letter of Credit Agreement.

SECTION 1.2.         STANDBY LETTER OF CREDIT B

(a)            Standby Letter of Credit B.  Bank has made or cause an affiliate to issue a standby letter of credit for the account of Borrower and for the benefit of Nashik Municipal Corporation, Nashik, India to finance the installation and commissioning of a multi channel digital planetarium system with science center (the “Standby Letter of Credit B”) in the principal amount of Twenty Thousand One Hundred Sixty Seven Dollars and Seventy Five Cents ($20,167.75). The Standby Letter of Credit B has an expiration date of September 30, 2007 and is subject to the additional terms of the Letter of Credit agreement, application and any related documents required by Bank in connection with the issuance thereof (the “Letter of Credit Agreement”).

(b)            Repayment of Drafts.  Each drawing paid under the Standby Letter of Credit B shall be repaid by Borrower in accordance with the provisions of the Letter of Credit Agreement.

SECTION 1.3.         STANDBY LETTER OF CREDIT C.

(a)            Standby Letter of Credit C.  Bank has made or cause an affiliate to issue a standby letter of credit for the account of Borrower and for the benefit




of Gorakhpur Development Authority Uttah Praadesh, India to finance a contract between Gorakhpur and Evans & Sutherland Computer Corporation (the “Standby Letter of Credit C”) in the principal amount of One Hundred Fifty Thousand Five Hundred Seventy Five Dollars ($150,575.00). The Standby Letter of Credit C has an expiration date of December 1, 2007 and is subject to the additional terms of the Letter of Credit agreement, application and any related documents required by Bank in connection with the issuance thereof (the “Letter of Credit Agreement”).

(b)            Repayment of Drafts.  Each drawing paid under the Standby Letter of Credit C shall be repaid by Borrower in accordance with the provisions of the Letter of Credit Agreement.

SECTION 1.4.         FOREIGN EXCHANGE FACILITY.

(a)            Foreign Exchange Facility.  Subject to the terms and conditions of this Agreement, Bank hereby agrees to make available to Borrower a facility (the “Foreign Exchange Facility”) under which Bank, from time to time up to and including December 1, 2007, will enter into foreign exchange contracts for the account of Borrower for the purchase and/or sale by Borrower in United States dollars of foreign currencies designated by Borrower; provided however, that the maximum amount of all outstanding foreign exchange contracts shall not at any time exceed an aggregate of Two Hundred Thousand United States Dollars (US$200,000.00).  No foreign exchange contract shall be executed for a term which extends beyond December 1, 2007.  Borrower shall have a “Delivery Limit” under the Foreign Exchange Facility not to exceed at any time the aggregate principal amount of Six Thousand United States Dollars (US$6,000.00), which Delivery Limit reflects the maximum principal amount of Borrower’s foreign exchange contracts which may mature during any two (2) day period.  All foreign exchange transactions shall be subject to the additional terms of a Foreign Exchange Agreement dated as of December 1, 2004  (“Foreign Exchange Agreement”), all terms of which are incorporated herein by this reference.

(b)            Settlement.  Each foreign exchange contract under the Foreign Exchange Facility shall be settled on its maturity date by Bank’s debit to any deposit account maintained by Borrower with Bank.”

SECTION 1.5.         INTEREST/FEES.

(a)            Interest. The outstanding principal balance of each credit subject hereto shall bear interest, and the amount of each drawing paid under the Standby Letter of Credit shall bear interest from the date such drawing is paid to the date such amount is fully repaid by Borrower, at the rate of interest set forth in each promissory note or other instrument or document executed in connection therewith.

(b)            Letter of Credit Fees.  Borrower shall pay to Bank (i) fees upon the issuance of each Performance Letter of Credit, as determined by Bank, equal to one percent (1%) per annum (computed on the basis of a 360-day year, actual days elapsed) of the face amount thereof, and (ii) fees upon the issuance of each Financial Letter of Credit, as determined by Bank, equal to one percent (1.5%) per annum (computed on the basis of a 360-day year, actual days elapsed) of the face amount thereof, and (iii) fees upon the payment or negotiation of each drawing under any Letter of Credit and fees upon the occurrence of any other activity with respect to any Letter of Credit (including without limitation, the transfer, amendment or cancellation of any Letter of Credit) determined in




accordance with Bank’s standard fees and charges then in effect for such activity.

SECTION 1.6.         COLLATERAL.

As security for all indebtedness of Borrower to Bank subject hereto and arising pursuant to any deposit or treasury management services provided by Bank to Borrower, Borrower hereby grants to Bank security interests of first priority in all Borrower’s interest in that certain money market savings account #3801563101, over which Borrower shall have no control (the “Cash Collateral Account”).  All of the foregoing shall be evidenced by and subject to the terms of such security agreements, financing statements, and other documents as Bank shall reasonably require, all in form and substance satisfactory to Bank.  Borrower shall reimburse Bank immediately upon demand for all costs and expenses incurred by Bank in connection with any of the foregoing security.

The balance in the Cash Collateral Account shall at all times be equal to or greater than one hundred percent (100%) of the aggregate of (i) all issued and outstanding, unpaid and unreimbursed Letters of Credit, plus (ii) such amounts as Bank may determine, in its sole discretion, are required to adequately secure Borrower’s liability and performance of any foreign exchange spot contracts under the Foreign Exchange Facility and deposit and treasury management services provided to Borrower by Bank.  In the event that the balance of the Cash Collateral Account, for any reason and at any time, is less than the required amount, Debtor shall, within five (5) Business Days after Bank gives Borrower verbal or written notice of such deficiency, deposit additional monies into the Cash Collateral Account in amounts sufficient to achieve the required amount.  As used herein, “Business Day” means any day except a Saturday, Sunday or any other day on which commercial banks in Utah are authorized or required by law to close.

All of the foregoing shall be evidenced by and subject to the terms of such security agreements, financing statements, deeds or mortgages, and other documents as Bank shall reasonably require, all in form and substance satisfactory to Bank.  Borrower shall pay to Bank immediately upon demand the full amount of all charges, costs and expenses (to include fees paid to third parties and all allocated costs of Bank personnel), expended or incurred by Bank in connection with any of the foregoing security, including without limitation, filing and recording fees and costs of appraisals, audits and title insurance.

ARTICLE II

REPRESENTATIONS AND WARRANTIES

Borrower makes the following representations and warranties to Bank, which representations and warranties shall survive the execution of this Agreement and shall continue in full force and effect until the full and final payment, and satisfaction and discharge, of all obligations of Borrower to Bank subject to this Agreement.

SECTION 2.1.         LEGAL STATUS.  Borrower is a corporation duly organized and existing and in good standing under the laws of Utah, and is qualified or licensed to do business (and is in good standing as a foreign corporation, if applicable) in all jurisdictions in which such qualification or licensing is required or in which the failure to so qualify or to be so licensed could have a material adverse effect on Borrower.




SECTION 2.2.         AUTHORIZATION AND VALIDITY.  This Agreement and each promissory note, contract, instrument and other document required hereby or at any time hereafter delivered to Bank in connection herewith (collectively, the “Loan Documents”) have been duly authorized, and upon their execution and delivery in accordance with the provisions hereof will constitute legal, valid and binding agreements and obligations of Borrower or the party which executes the same, enforceable in accordance with their respective terms.

SECTION 2.3.         NO VIOLATION.  The execution, delivery and performance by Borrower of each of the Loan Documents do not violate any provision of any law or regulation, or contravene any provision of the Articles of Incorporation or By-Laws of Borrower, or result in any breach of or default under any contract, obligation, indenture or other instrument to which Borrower is a party or by which Borrower may be bound.

SECTION 2.4.         LITIGATION.  There are no pending, or to the best of Borrower’s knowledge threatened, actions, claims, investigations, suits or proceedings by or before any governmental authority, arbitrator, court or administrative agency which could have a material adverse effect on the financial condition or operation of Borrower other than those disclosed by Borrower to Bank in writing prior to the date hereof.

SECTION 2.5.         CORRECTNESS OF FINANCIAL STATEMENT.  The annual financial statement of Borrower dated December 31, 2005, and all interim financial statements delivered to Bank since said date, true copies of which have been delivered by Borrower to Bank prior to the date hereof, (a) are complete and correct and present fairly the financial condition of Borrower, (b) disclose all liabilities of Borrower that are required to be reflected or reserved against under generally accepted accounting principles, whether liquidated or unliquidated, fixed or contingent, and (c) have been prepared in accordance with generally accepted accounting principles consistently applied.  Since the dates of such financial statements there has been no material adverse change in the financial condition of Borrower, nor has Borrower mortgaged, pledged, granted a security interest in or otherwise encumbered any of its assets or properties except in favor of Bank or as otherwise permitted by Bank in writing.

SECTION 2.6.         INCOME TAX RETURNS.  Borrower has no knowledge of any pending assessments or adjustments of its income tax payable with respect to any year.

SECTION 2.7.         NO SUBORDINATION.  There is no agreement, indenture, contract or instrument to which Borrower is a party or by which Borrower may be bound that requires the subordination in right of payment of any of Borrower’s obligations subject to this Agreement to any other obligation of Borrower.

SECTION 2.8.         PERMITS, FRANCHISES.  Borrower possesses, and will hereafter possess, all permits, consents, approvals, franchises and licenses required and rights to all trademarks, trade names, patents, and fictitious names, if any, necessary to enable it to conduct the business in which it is now engaged in compliance with applicable law.

SECTION 2.9.         ERISA.  Borrower is in compliance in all material respects with all applicable provisions of the Employee Retirement Income Security Act of 1974, as amended or recodified from time to time (“ERISA”); Borrower has not violated any provision of any defined employee pension benefit plan (as defined in ERISA) maintained or contributed to by Borrower (each, a




“Plan”); no Reportable Event as defined in ERISA has occurred and is continuing with respect to any Plan initiated by Borrower; Borrower has met its minimum funding requirements under ERISA with respect to each Plan; and each Plan will be able to fulfill its benefit obligations as they come due in accordance with the Plan documents and under generally accepted accounting principles.

SECTION 2.10.       OTHER OBLIGATIONS.  Borrower is not in default on any obligation for borrowed money, any purchase money obligation or any other material lease, commitment, contract, instrument or obligation.

SECTION 2.11.       ENVIRONMENTAL MATTERS.  Except as disclosed by Borrower to Bank in writing prior to the date hereof, Borrower is in compliance in all material respects with all applicable federal or state environmental, hazardous waste, health and safety statutes, and any rules or regulations adopted pursuant thereto, which govern or affect any of Borrower’s operations and/or properties, including without limitation, the Comprehensive Environmental Response, Compensation and Liability Act of 1980, the Superfund Amendments and Reauthorization Act of 1986, the Federal Resource Conservation and Recovery Act of 1976, and the Federal Toxic Substances Control Act, as any of the same may be amended, modified or supplemented from time to time.  None of the operations of Borrower is the subject of any federal or state investigation evaluating whether any remedial action involving a material expenditure is needed to respond to a release of any toxic or hazardous waste or substance into the environment.  Borrower has no material contingent liability in connection with any release of any toxic or hazardous waste or substance into the environment.

ARTICLE III

CONDITIONS

SECTION 3.1.         CONDITIONS OF INITIAL EXTENSION OF CREDIT.  The obligation of Bank to extend any credit contemplated by this Agreement is subject to the fulfillment to Bank’s satisfaction of all of the following conditions:

(a)            Approval of Bank Counsel.  All legal matters incidental to the extension of credit by Bank shall be satisfactory to Bank’s counsel.

(b)            Documentation.  Bank shall have received, in form and substance satisfactory to Bank, each of the following, duly executed:

(i) This Agreement and each promissory note or other instrument or document required hereby.

(ii) Certificate of Incumbency.

(iii) Corporate Resolution: Borrowing.

(iv) S/A; Borrower: Specific Rights to Payment.

(v) Foreign Exchange Agreement.

(vi)           Such other documents as Bank may require under any other Section of this Agreement.

(c)            Financial Condition.  There shall have been no material adverse change, as determined by Bank, in the financial condition or business of Borrower, nor any material decline, as determined by Bank, in the market value of any collateral required hereunder or a substantial or material portion of the assets of Borrower.




(d)            Insurance.  Borrower shall have delivered to Bank evidence of insurance coverage on all Borrower’s property, in form, substance, amounts, covering risks and issued by companies satisfactory to Bank, and where required by Bank, with loss payable endorsements in favor of Bank.

SECTION 3.2.         CONDITIONS OF EACH EXTENSION OF CREDIT.  The obligation of Bank to make each extension of credit requested by Borrower hereunder shall be subject to the fulfillment to Bank’s satisfaction of each of the following conditions:

(a)            Compliance.  The representations and warranties contained herein and in each of the other Loan Documents shall be true on and as of the date of the signing of this Agreement and on the date of each extension of credit by Bank pursuant hereto, with the same effect as though such representations and warranties had been made on and as of each such date, and on each such date, no Event of Default as defined herein, and no condition, event or act which with the giving of notice or the passage of time or both would constitute such an Event of Default, shall have occurred and be continuing or shall exist.

(b)            Documentation.  Bank shall have received all additional documents which may be required in connection with such extension of credit.

(c)            Additional Letter of Credit Documentation.  Prior to the issuance of each Letter of Credit, Bank shall  have received a Letter of Credit Agreement, properly completed and duly executed by Borrower.

ARTICLE IV

AFFIRMATIVE COVENANTS

Borrower covenants that so long as Bank remains committed to extend credit to Borrower pursuant hereto, or any liabilities (whether direct or contingent, liquidated or unliquidated) of Borrower to Bank under any of the Loan Documents remain outstanding, and until payment in full of all obligations of Borrower subject hereto, Borrower shall, unless Bank otherwise consents in writing:

SECTION 4.1.         PUNCTUAL PAYMENTS.  Punctually pay all principal, interest, fees or other liabilities due under any of the Loan Documents at the times and place and in the manner specified therein.

SECTION 4.2.         ACCOUNTING RECORDS.  Maintain adequate books and records in accordance with generally accepted accounting principles consistently applied, and permit any representative of Bank, at any reasonable time, to inspect, audit and examine such books and records, to make copies of the same, and to inspect the properties of Borrower.

SECTION 4.3.         FINANCIAL STATEMENTS.  Provide to Bank all of the following, in form and detail satisfactory to Bank:

(a)            not later than 120 days after and as of the end of each fiscal year, an audited financial statement of Borrower, prepared by a certified public accountant acceptable to Bank, to include balance sheet, income statement and statement of cash flows;

(b)            not later than 45 days after and as of the end of each quarter, a financial statement of Borrower, prepared by Borrower, to include balance sheet and income statement;




(c)            from time to time such other information as Bank may reasonably request.

SECTION 4.4.         COMPLIANCE.  Preserve and maintain all licenses, permits, governmental approvals, rights, privileges and franchises necessary for the conduct of its business; and comply with the provisions of all documents pursuant to which Borrower is organized and/or which govern Borrower’s continued existence and with the requirements of all laws, rules, regulations and orders of any governmental authority applicable to Borrower and/or its business.

SECTION 4.5.         INSURANCE.  Maintain and keep in force, for each business in which Borrower is engaged, insurance of the types and in amounts customarily carried in similar lines of business, including but not limited to fire, extended coverage, public liability, flood, property damage and workers’ compensation, with all such insurance carried with companies and in amounts satisfactory to Bank, and deliver to Bank from time to time at Bank’s request schedules setting forth all insurance then in effect.

SECTION 4.6.         FACILITIES.  Keep all properties useful or necessary to Borrower’s business in good repair and condition, and from time to time make necessary repairs, renewals and replacements thereto so that such properties shall be fully and efficiently preserved and maintained.

SECTION 4.7.         TAXES AND OTHER LIABILITIES.  Pay and discharge when due any and all indebtedness, obligations, assessments and taxes, both real or personal, including without limitation federal and state income taxes and state and local property taxes and assessments, except (a) such as Borrower may in good faith contest or as to which a bona fide dispute may arise, and (b) for which Borrower has made provision, to Bank’s satisfaction, for eventual payment thereof in the event Borrower is obligated to make such payment.

SECTION 4.8.         LITIGATION.  Promptly give notice in writing to Bank of any litigation pending or threatened against Borrower.

SECTION 4.9.         NOTICE TO BANK.  Promptly (but in no event more than five (5) days after the occurrence of each such event or matter) give written notice to Bank in reasonable detail of:  (a) the occurrence of any Event of Default, or any condition, event or act which with the giving of notice or the passage of time or both would constitute an Event of Default; (b) any change in the name or the organizational structure of Borrower; (c) the occurrence and nature of any Reportable Event or Prohibited Transaction, each as defined in ERISA, or any funding deficiency with respect to any Plan; or (d) any termination or cancellation of any insurance policy which Borrower is required to maintain, or any uninsured or partially uninsured loss through liability or property damage, or through fire, theft or any other cause affecting Borrower’s property.

ARTICLE V

NEGATIVE COVENANTS

Borrower further covenants that so long as Bank remains committed to extend credit to Borrower pursuant hereto, or any liabilities (whether direct or contingent, liquidated or unliquidated) of Borrower to Bank under any of the Loan Documents remain outstanding, and until payment in full of all obligations of Borrower subject hereto, Borrower will not without Bank’s prior written consent:




SECTION 5.1.         USE OF FUNDS.  Use any of the proceeds of any credit extended hereunder except for the purposes stated in Article I hereof.

SECTION 5.2.         OTHER INDEBTEDNESS.  Create, incur, assume or permit to exist any indebtedness or liabilities resulting from borrowings, loans or advances, whether secured or unsecured, matured or unmatured, liquidated or unliquidated, joint or several, except (a) the liabilities of Borrower to Bank, and (b) any other liabilities of Borrower existing as of, and disclosed to Bank prior to, the date hereof.

SECTION 5.3.         MERGER, CONSOLIDATION, TRANSFER OF ASSETS.  Merge into or consolidate with any other entity; make any substantial change in the nature of Borrower’s business as conducted as of the date hereof; acquire all or substantially all of the assets of any other entity; nor sell, lease, transfer or otherwise dispose of all or a substantial or material portion of Borrower’s assets except in the ordinary course of its business.

SECTION 5.4.         LOANS, ADVANCES, INVESTMENTS.  Make any loans or advances to or investments in any person or entity, except any of the foregoing existing as of, and disclosed to Bank prior to, the date hereof.

ARTICLE VI

EVENTS OF DEFAULT

SECTION 6.1.         The occurrence of any of the following shall constitute an “Event of Default” under this Agreement:

(a)            Borrower shall fail to pay when due any principal, interest, fees or other amounts payable under any of the Loan Documents.

(b)            Any financial statement or certificate furnished to Bank in connection with, or any representation or warranty made by Borrower or any other party under this Agreement or any other Loan Document shall prove to be incorrect, false or misleading in any material respect when furnished or made.

(c)            Any default in the performance of or compliance with any obligation, agreement or other provision contained herein or in any other Loan Document (other than those referred to in subsections (a) and (b) above), and with respect to any such default which by its nature can be cured, such default shall continue for a period of twenty (20) days from its occurrence.

(d)            Any default in the payment or performance of any obligation, or any defined event of default, under the terms of any contract or instrument (other than any of the Loan Documents) pursuant to which Borrower, any guarantor hereunder or any general partner or joint venturer in Borrower if a partnership or joint venture (with each such guarantor, general partner and/or joint venturer referred to herein as a “Third Party Obligor”) has incurred any debt or other liability to any person or entity, including Bank.

(e)            The filing of a notice of judgment lien against Borrower or any Third Party Obligor; or the recording of any abstract of judgment against Borrower or any Third Party Obligor in any county in which Borrower or such Third Party Obligor has an interest in real property; or the service of a notice of levy and/or of a writ of attachment or execution, or other like process,




against the assets of Borrower or any Third Party Obligor; or the entry of a judgment against Borrower or any Third Party Obligor.

(f)             Borrower or any Third Party Obligor shall become insolvent, or shall suffer or consent to or apply for the appointment of a receiver, trustee, custodian or liquidator of itself or any of its property, or shall generally fail to pay its debts as they become due, or shall make a general assignment for the benefit of creditors; Borrower or any Third Party Obligor shall file a voluntary petition in bankruptcy, or seeking reorganization, in order to effect a plan or other arrangement with creditors or any other relief under the Bankruptcy Reform Act, Title 11 of the United States Code, as amended or recodified from time to time (“Bankruptcy Code”), or under any state or federal law granting relief to debtors, whether now or hereafter in effect; or any involuntary petition or proceeding pursuant to the Bankruptcy Code or any other applicable state or federal law relating to bankruptcy, reorganization or other relief for debtors is filed or commenced against Borrower or any Third Party Obligor, or Borrower or any Third Party Obligor shall file an answer admitting the jurisdiction of the court and the material allegations of any involuntary petition; or Borrower or any Third Party Obligor shall be adjudicated a bankrupt, or an order for relief shall be entered against Borrower or any Third Party Obligor by any court of competent jurisdiction under the Bankruptcy Code or any other applicable state or federal law relating to bankruptcy, reorganization or other relief for debtors.

(g)            There shall exist or occur any event or condition which Bank in good faith believes impairs, or is substantially likely to impair, the prospect of payment or performance by Borrower of its obligations under any of the Loan Documents.

(h)            The death or incapacity of Borrower or any Third Party Obligor if an individual.  The dissolution or liquidation of Borrower or any Third Party Obligor if a corporation, partnership, joint venture or other type of entity; or Borrower or any such Third Party Obligor, or any of its directors, stockholders or members, shall take action seeking to effect the dissolution or liquidation of Borrower or such Third Party Obligor.

(i)             Any change in ownership of an aggregate of twenty-five percent (25%) or more of the common stock of Borrower.

SECTION 6.2.         REMEDIES.  Upon the occurrence of any Event of Default:  (a) all indebtedness of Borrower under each of the Loan Documents, any term thereof to the contrary notwithstanding, shall at Bank’s option and without notice become immediately due and payable without presentment, demand, protest or notice of dishonor, all of which are hereby expressly waived by Borrower; (b) the obligation, if any, of Bank to extend any further credit under any of the Loan Documents shall immediately cease and terminate; and (c) Bank shall have all rights, powers and remedies available under each of the Loan Documents, or accorded by law, including without limitation the right to resort to any or all security for any credit subject hereto and to exercise any or all of the rights of a beneficiary or secured party pursuant to applicable law.  All rights, powers and remedies of Bank may be exercised at any time by Bank and from time to time after the occurrence of an Event of Default, are cumulative and not exclusive, and shall be in addition to any other rights, powers or remedies provided by law or equity.




ARTICLE VII

MISCELLANEOUS

SECTION 7.1.        NO WAIVER.  No delay, failure or discontinuance of Bank in exercising any right, power or remedy under any of the Loan Documents shall affect or operate as a waiver of such right, power or remedy; nor shall any single or partial exercise of any such right, power or remedy preclude, waive or otherwise affect any other or further exercise thereof or the exercise of any other right, power or remedy.  Any waiver, permit, consent or approval of any kind by Bank of any breach of or default under any of the Loan Documents must be in writing and shall be effective only to the extent set forth in such writing.

SECTION 7.2.         NOTICES.  All notices, requests and demands which any party is required or may desire to give to any other party under any provision of this Agreement must be in writing delivered to each party at the following address:

BORROWER:         EVANS & SUTHERLAND COMPUTER CORPORATION

600 Komas Drive, P.O. Box 58700

Salt Lake City, Utah 84108

BANK:    WELLS FARGO BANK, NATIONAL ASSOCIATION

Utah RCBO

299 South Main, 9th Floor

Salt Lake City, Utah 84111

or to such other address as any party may designate by written notice to all other parties.  Each such notice, request and demand shall be deemed given or made as follows:  (a) if sent by hand delivery, upon delivery; (b) if sent by mail, upon the earlier of the date of receipt or three (3) days after deposit in the U.S. mail, first class and postage prepaid; and (c) if sent by telecopy, upon receipt.

SECTION 7.3.         COSTS, EXPENSES AND ATTORNEYS’ FEES.  Borrower shall pay to Bank immediately upon demand the full amount of all payments, advances, charges, costs and expenses, including reasonable attorneys’ fees (to include outside counsel fees and all allocated costs of Bank’s in-house counsel), expended or incurred by Bank in connection with (a) the negotiation and preparation of this Agreement and the other Loan Documents, Bank’s continued administration hereof and thereof, and the preparation of any amendments and waivers hereto and thereto, (b) the enforcement of Bank’s rights and/or the collection of any amounts which become due to Bank under any of the Loan Documents, and (c) the prosecution or defense of any action in any way related to any of the Loan Documents, including without limitation, any action for declaratory relief, whether incurred at the trial or appellate level, in an arbitration proceeding or otherwise, and including any of the foregoing incurred in connection with any bankruptcy proceeding (including without limitation, any adversary proceeding, contested matter or motion brought by Bank or any other person) relating to Borrower or any other person or entity.

SECTION 7.4.         SUCCESSORS, ASSIGNMENT.  This Agreement shall be binding upon and inure to the benefit of the heirs, executors, administrators, legal representatives, successors and assigns of the parties; provided however, that Borrower may not assign or transfer its interests or rights hereunder without Bank’s prior written consent.  Bank reserves the right to sell, assign, transfer, negotiate or grant participations in all or any part of, or any interest in, Bank’s rights and benefits under each of the Loan Documents.  In connection therewith, Bank may disclose all documents and information which Bank




now has or may hereafter acquire relating to any credit subject hereto, Borrower or its business, or any collateral required hereunder.

SECTION 7.5.         ENTIRE AGREEMENT; AMENDMENT.  This Agreement and the other Loan Documents constitute the entire agreement between Borrower and Bank with respect to each credit subject hereto and supersede all prior negotiations, communications, discussions and correspondence concerning the subject matter hereof.  This Agreement may be amended or modified only in writing signed by each party hereto.

SECTION 7.6.         NO THIRD PARTY BENEFICIARIES.  This Agreement is made and entered into for the sole protection and benefit of the parties hereto and their respective permitted successors and assigns, and no other person or entity shall be a third party beneficiary of, or have any direct or indirect cause of action or claim in connection with, this Agreement or any other of the Loan Documents to which it is not a party.

SECTION 7.7.         TIME.  Time is of the essence of each and every provision of this Agreement and each other of the Loan Documents.

SECTION 7.8.         SEVERABILITY OF PROVISIONS.  If any provision of this Agreement shall be prohibited by or invalid under applicable law, such provision shall be ineffective only to the extent of such prohibition or invalidity without invalidating the remainder of such provision or any remaining provisions of this Agreement.

SECTION 7.9.         COUNTERPARTS.  This Agreement may be executed in any number of counterparts, each of which when executed and delivered shall be deemed to be an original, and all of which when taken together shall constitute one and the same Agreement.

SECTION 7.10.       GOVERNING LAW.  This Agreement shall be governed by and construed in accordance with the laws of the State of Utah.

SECTION 7.11.       ARBITRATION.

(a)            Arbitration.  The parties hereto agree, upon demand by any party, to submit to binding arbitration all claims, disputes and controversies between or among them (and their respective employees, officers, directors, attorneys, and other agents), whether in tort, contract or otherwise in any way arising out of or relating to (i) any credit subject hereto, or any of the Loan Documents, and their negotiation, execution, collateralization, administration, repayment, modification, extension, substitution, formation, inducement, enforcement, default or termination; or (ii) requests for additional credit.

(b)            Governing Rules.  Any arbitration proceeding will (i) proceed in a location in Utah selected by the American Arbitration Association (“AAA”); (ii) be governed by the Federal Arbitration Act (Title 9 of the United States Code), notwithstanding any conflicting choice of law provision in any of the documents between the parties; and (iii) be conducted by the AAA, or such other administrator as the parties shall mutually agree upon, in accordance with the AAA’s commercial dispute resolution procedures, unless the claim or counterclaim is at least $1,000,000.00 exclusive of claimed interest, arbitration fees and costs in which case the arbitration shall be conducted in accordance with the AAA’s optional procedures for large, complex commercial disputes (the commercial dispute resolution procedures or the optional procedures for large, complex commercial disputes to be referred to herein, as applicable, as the “Rules”).




If there is any inconsistency between the terms hereof and the Rules, the terms and procedures set forth herein shall control.  Any party who fails or refuses to submit to arbitration following a demand by any other party shall bear all costs and expenses incurred by such other party in compelling arbitration of any dispute.  Nothing contained herein shall be deemed to be a waiver by any party that is a bank of the protections afforded to it under 12 U.S.C. §91 or any similar applicable state law.

(c)            No Waiver of Provisional Remedies, Self-Help and Foreclosure.  The arbitration requirement does not limit the right of any party to (i) foreclose against real or personal property collateral; (ii) exercise self-help remedies relating to collateral or proceeds of collateral such as setoff or repossession; or (iii) obtain provisional or ancillary remedies such as replevin, injunctive relief, attachment or the appointment of a receiver, before during or after the pendency of any arbitration proceeding.  This exclusion does not constitute a waiver of the right or obligation of any party to submit any dispute to arbitration or reference hereunder, including those arising from the exercise of the actions detailed in sections (i), (ii) and (iii) of this paragraph.

(d)            Arbitrator Qualifications and Powers.  Any arbitration proceeding in which the amount in controversy is $5,000,000.00 or less will be decided by a single arbitrator selected according to the Rules, and who shall not render an award of greater than $5,000,000.00.  Any dispute in which the amount in controversy exceeds $5,000,000.00 shall be decided by majority vote of a panel of three arbitrators; provided however, that all three arbitrators must actively participate in all hearings and deliberations.  The arbitrator will be a neutral attorney licensed in the State of Utah or a neutral retired judge of the state or federal judiciary of Utah, in either case with a minimum of ten years experience in the substantive law applicable to the subject matter of the dispute to be arbitrated.  The arbitrator will determine whether or not an issue is arbitratable and will give effect to the statutes of limitation in determining any claim.  In any arbitration proceeding the arbitrator will decide (by documents only or with a hearing at the arbitrator’s discretion) any pre-hearing motions which are similar to motions to dismiss for failure to state a claim or motions for summary adjudication.  The arbitrator shall resolve all disputes in accordance with the substantive law of Utah and may grant any remedy or relief that a court of such state could order or grant within the scope hereof and such ancillary relief as is necessary to make effective any award.  The arbitrator shall also have the power to award recovery of all costs and fees, to impose sanctions and to take such other action as the arbitrator deems necessary to the same extent a judge could pursuant to the Federal Rules of Civil Procedure, the Utah Rules of Civil Procedure or other applicable law.  Judgment upon the award rendered by the arbitrator may be entered in any court having jurisdiction.  The institution and maintenance of an action for judicial relief or pursuit of a provisional or ancillary remedy shall not constitute a waiver of the right of any party, including the plaintiff, to submit the controversy or claim to arbitration if any other party contests such action for judicial relief.

(e)            Discovery.  In any arbitration proceeding, discovery will be permitted in accordance with the Rules.  All discovery shall be expressly limited to matters directly relevant to the dispute being arbitrated and must be completed no later than 20 days before the hearing date.  Any requests for an extension of the discovery periods, or any discovery disputes, will be subject to final determination by the arbitrator upon a showing that the request for discovery is essential for the party’s presentation and that no alternative means for obtaining information is available.




(f)             Class Proceedings and Consolidations.  No party hereto shall be entitled to join or consolidate disputes by or against others in any arbitration, except parties who have executed any Loan Document, or to include in any arbitration any dispute as a representative or member of a class, or to act in any arbitration in the interest of the general public or in a private attorney general capacity.

(g)            Payment Of Arbitration Costs And Fees.  The arbitrator shall award all costs and expenses of the arbitration proceeding.

(h)            Real Property Collateral; Judicial Reference.  Notwithstanding anything herein to the contrary, no dispute shall be submitted to arbitration if the dispute concerns indebtedness secured directly or indirectly, in whole or in part, by any real property unless (i) the holder of the mortgage, lien or security interest specifically elects in writing to proceed with the arbitration, or (ii) all parties to the arbitration waive any rights or benefits that might accrue to them by virtue of the single action rule statute of Utah, thereby agreeing that all indebtedness and obligations of the parties, and all mortgages, liens and security interests securing such indebtedness and obligations, shall remain fully valid and enforceable.  If any such dispute is not submitted to arbitration, the dispute shall be referred to a master in accordance with Utah Rule of Civil Procedure 53, and this general reference agreement is intended to be specifically enforceable.  A master with the qualifications required herein for arbitrators shall be selected pursuant to the AAA’s selection procedures.  Judgment upon the decision rendered by a master shall be entered in the court in which such proceeding was commenced in accordance with Utah Rule of Civil Procedure 53(e).

(i)             Miscellaneous.  To the maximum extent practicable, the AAA, the arbitrators and the parties shall take all action required to conclude any arbitration proceeding within 180 days of the filing of the dispute with the AAA.  No arbitrator or other party to an arbitration proceeding may disclose the existence, content or results thereof, except for disclosures of information by a party required in the ordinary course of its business or by applicable law or regulation.  If more than one agreement for arbitration by or between the parties potentially applies to a dispute, the arbitration provision most directly related to the Loan Documents or the subject matter of the dispute shall control.  This arbitration provision shall survive termination, amendment or expiration of any of the Loan Documents or any relationship between the parties.

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the day and year first written above.

EVANS & SUTHERLAND COMPUTER

 

WELLS FARGO BANK,

CORPORATION

 

NATIONAL ASSOCIATION

 

 

 

 

 

 

By:

/s/ Paul L. Dailey

 

 

By:

/s/ Gary Rigby

 

Title: Chief Financial Officer

 

Gary Rigby, Relationship Manager

 



EXHIBIT 10.25

THIS MORTGAGE IS AN OPEN-END MORTGAGE AND SECURES FUTURE ADVANCES

(All notices to be given to Mortgagee pursuant to
42 Pa. C.S.A. 8143 shall be given as set forth
in Paragraph 25 of this Mortgage.)

OPEN-END MORTGAGE AND SECURITY AGREEMENT

THIS OPEN-END MORTGAGE AND SECURITY AGREEMENT (this “Mortgage” made this 14th day of January, 2004, by and between Spitz, Inc., a Delaware corporation, with an address of P.O. Box 198, Route 1, Chadds Ford, Pennsylvania 19317 (the Mortgagor), and FIRST KEYSTONE BANK (Mortgagee), a federally chartered stock savings bank organized and existing under the laws of the United States of America, at Mortgagee’s office located at 22 West State Street, Media, Pennsylvania, 19063.

WITNESSETH:

WHEREAS, this Mortgage is an Open-End Mortgageas set forth in 42 Pa. C.S.A. 8143 and secures obligations of Mortgagor and Transnational, Inc. (TN) to Mortgagee up to a maximum amount of principal indebtedness outstanding at any time of Three Million Two Hundred Thousand ($3,200,000.00) Dollars together with, but not limited to, advances for the payment of taxes and municipal assessments, maintenance charges, insurance premiums, costs incurred for the protection of the Mortgaged Property (hereinafter defined) or the lien of this Mortgage, expenses incurred by Mortgagee by reason of default by Mortgagor under this Mortgage the Note (hereinafter defined), and all other sums due hereunder or secured hereby, plus accrued and unpaid interest due under the Note; and

WHEREAS, Mortgagor and TN, as part of the foregoing obligations, has executed and delivered to Mortgagee its Mortgage Note, dated even date herewith (the Note), evidencing Mortgagor’s and TN’s indebtedness to Mortgagee in the principal amount of Three Million Two Hundred Thousand ($3,200,000.00) Dollars in accordance with a certain Commitment Letter from Mortgagee to Mortgagor and TN, dated December 19, 2003, (the Commitment Letter), and a certain Loan Agreement (the Loan Agreement), dated even date herewith, by and between Mortgagor, TN and Mortgagee, together with interest thereon payable at the rate and times, in the manner, and according to the terms and conditions specified in the Note which provides for interest rate adjustments based on a formula therein set forth; and

WHEREAS, all of the terms, conditions and provisions of the Note, the Commitment Letter and the Loan Agreement are by reference incorporated herein as if fully set forth; and

WHEREAS, Mortgagor has duly executed and delivered this Mortgage to secure all of Mortgagor’s and TN’s obligations under the Note and the Loan Agreement.

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NOW, THEREFORE, in consideration of the aforesaid indebtedness, and to secure the payment of all sums due or to become due under the Note, under the Commitment Letter, under the Loan Agreement, and under the terms of this Mortgage, and to secure the payment of all sums advanced by Mortgagee to Mortgagor and TN, as well as to secure the performance and observance of all of the terms, conditions and provisions of the Note, the Commitment Letter, the Loan Agreement, this Mortgage, the Assignment of Rents (hereinafter defined), the Environmental Indemnity Agreement (hereinafter defined) and all other agreements and instruments given by or on behalf of Mortgagor and TN to Mortgagee in connection with the Note, the Commitment Letter, the Loan Agreement, or this Mortgage (collectively the Loan Documents), Mortgagor has granted, bargained, conveyed, sold, aliened, enfeoffed, released, confirmed and mortgaged, and by these presents does hereby grant, bargain, convey, sell, alien, enfeoff, release, confirm and mortgage unto Mortgagee, its successors and assigns all that certain parcel of real property known as Route 1, Chadds Ford Township, Delaware County, Pennsylvania, being Folio No. 04-00-00034-02, and more specifically described on the metes and bounds legal description, attached hereto, made a part of hereof, and labeled Exhibit A (the Real Estate).

TOGETHER WITH all of Mortgagor’s right, title and interest now owned or hereafter acquired in:

(i)  All buildings, structures and improvements of every kind and description now or hereafter erected or placed on the Real Estate.

(ii)  All tenements, hereditaments, appurtenances and all the estates and rights of Mortgagor in and to the Real Estate or any part thereof.

(iii)  All streets, roads, passages, ways, waters, water courses, easements, and privileges of whatsoever kind or character, belonging to, and adjoining, used in connection with or in any way appertaining to the Real Estate.

(iv)  All reversions, remainders, easements, rents, issues, income and profits arising or issuing from the Real Estate and/or the buildings, structures and improvements now or hereafter erected or placed thereon, or any portion thereof, including, but not limited to, the rents, issues, income and profits arising or issuing from all insurance policies, sale agreements, licenses, options, leases and subleases now or hereafter entered into covering any part of the Real Estate and/or the buildings, structures and improvements now or hereafter erected or placed thereon, or any portion thereof, all of which insurance policies, sale agreements, licenses, options, leases, subleases, rents, issues, income and profits are hereby assigned to Mortgagee by Mortgagor. Mortgagor will execute and deliver to Mortgagee, on demand, such separate, specific assignments and instruments as Mortgagee may require to implement, confirm, maintain and continue the assignment hereunder. Mortgagor hereby appoints Mortgagee, its designees and nominees, as Mortgagor’s agents and attorneys-in-fact to collect such rents, issues and profits.

(v)  All awards, damages, payments and other compensation, and any and all claims therefor, and rights thereto, which may result from taking or injury by virtue of the exercise of the power of eminent domain of, or to, or any damage, injury or destruction in any manner caused to, the Real Estate and/or the

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buildings, structures and improvements now or hereafter erected or placed thereon, or any portion thereof, all of which award, damages, payments, compensation, claims and rights are hereby assigned to Mortgagee to the fullest extent that Mortgagor may do so under law. Mortgagor hereby appoints Mortgagee, its designees and nominees, as Mortgagor’s agents and attorneys-in-fact to collect any such awards, damages, payments and compensation.

(vi)  All fixtures, fittings, furnishings, furniture, trade fixtures, machinery, equipment, apparatus, building materials, appliances, goods, supplies, tools, chattels, and all articles of tangible personal property of whatever kind and nature, together with all replacements thereof, substitutions therefor and additions and accessions thereto, and all proceeds and profits thereof and therefrom, now or at anytime hereafter, affixed or attached to, installed upon, included within, or used in any way in connection with the construction, use, enjoyment, operation, maintenance or occupancy of the Real Estate and the buildings, structures and improvements now or hereafter erected or placed thereon; and all agreements, contract rights, chattel paper, negotiable instruments, general intangibles, accounts, instruments, and documents (as those terms are defined in the Pennsylvania Uniform Commercial Code). Any item referred to in this paragraph (vi) shall hereinafter, for purposes of creating a security interest therein under the Pennsylvania Uniform Commercial Code, sometimes be referred to as the Personal Property.

The Real Estate, and all of the right, title and interest of Mortgagor therein and thereto, and all of the property rights, title and interest referred to in paragraphs (i) through (vi) above shall hereinafter sometimes be referred to collectively as the Mortgaged Property.

TO HAVE AND TO HOLD the Mortgaged Property hereby granted and conveyed, or mentioned and intended so to be, unto Mortgagee, its successors and assigns, to its and their own use and benefit forever.

PROVIDED, HOWEVER, that if Mortgagor pays to Mortgagee the principal interest to become due under the Note at the time and in the manner stipulated therein, and pays all other sums payable by Mortgagor and TN to Mortgagee as are secured hereby, and if Mortgagor and TN perform and comply with all the agreements, conditions, covenants and provisions contained in the Note, the Loan Agreement, this Mortgage and the other Loan Documents, and if Mortgagor and TN pay all satisfaction costs, including the recording costs for any Mortgage satisfaction and termination statements, then this Mortgage and the estate, right, title and interest of Mortgagee in and to the Mortgaged Property shall cease and become void. Until such time, Mortgagor covenants, represents, promises, warrants and agrees to and with Mortgagee as follows:

1.  Mortgagor’s Title. Mortgagor warrants, covenants and represents as follows:

1.1  Mortgagor has good and marketable and unencumbered fee simple title to the Mortgaged Property subject only to the title exceptions not removed from Title Insurance Commitment No. 03-1156 dated effective October 30, 2003, issued by Strong Abstract, Inc. agent for First American Title Insurance Company, at the time of closing the loan evidenced by the Note; and

1.2  Mortgagor will forever warrant and defend the title to the Mortgaged Property unto the Mortgagee, its successors and assigns, against all persons and all claims of every kind and nature whatsoever.

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2.  Payment and Performance by Mortgagor.

2.1  Mortgagor and TN shall pay to Mortgagee all principal, interest and other sums now or hereafter due and payable to Mortgagee under the terms of the Note, this Mortgage, and all other Loan Documents, as and when the same shall become due and payable by the terms thereof and hereof.

2.2  Mortgagor and TN shall perform and comply with all terms, condition, provisions, covenants and agreements on the part of Mortgagor and/or TN to be observed and performed under this Mortgage, the Note, the Loan Agreement, and all other Loan Documents. All the terms, conditions and provisions of the Loan Documents are by reference incorporated herein as if fully set forth.

2.3  Mortgagor shall timely perform all of its obligations and duties under any present or future lease, easement, license, permit, approval, covenant or agreement relating to, affecting, created for the benefit of or used in connection with the operation of all or any portion of the Mortgaged Property.

2.4  This mortgage secures obligations of Mortgagor and TN to Mortgagee which obligations shall include, but not be limited to, expenses and attorneys fees incurred by Mortgagee by reason of default by Mortgagor and/or TN hereunder, under the Note or under any of the other Loan Documents, the payment of taxes, municipal assessments and insurance premiums whether advanced prior to or after the entry of judgment in any action to enforce this security instrument, together with all other sums due hereunder or secured hereby, plus accrued and unpaid interest.

3.  Maintenance and Repair. Mortgagor shall keep and maintain the Mortgaged Property and the sidewalks, curbs and drives abutting and adjacent thereto, if any, in good and tenantable order, condition and repair, and will make as and when necessary all repairs, renewals and replacements, structural and not structural, exterior and interior, ordinary and extraordinary, foreseen and unforseen. All such repairs, renewals and replacements made by Mortgagor shall be at least equal in quality to the original portion of the Mortgaged Property being repaired, renewed or replaced. Mortgagor shall abstain from and shall not permit the commission of waste in or about the Mortgaged Property.

4.  Removal, Demolition and Alteration. Mortgagor shall not undertake or permit the removal or demolition of any building at any time erected on or forming a part of the Mortgaged Property, nor shall Mortgagor, without Mortgagee’s prior written consent, undertake or permit any alteration in the design or structural character of any such building.

5.  Inspection by Mortgagee. Mortgagor will permit Mortgagee and Mortgagee’s agents and representatives to enter the Mortgaged Property and all parts thereof for the purposes of making site and building investigations, performing soil, groundwater, structural and other tests, and generally to inspect. and photograph the condition and state of repair of the Mortgaged Property at any reasonable time upon one (1) business day prior notice.

6.  Insurance. Mortgagor shall from and after the date hereof and at all times while the indebtedness secured hereby is outstanding maintain at Mortgagor’s sole expense, insurance in amounts, with deductibles satisfactory to Mortgagee as more fully set forth in the Loan Agreement, including, without

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limitation, all risk, fire, hazard and extended coverage insurance with vandalism and malicious mischief endorsements on all buildings, structures and improvements now existing or hereafter erected on or forming a part of the Mortgaged Property, and all of the Personal Property, to the extent of one hundred percent (100%) of the replacement value thereof pursuant to full replacement value endorsements naming Mortgagee as mortgagee and additional insured pursuant to a standard mortgagee loss payable clause, without co-insurance. Mortgagor shall also insure against such other hazards as Mortgagee may require from time to time and shall maintain rent insurance against loss of income arising out of damage or destruction by fire or the perils of extended coverage insurance, in an amount equal to one (1) year’s gross rental income to the owner of the Mortgaged Premises, or business interruption insurance in an amount as required by Mortgagee from time to time, but not to exceed Mortgagee’s reasonable estimate of the annual cost of debt service on the Note, taxes, insurance and maintenance for the Mortgaged Premises. All such insurance shall be in such amounts as is necessary to comply with co-insurance requirements and otherwise as Mortgagee shall require, and shall be written by stock or nonassessable mutual carriers with a general policy holders rating of A or better and a financial rating of VI or better in the most recent edition of Best’s Key Rating Guide, Property-Casualty, published by Alfred M. Best Co., Inc. Mortgagor shall deliver to Mortgagee upon demand, and in the absence of demand not less than twenty (20) days prior to the expiration date of each such insurance policy, proof of the renewal and continuance of all required insurance coverages, with premiums prepaid. As additional security for the payment of the indebtedness secured by this Mortgage, shall name Mortgagee as an additional insured or be endorsed with a standard mortgagee clause, shall not be subject to contribution, shall be for a term of at least one (1) year, and shall provide for cancellation or modification only upon at least thirty (30) days prior written notice to Mortgagee.

6.1  If any of the insurance referred to herein, or any part thereof, shall expire, or be canceled, or become void or voidable by reason of the breach of any condition thereof, or if Mortgagee determines that such coverage is unsatisfactory due to the failure or impairment of the capital of any company in which the insurance may then be carried such that its AM Best Rating falls below the standard set forth in this Mortgage, or if for any reason whatever the insurance shall be or become unsatisfactory to Mortgagee, Mortgagor shall place new insurance on the Mortgaged Property, satisfactory to Mortgagee.

6.2  If Mortgagee acquires title to the Mortgaged Property either by virtue of a judicial sale thereof pursuant to proceedings under the Note or upon this Mortgage or by virtue of a deed in lieu of foreclosure, or otherwise, then, and in any such event, all of Mortgagor’s right, title and interest in and to all insurance policies referred to herein, including unearned premiums thereon and the proceeds thereof, shall vest in Mortgagee.

7.  Taxes, Assessments and Other Charges. If requested by Mortgagee, in addition to the monthly installment of interest and/or principal due to Mortgagee, Mortgagor shall pay to Mortgagee, on the payment date of installments due under the Note, until the Note is fully paid, a sum (the Escrow Payment) equal to one-twelfth (1/12) of the annual real estate taxes, other municipal assessments and the estimated annual premiums for all insurance required hereunder (the Escrow Charges), with an initial deposit to cover the months which will have elapsed between the last date such taxes, charges and premiums were due and payable and the first date on which an installment shall be due hereunder. The Escrow Payments may be commingled with other funds of Mortgagee

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and no interest thereon shall be due of payable to Mortgagor. Mortgagee shall apply the Escrow Payments to the payment of the Escrow Charges in such order or priority as Mortgagee shall determine. If, at any time, the Escrow Payments theretofore paid to Mortgagee shall be insufficient for the payment of the Escrow Charges, Mortgagor, within ten (10) days after demand, shall pay the amount of the deficiency to Mortgagee.

Mortgagor shall pay, prior to the accrual of any interest or penalties, without any deduction, defalcation or abatement, and shall furnish to Mortgagee proper receipts for, within five (5) days after their respective due dates, all ground rents, taxes, assessments, water and sewer rents, licenses or permit fees, and all other charges or claims which may be assessed, levied charged, imposed or filed at any time against Mortgagor, the Mortgaged Property or any part thereof, or against the interest of Mortgagee therein, by any governmental instrumentality or agency or other lawful authority or by any deed restriction, private agreement or declaration, recorded or otherwise, or which by any present or future law may have priority over the indebtedness secured hereby either in lien or in distribution out of the proceeds of any judicial sale. Mortgagor will pay, when due, all charges for utilities, whether public or private, used or consumed upon, in or in connection with the Mortgaged Property.

8.  Sale or Transfer of the Mortgaged Property. Mortgagor shall not, without the prior written consent of Mortgagee: (i) sell, transfer, convey or assign the Mortgaged Property, or any part thereof, or any interest therein, including but not limited to, an equitable interest in the Mortgaged Property, or any part thereof, to any party; or (ii) permit the sale, transfer, conveyance or assignment of the Mortgaged Property or any part thereof or any interest therein, either voluntarily or by operation of law.

9.  Internal Revenue Stamps. If at any time the United States Government or any department or bureau thereof shall require Internal Revenue stamps on the Note or other indebtedness secured hereby, Mortgagor shall, upon demand made by Mortgage, pay for such stamps together with any interest and penalties payable with respect thereto.

10.  Taxation of Note and Mortgage. If any law is hereafter enacted: (i) deducting from the value of real estate, for purposes of taxation, any lien or encumbrance thereon; (ii) revising or changing in any way the laws and ordinances now in force for the taxation of mortgages or the debts secured thereby, or the manner of collections of such taxes; (iii) imposing a tax directly or indirectly on Mortgagee with respect to the Mortgaged Property, the value of Mortgagor’s equity therein, the indebtedness evidenced by the Note and/or secured by this Mortgage; (iv) requiring Mortgagee to pay, in whole or in part, any tax, assessment, charge or lien required to be paid by Mortgagor pursuant to the terms of this Mortgage; then, and in any such event, the entire unpaid balance of the indebtedness secured by this Mortgage shall, at the option of Mortgagee, without notice to Mortgagor, become immediately due and payable, unless, to the extent permitted by such law or ordinance, Mortgagor is authorized to, and does, pay or reimburse Mortgagee for the full amount of any such tax, assessment, charge or lien.

11.  Protection of Mortgage Lien. Mortgagor will promptly perform and observe, or cause to be performed and observed, all of the terms, covenants and condition of all instruments of record affecting the Mortgaged Property, or imposing any duty or obligation upon Mortgagor or any occupant or tenant of the Mortgaged Property or any part thereof. Mortgagor shall do or cause to be done all things necessary to preserve intact and unimpaired any and all easements, appurtenances and other interests and rights in favor of or constituting any portion of the Mortgaged Property.

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12.  Costs, Expenses and Counsel Fees. Mortgagor and/or TN shall pay all expenses incurred by Mortgagee incident to the preparation, execution, delivery and/or recording of the Note, this Mortgage and all of the other Loan Documents. Mortgagor and/or TN shall, upon demand made by Mortgagee, promptly pay to Mortgagee all expenses and costs, including reasonable attorneys’ fees, incurred by Mortgagee to collect any of the indebtedness secured hereby or to enforce the performance of the terms, conditions, provisions, agreements and covenants contained herein, in the Note, the Loan Agreement, or in any other Loan Document, whether or not suit is instituted, or incurred by Mortgagee in connection with any action, proceeding, litigation or claim instituted or asserted by or against Mortgagee or in which the Mortgagee becomes engaged, wherein it becomes necessary, in the opinion of Mortgagee, to enforce, defend or uphold the lien of this Mortgage or the validity or effectiveness of any assignment of any claim, award, payment, insurance recovery or any other right or property conveyed, encumbered or assigned by Mortgagor to Mortgagee hereunder, or the priority of any of the same or otherwise. All such expenses, costs and attorneys’ fees, together with interest thereon at the rate set forth in the Note in the event of a default thereunder, shall be deemed to be part of the principal indebtedness evidenced by the Note on a pro rata basis and secured by this Mortgage.

13.  Security Interest in the Personal Property. Mortgagor and Mortgagee hereby acknowledge that this Mortgage constitutes a security agreement under the Pennsylvania Uniform Commercial Code, and Mortgagor hereby grants to Mortgagee a security interest in every item of the Personal Property and the proceeds thereof and profits therefrom, replacements and substitutions therefor and additions and accessions thereto. Mortgagor shall, upon demand made by Mortgagee, execute, deliver and file any financing statements, continuation statements and other instruments as Mortgagee may from time to time require in order to perfect, confirm and maintain such perfected security interest under the Pennsylvania Uniform Commercial Code. Mortgagor hereby irrevocably appoints Mortgagee, its designees and nominees, as Mortgagor’s agents and attorneys-in-fact to execute, deliver and file, on Mortgagor’s behalf and in its name, any such financing statements, continuation statements, and other instruments as Mortgagee, in its sole discretion, deems necessary.

13.1  Mortgagor hereby warrants and represents to Mortgagee that Mortgagor is and will be the owner of every item of the Personal Property, free from any leases, conditional sales, chattel mortgages, security interests, liens or encumbrances other than the security interest hereby created. Mortgagor further hereby represents and warrants to Mortgagee that, unless Mortgagee gives its prior written consent to the contrary, every item of the Personal Property has been, and shall be created thereon except the security interest hereby created.

14.  Rents, Profits and Leases. Mortgagor hereby assigns and transfers unto Mortgagee, its successors and assigns: (i) all rights, title, interest and privileges which Mortgagor has or may have as lessor in any lease now existing or hereafter made and affecting the Mortgaged Property or any part thereof, together with any extensions or renewals of such leases (collectively, the Leases and individually, a Lease); and (ii) all rents, income, and profits due or to become due under the Leases, or any of them, or arising or accruing from or relating to the Mortgaged Property, or any portion thereof, or the use thereof, and Mortgagor hereby confers upon Mortgagee, immediately upon Mortgagor’s default in any respect under this Mortgage, the Note or any other Loan Document, the right to enter upon and take possession of the Mortgaged Property, or any portion thereof, and the right, with or without taking possession of the Mortgaged Property, to collect and receive all rents, income and profits accruing from the Leases and from the Mortgaged Property.

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14.1  Mortgagor hereby warrants, certifies, covenants and represents to Mortgagee as follows:

14.1.1  That Mortgagor has or will have title to and full right to assign the Leases and the rents, income and profits due and to become due arising from and due pursuant to the Leases and from the Mortgaged Property.

14.1.2  That Mortgagor will not, without the prior written consent of Mortgagee in each instance, enter into any Lease for all or any portion of the Mortgaged Property for a term of more than three (3) years or alter or modify any Lease, consent to any subletting of any Lease, or subordinate any Lease to any mortgage or other encumbrance other than this Mortgage. Each and every Lease shall be for fair market rental and on other than commercially reasonable terms between unrelated parties at arms length dealing. All such leases shall be subject and subordinate in lien and payment to the Mortgage and any extension, renewal, modification or replacement thereof

14.1.3  That Mortgagor has not executed, and will not execute, any prior or other assignment of any of its rights under any of the Leases or its rights to the rent, income and profits therefrom or from the Mortgaged Property.

14.1.4  That as of the date of this Mortgage, there are no Leases respecting all of any portion of the Mortgaged Property.

14.2  Mortgagor has executed, acknowledged and delivered to Mortgagee a specific separate Assignment of Rents, Profits and Leases with respect to the Mortgaged Property dated even date herewith (the Assignment of Rents). In the event of any conflict between the terms of this Mortgage, including without limitation this paragraph 14, and the terms of any separate Assignment of Rents, the terms of the Assignment of Rents shall control.

15.  Destruction of the Mortgaged Property. In the event of any loss, damage or destruction to or of the Mortgaged Property, or any part thereof, Mortgagor shall give immediate written notice thereof to Mortgagee, and Mortgagee may make proof of loss thereof if proof of loss is not made promptly by Mortgagor; provided, however, that any adjustment of a proof of loss shall require the prior written consent of Mortgagee which shall not be unreasonably whithheld, conditioned or delayed. Each insurance company concerned is hereby authorized and directed to make payment under its insurance policies directly to Mortgagee. Mortgagee may, with the consent of Mortgagor, on behalf of Mortgagor, adjust and compromise any claims under any insurance policies. Mortgagor hereby irrevocably constitutes and appoints Mortgagee, its designees and nominees after an Event of Default, as Mortgagor’s agents and attorneys-in-fact to adjust and compromise claims and to collect and receive proceeds and to endorse drafts therefor. Any proceeds paid to or collected by Mortgagee in connection with collecting such proceeds, shall be applied, in such order and amounts as Mortgagee, in Mortgagee’s sole discretion, may elect, in reduction of the outstanding principal balance of the Note, accrued and unpaid interest, or any other sum due under and/or secured by the Note or this Mortgage, whether or not then due. Mortgagee shall deliver written notice to Mortgagor of the amount so applied and of the then outstanding balance of the indebtedness secured by this Mortgage if the insurance proceeds are insufficient to pay the entire amount hereof. In the event a balance remains outstanding on the Note and Mortgagee receives proceeds of rent insurance or business interruption insurance beyond those required to be

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applied for the current monthly installment due under the Note, Mortgagee may retain such additional proceeds in escrow, for the account of Mortgagor, and so apply such proceeds on a monthly basis, provided that any such proceeds not needed to be applied to keep the Mortgagor current and not in default hereunder during the reasonably estimated period of time when the rents from the Mortgaged Premises will be inadequate to provide Mortgagor with sufficient funds with which to pay Mortgagee the amounts falling due each month shall be paid over to Mortgagor to met the other expenses of the Mortgaged Premises.

15.1  Repair and Restoration. Notwithstanding the provision of paragraph 15, and provided that (i) no event of default has occurred hereunder or under the Note or other Loan Documents, (ii) Mortgagee is satisfied that the there are sufficient proceeds to complete the restoration of the improvements constructed on the Mortgaged Premises to the same value and character as existed prior to such damage, and (iii) the insurers do not deny liability as to the insureds, Mortgagee shall apply the insurance proceeds for the repair and restoration of the Mortgaged Property in accordance in accordance with the following conditions:

15.1.1  Prior to commencement of repair and restoration, the contracts, contractors, and plans and specifications thereof shall be approved by Mortgagee which approval shall not be unreasonably withheld, conditioned or delayed, and Mortgagee shall be provided with mechanics’ lien waivers.

15.1.2  At the time of any disbursement of the proceeds, Mortgagor shall not be in default under the Note, or this Mortgage, no mechanics’ or materialmen’s liens shall have been filed and remain undischarged and/or not bonded against and a satisfactory bring down of title insurance shall be delivered to Mortgagee.

15.1.3  Disbursement shall be made from time to time in an amount not exceeding the cost of the work completed since the last disbursement, upon receipt of satisfactory evidence of the stage of completion and or performance of the work in a good and workmanlike manner in accordance with the contracts and the plans and specifications.

15.1.4  Mortgagee shall retain ten percent (10%) of the proceeds until the repair and restoration is fully completed.

15.1.5  The proceeds shall not bear interest and may be commingled with Mortgagee’s other funds.

15.1.6  Mortgagee may impose such other conditions as are customarily imposed by construction lenders.

15.1.7  Prior to commencement of and at any time during repair and restoration, if the estimated cost thereof as determined by Mortgagee exceeds the amount of the proceeds, Mortgagor shall, immediately upon demand by Mortgagee, pay the amount of such excess to Mortgagee to be

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added to the proceeds held by Mortgagee. Any sum so added by Mortgagor which remains upon completion of repair and restoration shall be refunded to Mortgagor. If any sum remains after the completion and any refund to Mortgagor aforesaid, such sum remaining shall, at Mortgagee’s option, be applied on account of the outstanding balance of the Note.

16.  Environmental Matters. Mortgagee shall, if it has reason to believe a problem exists, have the right to conduct or have conducted by its agents or contractors such environmental inspections, audits and testing as Mortgagee shall deem necessary or advisable at any reasonable time upon at least one (1) business day prior notice, at the sole cost and expense of Mortgagor and/or TN. Mortgagor and each lessee of any property encumbered by the lien of the Loan Documents, shall cooperate or, in the case of any such lessee shall be caused to cooperate, with such inspection efforts; such cooperation shall include, without limitation, supplying such information concerning the operations conducted and hazardous substances or hazardous waste located on any of such properties. In the event that Mortgagor shall fail to comply with any applicable state or federal environmental law, then Mortgagee may, in addition to any of its other remedies hereunder and the other Loan Documents, cause each such property to be brought into compliance and all expenses incurred by Mortgagee added to the sum secured by the Loan Documents and evidenced by the Note, and shall bear interest from the date of demand at the interest rate then in effect thereunder, plus five (5%) percent. Further, in the event Mortgagee, in order to protect the priority of this Mortgage, or to preserve the value of the Mortgaged Property, or in any situation in which Mortgagee is required, by court order or otherwise, to pay any costs, fees, expenses, settlements, damages, fines (civil or criminal) or penalties, including but not limited to, clean-up costs, attorney’s fees and court costs, because of a past, present or future violation of the Environmental Laws (as defined in that certain Environmental Indemnity Agreement made by Mortgagor and Guarantor and delivered to Mortgagee even date herewith) on, in, under from or about the Mortgaged Property, all such sums shall be added to the amount secured hereby, shall be secured hereby (if this Mortgage is at that time in existence), shall be payable on demand by Mortgagor and/or TN and shall bear interest from the date of demand at the interest rate then in effect thereunder, plus five (5%) percent. The terms of this paragraph shall survive the payment in full of all other sums secured hereby and the satisfaction of record of this Mortgage. Mortgagor and TN have executed and delivered to Mortgagee that certain Environmental Indemnity Agreement dated even date herewith (the Environmental Indemnity Agreement) setting forth certain representations, warranties, covenants and obligations of Mortgagor and TN respecting environmental matters at the Mortgaged Property. In the event of any conflict between this Mortgage and the Environmental Indemnity Agreement. the terms of the Environmental Indemnity Agreement shall control. The terms of the Environmental Indemnity Agreement are incorporated herein by reference.

17.  Eminent Domain. In the event that the Mortgaged Property, or any part thereof, shall be taken in condemnation proceedings or by the exercise of any right of eminent domain or bona fide sale in lieu thereof (hereinafter collectively referred to as condemnation proceedings), Mortgagor and Mortgagee shall have the right to participate in any such condemnation proceedings and the award that may be made in any such condemnation proceedings or the proceeds thereof or the agreed upon compensation for damages sustained shall be applied by Mortgagee, in such order and amounts as Mortgagee, in its sole discretion, may elect, in reduction of the outstanding principal balance of the Note, all accrued and unpaid interest, or any other sum due under and/or secured by the Note or this Mortgage, whether or not then due. In the event the whole of the

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Mortgaged Property is taken and the amount of the awards, proceeds or compensation received by Mortgagee is insufficient to pay the then unpaid principal balance of the Note, together with all accrued and unpaid interest thereon, and all other sums then due to Mortgagee from Mortgagor and TN, Mortgagor and/or TN shall, within ten (10) days after the application of the award, proceeds or compensation as aforesaid, pay such deficiency to Mortgagee. In the event less than the whole of the Mortgaged Property is taken, and the amount of the awards, proceeds or compensation received by Mortgagee is insufficient to reduce the outstanding balance of the Note to an amount equal to or less than eighty-five (85%) percent of the appraised value of the Mortgaged Property after the taking determined by an appraisal of the Mortgaged Property by a qualified appraiser approved by Mortgagee, then Mortgagor and/or TN shall, within ten (10) days after the application of the award, proceeds or compensation as aforesaid, pay to Mortgagee the amount necessary to reduce the outstanding balance of the Note to an amount equal to eighty-five (85%) percent of the appraised value of the Mortgaged Property after the taking. The cost of such appraisal shall be the responsibility of Mortgagor.

17.1  Repair and Restoration. Notwithstanding the provisions of paragraph 17, in the event of a partial taking, and provided that (i) no event of default has occurred hereunder or under the Note or other Loan Documents, and (ii) Mortgagee is satisfied that the there are sufficient proceeds to complete the restoration of the improvements constructed on the Mortgaged Premises to the same value and character as existed prior to such taking, Mortgagee shall apply the condemnation proceeds for the repair and restoration of the Mortgaged Property in accordance with the following conditions:

17.1.1  Prior to commencement of repair and restoration, the contracts, contractors, and plans and specifications thereof shall be approved by Mortgagee, which approval shall not be unreasonably withheld, conditioned or delayed, and Mortgagee shall be provided with mechanics’ lien waiver.

17.1.2  At the time of any disbursement of the proceeds, Mortgagor shall not be in default under the Note, or the Mortgage, no mechanics’ or materialmen’s liens shall have been filed and remain undischarged and or properly bonded against and a satisfactory bring down of title insurance shall be delivered to Mortgagee.

17.1.3  Disbursement shall be made from time to time in an amount not exceeding the cost of the work completed since the last disbursement, upon receipt of satisfactory evidence of the stage of completion and of performance of the work in a good and workmanlike manner in accordance with the contracts and the plans and specifications.

17.1.4  Mortgagee shall retain ten percent (10%) of the proceeds until the repair and restoration is fully completed.

17.1.5  The proceeds shall not bear interest and may be commingled with Mortgagee’s other funds.

17.1.6  Mortgagee may impose such other conditions as are customarily imposed by construction lenders.

17.1.7  Prior to commencement of and at any time during repair and restoration, if the estimated cost thereof as determined by Mortgagee exceeds the amount of the proceeds, Mortgagor shall, immediately upon demand by Mortgagee, pay the amount of such excess to Mortgagee to be

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added to the proceeds held by Mortgagee. Any sum so added by Mortgagor which remains upon completion of repair and restoration shall be refunded to Mortgagor. If any sum remains after the completion and any refund to Mortgagor aforesaid, such sum remaining shall, at Mortgagee’s option, be applied on account of the outstanding balance of the Note.

18.  Events of Default. The occurrence of any one or more of the following shall constitute an Event of Default hereunder:

18.1  The occurrence of an event of default under the Note, the Loan Agreement, the Assignment of Rents, the Environmental Indemnity Agreement or any other Loan Document.

18.2  The failure of Mortgagor to perform or comply with any other of the terms, conditions, provisions, agreements, covenants and conditions contained herein.

18.3  The filing of any non consensual lien or encumbrance, mechanic’s or materialmen’s lien or municipal claim against all or any portion of the Mortgaged Property which is not discharged within twenty (20) days unless it is being contested by Mortgagor in good faith and due diligence in appropriate proceedings with the approval of Mortgagee, a bond or escrow having been posted with Mortgagee for the full amount of such contested lien.

18.4  The existence of any security interest, pledge, consensual lien, or other consensual encumbrance in favor of any party other than Mortgagee in the Mortgaged Property.

18.5  If Mortgagor shall at any time deliver or cause to be delivered to Mortgagee a notice pursuant to 42 Pa. C.S.A. 8143 electing to limit the indebtedness secured by this Mortgage.

In the event of any conflict between the terms of this Mortgage, including without limitation this paragraph 18, and the terms of the Note, the terms of the Note shall control.

19.  Remedies. Upon the happening of any Event of Default, the entire unpaid balance of principal, and all accrued and unpaid interest under the Note and all other sums due under or secured by this Mortgage shall, at the option of Mortgagee, become immediately due and payable, without notice or demand. Mortgagee may forthwith, and without delay:

19.1  Institute an action of mortgage foreclosure against the Mortgaged Property, or any portion thereof, or take such other action at law or in equity for the enforcement of this Mortgage and realization on the mortgage security or any other security herein or elsewhere provided for, and proceed therein to final judgment and execution thereon for the entire accelerated indebtedness as aforesaid, together with all costs of suit and attorney’s fees, together with interest at the default rate set forth in the Note on any judgement obtained by mortgagee from and after the date of any Sheriff’s Sale of the Mortgaged Property until actual payment is made by the Sheriff of the full amount due to Mortgagee. The obligations of the Mortgagor and/or TN and the rights and remedies of the Mortgagee hereunder shall survive the entry of judgment hereunder or under the obligation this Mortgage secures; it being the intention of parties hereto that such rights, remedies and obligations shall not merge into or be extinguished by any such judgment but shall continue until all sums secured hereby have been paid in full.

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19.1.1  The Mortgaged Property, or any portion thereof, may be sold pursuant to any Writ of Execution issued on a judgment obtained by virtue of the Note or this Mortgage or pursuant to any other judicial proceedings, whether or not under this Mortgage, in one parcel as an entirety, or in such parcels, manner and order as Mortgagee, in its sole discretion, may elect.

19.2  Enter and take possession of the Mortgaged Property and manage and operate the same, let or re-let the Mortgaged Property or any part thereof, cancel, modify, and grant indulgences with respect to the Leases, evict tenants, bring or defend any suits in Mortgagee’s name or in Mortgagor’s name in connection with possession of the Mortgaged Property, make repairs, alterations and improvements as Mortgagee deems appropriate, and perform such other acts in connection with the management and operation of the Mortgaged Property as Mortgagee, in its sole discretion, deems appropriate, and demand, sue for, collect and receive all or any rents, income and profits accruing from the Mortgaged Property and from the Leases shall be applied by Mortgagee, in such order and amounts as Mortgagee shall elect, to the costs of operation and maintenance of the Mortgaged Property, the expenses (including attorney’s fees) incident to taking and retaining possession of the Mortgaged Property and collecting the rents, issues and profits therefrom and from any Lease, any other expenses as Mortgagee shall determine and monies necessary to satisfy all indebtedness due under and/or secured by the Note and this Mortgage.

19.2.1  THE FOLLOWING SECTION SETS FORTH WARRANTS OF ATTORNEY FOR ANY ATTORNEY TO CONFESS JUDGMENTS AGAINST MORTGAGOR. IN GRANTING THESE WARRANTS OF ATTORNEY TO CONFESS JUDGMENTS AGAINST MORTGAGOR, MORTGAGOR HEREBY KNOWINGLY, INTENTIONALLY, VOLUNTARILY, AND UNCONDITIONALLY WAIVES ANY AND ALL RIGHTS MORTGAGOR MAY HAVE TO PRIOR NOTICE AND AN OPPORTUNITY FOR HEARING UNDER THE RESPECTIVE CONSTITUTIONS AND LAWS OF THE COMMONWEALTH OF PENNSYLVANIA AND THE UNITED STATES OF AMERICA.

FOR THE PURPOSE OF OBTAINING POSSESSION OF THE MORTGAGED PROPERTY UPON THE OCCURRENCE OF AN EVENT OF DEFAULT, MORTGAGOR HEREBY AUTHORIZES AND EMPOWERS ANY ATTORNEY OF ANY COURT OF RECORD OF THE COMMONWEALTH OF PENNSYLVANIA OR ELSEWHERE, AS ATTORNEY FOR MORTGAGOR AND ALL PERSONS CLAIMING UNDER OR THROUGH MORTGAGOR, TO, BY COMPLAINT OR OTHERWISE, APPEAR FOR AND ENTER AND CONFESS JUDGMENT IN FAVOR OF MORTGAGEE AND AGAINST MORTGAGOR, AND AGAINST ALL PERSONS CLAIMING UNDER OR THROUGH MORTGAGOR, FOR RECOVERY BY MORTGAGEE OF POSSESSION OF THE MORTGAGED PROPERTY, FOR WHICH THIS MORTGAGE, OR A COPY HEREOF VERIFIED BY AFFIDAVIT, SHALL BE A SUFFICIENT WARRANT; WHEREUPON, IF MORTGAGEE SO DESIRES, A WRIT OF POSSESSION MAY IMMEDIATELY ISSUE FOR POSSESSION OF THE MORTGAGED PROPERTY, WITHOUT ANY WRIT OR PROCEEDING WHATSOEVER AND WITHOUT ANY STAY OF EXECUTION. IF FOR ANY REASON AFTER SUCH ACTION HAS BEEN COMMENCED IT SHALL BE DISCONTINUED, OR POSSESSION OF THE MORTGAGED PROPERTY SHALL REMAIN IN OR BE RESTORED TO MORTGAGOR, MORTGAGEE SHALL HAVE THE RIGHT IN CONNECTION WITH THE SAME DEFAULT OR ANY SUBSEQUENT DEFAULT TO BRING ONE OR MORE FURTHER ACTIONS OR ENTER

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AND CONFESS JUDGMENT ONE OR MORE TIMES AS HEREIN PROVIDED TO RECOVER POSSESSION OF THE MORTGAGED PROPERTY. MORTGAGEE MAY BRING AN ACTION IN EJECTMENT AND CONFESS JUDGMENT THEREIN BEFORE OR AFTER THE INSTITUTION OF PROCEEDINGS TO FORECLOSE THIS MORTGAGE OR TO ENFORCE THE NOTE, OR AFTER ENTRY OF JUDGMENT IN ANY PROCEEDINGS TO FORECLOSE THIS MORTGAGE OR ON THE NOTE, OR AFTER A SHERIFF’S SALE OF THE MORTGAGED PROPERTY IN WHICH MORTGAGEE IS THE SUCCESSFUL BIDDER.

MORTGAGOR ACKNOWLEDGES THAT MORTGAGOR HAS HAD THE ASSISTANCE OF LEGAL COUNSEL IN THE REVIEW AND EXECUTION OF THIS MORTGAGE AND FURTHER ACKNOWLEDGES THAT THE MEANING AND EFFECT OF THE FOREGOING PROVISIONS CONCERNING CONFESSION OF JUDGMENT HAVE BEEN FULLY EXPLAINED TO MORTGAGOR BY SUCH COUNSEL, AND AS EVIDENCE OF SUCH FACT THE MORTGAGOR SIGN(S) HIS/HER/THEIR/ITS INITIALS BELOW.

/s/ PLD

 

/s/ JAS

 

(Initials of Mortgagor)

 

(Initials of Mortgagor)

 

19.3  Have a receiver appointed to enter into possession of the Mortgaged Property and to collect the rents, issues, profits and income therefrom and to apply such rents, issues, profits and income as provided for in subparagraph 19.2.1 hereof or as the court may otherwise direct. Mortgagee shall be entitled to the appointment of a receiver without the necessity of proving either the inadequacy of the security for the indebtedness secured hereby or the insolvency of Mortgagor or any other person who may be legally or equitably liable to pay money secured hereby and the Mortgagor and each such other person shall be deemed to have waived such proof and to have consented to the appointment of such receiver. Should the Mortgagee or any receiver collect rents, issues, profits or income from the Mortgaged Property, monies so collected shall not be substituted for the payment of the indebtedness secured hereby, nor can they be used to cure the default, without the prior written consent of Mortgagee. Any receiver shall be liable to account only for the rents, issues, profits and income actually received by such receiver.

19.4  Exercise all of the remedies of a secured party under the Pennsylvania Uniform Commercial Code, including, but not limited to, the right and power to sell, or otherwise dispose of, the Personal Property or any part thereof, and for that purpose Mortgagee shall take immediate and exclusive possession of the Personal Property or any part thereof as Mortgagee elects and, with or without judicial process, enter upon any portion of the Mortgaged Property on which the Personal Property, or any part thereof, may be situated and remove the same without being guilty of trespass and without liability for damages thereby occasioned.

19.5  Exercise any other right or remedy otherwise available to Mortgagee and resort to any other security held by Mortgagee for the payment of the indebtedness secured hereby in such order and manner as Mortgagee, in its sole discretion, may elect.

20.  Remedies Cumulative. The rights and remedies of Mortgagee provided for in this Mortgage, in the Note, in the Loan Agreement, and in any other Loan

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Document, shall be cumulative and concurrent and shall not be exclusive of any right or remedy provided by law, in equity or otherwise. Said rights and remedies may, at the sole and exclusive discretion of Mortgagee, be pursued singly, successively or together, and may be exercised as often as occasion therefor shall arise.

21.  Mortgagor’s Waivers. Mortgagor and TN hereby waive and release: (i) all errors, defects and imperfections (except as to notice required hereunder or in the Loan Documents), in any proceeding instituted by Mortgagee under this Mortgage, the Note, the Loan Agreement, or any other Loan Document; (ii) all notices of default or of Mortgagee’s exercise, or election to exercise, any right or remedy referred to in paragraph 19 hereof; and (iii) the benefit of any laws now or hereafter enacted extending the time for payment of any sum due under or secured hereby or affording any right to a stay of any execution to be issued on any judgment obtained under the Note, the Loan Agreement, this Mortgage or any other Loan Document, or exempting any property from levy and sale upon any such execution.

22.  No Waiver. No failure or delay by Mortgagee in insisting upon the strict performance by Mortgagor and/or TN of any of the terms, covenants, conditions, agreements and provisions contained herein, in the Note, the Loan Agreement, or in any other Loan Document shall constitute or operate as an estoppel or a waiver of any such terms, covenants, conditions, agreements and provisions, nor shall any such failure or delay preclude Mortgagee from thereafter insisting upon such strict performance by Mortgagor and/or TN. Neither Mortgagor, TN nor any guarantor or surety or other person obligated for the payment of the indebtedness secured hereby shall be relieved of such obligation by reason of the failure of Mortgagee or TN to comply with any request of Mortgagor or of any such guarantor, surety or other person to take action to foreclose this Mortgage or to otherwise enforce any of the provisions of this Mortgage or any of the obligations secured by this Mortgage, or by reason of the release, regardless of consideration, of the whole or any part of the security held for the indebtedness secured by this Mortgage, or by reason of any agreement or stipulation between any subsequent owner or owners or the Mortgaged Property and Mortgagee extending the time of payment or modifying the terms of the Note or this Mortgage without first having obtained the consent of Mortgagor, TN, or any such guarantor, surety or other person, and Mortgagor and each such guarantor, surety and other person shall continue to be liable to make payments according to the terms of any such extension or modification agreement, unless expressly released and discharged in writing by Mortgagee. Mortgagee may release, regardless of consideration, the obligation of any party at any time liable for any of the indebtedness secured by this Mortgage without, as to any other person so obligated or the remainder of such security, in any way affecting such other person’s obligation or impairing or affecting the lien of this Mortgage or the priority of the lien of this Mortgage.

23.  Mortgagee’s Right to Remedy Defaults. If, after the expiration of all applicable notice and cure periods, Mortgagor fails to pay when due any sum required to be paid by Mortgagor or fails to perform any obligation of Mortgagor hereunder, Mortgagee, at its option, shall have the right, but not the obligation, to pay any such sum or to take any action which Mortgagee deems necessary or advisable to protect the security of this Mortgage or the Mortgaged Property, all without prejudice to any of Mortgagee’s rights or remedies available hereunder or under the Note, the Loan Agreement, or under any other Loan Document, at law, or in equity. The amount of all payments so made by Mortgagee, together with all costs so incurred by Mortgagee, shall immediately be due and payable from Mortgagor and/or TN to Mortgagee, together with interest

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at the rate set forth in the Note in the event of a default thereunder, from the date such payment was made of cost incurred by Mortgagee until the date of repayment by Mortgagor and/or TN. All such amounts, together with interest as aforesaid, shall be add to and evidenced by the Note and secured by this Mortgage.

24.  Further Assurances. Mortgagor will execute and deliver such further instruments and documents, and perform such further acts as may be requested by Mortgagee from time to time to confirm the provisions of, or to carry out more effectively the purposes of this Mortgage, the Note, the Loan Agreement, or any other Loan Documents. Mortgagor hereby authorizes Mortgagee to execute and deliver such further instruments and documents and to perform such further acts at any time and from time to time, on behalf of Mortgagor. Mortgagor hereby irrevocably appoints Mortgagee, its designees and nominees, as Mortgagor’s agents and attorneys-in-fact, to execute, from time to time, on behalf of Mortgagor, one or more such instruments and documents.

25.  Notices and Other Communications. All notices and other communications hereunder shall be given in the manner specified in the Loan Agreement. All notices to be given to Mortgagee pursuant to 42 Pa. C.S.A. 8143 shall be given to Mortgagee by certified mail to Mortgagee’s address set forth below.

26.  Captions. The heading and captions herein are inserted for convenience of reference only and shall not control or affect the meaning or construction of any of the provisions of this Mortgage.

27.  Binding Effect. This Mortgage shall bind Mortgagor and its successors and assigns and shall inure to the benefit of Mortgagee and Mortgagor and their respective successors and assigns.

28.  No Amendment. This Mortgage shall not be modified or amended except in writing signed by the party against whom the enforcement of such amendment or modification is sought.

29.  Severability. If any term, covenant or condition of this Mortgage or the application thereof to any party or circumstance shall, to any extent, be invalid, or unenforceable, the remainder of this Mortgage, or the application of such term, covenant or condition to parties or circumstances other than those as to which it is held invalid or unenforceable shall not be affected thereby and each term, covenant or condition of this Mortgage shall be valid and be enforced to the fullest extent permitted by law.

30.  Governing Law. This Mortgage shall be construed and enforced in accordance with the laws of the Commonwealth of Pennsylvania.

31.  Waiver of Jury Trial. MORTGAGOR AND MORTGAGEE HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE ANY RIGHT EITHER MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED HEREON, OR ARISING OUT OF, UNDER OR IN CONNECTION WITH, THE NOTE, THIS MORTGAGE, AND OTHER LOAN DOCUMENTS, ANY OTHER TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER VERBAL OR WRITTEN) OR ACTIONS OF THE MORTGAGEE OR THE MORTGAGOR IN CONNECTION HEREWITH OR THEREWITH. THIS PROVISION IS A MATERIAL

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INDUCEMENT FOR THE MORTGAGEE TO MAKE THE LOAN EVIDENCED BY THE NOTE AND SECURED BY, INTER ALIA, THIS MORTGAGE.

IN WITNESS WHEREOF, Mortgagor has caused this Mortgage to be duly executed the day and year first above written.

MORTGAGOR:

 

 

 

SPITZ, INC.

 

 

/s/ Donn L. Guthrie

 

 

 

WITNESS AS TO BOTH

WITNESS AS TO BOTH

 

 

BY:

 /s/ Jonathan Shaw

(SEAL)

 

 

 

 

 

ATTEST:

 /s/ Paul Dailey

(SEAL)

 

 

 

 

 

[Corporate Seal]

 

In consideration of Mortgagee’s advance of the proceeds of the Note and the covenants and obligations of TN as set forth herein, and intending to be legally bound hereby, TN has caused this Mortgage to be duly executed.

TRANSNATIONAL INDUSTRIES, INC.

/s/ Donn L. Guthrie

 

 

WITNESS AS TO BOTH

 

 

BY:

 /s/ Jonathan Shaw

(SEAL)

 

 

 

 

 

ATTEST:

 /s/ Paul Dailey

(SEAL)

 

 

 

 

 

[Corporate Seal]

 

I hereby certify that the address of the above-named Mortgagee is 22 West State Street, Media, Delaware County, Pennsylvania, 19063.

/s/ Donn L. Guthrie

 

Donn L. Guthrie, Esquire

 

17




COMMONWEALTH OF PENNSYLVANIA :

:SS

COUNTY OF CHESTER :

On this, the 14th day of January, 2004, before me, the undersigned officer, appeared Jonathan A. Shaw and Paul L. Dailey, who acknowledged themselves to be the President and Executive President of, Spitz, Inc., a Delaware corporation, and Transnational Industries, Inc., a Delaware corporation, and that they as such, being authorized to do so, executed the foregoing instrument and acknowledged that he executed the same for the purpose therein contained.

IN WITNESS WHEREOF, I hereunto set my hand and official seal.

/s/ Maria Pantano Bucci

 

NOTARY PUBLIC

My Commission Expires:

(Notary Seal)

Maria Pantano Bucci, Notary Public

 

Marple Twp., Delaware County

 

My commission expires June 16, 2007

 

 

RECORDING INFORMATION:

18




ALL THAT CERTAIN lot or parcel of land with buildings and improvements thereon erected, Situate in the Township of Chadds Ford, County of Delaware, State of Pennsylvania, bounded and described according to a Final Subdivision Plan for Chadds From Plaza, made by Brandywine Valley Engineers, Aston, PA, dated 1/19/1998 and last revised 10/2/2002 as follows, to wit:

BEGINNING at a point of curve on the Southwesterly side of Brandywine Drive (60 feet wide), being a corner of Proposed Lot #2 (as shown on said plan); thence from said point of beginning extending along said drive the three following courses and distances: (1) on a line curving to the left having a radius of 425.00 feet an arc distance of 74.78 feet to a point; thence (2) South 48 degrees 55 minutes 22 seconds East 467.61 feet to a point of curve; thence (3) on a line curving to the right having a radius of 250.00 feet an arc distance of 101.40 feet to a point, being a corner of lands now or late of Thomas Hannum; thence leaving said drive extending along lands of Hannum the two following courses and distances: (1) South 64 degrees 18 minutes 55 seconds West 229.98 feet to a point; thence (2) South 25 degrees 41 minutes 05 seconds East 261.49 feet to a point on the title line in the bed of Baltimore Pike, being a corner of lands of Hannum; thence extending along said title line the three following courses and distances: (1) South 66 degrees 53 minutes 00 seconds West 33.53 feet to a point; thence (2) South 60 degrees 12 minutes 00 seconds West 210.00 feet to a point; thence (3) South 57 degrees 55 minutes 00 seconds West 371.81 feet to a point, being a corner of other lands of Brandy Partners; thence leaving said pike extending along said lands the three following courses and distances: (1) North 20 degrees 56 minutes 06 seconds West 317.68 feet to a point; thence (2) North 52 degrees 44 minutes 03 seconds West 339.59 feet to a point; thence (3) North 25 degrees 49 minutes 00 seconds West 295.00 feet to a point; thence still along said lands and along Lot #2 North 64 degrees 11 minutes 00 seconds East 743.13 feet to the first mentioned point and place of beginning.

BEING Lot #3 on the above-mentioned Plan.

BEING Folio #04-00-00034-02.

BEING THE SAME PREMISES which Brandy Partners, a Pennsylvania limited partnership, by Indenture bearing date the 14th day of January, 2004, duly executed, acknowledged and delivered, and intended to be forthwith recorded, granted and conveyed unto Spitz, Inc., a Delaware corporation, in fee.

EXHIBIT “A”

19



EXHIBIT 10.26

MORTGAGE NOTE

$3,200,000.00

January 14, 2004

 

FOR VALUE RECEIVED, and without defalcation or setoff, Transnational Industries, Inc., a Delaware corporation, and Spitz, Inc., a Delaware corporation (individually, collectively, jointly and severally referred to as the “Maker”), with an address of P.O. Box 198, Route 1, Chadds Ford, Pennsylvania 19317 promises to pay to the order of FIRST KEYSTONE BANK (“Payee”), a federally chartered stock savings bank organized and existing under the laws of the United States of America, at Payee’s office located at 22 West State Street, Media, Pennsylvania, 19063, the principal amount of Three Million Two Hundred Thousand ($3,200,000.00) Dollars, advanced pursuant to the terms, conditions, and provisions of a certain Loan Agreement dated even date herewith, by and between Maker and Payee (the “Loan Agreement”), together with interest on the outstanding principal balance of this Mortgage Note (the Note) from the date hereof at the rate of five and three quarter (5.750%) percent per annum, provided, however, effective January 14, 2006, and on that same day every thirty sixth (36th) month thereafter the rate of interest will adjust to a fixed per annum rate equal to the greater of (i) five and three quarter (5.750%) percent, or (ii) three hundred (300) basis points (3.00%) over the Three (3) Year Constant Maturity Treasury Rate, the said fixed rate to be set five (5) days prior to the effective date of the rate change; provided, however, that should the fifth day fall on a Saturday, Sunday or a bank holiday, the said fixed rate shall be set on the last day prior to such the fifth day for which a Three (3) Year Constant Maturity Treasury Rate is available. The rate of interest from time to time charged on the outstanding balance of this Note is hereinafter referred to as the Rate.

1.  Payment.  The principal amount of this Note shall be payable, together with interest thereon, in lawful money of the United States, in the following manner:

(a)  On January 1, 2004, a payment of interest only scheduled to accrue on the principal balance outstanding from the date hereof to January 31, 2004.

(b)  Commencing on the first day of March, 2004 and on the first day of each and every month thereafter, Maker shall pay to Payee the principal, together with interest accruing hereunder at the Rate, in arrears, in amortized, consecutive, and successive monthly installments sufficient to repay the principal balance of this Note, together with interest accruing thereon at the Rate, in full over a twenty (20) year amortization period (the “Amortization Period”), provided, however, interest on this Note shall be calculated on the basis of a three hundred sixty (360) day year, and charged for the actual number of days elapsed. Provided, however, Payee shall recalculate the amount of the monthly principal and interest installment due on this Note on the first day of the first month following the effective date of any change in the Rate. The recalculated monthly installment shall be equal to the monthly installment sufficient to repay the principal balance Maker is expected to owe as of the effective date of any change in the Rate, together with interest accruing thereon at the Rate, in full over the remaining portion of the original Amortization Period.

1




(c)  Notwithstanding the foregoing, and unless sooner paid, the entire outstanding principal amount of this Note, together with all interest accrued and not theretofore paid, and all other sums payable hereunder, shall be due and payable in full on January 13, 2024 (the “Maturity Date”).

2.  Security.  The payment of this Note, and the performance by Maker of all of its obligations under the commitment letter dated December 19, 2003 (the “Commitment Letter”), and the Loan Agreement are secured by, among other things:

(a)  a certain Open-End Mortgage and Security Agreement, dated even date herewith (the Mortgage), secured upon certain real property premises currently occupied by Spitz, Inc., located at Route 1, Chadds Ford Township, Delaware County, Pennsylvania, being Folio No. 04-00-00034-02, and more specifically described on the metes and bounds legal description, attached to the Mortgage and labeled Exhibit A, and all improvements now or hereafter placed or made thereon and thereto (the Mortgage Premises), and creating a security interest under the Pennsylvania Uniform Commercial Code in all fixtures, equipment and other tangible personal property, including, but not limited to, all machinery, appliances, furnishings, tools and building materials now or hereafter acquired by Maker and installed or to be installed upon, or used or to be used in connection with, the Mortgaged Premises;

(b)  those certain UCC-1 Financing Statements, dated even date herewith, identifying Maker as Debtorand Payee as the Secured Party, securing Payee’s interest in and to all fixtures, equipment and other tangible personal property, including, but not limited to, all machinery, appliances, furnishings, tools and building materials now or hereafter acquired by Maker and installed or to be installed upon, or used or to be used in connection with the Mortgaged Premises;

(c)  an Assignment of Rents, Profits and Leases, dated even date herewith, pursuant to which Spitz, Inc. has collaterally assigned to Payee all of its right, title and interest in and to all rents, profits and income arising from the Mortgaged Premises and from all leases now or hereafter in effect pertaining to all or any portion of the Mortgaged Premises, and;

(d)  a Collateral Assignment of Agreements Affecting Real Estate, dated even date herewith, pursuant to which Maker has collaterally assigned to Payee all of Maker’s right, title and interest in and to all approvals, permits, contracts and warranties, now or hereafter in effect, pertaining to all or any portion of the Mortgaged Premises.

All of the agreements, conditions, covenants and provisions contained in the Commitment Letter, the Loan Agreement, and the documents listed in clauses (a) through (d) above (hereinafter referred to collectively as the “Loan Documents) are hereby made a part of this Note to the same extent and with the same force and effect as if they were fully set forth herein. Maker covenants and agrees to keep and perform, or cause to be kept and performed, all such agreements, conditions, covenants and provisions, strictly in accordance with their terms.

3.  Late Charge.  Maker is obligated to make payments of interest or principal or both on the above specified due dates in accordance with the terms of this Note

2




without defalcation or setoff and without notice or demand, and the failure to receive any notice or demand from Payee shall not be a defense to, or excuse for, the failure to make such payments on the due dates. If any installment of interest or principal or both, or any other payment required hereunder or under any of the Loan Documents is not paid within fifteen (15) days after the due date of such installment, or payment, a late charge equal to the greater of: (a) five percent (5.00%) of such overdue amount; or (b) seventy-five ($75.00) Dollars will be due and payable to Payee to cover the additional expense incident to such delinquency. This shall not be construed to obligate Payee to accept any overdue installment (i.e., any payment remaining unpaid for a period of five (5) days after written notice of failure to pay the same when due) nor to limit Payee’s rights and remedies for Maker’s default, as hereinafter set forth.

4.  Default. Maker shall be in default hereunder upon the occurrence of any of the following events (an “Event of Default): (i) any installment of interest or principal and interest, or any other sum required hereunder, or any other payment required under any of the Loan Documents, remains unpaid for the period of five (5) days after written notice of failure to pay the same when due in accordance with the provisions hereof or under any of the Loan Documents; (ii) after the expiration of any applicable notice and cure periods, if any, the default by Maker under any of the Loan Documents; (iii) the institution by or against Maker of any bankruptcy, insolvency, reorganization, arrangement, debt adjustment, receivership, liquidation or dissolution proceeding which, if instituted against any such party, is consented to by such party or remains not dismissed or stayed for sixty (60) days; (iv) the adjudication of Maker as a bankrupt or the appointment of a trustee or receiver for all or any part of Maker’s property; (v) the making by Maker of an assignment for the benefit of creditors; (vi) the admission by Maker of an inability to pay his/her/its or their debts as they become due; (vii) after the expiration of any applicable notice and cure periods, if any, the default by Maker or any affiliate, owner or subsidiary thereof, in making any payment for money owed or borrowed by Maker or any affiliate, owner or subsidiary thereof including, without limitation, the occurrence of an event of default under that certain Line Of Credit Agreement dated June 12, 1997 between Payee and Maker, amended by that certain Modification Agreement dated July 7, 2000, and further amended by that certain Second Modification Agreement dated July 18, 2002, respecting a Two Million ($2,000,000.00) Dollar commercial revolving line of credit; (viii) the untruth, in any respect regarded by Payee as material, of any warranty, representation, certification, financial statement or other information made or furnished by Maker in connection with the loan made by Payee to Maker pursuant to the Commitment Letter and the Loan Agreement; or (ix) the sale or transfer of any right, title, or interest, legal or equitable, in the Mortgaged Premises or any part or parcel thereof or a change of the majority of the members of the board of directors of Maker during any twelve (12) month period.

5.  Remedies. Upon the occurrence of any Event of Default, the entire unpaid balance of principal (including any additional loans or advances and all other sums paid by Payee to or on behalf of Maker or added to the principal hereof pursuant to the terms of this Note or any of the Loan Documents), with all accrued interest thereon, together with an attorney’s commission for collection of the greater of Five Thousand ($5,000.00) Dollars or five (5%) percent of the total indebtedness, and all other sums due and owing hereunder or under the Loan Documents, shall, at the option of Payee, become immediately due and payable without presentment, demand or further action of any kind, and one or more executions may forthwith issue on any judgment or judgments obtained by virtue of any provision of this Note or otherwise obtained and any security given to

3




secure the obligation evidenced by this Note may thereupon forthwith be enforced, and Payee may also recover all costs of suit and other expenses of collection involving, but not limited to, reasonable attorney’s fees, the costs of title searches, the costs of eviction of any tenants and re-appraisals.

The rights and remedies provided herein or in the Loan Documents shall be cumulative and concurrent and shall not be exclusive of any right or remedy provided by law, in equity or otherwise. Said rights and remedies may, at the sole discretion of Payee, be pursued singly, successively or together as often as occasion therefor shall arise, against Maker and/or the Mortgaged Premises or any other security for this Note, as applicable. No failure on the part of Payee to exercise any of such rights or remedies shall be deemed a waiver of any such rights or remedies or of any Event of Default hereunder.

Upon the occurrence of an Event of Default, Payee shall have the right, but not the duty, to cure such default, in part or in its entirety, and all amounts expended or debts incurred by Payee, including reasonable attorneys’ fees, shall be deemed to be advances to Maker, shall be added to the principal due under this Note, shall be secured by the security for this Note, and shall be payable by Maker to Payee upon demand with interest at the Default Rate (hereinafter defined).

6.  Default Rate.  Upon the occurrence of an Event of Default, interest shall continue to accrue thereafter at the default rate of the Rate plus five (5%) percent per annum (the Default Rate) until this Note, and all sums due hereunder, are paid in full, including the period following the entry of any judgment. Interest after the occurrence of an Event of Default at the Default Rate shall be calculated on the basis of a three hundred sixty (360) day year, but charged for the actual number of days elapsed.

7.  WARRANT OF ATTORNEY.  THE FOLLOWING SECTION SETS FORTH WARRANTS OF ATTORNEY FOR ANY ATTORNEY TO CONFESS JUDGMENTS AGAINST MAKER. IN GRANTING THESE WARRANTS OF ATTORNEY TO CONFESS JUDGMENTS AGAINST MAKER, MAKER HEREBY KNOWINGLY, INTENTIONALLY, VOLUNTARILY, AND UNCONDITIONALLY WAIVE(S) ANY AND ALL RIGHTS MAKER MAY HAVE TO PRIOR NOTICE AND AN OPPORTUNITY FOR HEARING UNDER THE RESPECTIVE CONSTITUTIONS AND LAWS OF THE COMMONWEALTH OF PENNSYLVANIA AND THE UNITED STATES OF AMERICA.

UPON THE OCCURRENCE OF AN EVENT OF DEFAULT, MAKER, WITHOUT FURTHER CONSENT OR NOTICE, DOES HEREBY IRREVOCABLY AND UNCONDITIONALLY AUTHORIZE AND EMPOWER ANY ATTORNEY OF THE PROTHONOTARY OF ANY COURT OF RECORD OF THE COMMONWEALTH OF PENNSYLVANIA OR ELSEWHERE TO APPEAR FOR MAKER IN ANY SUCH COURT, AND WITH OR WITHOUT A COMPLAINT OR DECLARATION FILED, IN AN APPROPRIATE ACTION BROUGHT AGAINST MAKER ON THIS NOTE, TO ENTER AND CONFESS JUDGMENT AGAINST MAKER IN FAVOR OF PAYEE OR ITS SUCCESSORS AND ASSIGNS, FOR ALL OR ANY PORTION OF THE ENTIRE AMOUNT DUE TO PAYEE UPON SUCH EVENT OF DEFAULT AS PROVIDED HEREIN, TOGETHER WITH COSTS OF SUIT AND ATTORNEYS’ COMMISSION IN AN AMOUNT EQUAL TO FIVE (5%) PERCENT

4




OF THE PRINCIPAL AMOUNT OUTSTANDING UNDER THIS NOTE, BUT IN NO EVENT LESS THAN FIVE THOUSAND ($5,000.00) DOLLARS; AND FOR SO DOING THIS NOTE OR A COPY HEREOF VERIFIED BY AFFIDAVIT SHALL BE A SUFFICIENT WARRANT. THE AUTHORITY HEREIN GRANTED TO APPEAR, ENTER AND CONFESS JUDGMENT SHALL NOT BE EXHAUSTED BY ANY ONE OR MORE EXERCISE THEREOF OR BY ANY DEFECTIVE EXERCISE THEREOF, BUT SHALL CONTINUE AND BE EXERCISABLE FROM TIME TO TIME UNTIL THE FULL PAYMENT OF ALL AMOUNTS DUE FROM MAKER TO PAYEE HEREUNDER AND UNDER THE LOAN DOCUMENTS IS MADE. THE FOREGOING RIGHT AND REMEDY IS IN ADDITION TO AND NOT IN LIEU OF ANY OTHER RIGHT OR REMEDY AVAILABLE TO PAYEE UNDER THIS NOTE OR OTHERWISE.

MAKER ACKNOWLEDGES HAVING HAD THE ASSISTANCE OF LEGAL COUNSEL OR THE OPPORTUNITY TO RETAIN LEGAL COUNSEL IN THE REVIEW AND EXECUTION OF THIS NOTE FOR THE PURPOSE OF EXPLAINING THE MEANING AND EFFECT OF THE FOREGOING PROVISIONS CONCERNING CONFESSION OF JUDGMENT, AND FURTHER ACKNOWLEDGES THAT THE MEANING AND EFFECT OF THE FOREGOING PROVISIONS CONCERNING CONFESSION OF JUDGMENT HAVE BEEN EITHER FULLY EXPLAINED TO MAKER BY SUCH COUNSEL OR FULLY UNDERSTOOD BY MAKER WITHOUT RELIANCE ON PAYEE IF MAKER HAS ELECTED NOT TO BE REPRESENTED BY LEGAL COUNSEL AND AS EVIDENCE OF SUCH FACT SIGNS HIS/HER/THEIR/ITS INITIALS.

/s/ PLD

 

/s/ JAS

 

 

(Initials of Maker)

 

(Initials of Maker)

 

 

Maker hereby waives the benefit of any laws now or hereafter enacted providing for any stay of execution, marshaling of assets, exemption from civil process, redemption, extension of time for payment, or valuation or appraisement of all or any part of the Mortgaged Premises or any other security for this Note, exempting all or any part of the Mortgaged Premises, any other security for this Note or any other property of Maker from attachment, levy or sale upon any such execution or conflicting with any provision of this Note or any of the Loan Documents. Maker waives and releases Payee and said attorney or attorneys from all errors, defects and imperfections whatsoever in confessing any such judgment or in any proceedings relating thereto or instituted by Payee hereunder or under any of the Loan Documents. Maker hereby agrees that any property that may be levied upon pursuant to a judgment obtained under this Note may be sold upon any execution thereon in whole or in part, and in any manner and order that Payee, in its sole discretion may elect.

8.  Prepayment.  Upon giving Payee at least thirty (30) days prior written notice, Maker may prepay all or any portion of the outstanding principal balance of this Note by paying, in addition to (i) the prepaid principal amount, (ii) all accrued and unpaid interest to the date of prepayment, and (iii) all other amounts due under this Note, a prepayment premium (“Prepayment Premium) equal to the greater of:

5




(a)              the product obtained multiplying (1) the difference between the then Rate and the yield rate of that U.S. Treasury Note the due date of which is closest to (either before, after or on) the end of the current three (3) year fixed rate period of this Note (the Period End Date) (however, if the period between the Period End Date and the due date exceeds six(6) months, the average of the yield rates of the two U.S. Treasury Notes with due dates next preceding and following the Period End Date shall be used to compute such difference; and if there are two or more U.S. Treasury Notes with the same due dates, that one with a whole yield rate closest to the Rate shall be used to compute such difference) as reported in the Wall Street Journal or similar publication on the fifth (5th) business day preceding the prepayment date, and (2) the number of whole and fractional years remaining between the prepayment date and the Period End Date, and (3) the prepaid principal amount; or

(b)             one (1%) percent of the prepaid principal amount.

Prepayment shall mean any event whereby the indebtedness evidenced by this Note is paid in advance of the payment schedule or fully satisfied prior to the Maturity Date in any manner, whether voluntary or involuntary, including without limitation any payment after default, any payment after the Maturity Date is accelerated, or any payment under court order or bankruptcy proceeding. Payee shall not be required to accept ay prepayment if it does not include payment of the required Prepayment Premium. Notwithstanding anything herein to the contrary, Maker may during each calendar year, upon giving Payee thirty (30) days prior written notice, prepay, in the aggregate, an amount equal to or less than ten (10%) percent of the outstanding principal balance of the indebtedness evidenced by this Note determined as of January 1 of each calendar year without liability for the payment of any Prepayment Premium.

Notwithstanding the foregoing, no Prepayment Premium will be due and payable (i) in the event of the receipt and retention by the Payee of proceeds from any casualty loss or condemnation (ii) during the last 120 days of any three (3) year term of this Note or (iii) as a result of the sale of all or a portion of the Mortgaged Premises to an unaffiliated third party in an arms length transaction.

All prepayments shall first be applied to the Prepayment Premium, then on account of interest accrued hereunder and other sums due hereunder other than principal, with the balance applied to principal. No partial prepayment shall postpone or interrupt payments of interest or the payment of the remaining principal balance, all of which shall continue to be due and payable at the times and in the manner set forth above.

9.  Waiver.  The Maker and all other endorsers, sureties and guarantors hereby jointly and severally waive presentment and demand for payment, notice of demand, notice of default (except as required in this Note), notice of dishonor, protest and notice of protest of this Note, and all other notices in connection with the delivery, acceptance, performance, default or enforcement of the payment of this Note, and also waive notice of the exercise of any options on the part of Payee hereunder.

The granting, with or without notice, of any extension or extensions of time for payment of any sum or sums due hereunder, or under any of the Loan

6




Documents, or for the performance of any covenant, provision, condition or agreement contained herein or therein, or the granting of any other indulgence, or the taking or releasing or subordinating of any security for the indebtedness evidenced hereby, or any other modification or amendment of this Note or any of the Loan Documents, will in no way release or discharge the liability of Maker, whether or not granted or done with the knowledge or consent of Maker.

Payee shall not be deemed, by any act of omission or commission, to have waived any of its rights or remedies hereunder, under any of the Loan Documents, at law or in equity, unless such waiver is in writing and signed by Payee, and then only to the extent specifically set forth in the writing. A waiver as to one event shall not be construed as continuing or as a bar to or waiver of any right or remedy as to a subsequent event.

10.  Joint and Several Liability.  The obligations and liabilities hereunder of the persons or entities referred to as “Maker” shall be joint and several.

11.  Notice.  Regular monthly payment invoices and notice of any change in the monthly installment of principal and interest due under this Note shall be sent by regular mail, postage prepaid, to the address of Maker set forth above. All other notices and other communications required or given under this Note shall be given in the manner and to the addresses set forth in the Loan Agreement

12.  Miscellaneous.  Notwithstanding any other provision contained herein, if, at any time, the Rate or the Default Rate shall be deemed by any competent court of law, governmental agency or tribunal to exceed the maximum rate of interest permitted by any applicable laws, then, for such time as the Rate or the Default Rate would be deemed excessive, its application shall be suspended and there shall be charged instead the maximum rate of interest permitted under such laws. Any amounts theretofore received by Payee hereunder in excess of the maximum rate of interest so permitted shall be applied by Payee in reduction of the outstanding principal balance of this Note, or if this Note shall have theretofore been paid in full, the amount of such excess shall promptly be returned by Payee to Maker.

In the event any portion of this Note shall be declared by any court of competent jurisdiction to be invalid or unenforceable, such portion shall be deemed severable from this Note, and the remaining parts hereof shall remain in full force and effect, as fully as though such invalid or unenforceable portion was never part of this Note.

The obligations of Maker hereunder shall be binding on the successors and assigns of Maker, and the benefits of this Note shall inure to Payee, its successors and assigns and to any holder of this Note.

Each and every person or entity signing this Note as an endorser binds himself, herself or itself as principal not as surety, and agrees to be bound by and comply with all of the terms, conditions and provisions of this Note.

7




Nothing herein contained or contained in any of the Loan Documents shall be construed to create a partnership or joint venture between Payee and Maker, or to render Payee in any way responsible for the debts or losses of Maker.

This Note, and all issues arising hereunder, shall be governed by and construed according to the laws of the Commonwealth of Pennsylvania.

MAKER AND PAYEE HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE ANY RIGHT EITHER MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED HEREON, OR ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS NOTE, THE MORTGAGE, ANY OTHER DOCUMENT OR INSTRUMENT RELATING HERETO OR THERETO, ANY OTHER TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER VERBAL OR WRITTEN) OR ACTIONS OF THE PAYEE OR THE MAKER IN CONNECTION HEREWITH OR THEREWITH. THIS PROVISION IS A MATERIAL INDUCEMENT FOR THE PAYEE TO MAKE THE LOAN EVIDENCED BY THIS NOTE.

[THIS SPACE INTENTIONALLY LEFT BLANK. SIGNATURE PAGE FOLLOWS.]

8




IN WITNESS WHEREOF, Maker has caused this Note to be duly executed and sealed this 14th day of January, 2004.

WITNESSES:

 

MAKER:

 

 

 

 

 

SPITZ, INC.

/s/ Maria Pantano Bucci

 

 

 

 

/s/ Donn L. Guthrie

 

 

 

 

WITNESS AS TO ALL

 

 

 

 

BY:

 

 /s/ Jonathan Shaw

(SEAL)

 

 

 

 

 

ATTEST:

 

 /s/ Paul Dailey

(SEAL)

 

 

 

 

 

 

 

TRANSNATIONAL INDUSTRIES, INC.

 

 

 

 

 

BY:

 

 /s/ Jonathan Shaw

(SEAL)

 

 

 

 

 

ATTEST:

 

 /s/ Paul Dailey

(SEAL)

 

9



EXHIBIT 10.27

LOAN AGREEMENT

THIS IS A LOAN AGREEMENT (the “Agreement”), dated as of the 14th day of January, 2004, between Transnational Industries, Inc., a Delaware corporation, and Spitz, Inc., a Delaware corporation (individually, collectively, jointly and severally referred to as the “Borrower”), with an address of P.O. Box 198, Route 1, Chadds Ford, Pennsylvania 19317, and FIRST KEYSTONE BANK (“Lender”), a federally chartered stock savings bank organized and existing under the laws of the United States of America, with a principal business office located at 22 West State Street, Media, Pennsylvania, 19063.

1.   DEFINITIONS. The following terms when used in this Agreement shall have the respective meanings set forth below:

1.1.           Assignments: Additional collateral for the Loan, including, without limitation, (i) a Collateral Assignment of Agreements Affecting Real Estate,including without limitation, all approvals, permits, contracts and warranties related to the Land; and (ii) an Assignment of Rents, Profits and Leases.

1.2            Borrower: Transnational Industries, Inc., a Delaware corporation, and Spitz, Inc., a Delaware corporation, individually, collectively, jointly and severally.

1.3.           Closing Date: The date of the execution and delivery of this Agreement by Borrower and Lender.

1.4.           Collateral: The real property and personal property pledged to Lender to secure the Loan pursuant to the Mortgage and the Assignments, including, without limitation, the Land and the improvements thereon.

1.5.           Commitment Letter: A certain Commitment Letter from Lender to Borrower dated December 19, 2004

1.6.           Event of Default: The occurrence of any event described in Paragraph 5.1 hereof.

1.7.           Governmental Authority: The United States of America, the Commonwealth of Pennsylvania, and any political subdivision thereof in which the Land is located including without limitation the County of Delaware, the Township of Chadds Ford, and any agency, department, court, commission, board, bureau or instrumentality of any of them which exercises jurisdiction over the Land or Borrower.

1.8.           Land: The real property currently occupied by Borrower located at Route 1, Chadds Ford Township, Delaware County, Pennsylvania, being Folio No. 04-00-00034-02, as more particularly described on Exhibit “A” to the

1




Mortgage, together with all of the property rights, title, interests, easements and other rights appurtenant to such real property and defined in the Mortgage as the Mortgaged Property.

1.9.           Legal Requirements: All applicable laws, statutes, ordinances, rulings, regulations, codes, decrees, orders, judgments, conditions, restrictions and requirements of any Governmental Authority, including, without limitation, agreements, requirements, restrictions and conditions related to any permit, approval or other grant of authority.

1.10.         Loan: The credit facility of Three Million Two Hundred Thousand ($3,200,000.00) Dollars to be advanced by Lender to Borrower pursuant to this Agreement and to be evidenced by the Note and secured by, among other things, the Mortgage and the Assignments.

1.11.         Loan Documents: All agreements, documents, instruments, certificates, legal opinions and other papers executed and delivered or otherwise furnished by Borrower to Lender in connection with the Loan including, without limitation, this Agreement, the Commitment Letter, the Note, the Mortgage, and the Assignments.

1.12.         Maturity Date: January 13, 2024.

1.13.         Mortgage: The mortgage of even date herewith from Borrower to Lender granting a first lien mortgage and security interest in, among other things, (i) the Land, and (ii) all personal property of Borrower located on the Land.

1.14.         Note: The mortgage note of even date herewith from Borrower to Lender evidencing the Loan in the amount of Three Million Two Hundred Thousand ($3,200,000.00) Dollars and all extensions, renewals and modifications thereof.

1.15.         Permitted Exceptions: The title exceptions not removed at the closing of the Loan from Title Insurance Commitment No. 03-1156 dated effective October 30, 2003, issued by Strong Abstract, Inc. agent for First American Title Insurance Company, as approved by Lender in its sole discretion.

1.16.         Title Agent: Strong Abstract, Inc., agent for First American Title Insurance Company.

2.   LOAN.

2.1.           General. Borrower is the owner in fee of the Land. The Loan shall be repaid in full no later than the Maturity Date, in accordance with this Agreement and the other Loan Documents.

2.2.           Loan Amount. Subject to the terms and conditions of this Agreement, Lender shall lend to Borrower and Borrower shall borrow from Lender Three Million Two Hundred Thousand ($3,200,000.00) Dollars, which shall bear interest and be repaid as set forth in the Note.

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2.3.           Loan Disbursement. The purpose of the Loan is to finance Borrower’s acquisition of the Land. The proceeds of the Loan shall be fully disbursed of even date herewith by check or wire transfer to the Title Agent to be applied on account of the purchase price for the Land.

3.   REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants to Lender as of the date hereof and at all times when this Agreement shall remain in effect or the indebtedness evidenced by the Note shall remain outstanding that:

3.1.           Organization and Good Standing. Borrower is/are duly organized, validly existing and in good standing under the laws of the State of Delaware and Spitz, Inc. is registered as a foreign corporation and is in good standing in the Commonwealth of Pennsylvania and in any other jurisdiction in which Borrower was organized. The character of the properties owned or leased by Borrower and the nature of Borrower’s. businesses do not require Borrower to be qualified and in good standing in any other state in order to avoid material liability or disadvantage. Certified copies of Borrower’s organizational documents and all amendments thereto have been delivered to Lender and are current, correct and complete as of the date hereof

3.2.           Power and Authority. Borrower has full power and authority (i) to own Borrower’s properties, and Spitz, Inc, has full power and authority to own the Land, and (ii) to conduct Borrower’s businesses as now conducted and as to be conducted in connection with the operation of the Land. Borrower has full power and authority to execute, deliver and comply with the provisions of each of the Loan Documents executed by Borrower. Each of the Loan Documents executed by Borrower constitute the legally binding obligation of Borrower enforceable against Borrower in accordance with its terms.

3.3.           No Litigation. There is no action, suit or proceeding pending or, to the knowledge of Borrower, threatened against or affecting Borrower or all or any portion of the Land or Borrower’s business, except actions, suits and proceedings fully covered (except for deductibles) by insurance.

3.4.           Conflict. Neither the execution nor the delivery of any of the Loan Documents, nor the performance or satisfaction by Borrower of any of the provisions thereof, will conflict with or result in a breach of any of the provisions of any applicable Legal Requirements, or any agreement or other instrument to which Borrower is a party or by which Borrower is bound, or result in the creation or imposition of any lien, charge or encumbrance upon any property of Borrower, or the Land other than any lien created pursuant to any of the Loan Documents.

3.5.           Consent. No consent, approval or other authorization of or by any Governmental Authority is required in connection with the execution or delivery by Borrower of any of the Loan Documents, or compliance with or performance of any of the provisions thereof.

3.6.           Permits and Approvals. Borrower has secured all licenses, permits, authorizations, consents and approvals required by any Governmental Authority for the use and occupation of the Land as commercial real estate and the operation of Borrower’s business thereon.

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3.7.           Compliance: Zoning. Borrower has complied with all Legal Requirements and all recorded instruments affecting the Land and the use thereof complies with all zoning and use-related Legal Requirements.

3.8.           Financial Statements.

3.8.1.        The financial statements of Borrower delivered to Lender prior to the date hereof are Borrower’s most current financial statements and fully and accurately present the financial condition of Borrower as of the date thereof, in accordance with generally accepted accounting principles consistently applied. There are no liabilities or obligations of Borrower which are individually or in the aggregate material, either accrued, absolute, contingent or otherwise, except (i) to the extent set forth in the balance sheets and the notes thereto and not heretofore paid or discharged, and (ii) those incurred subsequent to the date of the foregoing financial statements, which are consistent with past business practice and in the normal and ordinary course of business.

3.8.2.        Since the dates of the foregoing financial statements, there has not been (i) any material adverse change in the financial condition or in the operations, business or property of Borrower or (ii) any damage, destruction or loss, whether or not covered by insurance, materially and adversely affecting the operations, business or property of Borrower. Borrower is not aware of any fact or circumstance, which (with or without the passage of time or the giving of notice or both) would or could result in any such change.

3.9.           Taxes and Assessments. All federal, state and other tax returns and reports of Borrower required to be filed have been duly filed, and all federal, state and other taxes, assessments (including assessments for municipal improvements), fees or other governmental charges imposed upon Borrower or the Land which are due and payable have been paid. Borrower is not aware of any proposed material tax or other assessments against it, or the Land, and no extension of time for assessment or payment of any federal, state or local tax by the Borrower is in effect, unless an extension has been applied for and granted and any taxes due with such extension paid.

3.10.         Title.

3.10.1.      Spitz, Inc. holds good, indefeasible and marketable fee simple title to the Land, free and clear of all mortgages, liens, encumbrances, ground rents, leases, tenancies, licenses, security interests, covenants, conditions, restrictions, rights-of-way, easements, encroachments and any other matters affecting title except (i) the Permitted Exceptions, and (ii) the liens and encumbrances created in favor of Lender pursuant to the Loan Documents.

3.10.2.      Lender’s right, title and interest in and to each of the agreements, documents, instruments, contracts, permits, licenses and other materials and assets, if any, assigned to Lender pursuant to this Agreement and the other Loan Documents are free and clear of all liens, encumbrances, leases, licenses, covenants, conditions, restrictions, security interests, other assignments and other matters affecting title (except the Permitted Exceptions), and Borrower is

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permitted to assign such agreements, documents, instruments, contracts, permits, licenses and other materials and assets. Borrower is without knowledge of the existence of any default under or breach of any of the foregoing.

3.10.3       Spitz, Inc. is lawfully authorized to mortgage and encumber the Land.

3.10.4       Borrower has not created, and will not create, or permit or suffer to be created, any liens, encumbrances or security interests in or on the Land other than the Mortgage, or create, or permit or suffer to be created, any reservation of title by any party other than Lender with respect to any portion of the Land, other than liens in favor of Lender.

3.11.         Utilities. All utility services necessary for the full use, development and enjoyment of the Land as currently improved, are available at no cost or expense at the title lines of the Land (or, if they pass through adjoining private land, in accordance with valid public or unencumbered private easements which inure to the benefit of Borrower and run with the Land, copies of which have been delivered to Lender) including, without limitation, sanitary sewers, storm sewers, water, electricity, and telephone.

3.12.         Roads. The Land is located along a dedicated public street, and if not located a dedicated public street, access to the Land is insured, and all curb-cut and street opening permits or licenses required for vehicular access to and from the Land to any adjoining public street or highway have been obtained and paid for by Borrower and are in full force and effect. All roads necessary for the full utilization of the Land for its intended purposes have either been completed or the necessary rights of way therefore have been acquired by Borrower or by the appropriate Governmental Authority having jurisdiction.

3.13.         Insurance. No notice has been received from any insurance company which issued any of the insurance policies or any of their agents, brokers or representatives, stating in effect that any such policy (i) will not be renewed, (ii) will be renewed only at a higher premium that is presently payable therefore, or (iii) will be renewed only with lesser or less complete coverage than is presently provided.

3.14.         No Default. No event has occurred and is continuing that is an Event of . Default or which would be an Event of Default with the passage of time or the giving of notice or both.

3.15.         Condemnation. There is no pending condemnation, expropriation, eminent domain or similar proceeding affecting the Land or any portion thereof, and Borrower had not received any written or oral notice of any thereof and has no knowledge that any such proceeding is contemplated.

3.16.         Leases: Agreements for Purchase. There are no leases or agreements of purchase and sale for all or any portion of the Land.

3.17.         Representations and Warranties True and Correct. The representations and warranties of Borrower made to Lender are true, correct and complete in every material respect. No representation,

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warranty or statement of Borrower contained herein or in any of the Loan Documents or in any other document, instrument or certificate delivered to Lender pursuant hereto or in connection with the transactions contemplated hereunder contains any untrue statement of any material fact, or omits or shall omit to state a material fact the absence of which makes such representation, warranty or statement misleading.

3.18          Compliance With Laws Respecting Acquisition. Borrower shall and has complied with all requirements of local and state law in connection with the acquisition ofthe Land.

4.   COVENANTS OF BORROWER

4.1.           Affirmative Covenants. Borrower covenants and agrees that, from the date hereof and so long as this Agreement shall remain in effect or the indebtedness evidenced by the Note shall remain outstanding, Borrower shall:

4.1.1.        Existence. Do or cause to be done all things necessary to preserve and keep Borrower’s legal existence in full force and effect under the laws of the State of Delaware and Spitz, Inc.’s foreign registration in full force and effect under the laws of the Commonwealth of Pennsylvania and in any other jurisdiction in which Borrower may have been organized, and to remain and cause Borrower to remain qualified and licensed in all jurisdictions in which such qualification or licensing is required for the conduct of Borrower’s business, including, without limitation, Pennsylvania. Borrower shall promptly deliver to Lender any and all documents evidencing an amendment to or modification of the articles of incorporation, certificate of organization, bylaws, operating agreements or other organization documents respecting Borrower.

4.1.2.        Required Notices. Give, or cause to be given, prompt written notice to Lender of (i) any action or proceeding instituted by or against Borrower or the Land by or before any Governmental Authority, or any such proceeding threatened against Borrower, the Land which, if adversely determined, could have a material and adverse effect upon the business, assets or condition (financial, legal or otherwise) of Borrower or the Land, (ii) any other action, event or condition of any nature which may have a material and adverse effect upon the business or assets of Borrower or which, with the giving of notice or the passage of time or both, would constitute an Event of Default under this Agreement or a default under any other material contract, instrument or agreement to which Borrower is a party or by which Borrower or any of Borrower’s properties or assets may be bound or subject, or (iii) any action or proceeding respecting the current development and use of the Land for commercial purposes.

4.1.3.        Payment of Debts, Taxes. Pay and discharge or cause to be paid and discharged when due and prior to the accrual thereon of interest or penalty, all taxes, assessments and governmental charges or levies imposed upon the Land, Borrower or their income or receipts, or any of their properties, as well as all lawful claims for labor, materials and supplies or otherwise which, if unpaid, might become a lien or charge upon such properties or any part thereof, unless the same shall be contested by Borrower in good faith and with due diligence by appropriate proceedings and Borrower shall have posted a bond or escrow with Lender equal to such contested amount.

4.1.4.        Compliance. Promptly and faithfully comply with, conform to and obey all present and future Legal Requirements applicable to

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Borrower, or the Land, all present and future requirements affecting title to the Land, the Loan Documents, all” agreements of purchase, if any, for all or any portion of the Land, and all leases now or hereafter entered into from time to time, and all other agreements and covenants to which Borrower is bound or subject. Promptly and faithfully comply with, conform to and obey all present and future orders, rules, regulations and requirements of any national or local board of fire underwriters relating in any way to the Land or any portion thereof. Promptly pay all license and permit fees and similar municipal charges relating in any way to the Land or any portion thereof or the construction or use of any building and improvement placed or to be placed upon and forming a part of the Land. Borrower shall immediately notify Lender of Borrower’ s receipt of notice from any Governmental Authority or any national or local board of fire underwriters relating to the construction, use or occupancy of the Land or any part thereof, or which requires any action to be taken with respect to the Land or any part thereof or which could have an adverse effect on the Land or any part thereof.

4.1.5.        Maintenance. Cause the Land to be kept in good condition and repair as set forth in the Mortgage, and operate the same properly, efficiently and in compliance with all Legal Requirements.

4.1.6.        Books and Records. Keep, or cause to be kept, in accordance with generally accepted accounting principles consistently applied, proper and complete books of record and account concerning affairs of Borrower and the Land and make such records available in Borrower’s offices at all reasonable times upon reasonable prior notice for inspection by Lender. Borrower agrees to maintain accounting records for the Land separate from any other accounting records which Borrower may maintain. Borrower agrees to retain all such books and records for a period of two (2) years after the repayment in full of the Loan.

4.1.7.        Financial Statements. So long as the Loan or any portion thereof remains outstanding, Borrower, at Borrower’s sole cost and expense, shall deliver or cause to be delivered to Lender current and complete financial statements and other information on a consolidated basis as follows:

a.              Within ninety (90) days following the end of Borrower’s fiscal year and each fiscal quarter, respectively, in each year, Borrower shall deliver to Lender the Borrower’s Annual Report on Form 10-KSB and quarterly report on Form 10-QSB, each of which will include financial statements consisting of a balance sheet, income statement and statement of source and application of funds for Borrower. Such financial statements for Borrower (i) shall, in the case of the annual statements be accompanied by an audit opinion by a certified public accounting firm selected and paid for by Borrower and satisfactory to Lender (it being agreed that the Borrower’s certified public accounting firm as of the Closing Date is acceptable to the Lender), (ii) shall be prepared in accordance with generally accepted accounting principles consistently applied, (iii) shall be in form reasonably satisfactory to Lender and (iv) shall be” certified as true, correct and complete by the Borrower’s chief financial officer.

b.              Borrower shall deliver to Lender such other financial information as to Borrower as Lender from time to time may request, all such information to be provided in form and time frame reasonably satisfactory to Lender.

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c.              Within thirty (30) days of the date the same are due for filing (including any available extensions properly applied for) Borrower shall deliver to Lender copies of Borrower’s Federal Income Tax Returns. All copies of such returns shall be certified by Borrower as true and correct and as actually filed with the Internal Revenue Service.

All such financial statements required by Lender hereunder shall be prepared in accordance with generally accepted accounting principles consistently applied by an independent certified public accountant acceptable to Lender. Borrower shall promptly notify Lender in writing if there is any material adverse change since the date of the last preceding statement submitted to Lender in the financial position of Borrower, and if there has been such a change, a detailed explanation thereof.

4.1.8. Change in Circumstances. Promptly notify Lender in writing of any change in any fact or circumstance represented or warranted by Borrower herein or in any other documents furnished to Lender in connection with this Agreement.

4.1.9.        Additional Instruments. Execute such additional instruments as may be requested by Lender in order to carry out the intent of this Agreement and the other Loan Documents and to perfect or give further assurances of any of the rights granted or provided for hereunder or under any of the other Loan Documents.

4.1.10.      Indemnification. Indemnify, defend and hold harmless Lender and its officers, directors, employees and agents from and against any and all liabilities, losses, claims, damages and expenses, including reasonable attorneys’ fees and expenses, of any kind or nature directly or indirectly resulting from or arising out of the Loan, or the Loan Documents, or any act or omission by Lender or its officers, directors, employees or agents, in connection therewith, including, without limitation, all claims for commissions by any broker or intermediary, disputes between or among Borrower, any Governmental Authorities, subcontractors, material suppliers, purchasers and tenants, unless caused by the gross negligence or willful malfeasance of Lender or its officers, directors, employees or agents.

4.1.11.      Reimbursement of Costs. Reimburse Lender for all of Lender’s costs payable to third parties incidental to the preparation and making of the Loan, including, without limitation, monthly credit reports, recording fees, filing fees, surveys and premiums for title insurance as may be required by Lender, the fees and expenses of any consultant employed by Lender, and all costs and expenses of Lender’s counsel relating to preparation or approval of any of the Loan Documents, examination of matters subject to Lender’s approval and legal services rendered in connection with Borrower’s failure to perform in accordance with the Loan Documents or otherwise relating to the transaction. All such costs billed at or prior to the Closing Date shall be paid on or before the Closing Date.

4.1.12.      Notices. Forward to Lender copies of all notices given or received by Borrower to or from; (i) any purchaser or tenant for any portion of the Land, (ii) any subcontractor or material supplier respecting the Land, (iv) any insurer or insurance underwriters

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respecting the Land or Borrower’s business, (v) any utility company respecting the Land or the Borrower’s business, or (vi) any Governmental Authority respecting the Land or the Borrower’s business (including, without limitation, notices of nonconforming construction, notices relating to Hazardous Materials and any Environmental Laws as those terms are defined in the Note and Mortgage, and notice of inability to perform the terms of any contract or agreement), promptly upon the giving or receipt of such notice.

4.1.13.      Loan Proceeds. Use Loan proceeds for the purposes identified in the Commitment and this Loan Agreement.

4.1.14.      Bank Accounts. Borrower shall maintain all deposit, operating and escrow accounts relating to the Land with Lender.

4.1.15.      Inspection. Permit Lender, its agents, employees and representatives, to enter and to inspect the Land at any reasonable time upon one (1) business day prior notice for the purposes of making site and building investigations and performing soil, groundwater, structural and other tests. Lender, or any persons designated by it, shall have the right to call at Borrower’s place or places of business at any reasonable time upon one (1) business day notice, and without hindrance or delay, to inspect, audit, check and make extracts from Borrower’s books, records, journals, orders, receipts and any correspondence and other data relating to the Borrower’s business or to any other transactions between the parties hereto, and shall have the right to make direct verification from the account debtors with respect to any or all accounts.

4.2.           Negative Covenants. Borrower covenants and agrees that from the date hereof and for so long as this Agreement shall remain in effect or the indebtedness evidenced by the Note shall remain outstanding, Borrower shall not:

4.2.1.        Amendment or Modification. Amend, vary or modify, or permit to be amended, varied or modified, any agreement, document or instrument assigned to Lender.

4.2.2.        Conveyance. Sell, assign, transfer, convey, lease or otherwise dispose of the Land, or any part thereof or interest or estate therein, or otherwise permit ownership or control of the Land or any portion thereof to be other than in Spitz, Inc.

4.2.3.        Governing Documents, Directors. Amend, or permit to be amended, the governing documents pursuant to which Borrower was organized and is operating or permit a change of the majority of the members of the board of directors of Borrower during any twelve (12) month period.

4.2.4.        Encumbrances. Create by mortgage, pledge, assignment, security agreement or otherwise, or suffer to exist, any security interest, pledge, lien, charge or other encumbrance upon the Land or any portion thereof, except (i) the liens or security interests created pursuant to the Loan Documents or other liens or security interests in favor of Lender; (ii) mechanics or tax liens being contested by Borrower in good faith and due diligence in appropriate proceedings with the approval of Lender, a bond or escrow having been posted with Lender for the full amount of such contested lien; and (iii) with the prior written consent of Lender, easements and licenses for the operation of the Land.

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4.2.5.        Other Borrowing and Guaranties. Undertake any additional financing in connection with the purchase or improvement of the Land or any part thereof, or borrow, in the aggregate, any sum in excess of Two Hundred Thousand ($200,000.00) from any person or persons, or assume, guaranty, endorse or otherwise become contingently liable upon, or responsible for, the obligation of any person other than as expressly provided in the Loan Documents, if to do so in the judgment of Lender would have a material adverse impact on the financial condition or status of Borrower.

5.   EVENTS OF DEFAULT AND REMEDIES.

5.1.           Events of Default. The occurrence of anyone or more of the following shall constitute an “Event of Default” hereunder:

5.1.1.        The occurrence of an event of default under the Note or any other Loan Document.

5.1.2.        The issuance of any levy, writ or process of execution or attachment against Borrower or any property or assets of Borrower, including without imitation the Land, or the levy or service of any such writ.

5.1.3.        The entry or filing of any judgment, lien, encumbrance, notice oflien, attachment, levy or any other adverse charge against Borrower or the Land or any portion thereof which is not discharged within twenty (20) days unless it is being contested by Borrower in good faith and due diligence in appropriate proceedings with the approval of Lender, a bond or escrow having been posted with Lender for the full amount of such contested lien.

5.1.4.        The failure of Borrower to comply with the requirements of any Governmental Authority concerning the Land unless the same shall be contested by Borrower in good faith and with due diligence by appropriate proceedings and Borrower shall have posted a bond or escrow with Lender in an amount satisfactory to Lender.

5.1.5.        The failure of Borrower to maintain any insurance or policy of insurance required by this Agreement or the Mortgage for a period in excess often (10) days from the date of written notice from Lender of the lapse or absence of any such insurance or policy of insurance.

5.1.6.        The failure of Borrower to provide or furnish to Lender within thirty (30) days of written request, proof of any insurance or policy of insurance required by this Agreement or the Mortgage.

5.1.7.        The failure of Borrower to provide or furnish to Lender within thirty (30) days of written request, any financial statement, tax return or other information required to be delivered to Lender pursuant to this Agreement or any other Loan Document.

5.1.8.        The failure of Borrower to comply, after any applicable notice or cure period, with any requirements of any recorded instrument or other agreement concerning the Land.

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5.1.9.        The making by Borrower of any amendment to or modification to any document, instrument or item which has been approved by Lender in accordance with the provisions hereof

5.1.10.      The failure by Borrower to pursue promptly and with due diligence and in good faith any remedy under any contract or agreement with respect to the Land available as the result of any material default by the other party thereto.

5.1.11.      The failure of Borrower to perform or comply with any of the terms, conditions, provisions, agreements and covenants contained herein or in any of the Loan Documents or in any other document, agreement or instrument given by or in behalf of Borrower in connection with the Loan.

5.1.12.      The default by Borrower or any affiliate, owner or subsidiary thereof, under any other loans or indebtedness between Lender and Borrower or any affiliate, owner or subsidiary thereof, including without limitation the occurrence of an event of default under that certain Line Of Credit Agreement dated June 12, 1997 between Lender and Borrower, amended by that certain Modification Agreement dated July 7, 2000, and further amended by that certain Second Modification Agreement dated July 18, 2002, respecting a Two Million ($2,000,000.00) Dollar commercial revolving line of credit.

5.1.13.      The falsity or incorrectness, regarded by Lender as material, of any representation or warranty made to Lender, or any financial statement given to Lender, by Borrower in or in connection with the Loan, this Agreement or any of the Loan Documents.

5.2.           Remedies. Upon the occurrence of any Event of Default, Lender may exercise as it may deem necessary or appropriate, any one or more of the following rights and remedies:

5.2.1.        Declare immediately due and payable all sums under the Note which are then unpaid, together with all accrued interest.

5.2.2.        Exercise any other right or remedy provided herein, in any of the Loan Documents, at law or in equity.

5.3.           Verification of Amounts Due/Declaration of No Set-Off. In any action or proceeding for recovery of any sums expended by Lender in connection with the operation and/or maintenance of the Land or otherwise due to Lender pursuant to the terms hereof, a statement of such expenditures, verified by the affidavit of an officer of Lender, shall be prima facie evidence of the amounts so expended and of the propriety of and necessity for such expenditures, and the burden of proving the contrary shall be upon Borrower. Within ten (10) days after being requested to do so by Lender, Borrower shall furnish to Lender or to any assignee of the Note and/or the Mortgage, a written statement in form and substance satisfactory to Lender stating the entire outstanding amount of the indebtedness evidenced by the Note and stating that Borrower has no offsets, recoupments, counterclaims or defenses or, if such offsets, recoupments, counterclaims or defenses are alleged to exist, the nature and extent thereof. In the event Borrower fails to furnish to Lender a written statement within ten (10) days after being requested to do so, or if such

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statement does not contain all of the information required, then except to the extent set forth in Borrower’s timely delivered written statement, Borrower shall be deemed to accept and concur with Lender’s statement of the entire outstanding amount of the indebtedness evidenced by the Note and agree that Borrower has no offsets, recoupments, counterclaims or defenses.

5.4.           Borrower’s Property. As security for the Loan and for the obligation and liabilities of Borrower hereunder and under each of the Loan Documents, Lender is hereby given a lien upon and a security interest in all funds and property of Borrower which may hereafter be deposited with or come into the possession of Lender, and for such purpose this Agreement shall constitute a security agreement under the Pennsylvania Uniform Commercial Code and Lender shall have all rights and may exercise all of the remedies of a secured party under the applicable provisions of the Pennsylvania Uniform Commercial Codes with respect to such funds and property of Borrower.

5.5.           Remedies Cumulative. The rights and remedies of Lender provided for in this Agreement, in any of the other Loan Documents, and in any other instrument, document or agreement given by or on behalf of Borrower in connection with the Loan, shall be cumulative and concurrent and shall not be exclusive of any right or remedy provided by law, in equity or otherwise. Said rights and remedies may, at the sole and exclusive discretion of Lender, be pursued singly, successively or together, and may be exercised as often as occasion therefore shall arise. No grace period, qualification or condition stated with respect to any Event of Default shall change, modify, amend or extend, or will be construed as an undertaking by Lender to change, modify, amend or extend the time for making any installment due under the Note or the Maturity Date, which time for making any installment and Maturity Date remain always of the essence of this Agreement.

5.6.           Lender’s Right to Remedy Defaults. If Borrower fails to pay when due any sum required to be paid by Borrower or fails to perform any obligation of Borrower hereunder, Lender, at its option; upon at least ten (10) days prior notice to Borrower, shall have the right, but not the obligation, to pay any such sum and to perform any such obligation and Lender shall have the right, but not the obligation, to pay any sum or to take any action which Lender deems necessary or advisable to protect the security for the Loan including without limitation the Mortgage and the Land, all without prejudice to any of Lender’s rights or remedies available hereunder or under any of the Loan Documents or under any other documents or instrument given by or on behalf of Borrower in connection with the Loan, at law, or in equity. The amount of all payments so made by Lender, together with all costs so incurred by Lender, shall immediately be due and payable from Borrower to Lender, together with interest at the rate set forth in the Note in the event of a default. All such amounts, together with interest as aforesaid, shall be added to and evidenced by the Note and be secured by the Mortgage, and Lender may charge all such amounts and interest as advances of the Loan and may deduct such amounts and interest as advances of the Loan thereafter to be advanced hereunder from any funds or property deposited by Borrower with Lender.

6.   INSURANCE.

6.1.           Coverage. Borrower shall, from and after the date hereof and at all times while this Agreement is in effect or the Note remains outstanding, maintain at Borrower’s sole expense, insurance in amounts, with deductibles satisfactory to Lender written by stock or nonassessable

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mutual carriers licensed in Pennsylvania with a general policy holders rating of “A” or better and a financial rating of VI or better in the most recent edition of “Best’s Key Rating Guide, Property-Casualty”, published by Alfred M. Best Co., Inc. Without limiting the generality of the foregoing, Borrower shall maintain the following minimum coverages, unless otherwise agreed to in writing by Lender:

6.1.1.        All risk, fire, hazard and extended coverage insurance with vandalism and malicious mischief endorsements on all buildings and structures to the extent of one hundred percent (100%) of the replacement value thereof pursuant to full replacement value endorsements naming Lender as mortgagee and additional insured pursuant to a standard mortgagee loss payable clause, and;

6.1.2.        Commercial general public liability insurance covering all operations of Borrower in connection with the Collateral, with contractual liability endorsement, naming Lender as additional insured in amounts not less than: (i) bodily injury: $3,000,000,000 for each occurrence, $3,000,000,900 in the aggregate, and (ii) property damage: $1,000,000,000 for each occurrence, and $3,000,000_000 in the aggregate; and

6.1.3.        Rent insurance against loss of income arising out of damage or destruction by fire or the perils of extended coverage insurance, in an amount equal to one (1) year’s gross rental income to the owner of the Land, or business interruption insurance in an amount as required by Lender from time to time, but not to exceed Mortgagee’s reasonable estimate of the annual cost of debt service on the Note, taxes; insurance and maintenance for the Land.

6.2.           Certificates; Notices.

6.2.1.        Borrower shall furnish to Lender, certificates certifying to the insurance required by Paragraph 6.1, (as Lender may request) and expressly granting Lender the same protections as if Lender held the original policies, (i) on or before the closing date, (ii) no fewer than twenty (20) days prior to the renewal or replacement of existing coverage or the obtaining of additional coverage, and (iii) at any other time upon the request of Lender.

6.2.2.        Each insurance policy of Borrower shall contain a provision (i) requiring the insurer to notify Lender, in writing and at least thirty (30) days in advance of any cancellation, expiration or material change in the policy, and (ii) stating that any loss otherwise payable thereunder shall be payable notwithstanding any act or neglect of the insured and notwithstanding ( a) any change in title to or ownership of the Land or (b) any provision of the policy relieving the insurer thereunder of liability for any loss by reason of the existence of other policies of insurance covering the Land against the peril involved, whether or not collectible, provided such coverage is available to Borrower at reasonable cost.

6.2.3.        If the insurance, or any part thereof, shall expire, or be withdrawn, or become void or unsafe, in the opinion of Lender, by reason of Borrower’s breach of any condition thereof, or become void or unsafe, in the opinion of Lender, by reason of the failure or impairment of the capital of any company issuing such certificates, Borrower shall place new insurance in accordance with this Agreement. All renewal policies, with premiums paid, shall be delivered to Lender at least thirty (30) days prior to the expiration of the existing policies.

13




6.2.4.        The insurance described in Paragraph 6.1 hereof shall not provide for deductibles in excess of amounts approved by Lender and, though obtained, maintained and paid for by Borrower, shall provide that loss thereunder shall be payable to Lender under a standard mortgagee’s loss payee clause.

6.3.           Lender May Provide Insurance. In any instance where insurance is not provided by Borrower as required hereunder, Lender may at its option, but shall not be required to, secure such insurance as Lender deems appropriate to cover Lender’s interests, without obligation to insure Borrower’s interests, and charge the cost of the same to Borrower, to be secured by the Loan Documents.

7.   MISCELLANEOUS.

7.1.           Lender’s Discretion. If any condition of this Agreement requires the submission of evidence of the existence or non-existence of a specified fact or facts, or implies as a condition the existence or non-existence of such fact or facts, Lender will, at all times, be free independently to establish to its satisfaction and in its discretion (unless otherwise specified) such existence or non-existence. Where any matter herein requires the approval or consent of the Lender, the decision to give or refuse to give such approval or consent shall be within Lender’s discretion unless otherwise specified.

7.2.           No Third-Party Beneficiary. The parties do not intend the benefits of this Agreement to inure to any third party or any of their respective creditors for debts or claims accruing to any such persons against Borrower. Lender shall not be liable for the manner in which any advance may be applied by Borrower. Notwithstanding anything contained herein or in any of the other Loan Documents, or any conduct or course of conduct by or between Borrower and Lender before or after the execution of this Agreement, this Agreement shall not be construed as creating any right, claim or cause of action against Lender or any of its officers, directors, agents or employees, in favor of any other person other than Borrower. Without limiting the generality of the foregoing, any advances made to any insurer, contractor, subcontractor or supplier of labor or materials or other creditor of Borrower, whether or not such advances are approved by Lender, shall not be deemed a recognition by Lender of third party beneficiary status of any such person. No part of the Loan will be at any time subject or liable to attachment or levy at the suit of any creditor of Borrower, or of any contractor, subcontractor or supplier of labor, materials or services, or any of their respective creditors, and regardless of any other term, condition or provision hereof, no such third party will have any status, right or entitlement hereunder.

7.3.           Reliance on Representations and Warranties. Lender shall be entitled to rely upon the representations and warranties of Borrower set forth in any of the Loan Documents without any investigation by Lender and notwithstanding any investigation conducted by Lender or on its behalf before or after the date hereof.

7.4.           Assignment.

7.4.1.        The rights of Borrower hereunder and under any other Loan Document shall not be assignable in any respect without the prior

14




written consent of Lender, which consent may be granted or withheld in Lender’s sole discretion. In any case, Borrower shall remain liable for repayment of all sums advanced hereunder before and after such assignment.

7.4.2.        All or any portion of the Loan or any of the Loan Documents may be endorsed, assigned or transferred in whole or in part by Lender, and any such holder or assignee thereof shall succeed to and be possessed of the rights of Lender under the Loan Documents to the extent so endorsed, transferred or assigned.

7.4.3.        Subject to the foregoing, this Agreement shall be binding upon, and shall inure to the benefit of, Borrower and Lender and their respective personal representatives, heirs, successors and assigns.

7.5.           Communications. All communications required or permitted by this Agreement shall be in writing and shall be deemed to have been given or made when hand delivered or delivered by guaranteed overnight delivery, or upon deposit in the United States mail, postage prepaid, certified or registered mail, return receipt requested, addressed as follows:

7.5.1.        If to Lender:

First Keystone Bank
22 West State Street
Media, Pennsylvania 19063
Attention: A. Charles Amentt, Jr.
Senior Vice President, Lending

                With a required copy to:

Donn L. Guthrie, Esquire
10 Beatty Road
Media, Pennsylvania 19063

7.5.2.        If to Borrower:

Transnational Industries, Inc. and
Spitz, Inc.
P.O. Box 198
Route 1
Chadds Ford, Pennsylvania 19317

                With a required copy to:

Steven G.Brown, Esquire
Petrikin, Wellman, Damico, Brown & Petrosa
109 Chesley Drive
Media, Pennsylvania 19063

15




or in any case to such other address as either party may designate from time to time by notice to the other in the manner set forth herein.

7.6.           Headings. The headings preceding the text of the sections and subsections of this Agreement are used solely for convenience of reference and shall not affect the meaning or interpretation of this Agreement.

7.7.           Time of the Essence. All dates and times for performance set forth herein or in any of the other Loan Documents (whether or not elsewhere so stated) are of the essence.

7.8.           No Brokers. Borrower represents and warrants that Borrower has taken no action which would or might render it liable for payment of any brokerage or placement fees or commissions on account of the transactions contemplated by the Loan Documents, and Borrower will indemnify, defend and hold harmless Lender from any claims made in connection therewith.

7.9.           Governing Law. The Agreement and all questions relating to its validity, interpretation, performance and enforcement (including, without limitation, provisions concerning limitations of actions), shall be governed by and construed in accordance with the laws of the Commonwealth of Pennsylvania, notwithstanding any conflict-of-laws doctrines of such state or other jurisdiction to the contrary, and without the aid of any canon, custom or rule of law requiring construction against the draftsman.

7.10.         Severability. Any provision in any of the Loan Documents which is determined to be unenforceable or invalid shall be ineffective to the extent of such unenforceability or invalidity without affecting the remaining provisions thereof.

7.11.         Survival. All agreements, representations and warranties made in this Agreement shall survive the closing hereunder and the making of all advances hereunder.

7.12.         Entire Agreement: Controlling Document; Amendment. This Agreement, together with the exhibits hereto, which are incorporated herein by reference, and the other Loan Documents embody the entire agreement and understanding between Borrower and Lender with respect to the subject matter hereof and supersede all prior commitments, agreements and understandings relating to the subject matter hereof. The provisions of this Agreement (including the exhibits attached hereto) shall be deemed complementary to the provisions of the other Loan Documents, but in the event of conflict, the provisions hereof shall be deemed to modify and supersede the conflicting provisions in such other Loan Documents and to control to the extent enforceable under applicable law. Neither this Agreement nor any of the other Loan Documents may be modified or amended except by a written agreement executed by the party against which enforcement is sought.

7.13.         Indulgences, Etc. Neither the failure nor any delay on the part of either party to exercise any right, remedy, power or privilege under this Agreement (a “Right”) shall operate as a waiver thereof, nor shall any single or partial exercise of any Right preclude any other or further

16




exercise of the same or of any other Right, nor shall any waiver of any Right with respect to any occurrence be construed as a waiver of such Right with respect to any other occurrence. No waiver shall be effective unless it is in writing and. is signed by the party asserted to have granted such Waiver.

7.14          Counterparts. This Agreement may be executed in one or more counterparts, via facsimile transmission or otherwise, each of which will be deemed an original, but all of which together will constitute one and the same instrument.

7.15.         TRIAL BY JURY. BORROWER AND LENDER HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE ANY RIGHT EITHER MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED HEREON, OR ARISING OUT OF, UNDER OR IN CONNECTION WITH, THIS AGREEMENT, THE NOTE, THE MORTGAGE, ANY OTHER DOCUMENT OR INSTRUMENT RELATING HERETO OR THERETO, ANY OTHER TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER VERBAL OR WRITTEN) OR ACTIONS OF THE LENDER OR BORROWER IN CONNECTION HEREWITH OR THEREWITH. THIS PROVISION IS A MATERIAL INDUCEMENT FOR THE LENDER TO MAKE THE LOAN EVIDENCED BY THE NOTE.

[THIS SPACE INTENTIONALLY LEFT BLANK. SIGNATURE PAGE FOLLOWS.]

17




IN WITNESS WHEREOF, and intending to be legally bound hereby, Borrower and Lender, have caused this Agreement to be duly executed under seal as of the date first above written.

 

LENDER:

 

 

 

FIRST KEYSTONE BANK

 

 

 

 

 

BY:

/s/ A. Charles Amentt, Jr.

 

 

 

 

 

BORROWER:

 

 

 

TRANSNATIONAL INDUSTRIES, INC.

 

 

 

BY:

/s/ Jonathan Shaw

 

 

 

 

 

ATTEST:

/s/ Paul Dailey

 

[Corporate Seal]

 

 

 

 

 

SPITZ, INC.

 

 

 

BY:

/s/ Jonathan Shaw

 

 

 

ATTEST:

/s/ Paul Dailey

 

[Corporate Seal]

 

18



 

EXHIBIT 10.28

FIRST MODIFICATION AGREEMENT

THIS FIRST MODIFICATION AGREEMENT (the “Agreement”) is made and entered into this    30 th     day of March , 2007 , by and between First Keystone Bank (the “Bank”), chartered under the Laws of the United States of America, having its principal office at 22 West State Street, Media, Pennsylvania, 19063, Spitz, Inc. , a Delaware corporation (the “Borrower”), with an address of P.O. Box 198, Route 1, Chadds Ford, Pennsylvania, 19317, and Evans & Sutherland Computer Corporation , a Utah corporation (the “Guarantor”).  The Bank, Borrower and Guarantor are sometimes herein referred to as a “Party” and collectively as the “Parties”.

Background

A.            Bank extended to Borrower and Transnational Industries, Inc. , a Delaware corporation (“Transnational”), a credit facility on January 14, 2004, (the “Loan”) in the original principal sum of Three Million Two Hundred Thousand Dollars ($3,200,000.00) evidenced by that certain Mortgage Note (the”Note”) made by Borrower and Transnational and delivered to Bank on January 14, 2004.  The Loan was advanced to finance the acquisition of the premises known as Route 1, Chadds Ford Township, Delaware County, Pennsylvania, being Folio No. 04-00-00034-02 and operated by Borrower as its principal business office.

B.            The Loan is further evidenced by that certain Loan Agreement by and among the Borrower, Transnational and Bank dated January 14, 2004 (the “Loan Agreement”).

C.            In addition to the Loan, Bank extended to Borrower a line of credit facility in the original maximum principal sum of Three Million Dollars ($3,000,000.00) (the “Line of Credit”) to be advanced pursuant to that certain Line of Credit Agreement between Borrower, Guarantor and Bank dated April 28, 2006 (the Line of Credit Agreement”).

D.             On or about April 28, 2006, Transnational sold all of Transnational’s one hundred percent (100%) ownership interest in and to Borrower to Guarantor.

E.              In connection with the origination of the Line of Credit and the sale by Transnational of all of Transnational’s interests in and to Borrower, Bank released Transnational as a co-borrower under the Loan as more fully set forth in the Line of Credit Agreement.

F.             The Loan Agreement sets forth certain financial covenants of the Borrower, including without limitation a covenant to deliver to Bank within ninety (90) days following the end of Borrower’s fiscal year and each fiscal quarter, respectively, in each year, the Borrower’s Annual Report on Form 10-KSB and quarterly report on Form 10-QSB, (the “Financials”), and a covenant to provide Bank, within thirty (30) days of the date the same are due for filing, copies of Borrower’s Federal Income Tax Returns (the “Tax Returns”).




 

G.             Guarantor is a publicly traded company and, pursuant to the Line of Credit Agreement, has agreed to provide to Bank, within ninety (90) days following the end of Guarantor’s fiscal year and each fiscal quarter, respectively, in each year, Guarantor’s Annual Report on Form 10-K and quarterly report on Form 10-Q.

H.            As a wholly owned subsidiary of Guarantor, Borrower is no longer required to prepare separate audited financials or file a separate income tax return and Borrower and Guarantor have requested that Bank waive the requirement that Financials and Tax Returns be provided.

I.              As of the date hereof the outstanding principal balance of the Loan is Two Million Nine Hundred Thirteen Thousand Dollars Nine Hundred Sixty Two and 53/100 dollars ($2,913,962.53) .

J.              Guarantor has agreed to guarantee the Loan as more fully set forth in that certain Guaranty dated even date herewith (the “Guaranty”) in consideration of the agreement of Bank to grant Borrower’s and Guarantor’s aforementioned request and modify the terms of the Loan Agreement.

K.            Bank has no obligation to modify the terms of the Loan. Bank is willing to grant Borrower’s and Guarantor’s aforementioned request on the terms and conditions set forth in this Agreement.

Agreement

NOW THEREFORE, in consideration of the sum of One ($1.00) Dollar and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and intending to be legally bound hereby, the parties hereto hereby covenant and agree as follows:

1.             The Background recitals are incorporated herein by reference.

2.             Sections 4.1.7 (a) and (c) of the Loan Agreement respecting the requirement that Borrower provide Financials and Tax Returns to the Bank are deleted in their entirety.

3.              So long as the Loan or any portion thereof remains outstanding, Guarantor, at Guarantor’s sole cost and expense,  shall deliver or cause to be delivered to Bank current and complete financial statements and other information as follows:

(a)           Within ninety (90) days following the end of Guarantor’s fiscal year and each fiscal quarter, respectively, a copy of Guarantor’s Annual Report on Form 10-K and quarterly report on Form 10-Q, each of which will include financial statements consisting of a balance sheet, income statement and statement of source and application of funds for Guarantor.  Such financial statements for Guarantor shall: (i) in the case of the annual statements be accompanied by an audit opinion by a certified public accounting firm selected and paid for by Guarantor and satisfactory to Bank (it being agreed that Guarantor’s current certified public accounting firm or other nationally recognized public accounting firm is acceptable to the Bank), (ii) be prepared in accordance with generally accepted accounting principles consistently applied, (iii) be

2




 

in form reasonably satisfactory to Bank and (iv) be certified as true, correct and complete by Guarantor’s chief financial officer.

(b)           Such additional financial and other information as the Bank may from time to time reasonably request, subject to applicable Securities laws and other requirements for publicly traded companies.

Guarantor shall promptly notify Bank  in writing if there is any material adverse change since the date of the last preceding statement submitted to Bank in the financial position of Guarantor, and if there has been such a change, a detailed explanation thereof.

4.             Borrower and Guarantor hereby ratify and affirm all of the terms, conditions and provisions of the Loan Agreement, the Note, the Guaranty and all other documents executed and delivered by Borrower or Guarantor in connection with the Loan, to the extent the same are not otherwise expressly modified herein.  It is expressly agreed and understood that except as expressly provided in this Agreement, the terms, conditions and provisions set forth in the Loan Agreement, the Note, and all other documents executed and delivered by Borrower or Guarantor in connection with the Loan shall remain in full force and effect in accordance with their respective terms, conditions and provisions.  Without limiting the generality of the foregoing, nothing in this Agreement shall be construed to:

(i)            impair the validity, perfection or priority of any lien or security interest securing the Loan;

(ii)           waive or impair any rights, powers or remedies of Bank under the Loan Agreement, the Note, the Guaranty and all other documents executed and delivered by Borrower or Guarantor in connection with the Loan with respect to any defaults thereunder which may occur;

(iii)          require Bank to hereafter amend or modify the terms of the Loan Agreement, the Note, the Guaranty or any other documents executed and delivered by Borrower or Guarantor in connection with the Loan; or

(iv)          make any other loan or other extension of credit to Borrower or Guarantor.

In the event of any inconsistency between the terms of this Agreement and the Loan Agreement, this Agreement shall govern.  Borrower and Guarantor each acknowledge that it has consulted with counsel in connection with the negotiation and delivery of this Agreement.  This Agreement shall be construed without regard to any presumption or rule requiring that it be construed against the party causing this Agreement or any part of this Agreement to be drafted.

5.             Borrower and Guarantor hereby acknowledge and agree that no setoff or counterclaim to Borrower’s and Guarantor’s obligations evidenced by the Loan Agreement, the Note, the Guaranty and all other documents executed and delivered by Borrower or Guarantor in connection with the Loan exists, and no agreement has been made with any person under which any deduction or discount may be claimed, that to the best of Borrower’ s and Guarantor’s knowledge, information and

3




 

belief, no Event of Default (as defined in the Loan Agreement) has occurred which is continuing and no event has occurred which with the passage of time or the giving of notice or both, could become an Event of Default under the Loan Agreement.

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed on the day and year first above written.

 

BANK:

 

 

 

 

FIRST KEYSTONE BANK

 

 

 

 

 

 

 

 

 

 

 

 

 

BY:

/s/ David Ffrench

 

 

 

 

 

 

 

 

 

BORROWER:

 

 

 

 

SPITZ, INC., A Delaware Corporation

 

 

 

 

 

 

 

 

 

 

/s/ Calvin Eddings

 

BY: /s/ Paul L. Dailey

 

 

Witness

 

 

 

 

 

 

 

 

 

/s/ Calvin Eddings

 

ATTEST: /s/ David H. Bateman

Witness

 

 

 

 

 

 

 

 

 

 

 

[Corporate Seal]

 

 

 

 

 

GUARANTOR:

 

 

 

 

EVANS & SUTHERLAND COMPUTER
CORPORATION,
a Utah Corporation

 

 

 

 

 

 

/s/ Calvin Eddings

 

BY: /s/ David H. Bateman

Witness

 

 

 

 

 

 

 

 

 

/s/ Calvin Eddings

 

ATTEST: /s/ Paul L. Dailey

Witness

 

 

 

 

 

 

[Corporate Seal]

 

4



 

EXHIBIT 10.29

SECOND MODIFICATION AGREEMENT

THIS SECOND MODIFICATION AGREEMENT (the “Agreement”) is made and entered into this    30 th     day of March , 2007 , by and between First Keystone Bank (the “Bank”), chartered under the Laws of the United States of America, having its principal office at 22 West State Street, Media, Pennsylvania, 19063, Spitz, Inc. , a Delaware corporation (the “Borrower”), with an address of P.O. Box 198, Route 1, Chadds Ford, Pennsylvania, 19317, and Evans & Sutherland Computer Corporation , a Utah corporation (the “Guarantor”).  The Bank, Borrower and Guarantor are sometimes herein referred to as a “Party” and collectively as the “Parties”.

Background

A.            Bank extended to Borrower a line of credit facility on April 28, 2006, (the “Loan”) in the maximum principal sum of Three Million Dollars ($3,000,000.00) evidenced by that certain Line of Credit Note (the “Note”) made by Borrower and delivered to Bank on April 28, 2006.  The Loan is to be advanced pursuant to the terms of a Line of Credit Agreement between Bank, Borrower and Guarantor dated April 28, 2006 (the “Line of Credit Agreement”).   All capitalized terms not specifically defined herein shall have the meanings given such terms as set forth in the Line of Credit Agreement.

B.            The Parties entered into that certain First Modification Agreement dated July 28, 2006 (the “First Modification”), wherein, among other modifications, the parties agreed to reduce the Maximum Credit Limit to the  lesser of (i) One Million One Hundred Thousand Dollars ($1,100,000.00), or (ii) the sum of (a) eighty (80%) percent of the Borrower’s Qualified Accounts Receivable and (b) fifty (50%) percent of Borrower’s Qualified Inventory.

C.             On or about April 28, 2006, Transnational Industries, Inc., a Delaware corporation, sold all of Transnational’s one hundred percent (100%) ownership interest in and to Borrower to Guarantor.

D.             The Line of Credit Agreement sets forth certain financial covenants of the Borrower, including without limitation a covenant to provide Bank within ninety (90) days following the end of Borrower’s tax year, current year end audited financial statements including, without limitation, a balance sheet, income statement and statement of source and application of funds (collectively the “Audited Financials”), and a covenant to provide Bank within sixty (60) days of the date the same are due for filing, copies of Borrower’s Federal Income Tax Returns (the “Tax Returns”).

E.              Guarantor is a publicly traded company and, pursuant to the Line of Credit Agreement, has agreed to provide to Bank, within ninety (90) days following the end of Guarantor’s fiscal year and each fiscal quarter, respectively, Guarantor’s Annual Report on Form 10-K and quarterly report on Form 10-Q.




 

F.             As a wholly owned subsidiary of Guarantor, Borrower is no longer required to prepare separate audited financials or file a separate income tax return and Borrower and Guarantor have requested that Bank waive the requirement that Audited Financials and Tax Returns be provided.

G.            As of the date hereof the outstanding principal balance of the Loan is Seven Hundred Ninety Nine Thousand Nine Hundred Eighty and 06/100 Dollars ($799,980.06) .

H.            Bank has no obligation to modify the terms of the Loan. Bank is willing to grant Borrower’s aforementioned request on the terms and conditions set forth in this Agreement.

Agreement

NOW THEREFORE, in consideration of the sum of One ($1.00) Dollar and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and intending to be legally bound hereby, the parties hereto hereby covenant and agree as follows:

1.             The Background recitals are incorporated herein by reference.

2.             Sections 4.1.6.1 (a) and (b) of the Line of Credit Agreement respecting the requirement that Borrower provide Audited Financials and Tax Returns to the Bank are deleted in their entirety.

3.             Borrower and Guarantor hereby ratify and affirm all of the terms, conditions and provisions of the Line of Credit Agreement, the Note, the First Modification, and all other documents executed and delivered by Borrower or Guarantor in connection with the Loan, to the extent the same are not otherwise expressly modified herein.  It is expressly agreed and understood that except as expressly provided in this Agreement, the terms, conditions and provisions set forth in the Line of Credit Agreement, the Note, the First Modification, and all other documents executed and delivered by Borrower or Guarantor in connection with the Loan shall remain in full force and effect in accordance with their respective terms, conditions and provisions.  Without limiting the generality of the foregoing, nothing in this Agreement shall be construed to:

(i)            impair the validity, perfection or priority of any lien or security interest securing the Loan;

(ii)           waive or impair any rights, powers or remedies of Bank under the Line of Credit Agreement, the Note, and all other documents executed and delivered by Borrower or Guarantor in connection with the Loan with respect to any defaults thereunder which may occur;

(iii)          require Bank to hereafter amend or modify the terms of the Line of Credit Agreement, the Note, or any other documents executed and delivered by Borrower or Guarantor in connection with the Loan; or

(iv)          make any other loan or other extension of credit to Borrower or Guarantor.

In the event of any inconsistency between the terms of this Agreement and the Line of Credit Agreement, this Agreement shall govern.  Borrower and Guarantor each acknowledge that it has

2




 

consulted with counsel in connection with the negotiation and delivery of this Agreement.  This Agreement shall be construed without regard to any presumption or rule requiring that it be construed against the party causing this Agreement or any part of this Agreement to be drafted.

4.             Borrower and Guarantor hereby acknowledge and agree that no setoff or counterclaim to Borrower’s and Guarantor’s obligations evidenced by the Line of Credit Agreement, the Note, and all other documents executed and delivered by Borrower or Guarantor in connection with the Loan exists, and no agreement has been made with any person under which any deduction or discount may be claimed, that to the best of Borrower’s and Guarantor’s knowledge, information and belief, no Event of Default (as defined in the Line of Credit Agreement) has occurred which is continuing and no event has occurred which with the passage of time or the giving of notice or both, could become an Event of Default under the Line of Credit Agreement.

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed on the day and year first above written.

 

BANK:

 

 

 

 

FIRST KEYSTONE BANK

 

 

 

 

 

 

 

 

 

 

 

 

 

BY:

/s/ David Ffrench

 

 

 

 

 

 

 

 

 

BORROWER:

 

 

 

 

SPITZ, INC., A Delaware Corporation

 

 

 

 

 

 

 

/s/ Calvin Eddings

 

BY: /s/ Paul L. Dailey

Witness

 

 

 

 

 

 

 

 

 

/s/ Calvin Eddings

 

ATTEST: /s/ David H. Bateman

Witness

 

 

 

 

 

 

[Corporate Seal]

 

 

 

 

 

GUARANTOR:

 

 

 

 

EVANS & SUTHERLAND COMPUTER CORPORATION, a Utah Corporation

 

 

 

/s/ Calvin Eddings

 

BY: /s/ David H. Bateman

Witness

 

 

 

 

 

 

 

/s/ Calvin Eddings

 

ATTEST: /s/ Paul L. Dailey

Witness

 

 

 

 

 

 

[Corporate Seal]

 

3



 

EXHIBIT 10.30

GUARANTY

THIS GUARANTY is made this  30 th   day of March , 2007 , by  EVANS & SUTHERLAND COMPUTER CORPORATION , a Utah corporation (hereinafter the “Guarantor”).

W I T N E S S E T H:

WHEREAS , SPITZ, INC. , a Delaware corporation (hereinafter the “Borrower”), has executed and delivered to FIRST KEYSTONE BANK (hereinafter the “Lender”), a Mortgage Note in the original principal sum of Three Million Two Hundred Thousand Dollars ($3,200,000.00) (the “Note”) made by Borrower and Transnational Industries, Inc., a Delaware corporation (“Transnational”) and delivered to Lender on January 14, 2004, evidencing a loan (the “Loan”) to finance Borrower’s acquisition of the premises known as Route 1, Chadds Ford Township, Delaware County, Pennsylvania,  being Folio No. 04-00-00034-02 and operated by Borrower as its principal business office (the “Real Estate”).  The Loan is further evidenced by that certain Loan Agreement between Borrower, Transnational and Lender dated January 14, 2004 (the “Loan Agreement”); and

WHEREAS , the Loan is secured by, among other things, that certain Open-End Mortgage and Security Agreement dated January 14, 2004 (the “Mortgage”) encumbering the Real Estate; and

WHEREAS, on or about April 28, 2006, Transnational sold all of Transnational’s one hundred percent (100%) ownership interest in and to Borrower to Guarantor; and

WHEREAS, in connection with the origination of a line of credit and the sale by Transnational of all of Transnational’s interests in and to Borrower, Lender released Transnational as a co-borrower under the Loan; and

WHEREAS, the Loan Agreement sets forth certain financial covenants of the Borrower, including without limitation a covenant to deliver to Lender within ninety (90) days following the end of Borrower’s fiscal year and each fiscal quarter, respectively, a copy of the Borrower’s Annual Report on Form 10-KSB and quarterly report on Form 10-QSB, (the “Financials”), and a covenant to provide Lender, within thirty (30) days of the date the same are due for filing, copies




 

of Borrower’s Federal Income Tax Returns (the “Tax Returns”); and

WHEREAS, Guarantor is a publicly traded company and, pursuant to that certain First Modification Agreement dated even date herewith (the “First Modification Agreement”), Guarantor has agreed to provide to Lender Bank, within ninety (90) days following the end of Guarantor’s fiscal year and each fiscal quarter, respectively, in each year, Guarantor’s Annual Report on Form 10-K and quarterly report on Form 10-Q; and

WHEREAS, as a wholly owned subsidiary of Guarantor, Borrower is no longer required to prepare separate audited financials or file a separate income tax return and Borrower and Guarantor have requested that Lender waive the requirement that Financials and Tax Returns be provided; and

WHEREAS , Lender has agreed to waive the requirement that Financials and Tax Returns be provided in consideration, among other things, of the covenants and obligations made and assumed by Guarantor as herein set forth; and

WHEREAS , the outstanding principal balance of the Note, together with interest and all other sums due or to become due thereunder is referred to herein as the “Indebtedness”; and

WHEREAS , Guarantor has agreed to make this Guaranty in consideration of the agreement of Lender to modify the Loan as more fully set forth in the First Modification Agreement; and

WHEREAS , in order to induce Lender to enter into the First Modification Agreement, the Guarantor herein executes this Guaranty.

NOW THEREFORE , for good and valuable consideration, intending to be legally bound hereby, Guarantor agrees as follows:

1.             Guaranty of Performance .  Guarantor absolutely and unconditionally, jointly and severally, guarantees to Lender the payment and performance of the conditions of the Note, pursuant to the terms and conditions set forth therein, together with all reasonable legal and other expenses of collection, and hereby expressly and unconditionally waives demand, notice of presentment and non-payment, protest and notice of protest, of the Note, and agrees that the time for payment thereof may be extended by Lender without notice to or further consent from the Guarantor.  Guarantor further agrees to pay the full unpaid principal, interest and other charges due under the Note when owing immediately upon written notice of an Event of Default as to any

2




 

one or more of the terms and conditions of the Note, First Modification Agreement, Mortgage, Loan Agreement or any other document executed by Borrower and/or Guarantor and delivered to Lender in connection with the Loan (collectively referred to herein as the “Loan Documents”), it being agreed between the parties hereto that the full balance when due and owing on the Note shall become due and payable upon acceleration by the Lender in accordance with the terms of the Note.

2.             No Waiver .  Any waiver by Lender of an Event of Default under the Loan Documents, and any failure on the part of Lender to enforce its rights against Borrower, or its successors or assigns, shall not affect the absolute and unconditional liability of the Guarantor.  Any extensions of time granted by Lender to Borrower, or its successors or assigns, shall not release the Guarantor from its obligations hereunder.

3.             Actions Not Affecting Guarantor s Liability .  In addition to (but not in limitation of) all of the foregoing provisions, Lender may take any of the following actions (with or without notice to the Guarantor) without affecting the liability of the Guarantor in any way:

a.             release, exchange, increase or decrease, or surrender all or any part of the security held by it for the Indebtedness, or substitute new security for all or any portion thereof, whether or not the new security shall be equal in value with the security substituted;

b.             recast, extend or modify all or any portion of the Indebtedness;

c.             grant waivers, extensions, renewals or other indulgences under the Note;

d.             modify or amend any of the terms, provisions or agreements contained in the Note

e.             vary, exchange, release or discharge, wholly or partially, or delay in or abstain from perfecting or enforcing any security or guaranty of the Note;

f.              accept partial payment or performance of the Note from the Borrower; or

g.             compromise or make any settlement or other arrangement with the Borrower.

4.             Direct Proceedings Against Guarantor .  This shall be an agreement of suretyship as well as of guaranty.  Liability on this Guaranty shall not be conditional or contingent upon the pursuance by Lender or anyone else of whatever remedies it may have against Borrower, or its successors or assigns, nor shall Lender be required to foreclose, exhaust,

3




 

or in any other way look for the security which it now has or which it may obtain or in the future may acquire. Not in limitation of the generality of the foregoing, the liability of Guarantor hereunder shall remain effective and enforceable even though Borrower’s liability under the Note may be unenforceable, or recovery against the Borrower may be barred by the statute of limitations or otherwise, it being further understood and agreed that Guarantor waives any defense arising by reason of any disability or other defense of Borrower or by reason of the cessation from any cause whatsoever of the liability of Borrower.   The obligations and liabilities of Guarantor hereunder and any other guarantor/surety of the Borrower’s liabilities and obligations under the Note, the First Modification Agreement, the Mortgage and other Loan Documents, and all extensions, modifications and/or renewals thereof, shall be joint and several.

5.             Extensions or Renewals .  Liability of the Guarantor hereunder shall be a continuing one and shall extend to any and all notes or other evidences of indebtedness which may be given in extension, modification, increase or renewal of the present indebtedness of the Borrower evidenced by the Note.

6.             Representations and Warranties   The Guarantor hereby represents and warrants that:

a.             The Guarantor has no offsets, counterclaims or defenses against the Indebtedness or this Guaranty, and has the legal capacity to enter into this Guaranty and to perform Guarantor’s obligations hereunder.

b.             This Guaranty constitutes the legal, valid and binding obligation of the Guarantor enforceable against Guarantor in accordance with its terms.

c.             There is no action, suit, proceeding, inquiry or investigation, at law or in equity, or before or by any court, public board or body, pending, or within the knowledge of the Guarantor threatened, wherein an unfavorable decision, ruling or finding would adversely affect the validity or enforceability of this Guaranty or any of the Loan Documents.

d.             Neither the execution and delivery of this Guaranty, the consummation of the transactions contemplated hereunder nor the fulfillment of or compliance with the terms and conditions obtained herein is prevented or limited by, or would be prevented or limited by, or conflict with, or breach, the terms, conditions or provisions of any law, rule, regulations, order of any court or governmental agency, or any evidence of indebtedness, agreement or instrument of

4




 

whatever nature to which the Guarantor (or any company, corporation or other business entity controlled by the Guarantor or affiliated with any one of them) is now a party, or to which the Guarantor or any such entity is bound, or constitutes a default under any of the foregoing. Such execution, delivery, consummation and performance will not result in the creation or imposition of any lien, charge or encumbrance upon any of the property or assets of the Guarantor or any such entity, except as contemplated in the Loan Documents.

e.             The assumption by the Guarantor of its obligations hereunder will result in material benefits to the Guarantor.

f.              Neither this Guaranty nor any other document, certificate or statement furnished to the Lender by or on behalf of the Borrower or the Guarantor contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements contained herein and therein not misleading or incomplete.   The financial statements and tax returns of Guarantor delivered to Lender prior to the date hereof are Guarantor=s most current financial statements and tax returns available for public distribution and fully and accurately present the financial condition and income of Guarantor as of the date thereof, in accordance with generally accepted accounting principles consistently applied.

g.             As provided in the Loan Agreement, the proceeds of the Note are to be applied by the Borrower to its business purposes and no part thereof shall be used for the personal, household or consumer purposes of the Borrower or the Guarantor.

7.             Compliance With Loan Documents .  The Guarantor shall cause the Borrower to fully perform and observe all of the covenants, agreements and obligations of the Borrower under the Note, First Modification Agreement, the Mortgage and all other Loan Documents.

8.             Waiver of Subrogation .  The Guarantor waives and relinquishes any right of subrogation or other right of reimbursement, contribution or indemnification from the Borrower or the Borrower’s estate and any other right or payment from the Borrower or the Borrowers> estate, arising out of or on account of any sums paid or agreed to be paid by Guarantor under this Guaranty, whether any such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, secured, or unsecured.  The provisions of this subparagraph are made for the express benefit of Borrower as well as Lender and may be enforced independently by Borrower and Lender.

 

 

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9.             Event of Default .  Any one or more of the following shall constitute an “Event of Default” hereunder:

a.             Failure of the Guarantor to make any payments or perform Guarantor’s obligations pursuant to the terms hereof, provided, however, Lender shall, in accordance with the terms of the Loan Agreement, give to Guarantor all notices of default under the Loan, and Guarantor shall have the same opportunity to cure, if any, as are applicable with respect to the Borrower under the Loan Documents with any applicable cure period running concurrently with any cure period applicable to Borrower.

b.             If any representation or warranty made by the Guarantor pursuant to or in connection with this Guaranty or any report, certificate, financial statement or other instrument or document furnished by the Guarantor hereunder shall prove to be false or misleading in any material respect.

c.             After the giving of any applicable notice and expiration of any applicable cure period, the occurrence of an event of default under the Note, the First Modification Agreement, the Mortgage or any of the other Loan Documents.

10.           Remedies .  Lender shall provide Guarantor with notice of the occurrence of any Event of Default in accordance with the Notice provisions contained in the Note.  If any one or more Events of Default shall occur under this Guaranty,  then in each case, the Lender shall have all rights and remedies, including, but not limited to, the right to (i) cause all amounts payable hereunder and pursuant to the Note to be immediately due and payable, whereupon the same shall become immediately due and payable; (ii) take any other action available either in law or in equity to enforce performance or collect any amounts due or thereafter to become due under this Guaranty, the Note, the First Modification Agreement, the Mortgage or other Loan Documents and exercise all rights and remedies of the Lender thereunder; or (iii) enforce the observance of any of the covenants or obligations of the Guarantor under this Guaranty, Note, Loan Agreement, First Modification Agreement, Mortgage or any other Loan Document.

11.           Indemnification .  The Guarantor shall defend, hold harmless, and indemnify the Lender from and against any and all claims, liabilities, judgments, liens, losses, damages, costs, expenses, attorneys fees, and consultants fees incurred by or imposed upon the Lender relating to any obligations on the part of the Borrower as set forth in an Environmental Indemnity

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Agreement dated January 14, 2004.

12.           Costs of Suit .  This Guaranty shall include all reasonable attorneys> fees, expenses, and disbursements incurred by Lender in the collection or enforcement of payment or performance by Borrower of any obligation of Borrower to Lender, and in the collection or enforcement of payment or performance by Guarantor hereunder.

13.           Forbearance .  Neither the failure nor any delay on the part of Lender to exercise any right, remedy, power or privilege under this Guaranty (a “Right”) shall operate as a waiver thereof, nor shall any single or partial exercise of any Right preclude any other or further exercise of the same or of any other Right, nor shall any waiver of any Right with respect to any occurrence be construed as a waiver of such Right with respect to any other occurrence.  No waiver shall be effective unless it is in writing and is signed by the party asserted to have granted such waiver.

14.           Warrant of Borrowers Agreements and Representations .  The Guarantor further unconditionally guarantees to the same effect as above stated, the proper performance of any and all agreements, representations, warranties and undertakings given to Lender by Borrower in connection with the Loan by way of collateral security.

15.           Bankruptcy .  This Guaranty shall be a continuing Guaranty and (whether or not Guarantor shall have any notice or knowledge of any of the following) the liability and obligation of Guarantor hereunder shall be absolute and unconditional and shall remain in full force and effect without regard to, and shall not be released, discharged, or in any way impaired by any bankruptcy, insolvency, reorganization arrangement, or similar proceeding relating to Borrower or any co-Guarantor, or their properties.

16.           Waiver of Notice and Defense .  The Guarantor hereby consents to all of the terms and provisions of the Note, as the same may be from time to time amended or modified. The Guarantor hereby irrevocably waives:

a.             Notice of acceptance of this Guaranty and notice that the Note has been accepted by the Lender in reliance hereon;

b.             Notice of any amendment or any change in the terms of the Note or any of the other Loan Documents or any other present or future agreement relating directly or indirectly thereto;

7




 

c.             Notice of any default under the Note or any other Loan Document, or any other present or future agreement relating directly or indirectly thereto;

d.             Demand for performance or observance of and enforcement of any provisions of the Note, the First Modification Agreement, the Mortgage or any other Loan Document or any pursuit or exhaustion of any rights or remedies against the Borrower thereunder, or any other obligor who becomes liable in any manner for any of the Indebtedness, and any requirement of diligence or promptness on the part of the Lender in connection therewith;

e.             Diligence, presentment, protest, notice of dishonor and notice of default in the payment of any amount at any time payable by the Borrower under or in connection with the Note;

f.              The benefit of any statute of limitations affecting its liability hereunder or the enforcement thereof, and agrees that any payment of any indebtedness or other act which shall toll any statute of limitations applicable to the Note shall similarly operate to toll such statute of limitations applicable to Guarantor’s liability hereunder; or

g.             The benefit of laws exempting property from levy or execution.

17.           Successors and Assigns .  The parties hereto agree that this Guaranty shall bind and inure to the benefit of the Lender and its successors and assigns.

18.           Governing Law .  This Guaranty shall be governed by the substantive law of the Commonwealth of Pennsylvania.

19.           Assignment . Lender may assign this Guaranty in whole or in part to a party to whom the Note is assigned.

20.           Set-Off .  In addition to all liens upon, and rights of set-off against the monies, securities, or other property of Guarantor given to Lender by law, Lender shall have a lien upon and a right of set-off against all monies, securities and other property of Guarantor now or hereafter in the possession of Lender. Every such lien and right of set-off may be exercised without demand upon or notice to Guarantor, no lien or right of set-off shall be deemed to have been waived by any act or conduct on the part of Lender, or by any neglect to exercise such right of set-off or to enforce such lien, or by any delay in so doing, and every right of set-off and lien shall continue in full force and effect until such right of set-off or lien is specifically waived or

8




 

released by an instrument in writing executed by Lender.

21.           Subordination of Indebtedness .  Any indebtedness of Borrower now or hereafter held by Guarantor is hereby subordinated to this Guaranty, the Note, the Mortgage and the First Modification Agreement. Any such indebtedness of Borrower to Guarantor is assigned to Lender as security for this Guaranty and the Note and, if upon an Event of Default under this Guaranty, Lender so requests, shall be collected, enforced and received by Guarantor as trustee for Lender and be paid over to Lender on account of the amounts due under the Note but without reducing or affecting in any manner the liability of Guarantor under the other provisions of this Guaranty. Any such notes now or hereafter evidencing such indebtedness of Borrower to Guarantor shall be marked with a legend that the same are subject to this agreement and, if Lender so requests, shall be delivered to Lender.

22.           Intent of Language .  Reference to the Guarantor shall mean each Guarantor named above. The obligations of the Guarantor hereunder shall be joint and several. When such interpretation is appropriate, all words in the singular used herein shall include the plural, and all words in the masculine shall also mean the feminine, as the case may be.

23.           Severability .  If any term, provision, covenant or condition hereof should be held by a court of competent jurisdiction to be invalid, void or unenforceable, all other provisions, covenants and conditions hereof not held invalid, void or unenforceable shall continue in full force and effect and shall in no way be affected, impaired or invalidated thereby.

24.           No Set-Off .  The Guarantor shall make all payments required hereunder, free of any deductions, and without abatement, deduction, or setoff.

CONFESSION OF JUDGMENT

25.           THE FOLLOWING SECTION SETS FORTH WARRANTS OF ATTORNEY FOR ANY ATTORNEY TO CONFESS JUDGMENTS AGAINST GUARANTOR.  IN GRANTING THESE WARRANTS OF ATTORNEY TO CONFESS JUDGMENTS AGAINST GUARANTOR, GUARANTOR HEREBY KNOWINGLY, INTENTIONALLY, VOLUNTARILY, AND UNCONDITIONALLY WAIVE(S) ANY AND ALL RIGHTS GUARANTOR MAY HAVE TO PRIOR NOTICE AND AN OPPORTUNITY FOR HEARING UNDER THE RESPECTIVE CONSTITUTIONS AND LAWS OF THE COMMONWEALTH OF PENNSYLVANIA AND THE UNITED STATES OF AMERICA.

9




 

UPON THE OCCURRENCE OF AN EVENT OF DEFAULT, GUARANTOR HEREBY AUTHORIZES ANY ATTORNEY OF ANY COURT OF RECORD IN PENNSYLVANIA, OR ELSEWHERE, TO APPEAR FOR GUARANTOR IN ANY ACTION BROUGHT ON THIS GUARANTY, AND TO CONFESS JUDGMENT AGAINST GUARANTOR FOR ALL PRINCIPAL AND INTEREST AND ALL OTHER SUMS THEN DUE PURSUANT TO THE TERMS OF THE NOTE, FIRST MODIFICATION AGREEMENT, LOAN AGREEMENT, AND SUCH OTHER LOAN DOCUMENTS, OR ANY OF THEM, AND FOR COSTS OF SUIT AND AN ATTORNEY’S COMMISSION OF THE LESSER OF THE ACTUAL FEES INCURRED, OR TEN PERCENT (10%) OF THE AMOUNT CONFESSED, TOGETHER WITH INTEREST ON ANY JUDGMENT OBTAINED BY LENDER AT THE RATE OF INTEREST SPECIFIED IN THE NOTE AFTER DEFAULT, INCLUDING INTEREST AT THAT RATE FROM AND AFTER THE DATE OF ANY SHERIFF’S SALE UNTIL ACTUAL PAYMENT IS MADE BY THE SHERIFF TO LENDER OF THE FULL AMOUNT DUE LENDER, AND FOR SO DOING THIS SHALL BE A GOOD AND SUFFICIENT WARRANT.  GUARANTOR WAIVES AND RELINQUISHES ALL ERRORS, DEFECTS, AND IMPERFECTIONS IN THE ENTRY OF JUDGMENT AS AFORESAID, OR IN ANY PROCEEDING PURSUANT THERETO, AND ALL BENEFITS UNDER ANY LAW OR RULE OF COURT RELATING TO A STAY OF EXECUTION OR EXEMPTING ANY PROPERTY FROM LEVY OR SALE UNDER EXECUTION.  THE AUTHORITY HEREIN GRANTED TO CONFESS JUDGMENT SHALL NOT BE EXHAUSTED BY ANY EXERCISE THEREOF BUT SHALL CONTINUE FROM TIME TO TIME AND AT ALL TIMES UNTIL ALL OBLIGATIONS OF BORROWER TO LENDER HAVE BEEN FULLY DISCHARGED.

 

/s/ DHB

 

 

 

 

(Initials of Officer of Guarantor)

 

 

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WAIVER OF JURY TRIAL

26.           GUARANTOR HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVES ANY RIGHT GUARANTOR MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED HEREON, OR ARISING OUT OF, UNDER OR IN CONNECTION WITH, THIS GUARANTY, OR THE BORROWER=S OBLIGATIONS UNDER THE NOTE, THE FIRST MODIFICATION AGREEMENT, THE LOAN AGREEMENT, ANY OTHER DOCUMENT OR INSTRUMENT RELATING HERETO OR THERETO, ANY OTHER TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER VERBAL OR WRITTEN) OR ACTIONS OF THE BORROWER OR THE GUARANTOR IN CONNECTION HEREWITH OR THEREWITH.  THIS PROVISION IS A MATERIAL INDUCEMENT FOR THE LENDER TO MAKE THE LOAN EVIDENCED BY THE NOTE.

 

/s/ DHB

 

 

 

 

(Initials of Officer of Guarantor)

 

IN WITNESS WHEREOF , Guarantor has executed and sealed this Guaranty the day and year first above written.

WITNESS:

GUARANTOR:

 

 

 

 

EVANS & SUTHERLAND COMPUTER
CORPORATION
, a Utah Corporation

 

 

 

 

 

 

 

 

 

 

/s/ Calvin Eddings

BY: /s/ David H. Bateman

Witness

 

 

 

 

 

 

 

 

 

/s/ Calvin Eddings

ATTEST: /s/ Paul L. Dailey

Witness

 

 

 

 

 

11



Exhibit 21.1

EVANS & SUTHERLAND COMPUTER CORPORATION

SUBSIDIARIES OF THE REGISTRANT

 

State or Other

 

 

 

 

Jurisdiction of

 

 

 

 

Incorporation or

 

Names Under Which

Subsidiary Name

 

Organization

 

Each Subsidiary Does Business

 

 

 

 

 

Evans & Sutherland Graphics Corporation

 

Utah

 

Evans & Sutherland Graphics Corporation

 

 

 

 

 

Evans & Sutherland Computer Limited

 

United Kingdom

 

Evans & Sutherland Computer Limited

 

 

 

 

 

Spitz, Inc.

 

Delaware

 

Spitz, Inc.

 

 

 

 

 

Xionix Simulation, Inc.

 

Georgia

 

Xionix Simulation, Inc.

 

 

 

 

 

REALimage, Inc.

 

Delaware

 

REALimage, Inc.

 



 

Exhibit 23.1


Consent of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders
Evans & Sutherland Computer Corporation

We consent to incorporation by reference in the Registration Statements Nos. 33-39632, 333-53305, 333-58733, 333-104754, and 333-118277 on Forms S-8 and Registration Statements Nos. 333-09657 and 333-137637 on Forms S-3 of Evans & Sutherland Computer Corporation of our report dated April 2, 2007, with respect to the consolidated balance sheet of Evans & Sutherland Computer Corporation as of December 31, 2006, and the related consolidated statements of operations, stockholders’ equity (deficit) and comprehensive income (loss), and cash flows for the year ended December 31, 2006, which report appears in the December 31, 2006 Annual Report on Form 10-K of Evans & Sutherland Computer Corporation.

/s/ TANNER LC

April 2, 2007

Salt Lake City, Utah

 



Exhibit 23.2

Consent of Independent Registered Public Accounting Firm

The Board of Directors
Evans & Sutherland Computer Corporation

We consent to the use of our report dated March 31, 2006, with respect to the consolidated balance sheet of Evans & Sutherland Computer Corporation and subsidiaries as of December 31, 2005, and the related consolidated statements of operations, stockholders’ equity and comprehensive loss, and cash flows for the years ended December 31, 2005 and 2004 included herein.

/s/ KPMG LLP

Salt Lake City, Utah
April 2, 2007

 



Exhibit 31.1

Rule 13a-14 Certification

CERTIFICATIONS*

I, David H. Bateman, certify that:

1.                I have reviewed this annual report on Form 10-K of Evans & Sutherland Computer Corporation;

2.                Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.                Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.                The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

(a)           Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)          [Omitted in reliance on SEC Release No. 33-8238; 34-47986, Section III.E.]

(c)           Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)          Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.                The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)           All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)          Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 30, 2007

 

/s/ David H. Bateman

 

 

David H. Bateman

 

 

Chief Executive Officer

 

 

(Principal Executive Officer)

 

 



Exhibit 31.2

Rule 13a-14 Certification

CERTIFICATIONS*

I, Paul L. Dailey, certify that:

1.                I have reviewed this annual report on Form 10-K of Evans & Sutherland Computer Corporation;

2.                Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.                Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.                The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

(a)           Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)          [Omitted in reliance on SEC Release No. 33-8238; 34-47986, Section III.E.]

(c)           Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)          Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.                The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)           All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)          Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 30, 2007

/s/ Paul L. Dailey

 

 

Paul L. Dailey

 

 

Chief Financial Officer

 

 

(Principal Financial Officer)

 

 



Exhibit 32.1

Certification Pursuant to 18 U.S.C. 1350,

as Adopted Pursuant Section 906 of the

Sarbanes-Oxley Act of 2002

I, David H. Bateman, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Form 10-K of Evans & Sutherland Computer Corporation for the fiscal year ended December 31, 2006, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Form 10-K fairly presents, in all material respects, the financial condition and results of operations of Evans & Sutherland Computer Corporation.

Date: March 30, 2007

 

By:

/s/ David H. Bateman

 

 

 

 

David H. Bateman

 

 

 

Chief Executive Officer

 

I, Paul L. Dailey, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Form 10-K of Evans & Sutherland Computer Corporation for the fiscal year ended December 31, 2006, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Form 10-K fairly presents, in all material respects, the financial condition and results of operations of Evans & Sutherland Computer Corporation.

Date: March 30, 2007

 

By:

/s/ Paul L. Dailey

 

 

 

 

Paul L. Dailey

 

 

 

Chief Financial Officer

 

The foregoing certifications are being furnished solely to accompany the Report pursuant to 18 U.S.C. §1350, and are not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and are not to be incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing.