Attached files
| file | filename |
|---|---|
| EX-31.1 - EXHIBIT 31.1 - EVANS & SUTHERLAND COMPUTER CORP | ex311.htm |
| EX-32.1 - EXHIBIT 32.1 - EVANS & SUTHERLAND COMPUTER CORP | ex321.htm |
| EX-31.2 - EXHIBIT 31.2 - EVANS & SUTHERLAND COMPUTER CORP | ex312.htm |
| EXCEL - IDEA: XBRL DOCUMENT - EVANS & SUTHERLAND COMPUTER CORP | Financial_Report.xls |
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 March 29, 2013
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)
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Utah
(State or Other Jurisdiction of
Incorporation or Organization)
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87-0278175
(I.R.S. Employer
Identification No.)
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770 Komas Drive, Salt Lake City, Utah
(Address of Principal Executive Offices)
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84108
(Zip Code)
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Registrant's Telephone Number, Including Area Code: (801) 588-1000
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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 $0.20 per share) outstanding on May 3, 2013 was 11,089,199.
Evans & Sutherland Computer Corporation
Quarter Ended March 29, 2013
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Page No.
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PART I – FINANCIAL INFORMATION
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PART II – OTHER INFORMATION
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| SIGNATURE | ||
Item 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited) (In thousands, except share and per share data)
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March 29,
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December 31,
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|||||||
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2013
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2012
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|||||||
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ASSETS
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Current assets:
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Cash and cash equivalents
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$ | 1,856 | $ | 2,111 | ||||
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Restricted cash
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798 | 705 | ||||||
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Marketable securities
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599 | 712 | ||||||
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Accounts receivable, less allowances for doubtful receivables of $350
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and $324, respectively
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4,566 | 3,972 | ||||||
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Costs and estimated earnings in excess of billings on uncompleted contracts
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1,612 | 2,474 | ||||||
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Inventories, net
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3,438 | 3,125 | ||||||
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Prepaid expenses and deposits
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479 | 453 | ||||||
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Total current assets
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13,348 | 13,552 | ||||||
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Property, plant and equipment, net
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7,584 | 7,735 | ||||||
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Goodwill
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635 | 635 | ||||||
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Definite-lived intangible assets, net
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155 | 168 | ||||||
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Other assets
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1,999 | 2,160 | ||||||
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Total assets
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$ | 23,721 | $ | 24,250 | ||||
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LIABILITIES AND STOCKHOLDERS’ DEFICIT
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Current liabilities:
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Accounts payable
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$ | 1,314 | $ | 1,197 | ||||
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Accrued liabilities
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1,233 | 1,274 | ||||||
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Billings in excess of costs and estimated earnings on uncompleted contracts
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3,619 | 2,531 | ||||||
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Customer deposits
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2,785 | 3,180 | ||||||
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Current portion of retirement obligations
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488 | 517 | ||||||
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Current portion of long-term debt
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169 | 167 | ||||||
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Total current liabilities
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9,608 | 8,866 | ||||||
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Pension and retirement obligations, net of current portion
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33,242 | 33,369 | ||||||
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Long-term debt, net of current portion
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5,153 | 5,148 | ||||||
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Deferred rent obligation
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1,520 | 1,511 | ||||||
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Total liabilities
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49,523 | 48,894 | ||||||
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Commitments and contingencies
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Stockholders' deficit:
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Preferred stock, no par value: 10,000,000 shares authorized;
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no shares outstanding
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- | - | ||||||
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Common stock, $0.20 par value: 30,000,000 shares authorized;
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11,441,666 shares issued
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2,288 | 2,288 | ||||||
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Additional paid-in capital
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54,476 | 54,466 | ||||||
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Common stock in treasury, at cost: 352,467 shares
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(4,709 | ) | (4,709 | ) | ||||
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Accumulated deficit
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(50,382 | ) | (49,025 | ) | ||||
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Accumulated other comprehensive loss
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(27,475 | ) | (27,664 | ) | ||||
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Total stockholders' deficit
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(25,802 | ) | (24,644 | ) | ||||
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Total liabilities and stockholders' deficit
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$ | 23,721 | $ | 24,250 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited) (In thousands, except per share data)
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Three Months Ended
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March 29,
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March 30,
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2013
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2012
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Sales
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$ | 4,707 | $ | 7,817 | ||||
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Cost of sales
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3,397 | 4,548 | ||||||
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Gross profit
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1,310 | 3,269 | ||||||
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Operating expenses:
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Selling, general and administrative (excluding pension)
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1,565 | 1,472 | ||||||
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Research and development
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670 | 604 | ||||||
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Pension
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208 | 555 | ||||||
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Total operating expenses
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2,443 | 2,631 | ||||||
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Operating income (loss)
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(1,133 | ) | 638 | |||||
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Other expense, net
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(214 | ) | (217 | ) | ||||
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Income (loss) before income tax provision
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(1,347 | ) | 421 | |||||
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Income tax provision
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(10 | ) | (61 | ) | ||||
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Net income (loss)
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$ | (1,357 | ) | $ | 360 | |||
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Net income (loss) per common share – basic and diluted
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$ | (0.12 | ) | $ | 0.03 | |||
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Weighted average common shares outstanding – basic
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11,089 | 11,089 | ||||||
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Weighted average common shares outstanding – diluted
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11,089 | 11,125 | ||||||
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Comprehensive Income (Loss)
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Net income (loss)
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$ | (1,357 | ) | $ | 360 | |||
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Other comprehensive income:
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Amortization of deferred pension expense
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182 | - | ||||||
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Unrealized gains on marketable securities
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7 | 168 | ||||||
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Comprehensive income (loss)
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$ | (1,168 | ) | $ | 528 | |||
The accompanying notes are an integral part of these condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) (In thousands)
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Three Months Ended
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March 29,
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March 30,
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2013
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2012
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Cash flows from operating activities:
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Net income (loss)
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$ | (1,357 | ) | $ | 360 | |||
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Adjustments to reconcile net income (loss) to net cash used in
operating activities:
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Depreciation and amortization
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172 | 210 | ||||||
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Other
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344 | 224 | ||||||
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Change in assets and liabilities:
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Decrease (increase) in restricted cash
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(93 | ) | 246 | |||||
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Decrease (increase) in accounts receivable, net
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(622 | ) | 34 | |||||
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Decrease (increase) in inventories
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(404 | ) | 265 | |||||
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Decrease (increase) in costs and estimated earnings in excess of billings
on uncompleted contracts
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1,950 | (2,155 | ) | |||||
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Decrease (increase) in prepaid expenses and deposits
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135 | (409 | ) | |||||
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Increase (decrease) in accounts payable
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117 | (535 | ) | |||||
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Decrease in accrued liabilities
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(32 | ) | (3 | ) | ||||
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Increase (decrease) in pension and retirement obligations
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(156 | ) | 106 | |||||
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Decrease in customer deposits
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(395 | ) | (338 | ) | ||||
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Net cash used in operating activities
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(341 | ) | (1,995 | ) | ||||
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Cash flows from investing activities:
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Purchases of property, plant and equipment
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(8 | ) | (40 | ) | ||||
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Proceeds from sale of marketable securities
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135 | 139 | ||||||
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Net cash provided by investing activities
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127 | 99 | ||||||
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Cash flows from financing activities:
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Principal payments on long-term debt
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(41 | ) | (38 | ) | ||||
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Net cash used in financing activities
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(41 | ) | (38 | ) | ||||
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Net decrease in cash and cash equivalents
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(255 | ) | (1,934 | ) | ||||
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Cash and cash equivalents as of beginning of the period
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2,111 | 3,932 | ||||||
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Cash and cash equivalents as of end of the period
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$ | 1,856 | $ | 1,998 | ||||
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Non-cash investing and financing activities:
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Unrealized gain on marketable securities
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$ | 7 | $ | 168 | ||||
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Supplemental Disclosures of Cash Flow Information
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Cash paid for interest
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$ | 132 | $ | 161 | ||||
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Cash paid for income taxes
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24 | 17 | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
Notes to Condensed Consolidated Financial Statements
(Unaudited)
All dollar amounts (except share and per share amounts) in thousands.
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1.
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GENERAL
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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 flows, 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, 2012.
The accompanying unaudited condensed consolidated balance sheets, statements of comprehensive income (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 period ended March 29, 2013 are not necessarily indicative of the results to be expected for the full year ending December 31, 2013. 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 revenues 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 a three to six-month time period.
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 revenues and cost of sales are recognized in equal, offsetting amounts as contract costs are incurred.
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 value 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 income (loss) per common share is computed based on the weighted-average number of common shares outstanding during the period. Diluted net income (loss) per common share is computed based on the weighted-average number of common shares and dilutive common stock equivalents outstanding during the period. Stock options are considered to be common stock equivalents. When the Company incurs a loss, potentially dilutive common stock equivalents are excluded as their effect would be anti-dilutive, thereby decreasing the net loss per common share. Potentially dilutive securities from stock options are discussed in Note 3.
Inventories, net
Inventories consisted of the following:
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March 29,
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December 31,
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2013
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2012
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Raw materials
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$ | 5,215 | $ | 5,255 | ||||
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Work in process
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475 | 287 | ||||||
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Finished goods
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509 | 253 | ||||||
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Reserve for obsolete inventory
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(2,761 | ) | (2,670 | ) | ||||
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Inventories, net
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$ | 3,438 | $ | 3,125 | ||||
Liquidity
Recurring losses continue to produce negative cash flows from operating activities. As of March 29, 2013 the total stockholders’ deficit was $25,802 as compared to $24,644 as of December 31, 2012. The Company believes existing sources of liquidity and expected results of operations will be adequate to fund its obligations, including cash payments due to the Pension Plan trust, in amounts sufficient to satisfy regulatory funding standards through 2013 and the first six months of 2014. The Company also believes, based on Pension Plan funding estimates, that it will not be able to meet the total Plan funding amounts expected to become due to satisfy regulatory funding standards as scheduled in 2014 and beyond. In order to preserve the liquid resources required to maintain adequate working capital levels for the business through 2014, the Company has not made the cash contributions to the Pension Plan trust in sufficient amounts to satisfy regulatory funding standards. In January 2013, the Company initiated an application process for the distress termination of the Pension Plan in accordance with provisions of the Employee Retirement Income Security Act of 1974 (“ERISA”). If the distress termination is approved, the ERISA Title IV insurance fund, which is administered by the Pension Benefit Guaranty Corporation (“PBGC”) would take possession of the assets in the Pension Plan trust and pay future Pension Plan benefits (see Note 4). Through this process, the Company will seek to negotiate, with the PBGC, a settlement of its Pension Plan liabilities on terms that are feasible for the Company to continue in business as a going concern through 2014 and beyond, which is consistent with the purposes of the provisions of ERISA. There can be no assurance that the Company will be successful in these efforts. The condensed consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
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2.
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FAIR VALUE MEASUREMENTS
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Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly
7
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
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.
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:
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March 29, 2013
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Total
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Level 1
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Level 2
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Level 3
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Mutual funds – equity securities
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$ | 95 | $ | 95 | $ | - | $ | - | ||||||||
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Mutual funds – debt securities
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451 | 451 | - | - | ||||||||||||
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Money market mutual funds
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53 | 53 | - | - | ||||||||||||
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Total
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$ | 599 | $ | 599 | $ | - | $ | - | ||||||||
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December 31, 2012
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Total
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Level 1
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Level 2
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Level 3
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Mutual funds – equity securities
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$ | 367 | $ | 367 | $ | - | $ | - | ||||||||
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Mutual funds – debt securities
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298 | 298 | - | - | ||||||||||||
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Money market mutual funds
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47 | 47 | - | - | ||||||||||||
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Total
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$ | 712 | $ | 712 | $ | - | $ | - | ||||||||
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3.
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STOCK OPTION PLAN
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As of March 29, 2013, options to purchase 1,533,813 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 three months ended March 29, 2013 follows (shares in thousands):
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Weighted-
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Average
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Number
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Exercise
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of Shares
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Price
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Outstanding as of beginning of the period
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1,169 | $ | 3.19 | |||||
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Granted
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150 | 0.03 | ||||||
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Exercised
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- | - | ||||||
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Forfeited or expired
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(79 | ) | 5.77 | |||||
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Outstanding as of end of the period
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1,240 | 2.64 | ||||||
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Exercisable as of the end of the period
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979 | $ | 3.29 | |||||
As of March 29, 2013, options exercisable and options outstanding had a weighted average remaining contractual term of 4.3 and 5.3 years, respectively, and aggregate intrinsic value of $0 and $11, respectively.
8
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
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 three months of 2013, were based on estimates as of the date of grant as follows:
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Risk-free interest rate
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0.39%
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Dividend yield
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0.00%
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Volatility
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377%
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Expected life (in years)
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3.50
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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.
As of March 29, 2013, there was approximately $17 of total unrecognized share-based compensation cost related to grants under the plan that will be recognized over a weighted-average period of 2.6 years.
Share-based compensation expense included in selling, general and administrative (excluding pension) expense in the statements of comprehensive income (loss) for each of the three month periods ended March 29, 2013 and March 30, 2012 was approximately $10.
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4.
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EMPLOYEE RETIREMENT BENEFIT PLANS
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Distress Termination of Pension Plan
On January 7, 2013, the Company submitted a PBGC Form 600 Distress Termination, Notice of Intent to Terminate, to the PBGC. The notice filing initiates an application process by the Company with the PBGC for the distress termination of the Pension Plan. The Pension Plan is a defined benefit pension plan sponsored by the Company whose benefits are guaranteed by the ERISA Title IV insurance fund, which is administered by the PBGC. In the application process, the Company intends to demonstrate to the PBGC that it qualifies for a distress termination of the Pension Plan under either of two of the criteria of Section 4041(c)(2) of ERISA (inability to continue in business absent termination and unreasonably increased pension costs) and applicable PBGC regulations. To satisfy the criteria, the Company and its wholly owned subsidiary each must demonstrate to the satisfaction of the PBGC that, unless the termination occurs, the Company will be unable to pay its debts when they come due and will be unable to continue in business, or that the costs of the Pension Plan have become unreasonably burdensome solely as a result of a decline in the workforce covered by the Plan. A distress termination under Section 4041(c)(2) of ERISA would transfer the Pension Plan’s benefit obligations to the PBGC, up to ERISA guaranteed limits, without requiring reorganization under bankruptcy law. The Pension Plan’s actuary has informed the Company that following termination of the Plan and subject to the PBGC’s review of participant benefits, all of the benefits earned by participants as of the date of plan termination are expected to fall within ERISA guaranteed limits.
The unfunded obligation of the Pension Plan, as reported on the Company’s financial statements was $28,252 as of March 29, 2013. The Company believes business operations could produce adequate funds to meet the contributions to the Pension Plan trust in sufficient amounts to satisfy regulatory funding standards through the first six months of 2014 but has stopped making such contributions beginning in October 2012 in order to maintain adequate working capital levels for business operations through 2014. The Company also believes it will not be able to continue to meet the estimated contributions to the Pension Plan trust required to satisfy regulatory funding standards through the end of 2014, as well as the total contributions that will be required beyond 2014 to satisfy the total Pension Plan obligation.
If the distress termination application is approved by the PBGC, the PBGC will take possession of the assets in the Pension Plan trust and pay future Pension Plan benefits beginning upon trusteeship of the Pension Plan, up to ERISA guaranteed limits. In this event, the Company’s unfunded obligation of the Pension Plan would be replaced by a new Pension Plan termination liability to the PBGC, determined by the Pension Plan’s underfunding on a
9
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
termination basis pursuant to ERISA, PBGC regulations, and other applicable legal authority, along with an ERISA special termination premium. The Company would also be liable for any unpaid contributions to the Pension Plan (which in substance is a subset of plan termination liability) and annual insurance premiums for the Pension Plan, along with any interest and penalties. While the full Pension Plan termination and other pension related liabilities to the PBGC would likely be greater than the unfunded obligation of the Pension Plan as currently reported in the Company’s financial statements, the Company will seek to negotiate a settlement of such liabilities on terms that are feasible for the Company to continue in business as a going concern, which is consistent with the purposes of the statute.
The Company’s goal in seeking a distress termination of the Pension Plan is to ensure that the pension benefits of all Pension Plan participants are paid up to federally guaranteed limits and that the Company continues to operate as a going concern while avoiding the costly damage and disruption to the business which would result from bankruptcy reorganization. The Company has proposed a termination date of March 8, 2013 and intends to pursue a conclusion of the process and settlement with the PBGC of any resulting liabilities as quickly as feasible. The proposed termination date that was selected was the earliest possible date that was legally available as determined by the date of notification provided to participants and beneficiaries and the PBGC that an application was being filed with the PBGC to terminate the Plan. The proposed date of plan termination, if adopted by the PBGC, would be the effective date upon which the Plan ended. The Company is unable to determine the timing or the ultimate outcome as of the date of this filing.
Employer Contributions
Through September 15, 2012, the Company’s funding policy was to contribute to the Pension Plan trust amounts sufficient to satisfy regulatory funding standards, based upon independent actuarial valuations. Beginning in October 2012, the Company discontinued this policy in order to preserve the necessary liquidity to operate the business beyond the first six months of 2014. The Company did not make two contributions of $345, which were due on October 15, 2012 and January 15, 2013, respectively, to satisfy regulatory funding standards.
Independent actuarial valuations have determined that additional contributions totaling $1,387 will become due from April 15, 2013 through October 15, 2013 for a total of $2,077 due through the end of 2013 in order to satisfy regulatory funding standards. Future payments of contributions to satisfy regulatory funding standards will be determined through the application process to the PBGC for the distress termination of the Pension Plan. By not making the contributions to satisfy regulatory funding standards the Company could face a lien on its assets by the PBGC when the aggregate unpaid contributions with interest reaches $1,000, which could have occurred as early as April 2013. The Company made a contribution of $103 in partial payment of the amount due to satisfy regulatory funding standards in April 2013 to avoid a lien on its assets. The Company intends to make future contributions in sufficient amounts to avoid a lien on its assets if it determines that such a lien would prevent the Company from continuing to operate. The Company will continue to evaluate the consequences of a lien on its assets in conjunction with the application process to the PBGC for the distress termination.
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 $488 in the next 12 months.
10
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Components of Net Periodic Benefit Expense
|
Pension Plan
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Supplemental Executive Retirement Plan
|
|||||||||||||||
|
For the three months ended:
|
March 29, 2013
|
March 30, 2012
|
March 29, 2013
|
March 30, 2012
|
||||||||||||
|
Service cost
|
$ | - | $ | - | $ | - | $ | - | ||||||||
|
Interest cost
|
398 | 468 | 41 | 52 | ||||||||||||
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Expected return on assets
|
(460 | ) | (454 | ) | - | - | ||||||||||
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Amortization of actuarial loss
|
177 | 170 | 17 | 14 | ||||||||||||
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Amortization of prior year service cost
|
- | - | (12 | ) | (12 | ) | ||||||||||
|
Settlement charge
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- | 317 | - | - | ||||||||||||
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Net periodic benefit expense
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$ | 115 | $ | 501 | $ | 46 | $ | 54 | ||||||||
Pension expense for the period ended March 29, 2013 included net periodic benefit expense of $115 for the pension, $46 for the SERP and an additional $47 of insurance premium due to the PBGC. We reclassified $182 of actuarial loss from accumulated other comprehensive loss that was included in net periodic pension expense for the three months ended March 29, 2013 and was included in pension expense on the statement of comprehensive income (loss) for the same period.
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
Sales for the first three months of 2013 were lower than the comparable period of 2012 as a result of low 2012 sales bookings and the timing of customer deliveries. New customer bookings improved in the first three months of 2013 and as a result, the sales backlog increased to $17,675 as of March 29, 2013 compared to $15,511 as of December 31, 2012. Sales prospects remain strong and we believe that bookings will continue to improve for the remainder of 2013. The forecasted bookings and customer deliveries indicate that sales levels for the remainder of the year will improve with expectation that total 2013 sales will be comparable to 2012. The low sales volume for the first three months of 2013 contributed to a low gross profit percentage. We expect the gross profit percentage for the remainder of 2013 to also improve and be comparable to 2012 on an annual basis. The sales volume and lower gross profit for the first three months of 2013 illustrate the short-term fluctuations that can occur in our business. We do not believe they are an indication of any longer term trend. Conversely, current sales prospects appear especially strong supporting our belief that sales and gross profits for the remainder of 2013 will recover to yield annual results comparable to 2012. For the longer term, we believe the existing markets we serve will continue to yield annual sales at comparable levels, but have found it challenging to find opportunities for significant sales growth due to our current resource limitations and the worldwide economic environment.
Total operating expenses in the first three months of 2013 decreased compared to the same period in 2012 due to a decrease in pension expense. Otherwise operating expenses were comparable with a slight increase in selling, general and administrative expense (excluding pension) due to legal costs incurred. The pension expense for 2013 was lower due to 2012 settlement charges which occur from the accounting for lump-sum distributions. We continue to evaluate ways to further reduce our overhead structure and operating expenses.
The contrasting sales reported in the first three months of 2013 and 2012 resulted in a net loss of $1,357 for the first quarter of 2013 compared to net income of $360 for the corresponding quarter of 2012. With our expectations for improved sales levels for the remainder of 2013, we expect improved results that may continue to fluctuate from quarter to quarter. We do not expect annual net income for 2013, but results for the remainder of the year could be close to break even or profitable within a quarter, depending on the timing of revenue recognition. For the longer term we continue to expect variable but reasonably consistent future sales and gross profits from our current product line at annual levels sufficient to cover or exceed operating expenses, excluding the pension expense.
As a result of the net loss, in the first three months of 2013, our stockholders’ deficit increased to $25,802 as of March 29, 2013 compared to $24,644 as of December 31, 2012. We continue to believe we can manage this deficit for the short term; however for the long term, we believe we can overcome the deficit only with a reasonable settlement of our pension liabilities. The Company continues to pursue a reasonable settlement of its pension liabilities through the distress termination application process. However, the Company is unable to determine the timing or the ultimate outcome as of the date of this filing.
Critical Accounting Policies
Certain accounting policies are considered by management to be critical to an understanding of our condensed consolidated financial statements. Their application requires significant management judgment, with financial reporting results relying on estimates about the effect of matters that are inherently uncertain. A summary of critical accounting policies can be found in our Form 10-K for the year ended December 31, 2012. For all of these policies, management cautions that future results rarely develop exactly as forecasted, and the best estimates routinely require modification.
Results of Operations
Sales and Backlog
The following table summarizes our sales:
|
For the Three Months Ended
|
||||||||
|
March 29, 2013
|
March 30, 2012
|
|||||||
|
Sales
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$ | 4,707 | $ | 7,817 | ||||
Sales reported for the first three months of 2013 were 40% lower than the same period in 2012. This decrease reflected the effects of a slowdown in new customer orders that occurred during 2012 and the timing of customer deliveries. We expect sales for the remainder of 2013 to improve based on customer delivery schedules and strong new customer orders in the first quarter of 2013 along with strong sales prospects. As of March 29, 2013, our revenue backlog increased to $17,675 from $15,511 as of December 31, 2012, reflecting the improvement in new customer orders.
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Gross Profit
|
The following table summarizes our gross profit and the gross profit as a percentage of total sales:
|
For the Three Months Ended
|
||||||||
|
March 29, 2013
|
March 30, 2012
|
|||||||
|
Gross profit
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$ | 1,310 | $ | 3,269 | ||||
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Gross profit percentage
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28 | % | 42 | % | ||||
Our gross profit for the first three months of 2013 was lower than the same period in 2012 primarily due to fixed overhead costs becoming a higher percentage of the lower sales volume. Also customer projects that contributed to sales in the first three months of 2013 yielded average to low gross margins without any significant improvements that often occur on some projects from period to period.
Operating Expenses
The following table summarizes our operating expenses:
|
For the Three Months Ended
|
||||||||
|
March 29, 2013
|
March 30, 2012
|
|||||||
|
Selling, general and administrative (excluding
pension)
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$ | 1,565 | $ | 1,472 | ||||
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Research and development
|
670 | 604 | ||||||
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Pension
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208 | 555 | ||||||
|
Total operating expenses
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$ | 2,443 | $ | 2,631 | ||||
Operating expenses for the three months ended March 29, 2013 were lower overall than the same period in 2012. Selling, general and administrative expense (excluding pension) was slightly higher in 2013 than 2012 due to higher legal fees. Research and development expense was comparable to the prior year. Pension expense for 2013 was lower than 2012 due to settlement charges that were accrued in 2012 resulting from estimates for lump-sum distributions and other actuarial estimates.
Other Expense, net
The following table summarizes our other expense:
|
For the Three Months Ended
|
||||||||
|
March 29, 2013
|
March 30, 2012
|
|||||||
|
Other expense, net
|
$ | 214 | $ | 217 | ||||
For the first three months of 2013, other expense, net, was comparable to results of the same period in 2012.
Liquidity and Capital Resources
Cash Flows
In the first three months of 2013, the $341 of cash used in operating activities was primarily attributable to $841 used in the net loss for the period, after the effect of $516 of non-cash items, offset by $500 of cash provided by changes in working capital.
In the first three months of 2012, the $1,995 of cash used in operating activities was attributable to $2,789 of cash used in changes in working capital offset by $794 from the net income for the period, after the effect of $434 of non-cash items.
Most of the cash provided by and used in changes in working capital was driven by customer contract activity as progress payments often do not correlate with the cost and earnings reported during the period. 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 is expected from the varying progress payment terms experienced with our customer contracts.
Cash provided by investing activities was $127 in the first three months of 2013 compared to $99 provided for the same period of 2012, representing cash provided by the sale of marketable securities, offset by purchases of property, plant and equipment of $8 and $40 in 2013 and 2012, respectively.
In the first three months of 2013, financing activities used $41 of cash compared to $38 in 2012, for 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 March 29, 2013, 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 March 29, 2013, we had outstanding letters of credit totaling $1,240. The cash collateral for these letters of credit was classified as $798 of restricted cash and $442 of restricted cash included in other assets.
Mortgage Notes
As of March 29, 2013, our wholly owned Spitz subsidiary had obligations totaling $2,665 under its two mortgage notes payable.
Sale-Leaseback Financing
As of March 29, 2013, the principal balance on the debt obligation recorded from the sale-leaseback financing transaction was $2,657. The cash payment required to repurchase the property on March 29, 2013 was $2,727 consisting of $2,852 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 March 29, 2013, we would have recorded a premium of approximately 3% in the amount of $70 over the $2,657 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.
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
There has been no 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 three-month period ended March 29, 2013, 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.
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 with certainty, 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.
|
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 March 29, 2013, formatted in XBRL (Extensible Business Reporting Language) and furnished electronically herewith: (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Comprehensive Income (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.
|
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: May 10, 2013
|
By:
|
/s/ Paul Dailey | |
|
Paul Dailey, Chief Financial Officer
|
|||
|
and Corporate Secretary
|
|||
|
(Authorized Officer)
|
|||
| (Principal Financial and Accounting Officer) | |||
17