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EXCEL - IDEA: XBRL DOCUMENT - EVANS & SUTHERLAND COMPUTER CORP | Financial_Report.xls |
EX-31.1 - EXHIBIT 31.1 - EVANS & SUTHERLAND COMPUTER CORP | v317997_ex31-1.htm |
EX-31.2 - EXHIBIT 31.2 - EVANS & SUTHERLAND COMPUTER CORP | v317997_ex31-2.htm |
EX-32.1 - EXHIBIT 32.1 - EVANS & SUTHERLAND COMPUTER CORP | v317997_ex32-1.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
x | Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, |
For the quarterly period ended June 29, 2012
or
¨ | 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 001-14677
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 |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ¨ | Accelerated filer ¨ | |
Non-accelerated filer ¨ (Do not check if a smaller reporting company) | Smaller reporting company x |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ¨ No x
The number of shares of the registrant’s Common Stock (par value $0.20 per share) outstanding on July 30, 2012 was 11,089,199.
FORM 10-Q
Evans & Sutherland Computer Corporation
Quarter Ended June 29, 2012
Page No. | ||
PART I – FINANCIAL INFORMATION | ||
Item 1. | Condensed Consolidated Financial Statements (unaudited) | |
Condensed Consolidated Balance Sheets as of June 29, 2012 and December 31, 2011 | 3 | |
Condensed Consolidated Statements of Comprehensive Loss for the Three and Six Months Ended June 29, 2012 and July 1, 2011 | 4 | |
Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 29, 2012 and July 1, 2011 | 5 | |
Notes to Condensed Consolidated Financial Statements | 6 | |
Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations | 11 |
Item 4. | Controls and Procedures | 15 |
PART II – OTHER INFORMATION | ||
Item 1. | Legal Proceedings | 16 |
Item 6. | Exhibits | 16 |
SIGNATURE | 17 |
2 |
PART I – FINANCIAL INFORMATION
Item 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited) (In thousands, except share and per share data)
June 29, | December 31, | |||||||
2012 | 2011 | |||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 2,237 | $ | 3,932 | ||||
Restricted cash | 779 | 1,062 | ||||||
Marketable securities | 1,496 | 1,666 | ||||||
Accounts receivable, less allowances for doubtful receivables of $318 and $470, respectively | 3,581 | 4,040 | ||||||
Costs and estimated earnings in excess of billings on uncompleted contracts | 2,343 | 1,456 | ||||||
Inventories, net | 3,511 | 3,624 | ||||||
Prepaid expenses and deposits | 540 | 720 | ||||||
Total current assets | 14,487 | 16,500 | ||||||
Property, plant and equipment, net | 8,003 | 8,303 | ||||||
Goodwill | 635 | 635 | ||||||
Definite-lived intangible assets, net | 196 | 224 | ||||||
Other assets | 2,161 | 1,828 | ||||||
Total assets | $ | 25,482 | $ | 27,490 | ||||
LIABILITIES AND STOCKHOLDERS’ DEFICIT | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 993 | $ | 1,490 | ||||
Accrued liabilities | 1,470 | 1,749 | ||||||
Billings in excess of costs and estimated earnings on uncompleted contracts | 2,546 | 3,438 | ||||||
Customer deposits | 3,355 | 2,834 | ||||||
Current portion of retirement obligations | 531 | 560 | ||||||
Current portion of long-term debt | 162 | 155 | ||||||
Total current liabilities | 9,057 | 10,226 | ||||||
Pension and retirement obligations, net of current portion | 32,656 | 32,513 | ||||||
Long-term debt, net of current portion | 5,144 | 5,136 | ||||||
Deferred rent obligation | 1,493 | 1,480 | ||||||
Total liabilities | 48,350 | 49,355 | ||||||
Commitments and contingencies | ||||||||
Stockholders' deficit: | ||||||||
Preferred stock, no par value: 10,000,000 shares authorized; | ||||||||
no shares outstanding | - | - | ||||||
Common stock, $0.20 par value: 30,000,000 shares authorized; | ||||||||
11,441,666 shares issued | 2,288 | 2,288 | ||||||
Additional paid-in capital | 54,450 | 54,433 | ||||||
Common stock in treasury, at cost: 352,467 shares | (4,709 | ) | (4,709 | ) | ||||
Accumulated deficit | (47,870 | ) | (46,746 | ) | ||||
Accumulated other comprehensive loss | (27,027 | ) | (27,131 | ) | ||||
Total stockholders' deficit | (22,868 | ) | (21,865 | ) | ||||
Total liabilities and stockholders' deficit | $ | 25,482 | $ | 27,490 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
3 |
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Unaudited) (In thousands, except per share data)
Three Months Ended | Six Months Ended | |||||||||||||||
June 29, | July 1, | June 29, | July 1, | |||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
Sales | $ | 4,746 | $ | 6,582 | $ | 12,563 | $ | 12,219 | ||||||||
Cost of sales | 3,540 | 4,288 | 8,088 | 8,464 | ||||||||||||
Gross profit | 1,206 | 2,294 | 4,475 | 3,755 | ||||||||||||
Operating expenses: | ||||||||||||||||
Selling, general and administrative (excluding pension) | 1,279 | 1,390 | 2,751 | 2,681 | ||||||||||||
Research and development | 660 | 735 | 1,264 | 1,486 | ||||||||||||
Pension | 554 | 520 | 1,109 | 945 | ||||||||||||
Total operating expenses | 2,493 | 2,645 | 5,124 | 5,112 | ||||||||||||
Operating loss | (1,287 | ) | (351 | ) | (649 | ) | (1,357 | ) | ||||||||
Other expense, net | (184 | ) | (173 | ) | (401 | ) | (263 | ) | ||||||||
Loss before income tax provision | (1,471 | ) | (524 | ) | (1,050 | ) | (1,620 | ) | ||||||||
Income tax provision | (13 | ) | (25 | ) | (74 | ) | (67 | ) | ||||||||
Net loss | $ | (1,484 | ) | $ | (549 | ) | $ | (1,124 | ) | $ | (1,687 | ) | ||||
Net loss per common share – basic and diluted | $ | (0.13 | ) | $ | (0.05 | ) | $ | (0.10 | ) | $ | (0.15 | ) | ||||
Weighted average common shares outstanding – basic and diluted | 11,089 | 11,089 | 11,089 | 11,089 | ||||||||||||
Comprehensive Loss | ||||||||||||||||
Net loss | $ | (1,484 | ) | $ | (549 | ) | $ | (1,124 | ) | $ | (1,687 | ) | ||||
Other comprehensive income (loss): | ||||||||||||||||
Unrealized gain (loss) on marketable securities | (64 | ) | (21 | ) | 104 | 3 | ||||||||||
Comprehensive loss | $ | (1,548 | ) | $ | (570 | ) | $ | (1,020 | ) | $ | (1,684 | ) |
The accompanying notes are an integral part of these condensed consolidated financial statements.
4 |
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) (In thousands)
Six Months Ended | ||||||||
June 29, | July 1, | |||||||
2012 | 2011 | |||||||
Cash flows from operating activities: | ||||||||
Net loss | $ | (1,124 | ) | $ | (1,687 | ) | ||
Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | ||||||||
Depreciation and amortization | 392 | 495 | ||||||
Other | 439 | 228 | ||||||
Change in assets and liabilities: | ||||||||
Decrease in restricted cash | 283 | 302 | ||||||
Decrease in accounts receivable, net | 574 | 1,926 | ||||||
Decrease (increase) in inventories | (81 | ) | 165 | |||||
Decrease (increase) in costs and estimated earnings in excess of billings on uncompleted contracts | (1,779 | ) | 289 | |||||
Increase in prepaid expenses and deposits | (406 | ) | (241 | ) | ||||
Decrease in accounts payable | (497 | ) | (473 | ) | ||||
Decrease in accrued liabilities | (266 | ) | (641 | ) | ||||
Increase in pension and retirement obligations | 114 | 315 | ||||||
Increase in customer deposits | 521 | 1,325 | ||||||
Net cash provided by (used in) operating activities | (1,830 | ) | 2,003 | |||||
Cash flows from investing activities: | ||||||||
Purchases of property, plant and equipment | (64 | ) | (127 | ) | ||||
Proceeds from sale of marketable securities | 275 | 320 | ||||||
Net cash provided by investing activities | 211 | 193 | ||||||
Cash flows from financing activities: | ||||||||
Net principal payments on line-of-credit agreement | - | (500 | ) | |||||
Principal payments on long-term debt | (76 | ) | (74 | ) | ||||
Net cash used in financing activities | (76 | ) | (574 | ) | ||||
Net increase (decrease) in cash and cash equivalents | (1,695 | ) | 1,622 | |||||
Cash and cash equivalents at beginning of the period | 3,932 | 1,024 | ||||||
Cash and cash equivalents at end of the period | $ | 2,237 | $ | 2,646 | ||||
Supplemental Disclosures of Cash Flow Information: | ||||||||
Cash paid for interest | $ | 272 | $ | 273 | ||||
Cash paid for income taxes | 38 | 51 | ||||||
Non-cash investing and financing activities: | ||||||||
Unrealized gain on marketable securities | $ | 104 | $ | 3 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
5 |
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
All dollar amounts (except share and per share amounts) in thousands.
1. | GENERAL |
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of Evans & Sutherland Computer Corporation and subsidiaries (collectively, the “Company” and “E&S”) have been prepared in accordance with the instructions to Form 10-Q and, therefore, do not include all information and notes necessary for a complete presentation of financial position, results of operations, and cash flow, in conformity with U.S. generally accepted accounting principles (“US GAAP”). This report on Form 10-Q should be read in conjunction with the Company’s annual report on Form 10-K for the year ended December 31, 2011.
The accompanying unaudited condensed consolidated balance sheets, statements of comprehensive loss, and statements of cash flows reflect all normal recurring adjustments that are, in the opinion of management, necessary for a fair presentation of the Company’s financial position, results of operations and cash flows. The results of operations for the periods ended June 29, 2012 are not necessarily indicative of the results to be expected for the full year ending December 31, 2012. The Company operates on a calendar year-end with the first three fiscal quarters ending on the last Friday of the calendar quarter.
Revenue Recognition
Sales include revenue from system hardware that includes integrated software, database products and service contracts. The following methods are used to determine revenue recognition:
Percentage-of-Completion. In arrangements that are longer in term and require significant production, modification or customization, revenue is recognized using the percentage-of-completion method. In applying this method, the Company utilizes cost-to-cost methodology whereby it estimates 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 its estimate of total anticipated costs. This ratio is then utilized to determine the amount of gross profit earned based on the Company’s estimate of total gross profit at completion. The Company routinely reviews estimates related to percentage-of-completion contracts and adjusts for changes in the period the 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 condensed consolidated balance sheets.
In those arrangements where software is a significant component of the contract, the Company uses 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 products are accounted for using the completed contract method. Accordingly, revenue is recognized upon delivery of the completed product, provided persuasive evidence of an arrangement exists, title and risk of loss have transferred to the customer, the fee is fixed or determinable, and collection is reasonably assured.
Multiple Element Arrangements. Some contracts include multiple elements. Significant deliverables in such arrangements commonly include various hardware components of the Company’s visual display systems, domes, show content and various service and maintenance 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. Relative fair values of elements are generally determined based on actual and estimated selling price. Delivery times of such contracts typically occur within three to six months.
Other. Other revenue consists primarily of amounts earned under maintenance contracts that are generally sold as a single element. Revenue from product maintenance contracts, including separately priced extended warranty contracts, is deferred and recognized over the period of performance under the contract.
6 |
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Anticipated Losses. For contracts with anticipated losses at completion, a provision is recorded when the loss is probable. 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.
Stock-Based Compensation
Compensation cost for all stock-based awards is measured at fair value on the date of grant and is recognized over the service period for awards expected to vest. Determining the fair value of share-based awards at the grant date requires judgment, including estimating the number of share-based awards that are expected to be forfeited. Actual results and future estimates may differ from the Company’s current estimates.
Net Loss Per Common Share
Basic net loss per common share is computed based on the weighted-average number of common shares outstanding during the period. Diluted net loss per common share is computed based on the weighted-average number of common shares without consideration to common stock equivalents outstanding during the period as their effect would be anti-dilutive, thereby decreasing the net loss per common share. Stock options are considered to be common stock equivalents. When the Company incurs a loss, there are no dilutive common stock equivalents. Potentially dilutive securities from stock options are discussed in Note 3.
Inventories, net
Inventories consisted of the following:
June 29, | December 31, | |||||||
2012 | 2011 | |||||||
Raw materials | $ | 4,279 | $ | 4,767 | ||||
Work-in-process | 265 | 547 | ||||||
Finished goods | 1,422 | 571 | ||||||
Reserve for obsolete inventory | (2,455 | ) | (2,261 | ) | ||||
Inventories, net | $ | 3,511 | $ | 3,624 |
Liquidity
Recurring losses have produced negative cash flows from operating activities which, along with recent increases in the Company’s net pension liability, have resulted in an accumulated stockholders’ deficit of $47,870 as of June 29, 2012. This has negatively affected liquidity and capital resources. The pressure on near term liquidity and capital resources continues but has lessened in 2011 and 2012 with cost reductions that have improved the results of operations. The Company has little control over the primary factors affecting the net pension liability which include market interest rates, investment returns and actuarial estimates. The Company believes existing sources of liquidity and results of operations will adequately fund its obligations through 2012 and into 2013. This will continue to depend on a sufficient stream of new customer orders with adequate progress payments to produce cash from operating activities. For the longer term, in addition to results of operations, the factors affecting the net pension liability along with legislation which determines the timing of its payment will affect liquidity demands. There can be no assurance that the Company will be successful in its efforts to meet all of its obligations. The condensed consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
2. | FAIR VALUE MEASUREMENTS |
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. To increase the comparability of fair value measures, the following hierarchy prioritizes the inputs according to valuation methodologies used to measure fair value:
Level 1—Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2 – Observable inputs other than Level 1 including quoted prices for similar assets or liabilities, quoted prices in less active markets, or other observable inputs that can be corroborated by observable market data.
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EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Level 3—Unobservable inputs which are supported by little or no market activity.
The Company’s marketable securities are classified within Level 1 because the underlying investments have readily available market prices. Marketable securities measured at fair value on a recurring basis are summarized below:
June 29, 2012 | Total | Level 1 | Level 2 | Level 3 | ||||||||||||
Mutual funds – equity securities | $ | 1,161 | $ | 1,161 | $ | - | $ | - | ||||||||
Mutual funds – debt securities | 289 | 289 | - | - | ||||||||||||
Money market mutual funds | 46 | 46 | - | - | ||||||||||||
Total | $ | 1,496 | $ | 1,496 | $ | - | $ | - |
December 31, 2011 | Total | Level 1 | Level 2 | Level 3 | ||||||||||||
Mutual funds – equity securities | $ | 1,301 | $ | 1,301 | $ | - | $ | - | ||||||||
Mutual funds – debt securities | 314 | 314 | - | - | ||||||||||||
Money market mutual funds | 51 | 51 | - | - | ||||||||||||
Total | $ | 1,666 | $ | 1,666 | $ | - | $ | - |
3. | STOCK OPTION PLAN |
As of June 29, 2012, options to purchase 1,600,512 shares of common stock under the Company’s stock option plan were authorized and reserved for future grant. A summary of activity in the stock option plan for the six months ended June 29, 2012 follows (shares in thousands):
Weighted- | ||||||||
Average | ||||||||
Number | Exercise | |||||||
of Shares | Price | |||||||
Outstanding at beginning of the period | 1,151 | $ | 3.74 | |||||
Granted | 101 | 0.23 | ||||||
Exercised | - | - | ||||||
Forfeited or expired | (89 | ) | 6.59 | |||||
Outstanding at end of the period | 1,163 | 3.22 | ||||||
Exercisable at end of the period | 994 | $ | 3.68 |
As of June 29, 2012, options exercisable and options outstanding had a weighted average remaining contractual term of 4.4 and 5.1 years, respectively, and no aggregate intrinsic value.
The Black-Scholes option-pricing model is used to estimate the fair value of options under the Company’s stock option plan. The weighted average values of employee stock options granted under the stock option plan, as well as the weighted average assumptions used in calculating these values during the first six months of 2012, were based on estimates at the date of grant as follows:
8 |
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Risk-free interest rate | 0.36 | % | ||
Dividend yield | 0.0 | % | ||
Volatility | 396 | % | ||
Expected life (in years) | 3.5 |
Expected option life and volatility are based on historical data of the Company. The risk-free interest rate is calculated based on the average US Treasury Bill rate that corresponds with the option life. Historically, the Company has not declared dividends and there are no foreseeable plans to do so.
No options were exercised during the six months ended June 29, 2012. Options were cancelled as a result of the expiration of the exercise period of the options. As of June 29, 2012, there was approximately $35 of total unrecognized share-based compensation cost related to grants under the plan that will be recognized over a weighted-average period of 2.1 years.
Share-based compensation expense included in selling, general and administrative (excluding pension) expense in the statements of comprehensive loss for the three and six months ended June 29, 2012 was approximately $7 and $17, respectively. Share-based compensation expense included in selling, general and administrative (excluding pension) expense in the statements of comprehensive loss for the three and six months ended July 1, 2011 was approximately $13 and $21, respectively.
9 |
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
4. | EMPLOYEE RETIREMENT BENEFIT PLANS |
Components of Net Periodic Benefit Expense
Pension Plan | Supplemental Executive
Retirement Plan | |||||||||||||||
For the three months ended: | June 29, 2012 | July 1, 2011 | June 29, 2012 | July 1, 2011 | ||||||||||||
Service cost | $ | - | $ | - | $ | - | $ | - | ||||||||
Interest cost | 467 | 527 | 52 | 64 | ||||||||||||
Expected return on assets | (454 | ) | (501 | ) | - | - | ||||||||||
Amortization of actuarial loss | 170 | 108 | 14 | 9 | ||||||||||||
Amortization of prior year service cost | - | - | (12 | ) | (12 | ) | ||||||||||
Settlement charge | 317 | 325 | - | - | ||||||||||||
Net periodic benefit expense | $ | 500 | $ | 459 | $ | 54 | $ | 61 |
Pension Plan | Supplemental Executive
Retirement Plan | |||||||||||||||
For the six months ended: | June 29, 2012 | July 1, 2011 | June 29, 2012 | July 1, 2011 | ||||||||||||
Service cost | $ | - | $ | - | $ | - | $ | - | ||||||||
Interest cost | 933 | 1,055 | 103 | 128 | ||||||||||||
Expected return on assets | (907 | ) | (1,002 | ) | - | - | ||||||||||
Amortization of actuarial loss | 341 | 216 | 29 | 18 | ||||||||||||
Amortization of prior year service cost | - | - | (24 | ) | (24 | ) | ||||||||||
Settlement charge | 634 | 554 | - | - | ||||||||||||
Net periodic benefit expense | $ | 1,001 | $ | 823 | $ | 108 | $ | 122 |
Employer Contributions
In the first six months of 2012, the Company paid $727 to the pension trust and payments totaling $1,305 are scheduled for the remainder of 2012 with an additional payment of $412 expected in early 2013.
The Company is not currently required to fund the Supplemental Executive Retirement Plan (SERP). All benefit payments are made by the Company directly to those who receive benefits from the SERP. As such, these payments are treated as both contributions and benefits paid for reporting purposes. The Company expects to contribute and pay SERP benefits of approximately $531 in the next 12 months.
5. | CONDEMNATION OF PROPERTY |
In 2011, Rocky Mountain Power (“RMP”), a public utility company, took possession of a portion of the Company’s real estate interest (the “Substation”) by way of a decree of condemnation so that RMP may repurpose the Substation for public use. The Company’s interest in the Substation is governed by a series of agreements (the “Agreements”) with Wasatch Research Park I, LLC (“Wasatch”), which owned legal title of the Substation. In 2011, RMP offered and paid Wasatch $231 as compensation for the substation and the Company recorded a loss on the disposal of the substation based on the consideration it received from Wasatch for the Company’s interest in the Substation pursuant to the Agreements. The Company and Wasatch believe that the Substation value is higher than $231 and Wasatch, with the cooperation of the Company, is pursuing increased compensation from RMP through negotiation and legal proceedings. The Agreements provide that the Company and Wasatch will share equally in any proceeds in excess of the $231 less legal expenses. In the event that RMP pays additional compensation for the Substation to Wasatch, the Company will record a gain from the disposal of property to the extent of its share of the additional compensation it is entitled to under the Agreements. The Company is uncertain as to the final outcome of this matter.
10 |
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the condensed consolidated financial statements and notes of Evans & Sutherland Computer Corporation and subsidiaries (collectively, the “Company,” “E&S,” “we,” “us” and “our”) included in Item 1 of Part I of this Form 10-Q. In addition to the historical information contained herein, this quarterly report on Form 10-Q includes certain "forward-looking” statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. You can identify these forward-looking statements by the fact they use words such as “should,” “expect,” “anticipate,” “estimate,” “target,” “may,” “project,” “guidance,” “intend,” “plan,” “believe” and other words and terms of similar meaning and expression in connection with any discussion of future operating or financial performance. One can also identify forward-looking statements by the fact that they do not relate strictly to historical or current facts. Such forward-looking statements are based on current expectations and involve inherent risks and uncertainties, including factors that could delay, divert or change any of them, and could cause actual outcomes to differ materially from current expectations. These statements are likely to relate to, among other things, the Company’s goals, plans and projections regarding its financial position, results of operations, cash flows, market position, product development, sales efforts, expenses, performance or results of current and anticipated products and the outcome of contingencies such as legal proceedings and financial results, which are based on current expectations that involve inherent risks and uncertainties, including internal or external factors that could delay, divert or change any of them in the next several years.
Although the Company believes it has been prudent in its plans and assumptions, no assurance can be given that any goal or plan set forth in forward-looking statements can be achieved and readers are cautioned not to place undue reliance on such statements, which speak only as of the date made. The Company undertakes no obligation to release publicly any revisions to forward-looking statements as a result of new information, future events or otherwise.
All dollar amounts are in thousands.
Executive Summary
Revenue and gross margins for the first six months of 2012 were comparable to 2011 while the revenue recorded for the second quarter was significantly less than the comparable period of 2011. This low second quarter revenue was attributable to accelerated work completed on customer projects in the first quarter of 2012. The gross margins in the second quarter of 2012 suffered from volume related inefficiencies; however, with better than usual performance on several customer projects in the first quarter, the gross margins for the six-month period were stronger in 2012 than 2011. New customer bookings improved slightly in the second quarter of 2012 but were still less than expected. As a result, the sales backlog improved slightly compared to March 30, 2012 but still decreased to $15,375 as of June 29, 2012 compared to $17,449 as of December 31, 2011. While the sales backlog is low compared to recent history, sales prospects remain strong and the low bookings appear attributable to the timing of customer decisions rather than lost sales opportunities. For this reason, we remain hopeful that the sales backlog will recover with stronger bookings for the remainder of 2012. We have enjoyed continued success in the existing markets we serve but have found it challenging to find opportunities for significant sales growth within our current resource limitations and the worldwide economic environment.
Operating expenses in the first six months of 2012 decreased compared to the same period in 2011 except for an increase in the amount of pension expense recorded. The decrease in operating expenses was attributable to reduced research and development expenses due to redirecting some of the Company’s engineering resources to customer support and show productions. Pension expense for 2012 was higher due to greater lump-sum distributions in 2012 and other actuarial estimates. We continue to evaluate ways to further reduce our overhead structure and operating expenses but expect less in future reductions as the changes in the past two years consumed most of the cost cutting opportunities.
As a result of our expectations for sales and operating expenditures, we do not expect to record net income for the remainder of 2012. We continue to believe that our annual results will be close to breakeven with future sales levels comparable to 2011 under our existing cost structure. We continue to evaluate alternative strategies that will enable us to reach our goal of sustained profitability.
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As the result of the net loss, partially offset by some unrealized gains on marketable securities, in the first six months of 2012, our stockholders’ deficit increased to $22,868 as of June 29, 2012 compared to $21,865 as of December 31, 2011. The measurement of the pension obligation and return on the pension trust assets could also increase or reduce the stockholders’ deficit dependent on many factors such as market interest rates, investment returns and actuarial estimates. The pension liability is the largest component of our stockholders’ deficit and continues to pressure liquidity requirements. In the first six months of 2012 we paid $727 to the pension trust. Payments totaling $1,305 to the pension trust are scheduled for the remainder of 2012 with an additional payment of $412 expected in early 2013. The remaining payment requirements to the pension trust in 2013 will depend on several factors including investment returns, market interest rates, actuarial results, and the evolving rules and interpretations of recent legislation intended to defer the funding of pension obligations over a longer period. We continue to believe that existing sources of liquidity and cash generated from operating activities will adequately fund our obligations through 2012 and into 2013. Over the long term, the elimination of our stockholders’ deficit and funding of our obligations will continue to depend on a combination of profits from operations and the factors affecting the net pension liability.
Critical Accounting Policies
Certain accounting policies are considered by management to be critical to an understanding of our condensed consolidated financial statements. Their application requires significant management judgment, with financial reporting results relying on estimates about the effect of matters that are inherently uncertain. A summary of critical accounting policies can be found in our Form 10-K for the year ended December 31, 2011. For all of these policies, management cautions that future results rarely develop exactly as forecasted, and the best estimates routinely require modification.
Results of Operations
Sales and Backlog
The following table summarizes our sales:
For the Three Months Ended | For the Six Months Ended | |||||||||||||||
June 29, 2012 | July 1, 2011 | June 29, 2012 | July 1, 2011 | |||||||||||||
Sales | $ | 4,746 | $ | 6,582 | $ | 12,563 | $ | 12,219 |
Sales reported for the first six months of 2012 were comparable to the prior year increasing by 3%. Contributions from all of our products were consistent between the two six-month periods; however, the timing of deliveries for some of our larger digital theater products resulted in more sales recorded in the first quarter of 2012. As a result, the sales for the three-month period ended June 29, 2012 were significantly less than the comparable period of 2011. We expect higher quarterly sales for the remainder of 2012. As of June 29, 2012 our revenue backlog was $15,375 compared with $17,449 as of December 31, 2011.
Gross Profit
The following table summarizes our gross profit and the gross profit as a percentage of total sales:
For the Three Months Ended | For the Six Months Ended | |||||||||||||||
June 29, 2012 | July 1, 2011 | June 29, 2012 | July 1, 2011 | |||||||||||||
Gross profit | $ | 1,206 | $ | 2,294 | $ | 4,475 | $ | 3,755 | ||||||||
Gross profit percentage | 25 | % | 35 | % | 36 | % | 31 | % |
Our gross profit for the first six months of 2012 was higher than the same period of the prior year due to very favorable margins on several customer contracts in the first quarter of 2012. Our gross profit for the second quarter of 2012 was lower than the same period of 2011 due primarily to the under-absorption of overhead and inefficiencies resulting from the lower sales volume.
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Operating Expenses
The following table summarizes our operating expenses:
For the Three Months Ended | For the Six Months Ended | |||||||||||||||
June 29, 2012 | July 1, 2011 | June 29, 2012 | July 1, 2011 | |||||||||||||
Selling, general and administrative (excluding pension) | $ | 1,279 | $ | 1,390 | $ | 2,751 | $ | 2,681 | ||||||||
Research and development | 660 | 735 | 1,264 | 1,486 | ||||||||||||
Pension | 554 | 520 | 1,109 | 945 | ||||||||||||
Total operating expenses | $ | 2,493 | $ | 2,645 | $ | 5,124 | $ | 5,112 |
Selling, general and administrative expenses for three and six months ended June 29, 2012 were comparable to the same periods in 2011. Research and development expenses were somewhat lower than the prior year due to redirecting some of the Company’s resources to customer support and show productions. Pension expense for 2012 was higher than 2011 due to higher settlement charges resulting from increased estimates for lump-sum distributions in 2012 and other actuarial estimates.
Other Expense, net
The following table summarizes our other expense:
For the Three Months Ended | For the Six Months Ended | |||||||||||||||
June 29, 2012 | July 1, 2011 | June 29, 2012 | July 1, 2011 | |||||||||||||
Total other expense, net | $ | 184 | $ | 173 | $ | 401 | $ | 263 |
For the first six months of 2012, other expense, net increased due to net realized losses on marketable securities recorded in 2012 compared to realized gains recorded in 2011. The other significant component of other expense was interest expense which was comparable for the periods presented.
Liquidity and Capital Resources
Cash Flows
In the first six months of 2012, the $1,830 of cash used by operating activities was attributable to $1,537 of cash absorbed by changes in working capital and $293 absorbed by the net loss for the period, after the effect of $831 of non-cash items. Most of the cash absorbed by changes in working capital was driven by customer contract activity as progress payments did not keep pace with cost and earnings reported during the period.
In the first six months of 2011, the $2,003 of cash provided by operating activities was attributable to $2,967 of cash provided by changes in working capital which offset cash absorbed of $964 from the net loss after the effect of $723 of non-cash items. The largest contributing factors to the changes in working capital were a decrease in accounts receivable, an increase in customer deposits and a decrease in accrued liabilities. The decrease in accounts receivable reflected the collection of a significant outstanding accounts receivable recorded as of December 31, 2010 for an E&S Laser Projector (“ESLP”) system delivered in 2010. The increase in customer deposits reflects customer contract activity in the form of advance progress payments. The decrease in accrued liabilities was primarily due to the payment of agent commissions.
The contrasting cash effect from the changes in working capital between the two periods presented is significant but is within the range of fluctuations that are expected from the varying progress payment terms experienced with our customer contracts.
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There was nominal effect on cash flows from investing activities for the first six months of 2012 and 2011. Purchases of property, plant and equipment absorbed $64 and $127 of cash and the proceeds from the sale of marketable securities provided $275 and $320 of cash in first six months of 2012 and 2011, respectively.
In the first six months of 2012, financing activities used $76 of cash consisting of principal payments on mortgage notes. In the first six months of 2011, financing activities used $574 of cash consisting of repayment of a $500 balance on a line-of-credit agreement and $74 of principal payments on mortgage notes.
Credit Facilities
The Company is a party to a credit agreement with a commercial bank which permits borrowings of up to $1,100 to fund working capital requirements. Interest is charged on amounts borrowed at the lender’s prime rate. As of June 29, 2012, there were no borrowings outstanding under the credit agreement.
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 bank 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. As of June 29, 2012, we had outstanding letters of credit totaling $1,221. The cash collateral for these letters of credit was classified as $779 of restricted cash and $442 of restricted cash included in other assets.
Mortgage Notes
As of June 29, 2012, our wholly owned Spitz subsidiary had obligations totaling $2,787 under its two mortgage notes payable.
Sale-Leaseback Financing
As of June 29, 2012, the principal balance on the debt obligation recorded from the sale-leaseback financing transaction was $2,519. The cash payment required to repurchase the property on June 29, 2012 was $2,454 consisting of the $2,579 repurchase price under the agreement less a credit for the $125 security deposit. Accordingly, if we had exercised our option to repurchase the property on June 29, 2012, we would have recorded a discount of approximately 3% in the amount of $65 under the $2,519 balance of the debt.
Trademarks Used In This Form 10-Q
ESLP is a registered trademark of Evans & Sutherland Computer Corporation. All other products, services, or trade names or marks are the properties of their respective owners.
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Item 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures.
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)) as of the end of the period covered by this report. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures as of the end of the period covered by this report were effective at the reasonable assurance level such that the information required to be disclosed by us in reports filed under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission and (ii) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls system cannot provide absolute assurance that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company are detected.
Changes in Internal Control over Financial Reporting
During the six-month period ended June 29, 2012, the Company began processing the financial transactions for its parent company on a newly implemented accounting software system. This change was made to reduce costs by transitioning to a system which is better designed for the size and nature of the Company’s business operations. The Company has made changes to its internal control over financial reporting in connection with this transition to the new accounting software system. There has been no other change in our internal control over financial reporting identified in connection with the evaluation of disclosure controls and procedures discussed above that occurred during the six-month period ended June 29, 2012, or subsequent to that date, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. Our process for evaluating controls and procedures is continuous and encompasses constant improvement of the design and effectiveness of established controls and procedures and the remediation of any deficiencies which may be identified during this process.
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PART II - OTHER INFORMATION
Item 1. | LEGAL PROCEEDINGS |
In the normal course of business, we become involved in various legal proceedings. Although the final outcome of such proceedings cannot be predicted, we believe the ultimate disposition of any such proceedings will not have a material adverse effect on our consolidated financial position, liquidity, or results of operations.
Item 6. | EXHIBITS |
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 herewith. |
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 herewith. |
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 herewith |
101 | The following materials from this Quarterly Report on Form 10-Q for the periods ended June 29, 2012, formatted in XBRL (Extensible Business Reporting Language) and furnished electronically herewith: (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Comprehensive Loss, (iii) the Condensed Consolidated Statements of Cash Flows, and (iv) Notes to Condensed Consolidated Financial Statements, tagged as blocks of text. This exhibit will not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 (15 U.S.C. 78r), or otherwise subject to the liability of that section. Such exhibit will not be deemed to be incorporated by reference into any filing under the Securities Act or Securities Exchange Act, except to the extent that the Company specifically incorporates it by reference. |
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SIGNATURE
Pursuant to the requirements 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 | ||
Date: August 3, 2012 | By: | /s/ Paul Dailey |
Paul Dailey, Chief Financial Officer | ||
and Corporate Secretary | ||
(Authorized Officer) | ||
(Principal Financial Officer) |
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