Attached files
| file | filename |
|---|---|
| EXCEL - IDEA: XBRL DOCUMENT - EVANS & SUTHERLAND COMPUTER CORP | Financial_Report.xls |
| EX-32.1 - EXHIBIT 32.1 - EVANS & SUTHERLAND COMPUTER CORP | exhibit32_1.htm |
| EX-31.1 - EXHIBIT 31.1 - EVANS & SUTHERLAND COMPUTER CORP | exhibit31_1.htm |
| EX-31.2 - EXHIBIT 31.2 - EVANS & SUTHERLAND COMPUTER CORP | exhibit31_2.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 March 28, 2014
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.
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Large accelerated filer [ ]
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Accelerated filer [ ]
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Non-accelerated filer [ ] (Do not check if a smaller reporting company)
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Smaller reporting company [X]
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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 $0.20 per share) outstanding on May 8, 2014 was 11,089,199.
FORM 10-Q
Evans & Sutherland Computer Corporation
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited) (In thousands, except share and per share data)
|
March 28,
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December 31,
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|||||||
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2014
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2013
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|||||||
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ASSETS
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||||||||
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Current assets:
|
||||||||
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Cash and cash equivalents
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$ | 4,818 | $ | 3,376 | ||||
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Restricted cash
|
1,001 | 1,020 | ||||||
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Marketable securities
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119 | 229 | ||||||
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Accounts receivable, less allowances for doubtful receivables of $305
and $277, respectively |
5,147 | 5,552 | ||||||
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Costs and estimated earnings in excess of billings on uncompleted contracts
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1,560 | 2,391 | ||||||
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Inventories, net
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2,971 | 3,025 | ||||||
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Prepaid expenses and deposits
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588 | 568 | ||||||
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Total current assets
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16,204 | 16,161 | ||||||
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Property, plant and equipment, net
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7,349 | 7,405 | ||||||
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Goodwill
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635 | 635 | ||||||
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Definite-lived intangible assets, net
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104 | 115 | ||||||
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Other assets
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1,307 | 1,386 | ||||||
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Total assets
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$ | 25,599 | $ | 25,702 | ||||
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LIABILITIES AND STOCKHOLDERS’ DEFICIT
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||||||||
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Current liabilities:
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||||||||
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Accounts payable
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$ | 778 | $ | 1,433 | ||||
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Accrued liabilities
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1,169 | 1,183 | ||||||
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Billings in excess of costs and estimated earnings on uncompleted contracts
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4,513 | 3,358 | ||||||
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Customer deposits
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2,006 | 2,157 | ||||||
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Current portion of retirement obligations
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519 | 531 | ||||||
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Current portion of long-term debt
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3,057 | 2,995 | ||||||
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Total current liabilities
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12,042 | 11,657 | ||||||
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Pension and retirement obligations, net of current portion
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23,565 | 23,567 | ||||||
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Long-term debt, net of current portion
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2,316 | 2,362 | ||||||
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Deferred rent obligation
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1,518 | 1,514 | ||||||
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Total liabilities
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39,441 | 39,100 | ||||||
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Commitments and contingencies
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||||||||
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Stockholders' deficit:
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||||||||
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Preferred stock, no par value: 10,000,000 shares authorized;
no shares outstanding
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- | - | ||||||
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Common stock, $0.20 par value: 30,000,000 shares authorized; 11,441,666 shares issued
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2,288 | 2,288 | ||||||
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Additional paid-in capital
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54,489 | 54,484 | ||||||
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Common stock in treasury, at cost: 352,467 shares
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(4,709 | ) | (4,709 | ) | ||||
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Accumulated deficit
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(48,403 | ) | (47,852 | ) | ||||
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Accumulated other comprehensive loss
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(17,507 | ) | (17,609 | ) | ||||
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Total stockholders' deficit
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(13,842 | ) | (13,398 | ) | ||||
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Total liabilities and stockholders' deficit
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$ | 25,599 | $ | 25,702 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
(Unaudited) (In thousands, except per share data)
|
Three Months Ended
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||||||||
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March 28,
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March 29,
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|||||||
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2014
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2013
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|||||||
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Sales
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$ | 6,672 | $ | 4,707 | ||||
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Cost of sales
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4,528 | 3,397 | ||||||
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Gross profit
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2,144 | 1,310 | ||||||
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Operating expenses:
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||||||||
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Selling, general and administrative
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1,748 | 1,565 | ||||||
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Research and development
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560 | 670 | ||||||
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Pension
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209 | 208 | ||||||
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Total operating expenses
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2,517 | 2,443 | ||||||
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Operating loss
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(373 | ) | (1,133 | ) | ||||
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Other expense, net
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(169 | ) | (214 | ) | ||||
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Loss before income tax provision
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(542 | ) | (1,347 | ) | ||||
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Income tax provision
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(9 | ) | (10 | ) | ||||
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Net loss
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$ | (551 | ) | $ | (1,357 | ) | ||
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Net loss per common share – basic and diluted
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$ | (0.05 | ) | $ | (0.12 | ) | ||
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Weighted average common shares outstanding – basic and diluted
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11,089 | 11,089 | ||||||
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Comprehensive loss:
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||||||||
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Net loss
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$ | (551 | ) | $ | (1,357 | ) | ||
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Other comprehensive income (loss), net of tax:
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||||||||
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Reclassification of realized gains from sale of marketable securities to net loss
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- | (15 | ) | |||||
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Unrealized gain on marketable securities
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- | 22 | ||||||
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Reclassification of pension expense to net loss
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102 | 182 | ||||||
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Other comprehensive income, net of tax
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102 | 189 | ||||||
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Total comprehensive loss
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$ | (449 | ) | $ | (1,168 | ) | ||
The accompanying notes are an integral part of these condensed consolidated financial statements.
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
(Unaudited) (In thousands)
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Three Months Ended
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||||||||
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March 28,
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March 29,
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|||||||
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2014
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2013
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|||||||
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Cash flows from operating activities:
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||||||||
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Net loss
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$ | (551 | ) | $ | (1,357 | ) | ||
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Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
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||||||||
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Depreciation and amortization
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128 | 172 | ||||||
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Provision for excess and obsolete inventory
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40 | 91 | ||||||
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Amortization of deferred pension expense
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102 | 182 | ||||||
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Other
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101 | 71 | ||||||
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Change in assets and liabilities:
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||||||||
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Decrease (increase) in restricted cash
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19 | (93 | ) | |||||
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Decrease (increase) in accounts receivable, net
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368 | (622 | ) | |||||
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Decrease (increase) in inventories
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14 | (404 | ) | |||||
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Decrease in costs and estimated earnings in excess of billings
on uncompleted contracts
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1,986 | 1,950 | ||||||
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Decrease in prepaid expenses and deposits
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59 | 135 | ||||||
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Increase (decrease) in accounts payable
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(655 | ) | 117 | |||||
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Decrease in accrued liabilities
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(10 | ) | (32 | ) | ||||
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Decrease in pension and retirement obligations
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(14 | ) | (156 | ) | ||||
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Decrease in customer deposits
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(151 | ) | (395 | ) | ||||
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Net cash provided by (used in) operating activities
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1,436 | (341 | ) | |||||
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Cash flows from investing activities:
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||||||||
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Purchases of property, plant and equipment
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(61 | ) | (8 | ) | ||||
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Proceeds from sale of marketable securities
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110 | 135 | ||||||
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Net cash provided by investing activities
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49 | 127 | ||||||
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Cash flows from financing activities:
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||||||||
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Principal payments on long-term debt
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(43 | ) | (41 | ) | ||||
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Net cash used in financing activities
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(43 | ) | (41 | ) | ||||
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Net increase (decrease) in cash and cash equivalents
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1,442 | (255 | ) | |||||
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Cash and cash equivalents as of beginning of the period
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3,376 | 2,111 | ||||||
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Cash and cash equivalents as of end of the period
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$ | 4,818 | $ | 1,856 | ||||
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Non-cash investing and financing activities:
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||||||||
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Reclassification of realized gains from sale of marketable securities to net loss
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$ | - | $ | (15 | ) | |||
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Unrealized gain on marketable securities
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- | 22 | ||||||
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Supplemental Disclosures of Cash Flow Information:
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||||||||
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Cash paid for interest
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$ | 130 | $ | 132 | ||||
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Cash paid for income taxes
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39 | 24 | ||||||
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 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, 2013.
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 three months ended March 28, 2014 are not necessarily indicative of the results to be expected for the full year ending December 31, 2014. The Company operates on a calendar year with the first three fiscal quarters ending on the last Friday of the calendar quarter.
Revenue Recognition
Sales include revenues from system hardware and the related 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) for each contract to its total anticipated costs for that contract. 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 for each contract. 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.
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.
Inventories, net
Inventories consisted of the following:
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March 28,
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December 31,
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|||||||
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2014
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2013
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|||||||
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Raw materials
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$ | 5,353 | $ | 5,587 | ||||
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Work in process
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456 | 234 | ||||||
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Finished goods
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221 | 223 | ||||||
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Reserve for obsolete inventory
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(3,059 | ) | (3,019 | ) | ||||
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Inventories, net
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$ | 2,971 | $ | 3,025 | ||||
Liquidity
Recurring losses prior to 2013 have been accompanied by negative cash flows from operating activities. Furthermore, as of March 28, 2014, the unfunded obligation of the Company's qualified defined benefit pension plan ("Pension Plan"), as measured for accounting purposes, amounted to $19,012, contributing to a total stockholders’ deficit of $13,842 as of March 28, 2014. Aided by prior cost reduction efforts and improved 2013 sales volume the Company reported net income for 2013 and a loss of $551 for the first quarter of 2014. The Company does not believe it can sustain and improve annual profitability at sufficient levels to fund its existing Pension Plan obligation. In order to preserve the liquid resources required to operate the business, the Company stopped making cash payments due to the Pension Plan trust beginning in October 2012. 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”) which it believes will result in 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. However, as of the date of this filing, the Company is uncertain of the timing or the ultimate outcome. The 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 that the Company has the ability to access at the measurement date.
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:
|
March 28, 2014
|
Total
|
Level 1
|
Level 2
|
Level 3
|
||||||||||||
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Mutual funds – debt securities
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$ | 76 | $ | 76 | $ | - | $ | - | ||||||||
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Money market mutual funds
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43 | 43 | - | - | ||||||||||||
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Total
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$ | 119 | $ | 119 | $ | - | $ | - | ||||||||
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December 31, 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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||||||||||||
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Mutual funds – debt securities
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$ | 183 | $ | 183 | - | - | ||||||||||
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Money market mutual funds
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46 | 46 | - | - | ||||||||||||
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Total
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$ | 229 | $ | 229 | $ | - | $ | - | ||||||||
3. STOCK OPTION PLAN
As of March 28, 2014, options to purchase 1,396,413 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 28, 2014 follows (shares in thousands):
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Weighted-
|
||||||||
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Average
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||||||||
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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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1,235 | $ | 2.62 | |||||
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Granted
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200 | 0.13 | ||||||
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Exercised
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- | - | ||||||
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Forfeited or expired
|
(58 | ) | 4.44 | |||||
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Outstanding as of end of the period
|
1,377 | 2.18 | ||||||
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Exercisable as of the end of the period
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1,036 | $ | 2.87 | |||||
As of March 28, 2014, options exercisable and options outstanding had a weighted average remaining contractual term of 4.0 and 5.3 years, respectively, and aggregate intrinsic value of $10 and $36, respectively.
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 2014, were based on estimates as of the date of grant as follows:
|
Risk-free interest rate
|
0.74 | % | ||
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Dividend yield
|
0.00 | % | ||
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Volatility
|
340 | % | ||
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Expected life
|
3.5 years
|
|||
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 28, 2014, there was approximately $22 of total unrecognized share-based compensation cost related to grants under the stock option plan that will be recognized over a weighted-average period of 2.6 years.
Share-based compensation expense included in selling, general and administrative expense in the statements of comprehensive loss for each of the three month periods ended March 28, 2014 and March 29, 2013 was $5 and $10, respectively.
4. EMPLOYEE RETIREMENT BENEFIT PLANS
Distress Termination Application
On January 7, 2013, the Company submitted a Pension Benefit Guaranty Corporation (“PBGC”) Form 600 Distress Termination, Notice of Intent to Terminate, to the PBGC. The notice filing initiated an application process by the Company with the PBGC for the distress termination of the Pension Plan. The Pension Plan benefits are guaranteed by the ERISA Title IV insurance fund, which is administered by the PBGC. The Company proposed a termination date of March 8, 2013. Through the application process, the Company’s intent has been 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 Pension 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 Pension 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.
If the distress termination application is approved, 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 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 liability and other pension related liabilities due 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 is in discussions with the PBGC 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 been pursuing a conclusion of the process and a settlement of the resulting liabilities. Based upon recent correspondence with the PBGC, the Company believes that the application process will likely result in a settlement of the Pension Plan liabilities on terms that will enable the Company to continue to operate as a going concern. However, as of the date of this filing, the Company is uncertain of the timing or the ultimate outcome.
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 for its operations. As a result, a lien in favor of the PBGC has arisen against the assets of the Company to secure aggregate unpaid contributions which amount to $3,346, including interest, as of April 15, 2014. Independent actuarial valuations have determined that additional contributions of approximately $4,200 will become due through April 15, 2015. The Company’s legal counsel has advised that the PBGC usually does not take enforcement action under its lien rights while it is still considering the application for the distress termination which is consistent with the Company’s dialog with the PBGC through the application process. Based upon recent correspondence with the PBGC, the Company believes that the application process will likely result in a settlement of the Pension Plan liabilities on terms that will enable the Company to continue to operate as a going concern, although there can be no assurance as to the timing and ultimate outcome of such settlement discussions.
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 $519 in the next 12 months.
Components of Net Periodic Benefit Expense
|
Pension Plan
|
Supplemental Executive Retirement Plan
|
|||||||||||||
|
For the three months ended:
|
March 28, 2014
|
March 29, 2013
|
March 28, 2014
|
March 29, 2013
|
||||||||||
|
Service cost
|
$ | - | $ | - | $ | - | $ | - | ||||||
|
Interest cost
|
569 | 398 | 55 | 41 | ||||||||||
|
Expected return on assets
|
(574 | ) | (460 | ) | - | - | ||||||||
|
Amortization of actuarial loss
|
101 | 177 | 12 | 17 | ||||||||||
|
Amortization of prior year service cost
|
- | - | (12 | ) | (12 | ) | ||||||||
|
Settlement charge
|
- | - | - | - | ||||||||||
|
Net periodic benefit expense
|
96 | 115 | 55 | 46 | ||||||||||
|
Insurance premium due PBGC
|
58 | 47 | - | - | ||||||||||
| $ | 154 | $ | 162 | $ | 55 | $ | 46 | |||||||
For the three months ended March 28, 2014 and March 29, 2013, the Company reclassified $102 and $182, respectively, of actuarial loss from accumulated other comprehensive loss that was included in pension expense on the statement of comprehensive loss for the same periods.
The following discussion should be read in conjunction with the condensed consolidated financial statements and related 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
Although sales volume and the $551 net loss in the first quarter of 2014 showed improvement from the comparable period of 2013, which reported net loss of $1,357, it did not compare favorably to the most recent two consecutive profitable quarters in the last half of 2013. The weaker sales and resulting net loss in the first quarter of 2014 was primarily the result of the timing of work and deliveries on customer projects rather than a negative trend in the overall business. New bookings were strong and the sales backlog improved which creates a more encouraging outlook for the remainder of 2014. Also, cash balances improved from progress payments received on new customer orders. With the improved backlog and strong sales prospects we believe that sales and overall results for the remainder of 2014 will be comparable to 2013.
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 current expense of the Pension Plan. The success of our efforts to settle our pension liabilities for an amount that the business can satisfy remains critical to the long-term viability of the Company. We believe an improved financial position that would result from relief of the Pension Plan burden may present opportunities for better results through the availability of credit and stronger qualification for customer projects.
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, 2013. 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:
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For the Three Months Ended
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March 28, 2014
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March 29, 2013
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Sales
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$ | 6,672 | $ | 4,707 | ||||
Sales for the first three months of 2014 were 42% higher than the same period in 2013. The higher 2014 sales were attributable to progress and deliveries on larger customer contracts as compared to the same period of 2013.
Revenue backlog improved to $19,689 as of March 28, 2014, compared to $17,165 as of December 31, 2013. We expect sales for the remainder of 2014 to result in total annual sales comparable to 2013 based on delivery schedules from the improved revenue backlog and strong sales prospects.
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Gross Profit
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The following table summarizes our gross profit and the gross profit as a percentage of total sales:
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For the Three Months Ended
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March 28, 2014
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March 29, 2013
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Gross profit
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$ | 2,144 | $ | 1,310 | ||||
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Gross profit percentage
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32 | % | 28 | % | ||||
Gross profit for the first quarter was favorably affected by higher sales volume which absorbed fixed overhead as well as sales from specific contracts with favorable margins.
Operating Expenses
The following table summarizes our operating expenses:
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For the Three Months Ended
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March 28, 2014
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March 29, 2013
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Selling, general and administrative
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$ | 1,748 | $ | 1,565 | ||||
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Research and development
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560 | 670 | ||||||
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Pension
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209 | 208 | ||||||
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Total operating expenses
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$ | 2,517 | $ | 2,443 | ||||
For the first quarter of 2014, selling, general and administrative expenses were higher than the comparable period of 2013 due primarily to a higher use of labor resources for sales and marketing activities.
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For the first quarter of 2014, research and development expenses were lower than the comparable period of 2013. This was attributable primarily to engineering resources being redirected from research and development activities to customer projects and selling expenses. Pension expense for the first quarter of 2014 was comparable to the same period of 2013.
Other Expense, net
The following table summarizes our other expense:
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For the Three Months Ended
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March 28, 2014
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March 29, 2013
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Total other expense, net
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$ | 169 | $ | 214 | ||||
For the three months ended March 28, 2014, other expense, net, was lower than the same period in 2013 due to lower realized foreign currency losses.
Liquidity and Capital Resources
Outlook
As discussed above in the executive summary and the notes to the condensed consolidated financial statements, we have made significant progress in our effort to reverse our long history of operating losses and we believe that we will settle our pension liabilities on terms that the business can fulfill. As a result, we believe existing liquidity resources and funds generated from forecasted revenue will meet our current and long-term obligations upon adjustment for the settlement of the pension liabilities. We continue to operate in a rapidly evolving and often unpredictable business environment that may change the timing or amount of expected future cash receipts and expenditures.
Cash Flows
In the first three months of 2014, $1,436 of cash provided by operating activities was attributable to $180 of cash absorbed by the net loss for the period, after the effect of $371 of non-cash items plus a favorable change to working capital of $1,616. The change to working capital was driven by progress payments from customer contracts, attributable to the timing of billings and new customer orders.
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.
Cash provided by investing activities was $49 in the first three months of 2014 compared to $127 for the same period of 2013, representing cash provided by the sale of marketable securities, offset by purchases of property, plant and equipment of $61 and $8 in 2014 and 2013, respectively.
In the first three months of 2014, financing activities used $43 of cash compared to $41 in 2013, 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 28, 2014, 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 28, 2014, we had outstanding letters of credit totaling $1,091. The cash collateral for these letters of credit was classified as $1,001 of restricted cash and $90 of restricted cash included in other assets.
Mortgage Notes
As of March 28, 2014, our wholly owned Spitz subsidiary had obligations totaling $2,496 under its two mortgage notes payable.
Sale-Leaseback Financing
As of March 28, 2014, the principal balance on the debt obligation recorded from the sale-leaseback financing transaction was $2,877. The cash payment required to repurchase the property on March 28, 2014 was $3,027 consisting of $3,152 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 28, 2014, we would have recorded a premium of approximately 5% in the amount of $150 over the $2,877 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 quarter ended March 28, 2014, 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.
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.
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31.2
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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.
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32.1
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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.
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101
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The following materials from this Quarterly Report on Form 10-Q for the periods ended March 28, 2014, formatted in XBRL (Extensible Business Reporting Language) and filed 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.
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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 9, 2014 | By: |
/s/ Paul Dailey
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Paul Dailey, Chief Financial Officer
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and Corporate Secretary
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(Authorized Officer)
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(Principal Financial and Accounting Officer)
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16