| EVANS & SUTHERLAND COMPUTER CORP 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 |
| While we are optimistic about our long-term prospects, the following discussion highlights some risks and uncertainties that should be considered in evaluating our growth outlook |
| Our Business Model Is Changing and May Not Produce Consistent Earnings Which Could Adversely Affect Our Business 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 |
| In most of our markets we are experiencing increased competition, and 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 |
| When new systems are ordered, prices are usually below our comparable, last generation systems |
| Success in this environment requires a business model that emphasizes smaller systems and associated hardware revenue, with greater dependence on software, databases, and support services |
| We have made significant progress in adapting to this new business model and introducing products emphasizing the new factors for success |
| However, there is no assurance that this model will succeed and ensure profitability in the future |
| In addition, if we successfully sell our Simulation Business to Rockwell Collins and successfully acquire Spitz, Inc, then our business model will significantly change during 2006 |
| Our business will be based on digital theaters and laser projectors |
| A significant portion of our future success will depend on completing and selling our laser projector, an unproven product, and future products based on this 9 ______________________________________________________________________ technology |
| There is no guarantee that the laser projector or any future products based on this same technology will be successful in the market or that we can develop them |
| If we are unable to develop our laser projector, our business may be adversely affected |
| 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 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 |
| Migration to PC’s in the Commercial Simulation Market May Negatively Impact our Revenues Currently, off-the-shelf PC technology is not used in visual systems for Level D certification in the commercial simulation market |
| However, advances in technology could make it possible to attain Level D certification with such systems |
| If this occurs, E&S would expect to deliver a range of products at different prices, with the risk of lower average prices and lower total revenue for the mix of commercial systems |
| Prime Contractors May Continue Bringing Work In-house, Decreasing Demand for E&S Products Large prime contractors in the defense and aerospace industry have encountered the same competitive pressures described earlier for simulation and training revenue |
| To protect their own revenue and margins, most have responded by putting pressure on smaller suppliers, as well as bringing work in-house to protect established engineering organizations wherever possible |
| This trend has, in effect, created new competitors for our traditional business |
| These in-house engineering groups attempt to do only the most profitable work, such as software and databases, and leave less profitable hardware development to others |
| Often the costs of these efforts are not visible to the end customer because they are part of a much larger contract |
| If these trends continue and the end customers accept the results, they could reduce demand for our software and databases, which would adversely affect our financial performance |
| Delays in New Product Introductions Could Negatively Affect Financial Performance During 2006, we intend to introduce several important new products, including the simFUSION 7000 and the ESLP Delays in introducing and delivering these products could reduce planned sales and profit contribution |
| Changes in Government Priorities May Further Impact the Military Simulation Market During the last several years significant changes have taken place in budget priorities for both US and international government spending, especially military spending |
| Some of these changes have resulted in delays or reductions of visual system purchases |
| While we have downsized our Company in accordance with these changes, we have no assurance that such delays will not continue to occur or accelerate and cause further declines in our revenue from this market |
| We Depend on Several Significant Customers and our Business, Financial Condition and Results of Operations Could Suffer if Their Purchases Decline We currently derive a significant portion of our sales from a limited number of non-US government customers |
| The loss of any one or more of these customers could have a material adverse effect on our business, financial condition and results of operations |
| We were dependent on four of our non-US government customers for approximately 21prca of our consolidated sales in 2005 |
| We expect that sales to a limited number of customers will continue to account for a substantial portion of our sales in the 10 ______________________________________________________________________ foreseeable future |
| We have no assurance that sales from this limited number of customers will continue to reach or exceed historical levels in the future |
| We do not have supply contracts with any of our significant customers |
| Our Sales Could Decline Substantially as a Result of Terrorist Attacks and Other Activities that Make Air Travel Difficult or Reduce the Willingness of Our Commercial Airline Customers to Purchase Our Simulation Products During 2005, approximately 26prca of our total sales were derived from sales of our visual systems to commercial airline companies and other third parties in the commercial airline industry |
| The demand for our various commercial simulation products and services is heavily dependent upon new orders from these commercial airline customers |
| In the event terrorist attacks or other activities make air travel difficult or reduce the demand or willingness of our customers to purchase our commercial simulation products, our revenue may decline substantially |
| Our Shareholders May Not Realize Certain Opportunities Because of the Anti-Takeover Effect of State Law We may be subject to the Utah Control Shares Acquisition Act which provides that any person who acquires 20prca or more of the outstanding voting shares of a publicly held Utah corporation will not have voting rights with respect to the acquired shares unless a majority of the disinterested shareholders of the corporation votes to grant such rights |
| This could deprive shareholders of opportunities to realize takeover premiums for their shares or other advantages that large accumulations of stock would provide because anyone interested in acquiring E&S could only do so with the cooperation of our board of directors and a majority of disinterested shareholders |
| Following the Sale of Our Simulation Business to Rockwell Collins, Your Ability to Sell Your Stock May be Substantially Limited Our common stock is currently traded on the Nasdaq National Market under the symbol “ESCC” Following the completion of the proposed sale of our Simulation Business, we expect to continue to trade as a public company on the Nasdaq National Market |
| However, it is not possible to predict the trading price of our common stock following the closing of the sale to Rockwell Collins |
| 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 Not Complete the Transaction to Sell the Assets of our Simulation Business to Rockwell Collins Which Could Adversely Affect our Level of Expenses and Operating Results Even though we have entered into the Rockwell Purchase Agreement concerning the sale of our Simulation Business, this transaction may not be completed |
| If these pre-closing requirements are not met or if not waived as a requirement to closing, then this transaction will not occur, which could adversely affect our operating results |
| We May not Receive the dlra10 Million in Escrow Related to the Sale of Assets to Rockwell Collins and the Laser Projector Agreement As part of the Rockwell Purchase Agreement and Laser Agreement, a total dlra10dtta0 million is being held in an escrow account to secure any post-closing reduction in the purchase price based on the net asset value of the Simulation Business at closing, our indemnification obligations under the Rockwell Purchase Agreement and our delivery obligations under the Rockwell Laser Agreement |
| In the event that Rockwell Collins becomes entitled to any such purchase price reduction under the Rockwell Purchase Agreement, 11 ______________________________________________________________________ penalty under the Rockwell Laser Agreement or indemnification under the Rockwell Purchase Agreement, we may forfeit some or all of the dlra10dtta0 million deposited in escrow, which will reduce the amount of cash we have available in the future |
| Accordingly, there is no guarantee that we will receive these funds |
| Accordingly, there is no guarantee that we will receive these funds |
| If we do not deliver a motion-based ESLP to Rockwell Collins by a specified time, Rockwell Collins has the right to withdraw up to dlra3dtta0 million from the escrow account under the terms of the Rockwell Purchase Agreement and the related escrow agreement |
| Our Business will be Harmed if the Proposed Sale of Our Simulation Business to Rockwell Collins Disrupts Our Business Operations and Prevents Us From Realizing its Intended Benefits Prior to the closing of the sale of our Simulation Business to Rockwell Collins, our business operations may be disrupted due to a number of factors, any of which could harm our business or ability to complete the proposed sale |
| These factors include: · loss of key employees, sales representatives, vendors, or customers; · expenses incurred in connection with the proposed sale; and · the diversion of management’s attention from our day-to-day business |
| We May Not Be Able to Integrate the Spitz Acquisition into Our Operations Successfully If we successfully acquire Spitz from Transnational Inc |
| we may experience difficulties integrating their business with ours |
| This could result in additional costs and loss of productivity that could materially affect our operations and financial results |
| We May Face Risks Related to an SEC Investigation and Securities Litigation in Connection with the Restatement of our Financial Statements We are not aware that the SEC has begun any formal or informal investigation in connection with accounting errors requiring restatement of 2003 and 2004 financial statements and 2004 and 2005 quarterly financial statements, or that any laws have been violated |
| However, if the SEC makes a determination that the Company has violated Federal securities laws, the Company may face sanctions, including, but not limited to, monetary penalties and injunctive relief, which could adversely affect our business |
| In addition, the Company or its officers and directors could be named defendants in civil proceedings arising from the restatement |
| We are unable to estimate what our liability in either event might be |
| 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 |