Attached files
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 September 26, 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.
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 $0.20 per share) outstanding on November 5, 2014 was 11,089,199.
FORM 10-Q
Evans & Sutherland Computer Corporation
Quarter Ended September 26, 2014
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Page No.
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2
Item 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited) (In thousands, except share and per share data)
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September 26,
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December 31,
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|||||||
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2014
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2013
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ASSETS
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Current assets:
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Cash and cash equivalents
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$ | 3,983 | $ | 3,376 | ||||
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Restricted cash
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731 | 1,020 | ||||||
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Marketable securities
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- | 229 | ||||||
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Accounts receivable, less allowances for doubtful receivables of $246
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and $277, respectively
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4,810 | 5,552 | ||||||
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Costs and estimated earnings in excess of billings on uncompleted contracts
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2,178 | 2,391 | ||||||
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Inventories, net
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4,063 | 3,025 | ||||||
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Prepaid expenses and deposits
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506 | 568 | ||||||
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Total current assets
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16,271 | 16,161 | ||||||
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Property, plant and equipment, net
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7,339 | 7,405 | ||||||
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Goodwill
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635 | 635 | ||||||
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Definite-lived intangible assets, net
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80 | 115 | ||||||
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Other assets
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1,046 | 1,386 | ||||||
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Total assets
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$ | 25,371 | $ | 25,702 | ||||
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LIABILITIES AND STOCKHOLDERS’ DEFICIT
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Current liabilities:
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Accounts payable
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$ | 837 | $ | 1,433 | ||||
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Accrued liabilities
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1,150 | 1,183 | ||||||
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Billings in excess of costs and estimated earnings on uncompleted contracts
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3,661 | 3,358 | ||||||
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Customer deposits
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2,602 | 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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2,408 | 2,995 | ||||||
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Total current liabilities
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11,177 | 11,657 | ||||||
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Pension and retirement obligations, net of current portion
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23,525 | 23,567 | ||||||
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Long-term debt, net of current portion
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3,004 | 2,362 | ||||||
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Deferred rent obligation
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1,526 | 1,514 | ||||||
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Total liabilities
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39,232 | 39,100 | ||||||
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Commitments and contingencies (Note 4)
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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, $0.20 par value: 30,000,000 shares authorized;
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11,441,666 shares issued
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2,288 | 2,288 | ||||||
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Additional paid-in capital
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54,496 | 54,484 | ||||||
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Common stock in treasury, at cost: 352,467 shares
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(4,709 | ) | (4,709 | ) | ||||
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Accumulated deficit
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(48,632 | ) | (47,852 | ) | ||||
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Accumulated other comprehensive loss
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(17,304 | ) | (17,609 | ) | ||||
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Total stockholders' deficit
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(13,861 | ) | (13,398 | ) | ||||
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Total liabilities and stockholders' deficit
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$ | 25,371 | $ | 25,702 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
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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Nine Months Ended
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September 26,
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September 27,
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September 26,
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September 27,
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2014
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2013
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2014
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2013
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Sales
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$ | 7,656 | $ | 8,509 | $ | 20,040 | $ | 18,428 | ||||||||
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Cost of sales
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4,371 | 4,981 | 12,669 | 11,858 | ||||||||||||
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Gross profit
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3,285 | 3,528 | 7,371 | 6,570 | ||||||||||||
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Operating expenses:
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Selling, general and administrative
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1,637 | 1,545 | 5,211 | 4,291 | ||||||||||||
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Research and development
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537 | 529 | 1,608 | 1,873 | ||||||||||||
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Pension
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359 | 249 | 777 | 618 | ||||||||||||
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Total operating expenses
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2,533 | 2,323 | 7,596 | 6,782 | ||||||||||||
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Operating income (loss)
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752 | 1,205 | (225 | ) | (212 | ) | ||||||||||
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Other expense, net
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(192 | ) | (185 | ) | (567 | ) | (540 | ) | ||||||||
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Income (loss) before income tax provision
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560 | 1,020 | (792 | ) | (752 | ) | ||||||||||
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Income tax (provision) benefit
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79 | (31 | ) | 12 | (41 | ) | ||||||||||
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Net income (loss)
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$ | 639 | $ | 989 | $ | (780 | ) | $ | (793 | ) | ||||||
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Net income (loss) per common share – basic and diluted
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$ | 0.06 | $ | 0.09 | $ | (0.07 | ) | $ | (0.07 | ) | ||||||
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Weighted average common shares outstanding – basic
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11,089 | 11,089 | 11,089 | 11,089 | ||||||||||||
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Weighted average common shares outstanding – diluted
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11,435 | 11,155 | 11,089 | 11,089 | ||||||||||||
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Comprehensive income (loss):
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Net income (loss)
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$ | 639 | $ | 989 | $ | (780 | ) | $ | (793 | ) | ||||||
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Other comprehensive income:
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Reclassification of realized gains from sale of marketable securities to net income (loss)
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- | - | - | (26 | ) | |||||||||||
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Unrealized gain on marketable securities
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- | 3 | - | 18 | ||||||||||||
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Reclassification of pension expense to net income (loss)
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101 | 182 | 305 | 546 | ||||||||||||
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Other comprehensive income, net of tax
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101 | 185 | 305 | 538 | ||||||||||||
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Total comprehensive income (loss)
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$ | 740 | $ | 1,174 | $ | (475 | ) | $ | (255 | ) | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) (In thousands)
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Nine Months Ended
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September 26,
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September 27,
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2014
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2013
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Cash flows from operating activities:
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Net loss
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$ | (780 | ) | $ | (793 | ) | ||
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Adjustments to reconcile net loss to net cash provided by
operating activities:
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Depreciation and amortization
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376 | 452 | ||||||
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Amortization of deferred pension expense
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305 | 546 | ||||||
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Other
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294 | 471 | ||||||
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Change in assets and liabilities:
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Decrease (increase) in restricted cash
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289 | (333 | ) | |||||
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Decrease (increase) in accounts receivable, net
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726 | (1,287 | ) | |||||
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Increase in inventories
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(1,104 | ) | (1,062 | ) | ||||
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Decrease in costs and estimated earnings in excess of billings
on uncompleted contracts
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516 | 1,813 | ||||||
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Decrease in prepaid expenses and deposits
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402 | 633 | ||||||
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Increase (decrease) in accounts payable
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(596 | ) | 689 | |||||
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Decrease in accrued liabilities
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(21 | ) | (102 | ) | ||||
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Decrease in pension and retirement obligations
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(54 | ) | (549 | ) | ||||
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Increase in customer deposits
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445 | 419 | ||||||
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Net cash provided by operating activities
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798 | 897 | ||||||
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Cash flows from investing activities:
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Purchases of property, plant and equipment
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(289 | ) | (30 | ) | ||||
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Proceeds from sale of marketable securities
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229 | 385 | ||||||
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Net cash (used in) provided by investing activities
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(60 | ) | 355 | |||||
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Cash flows from financing activities:
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Principal payments on long-term debt
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(131 | ) | (123 | ) | ||||
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Net cash used in financing activities
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(131 | ) | (123 | ) | ||||
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Net increase in cash and cash equivalents
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607 | 1,129 | ||||||
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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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$ | 3,983 | $ | 3,240 | ||||
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Non-cash investing and financing activities:
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Reclassification of realized gains from sale of marketable securities to net loss
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$ | - | $ | (26 | ) | |||
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Unrealized gain on marketable securities
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- | 18 | ||||||
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Supplemental disclosures of cash flow information:
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Cash paid for interest
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$ | 390 | $ | 397 | ||||
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Cash paid for income taxes
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45 | 26 | ||||||
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, 2013.
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 periods ended September 26, 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 recognize revenue:
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 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 costs 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 Income (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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September 26,
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December 31,
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2014
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2013
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Raw materials
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$ | 5,871 | $ | 5,587 | ||||
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Work in process
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1,001 | 234 | ||||||
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Finished goods
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276 | 223 | ||||||
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Reserve for obsolete inventory
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(3,085 | ) | (3,019 | ) | ||||
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Inventories, net
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$ | 4,063 | $ | 3,025 | ||||
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers ("ASU 2014-09"). ASU 2014-09 provides for a single, principles-based model for revenue recognition that replaces existing revenue recognition guidance. ASU 2014-09 is effective for annual and interim periods beginning on or after December 15, 2016. It permits the use of either a retrospective or cumulative effect transition method and early adoption is not permitted. The Company has not yet selected a transition method and is in the process of evaluating the effect this standard will have on its consolidated financial statements and related disclosures.
Liquidity
The Company has experienced recurring annual losses since 2007. Furthermore, as of September 26, 2014, the unfunded obligation of the Company’s qualified defined benefit pension plan (“Pension Plan”), as measured for accounting purposes, amounted to $19,001, contributing to a total stockholders’ deficit of $13,861 as of September 26, 2014. Aided by prior cost reduction efforts and improved 2013 sales volume, the Company reported annual net income for 2013 but incurred a net loss of $780 for the first three quarters 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. Because of the payments due to the Pension Trust, a lien in favor of the Pension Plan has arisen against the assets of the Company. On October 3, 2014, the lender for the Company’s Spitz Inc. (“Spitz”) subsidiary’s mortgage notes, a commercial bank, notified the Company that the liens placed on the Company assets by the Pension Plan constituted an event of default under the mortgage notes’ credit agreements. Citing cross default terms, the bank suspended borrowings on the Spitz $1,100 working capital line of credit. The bank has not elected to accelerate the payment of the loan balance or exercise any other remedies available upon an event of default. The bank expressed interest in a continuing credit relationship upon satisfactory settlement of the pension liabilities and agreed to forbear from exercising any further remedies until January 15, 2015. The mortgage balances totaled $2,408 as of September 26, 2014. The Company has not used the Spitz $1,100 working capital line of credit since 2011 and, if necessary, the Company believes that it will have sufficient funds to satisfy the Spitz mortgage note balances if the bank were to accelerate the maturity under its default remedy. However, the Company further believes that it will conclude a satisfactory settlement with the PBGC by January 15, 2015 or within a time frame acceptable to the bank. The Company continues to progress through the termination process toward a settlement; however, as of the date of this filing, the Company is uncertain of the timing or the ultimate outcome and it cannot provide assurance that its expectations set forth above will occur in a timely manner or at all.
7
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
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2.
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STOCK OPTION PLAN
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As of September 26, 2014, options to purchase 1,439,913 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 nine months ended September 26, 2014 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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1,235 | $ | 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
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(101 | ) | 4.85 | |||||
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Outstanding as of end of the period
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1,334 | 2.08 | ||||||
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Exercisable as of the end of the period
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993 | 2.76 | ||||||
As of September 26, 2014, options exercisable and options outstanding had a weighted average remaining contractual term of 3.7 and 5.0 years, respectively, and aggregate intrinsic value of $26 and $76, 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 nine months of 2014, were based on estimates as of the date of grant as follows:
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Risk-free interest rate
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0.74 | % | ||
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Dividend yield
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0.00 | % | ||
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Volatility
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340 | % | ||
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Expected life
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3.5 years
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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.
8
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
As of September 26, 2014, there was approximately $14 of share-based compensation cost related to grants under the stock option plan that will be recognized over a weighted-average period of 2.1 years.
Share-based compensation expense included in selling, general and administrative expense in the statements of comprehensive income (loss) for the nine-month periods ended September 26, 2014 and September 27, 2013 was $12 and $14, respectively. Share-based compensation expense included in selling, general and administrative expense in the statements of comprehensive income (loss) for each of the three-month periods ended September 26, 2014 and September 27, 2013 was $4.
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3.
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EMPLOYEE RETIREMENT BENEFIT PLANS
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Distress Termination Application
On January 7, 2013, the Company submitted a 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 ongoing 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 $6,307, including interest, as of October 15, 2014. Independent actuarial valuations have determined that additional contributions of approximately $3,900 will become due through October 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 ongoing 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.
9
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
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 $519 in the next 12 months.
Components of Net Periodic Benefit Expense
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Pension Plan
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Supplemental Executive Retirement Plan
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For the three months ended:
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September 26, 2014
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September 27, 2013
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September 26, 2014
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September 27, 2013
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Service cost
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$ | - | $ | - | $ | - | $ | - | ||||||||
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Interest cost
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569 | 398 | 55 | 41 | ||||||||||||
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Expected return on assets
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(574 | ) | (460 | ) | - | - | ||||||||||
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Amortization of actuarial loss
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101 | 177 | 12 | 17 | ||||||||||||
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Amortization of prior year service cost
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- | - | (12 | ) | (12 | ) | ||||||||||
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Net periodic benefit expense
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96 | 115 | 55 | 46 | ||||||||||||
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Other pension related expense
|
208 | 88 | - | - | ||||||||||||
| $ | 304 | $ | 203 | $ | 55 | $ | 46 | |||||||||
|
Pension Plan
|
Supplemental Executive Retirement Plan
|
|||||||||||||||
|
For the nine months ended:
|
September 26, 2014
|
September 27, 2013
|
September 26, 2014
|
September 27, 2013
|
||||||||||||
|
Service cost
|
$ | - | $ | - | $ | - | $ | - | ||||||||
|
Interest cost
|
1,706 | 1,195 | 164 | 123 | ||||||||||||
|
Expected return on assets
|
(1,724 | ) | (1,381 | ) | - | - | ||||||||||
|
Amortization of actuarial loss
|
304 | 531 | 37 | 51 | ||||||||||||
|
Amortization of prior year service cost
|
- | - | (36 | ) | (36 | ) | ||||||||||
|
Net periodic benefit expense
|
286 | 345 | 165 | 138 | ||||||||||||
|
Other pension related expense
|
326 | 135 | - | - | ||||||||||||
| $ | 612 | $ | 480 | $ | 165 | $ | 138 | |||||||||
For the three-month periods ended September 26, 2014 and September 27, 2013, the Company reclassified $101 and $182, respectively, of actuarial loss from accumulated other comprehensive loss that was included in pension expense in the statements of comprehensive loss for the same periods. For the nine-month periods ended September 26, 2014 and September 27, 2013, the Company reclassified $305 and $546, respectively, of actuarial loss from accumulated other comprehensive loss that was included in pension expense in the statements of comprehensive income (loss) for the same periods.
10
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
4. Debt
Mortgage Notes
On October 3, 2014, the lender for the Spitz mortgage notes, a commercial bank, notified the Company that the liens placed on the Company assets by the Pension Plan were an event of default under the mortgage loan agreements. Pursuant to the notification, the Company and the bank entered into an agreement whereby the bank agreed to forbear from exercising any further remedies other than the suspension of advances under the working capital line of credit, until January 15, 2015 while the Company negotiates the settlement of its pension liabilities, subject to certain conditions agreed to by the Company. The conditions the Company agreed to include continuing to make debt service payments under the mortgage loan agreements, the occurrence of no further adverse events in the condition of the Company, and the incorporation of the financial covenants of the line of credit agreement between the bank and Spitz dated March 15, 2012 as additional covenants in the mortgage loan agreements effective immediately and continuing until the loans are paid in full. The Company believes that it will be able to comply with the additional covenants and, upon settlement of the pension liabilities, the pension plan liens will be replaced by consensual liens in favor of the PBGC which will be subordinate to the commercial bank’s lien under terms agreeable to the commercial bank. However, no assurance can be given that the Company will be able to comply with the additional covenants or that the pension plan liens will be replaced by consensual liens in favor of the PBGC.
Line of Credit
Because of cross default provisions, the October 3, 2014 notice of default of the mortgage note included notification by the commercial bank that it is no longer obligated to make advances under its line of credit agreement and that it elected to suspend future advances. The Company expects that upon settlement of the pension liabilities, it will be able to reach agreement with the commercial bank to permit new borrowings for future potential working capital requirements. However, no assurance can be given that the Company will be able to reach agreement with the commercial bank to permit new borrowings under the line of credit. As of September 26, 2014, there were no borrowings outstanding under the credit agreement and there have been no borrowings outstanding since February 2011.
Sale/Leaseback Financing
On July 31, 2014, the Company provided notice to Wasatch Research Park I, LLC (“Wasatch”) to exercise its option to repurchase the buildings it occupies under agreements with Wasatch. The repurchase price, net of a credit due for a lease deposit, would have been $3,027. The repurchase transaction required completion by October 31, 2014. On November 4, 2014, the Company agreed to an extension of its current lease for a term of 5 years. As a condition of the extension the Company will no longer have a right to repurchase the buildings. Base annual rent for the extended 5-year term will be $549. Base annual rent prior to the lease extension was $509.
The extension of the lease for 5 years without a repurchase option is expected to result in recording the disposition of building assets and the extinguishment of both the sale-leaseback debt and the deferred rent obligation in the fourth quarter of 2014. The new lease obligation is expected to be accounted for as an operating lease commencing November 1, 2014.
11
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
Sales volume and net income for the third quarter of 2014 was slightly lower than the comparable period of 2013. For the 9 month periods presented, sales and gross profit contributions improved in 2014; however the net loss was comparable due to higher operating expenses in 2014. The higher 2014 operating expenses were due largely to a credit from a settlement of a dispute which reduced expenses in the second quarter of 2013. Also, sales and marketing expenses in 2014 were higher due to a bi-annual tradeshow and the redirection of production and engineering resources to sales and marketing activities. The third quarter compares favorably to the first two quarters of 2014. The improvement was attributable to the timing of work and deliveries on customer projects rather than a negative trend in the overall business. The sales backlog and prospects remain strong which supports an encouraging outlook for the remainder of 2014 and into 2015. Cash balances are expected to continue to be variable as result of the timing of progress payments on customer orders. We continue to believe that sales and overall results for 2014 will be comparable to 2013.
We 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.
12
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:
|
For the Three Months Ended
|
For the Nine Months Ended
|
|||||||||||||||
|
September 26, 2014
|
September 27, 2013
|
September 26, 2014
|
September 27, 2013
|
|||||||||||||
|
Sales
|
$ | 7,656 | $ | 8,509 | $ | 20,040 | $ | 18,428 | ||||||||
Sales for the third quarter of 2014 were slightly lower compared to the same period in 2013. Sales for the first nine months of 2014 were 9% higher than the same period in 2013 due to an increase in the volume of orders and deliveries of all of our products. Revenue backlog was $19,857 as of September 26, 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 as well as strong sales prospects.
Gross Profit
The following table summarizes our gross profit and the gross profit as a percentage of total sales:
|
For the Three Months Ended
|
For the Nine Months Ended
|
|||||||||||||||
|
September 26, 2014
|
September 27, 2013
|
September 26, 2014
|
September 27, 2013
|
|||||||||||||
|
Gross profit
|
$ | 3,285 | $ | 3,528 | $ | 7,371 | $ | 6,570 | ||||||||
|
Gross profit percentage
|
43 | % | 41 | % | 37 | % | 36 | % | ||||||||
Gross profit percentages for the three- and nine-month periods ended September 26, 2014 were comparable to the same periods in 2013.
Operating Expenses
The following table summarizes our operating expenses:
|
For the Three Months Ended
|
For the Nine Months Ended
|
|||||||||||||||
|
September 26, 2014
|
September 27, 2013
|
September 26, 2014
|
September 27, 2013
|
|||||||||||||
|
Selling, general and
administrative
|
$ | 1,637 | $ | 1,545 | $ | 5,211 | $ | 4,291 | ||||||||
|
Research and development
|
537 | 529 | 1,608 | 1,873 | ||||||||||||
|
Pension
|
359 | 249 | 777 | 618 | ||||||||||||
|
Total operating expenses
|
$ | 2,533 | $ | 2,323 | $ | 7,596 | $ | 6,782 | ||||||||
General and administrative expenses were higher for the three- and nine-month periods ended September 26, 2014 compared to the same periods in 2013 due largely to a receipt in the second quarter of 2013 that was recorded as a credit for the recovery of legal fees pursuant to a settlement of a dispute with a subcontractor for a customer project. Also, sales and marketing expenses were higher due to increased tradeshow activity and the redirection of resources from content software production to sales and marketing activities. Research and development costs for the nine month period ended September 26, 2014 were lower than the same period in 2013 primarily due to engineering resources being redirected from research and development activities to customer projects and selling expenses. Pension expense was higher for the three- and nine-month periods ended September 26, 2014 compared to the same periods in 2013 due to an increase in other pension related expense attributable to accounting for the distress termination process.
13
Other Expense, net
The following table summarizes our other expense:
|
For the Three Months Ended
|
For the Nine Months Ended
|
|||||||||||||||
|
September 26, 2014
|
September 27, 2013
|
September 26, 2014
|
September 27, 2013
|
|||||||||||||
|
Total other expense, net
|
$ | 192 | $ | 185 | $ | 567 | $ | 540 | ||||||||
For the three- and nine-month periods ended September 26, 2014, other expense, net, was comparable to the same periods in 2013.
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 reduce 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 nine months of 2014, $798 of cash provided by operating activities was attributable to a favorable change in working capital of $603, in addition to $195 provided by the net loss of $780 after the effect of $975 of non-cash expense items.
In the first nine months of 2013, $897 of cash provided by operating activities was attributable to a favorable change in working capital of $221, in addition to $676 provided by the net loss of $793, after the effect of $1,469 of non-cash items expense items.
The change in working capital in both periods presented was driven by improvement in progress payments from customer contracts, attributable to the timing of billings and an increase in customer orders.
Cash used by investing activities was $60 in the first nine months of 2014 compared to $355 of cash that was provided by investing activities for the same period of 2013, representing cash provided by the sale of marketable securities offset by purchases of property, plant and equipment of $289 and $30 in 2014 and 2013, respectively.
In the first nine months of 2014, financing activities used $131 of cash compared to $123 in 2013, for principal payments on mortgage notes.
Credit Facilities
The Company is a party to a credit agreement with a commercial bank to provide borrowings of up to $1,100 to fund working capital requirements. Interest is charged on any amounts borrowed at the lender’s prime rate. On October 3, 2014, the commercial bank notified the Company that it is no longer obligated to make advances under the credit agreement and elected to suspend future advances because of events of default on loan covenants resulting from the liens placed on the Company’s assets by the Pension Plan. The Company expects that upon settlement of the pension liabilities, it will be able to comply with covenants as required by the commercial bank to permit new borrowings for potential working capital requirements. As of September 26, 2014, there were no borrowings outstanding under the credit agreement and there have been no borrowings outstanding since February 2011. The Company does not foresee the need for borrowings for the foreseeable future.
14
The Company has a finance arrangement which provided for 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 September 26, 2014, we had outstanding letters of credit totaling $731. The cash collateral for these letters of credit was classified as restricted cash.
Mortgage Notes
As of September 26, 2014, our wholly owned Spitz subsidiary had obligations totaling $2,408 under its two mortgage notes payable to a commercial bank. On October 3, 2014, the commercial bank notified the Company that the liens placed on the Company’s assets by the Pension Plan constituted an event of default under the mortgage notes’ loan agreements. The commercial bank agreed to forbear from exercising any further remedies, other than suspension of advances under the working capital line of credit, until January 15, 2015 while the Company negotiates the settlement of its pension liabilities. The agreement to forbear from exercising any further remedies is subject to the Company continuing to make debt service payments under the mortgage note agreements, the occurrence of no further adverse events in the condition of the Company and the Company’s agreement to the incorporation of the financial covenants in the line of credit agreement as additional covenants in the mortgage loan agreements effective immediately and continuing until the loans are paid in full. The Company believes that it will be able to comply with the additional covenants and, upon settlement of the pension liabilities, the Pension Plan liens will be replaced by consensual liens in favor of the PBGC which will be subordinate to the commercial bank’s lien under terms agreeable to the commercial bank. If necessary, the Company believes that it will have sufficient funds to satisfy the Spitz mortgage note balances if the bank were to accelerate the maturity under its default remedy. However, the Company further believes that it will conclude a satisfactory settlement with the PBGC by January 15, 2015 or within an extended time frame acceptable to the bank. The Company continues to progress through the termination process toward a settlement; however, as of the date of this filing, the Company is uncertain of the timing or the ultimate outcome and it cannot provide assurance that its expectations set forth above will occur in a timely manner or at all.
Sale-Leaseback Financing
On July 31, 2014, the Company provided notice to Wasatch Research Park I, LLC (“Wasatch”) to exercise the Company’s option to repurchase the buildings it occupies under agreements with Wasatch. The repurchase price, net of a credit due for a lease deposit, would have been $3,027. The repurchase transaction required completion by October 31, 2014. On November 4, 2014, the Company agreed to an extension of its current lease for a term of 5 years. As a condition of the extension the Company will no longer have a right to repurchase the buildings. Base annual rent for the extended 5-year term will be is $548. Base annual rent prior to the lease extension was $509.
As of September 26, 2014, the principal balance on the debt obligation recorded from the sale-leaseback financing transaction was $3,004. The extension of the lease for 5 years without a repurchase option is expected to be recorded as a disposition of building assets along with the extinguishment of the sale-leaseback debt obligation and the deferred rent obligation. The new lease obligation is expected to be recorded as an operating lease commencing November 1, 2014.
15
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 September 26, 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.
16
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.
On November 4, 2014, the Company entered into an agreement (“the Amendment”) to amend the Sublease Agreement dated November 13, 2009 with Wasatch Research Park I, LLC (“Wasatch”), under which the Company leases the land and buildings which serve as its principal executive, engineering, manufacturing and operations facilities in the University of Utah Research Park in Salt Lake City, Utah. The Amendment extends the term of the Sublease Agreement for 5 years expiring on October 31, 2019. Base annual rent for the 5 year extended term is $548,719, payable monthly. The annual rent prior to the Amendment was $509,142. The Company will pay, as additional rent, any increase in rent to be paid by Wasatch under the escalation provision of its land lease agreement with the University of Utah Research Park. The Company had previously exercised its option to purchase the buildings from Wasatch under the Repurchase Option Agreement dated November 13, 2009. By agreeing to extend the term of the lease, the Company has elected not to complete the purchase of the buildings and it will retain no purchase option or rights to ownership of the buildings through the extended term of the lease.
|
10.1
|
First Amendment to Sublease Agreement dated November 4, 2014, by and between Evans & Sutherland Computer Corporation and Wasatch Research Park I, LLC, filed herewith.
|
|
|
10.2
|
Line of Credit Agreement between Spitz, Inc. and Bryn Mawr Trust Company dated March 15, 2012
|
|
|
10.3
|
Loan Forbearance Agreement between Evans & Sutherland Computer Corporation, Spitz, Inc. and Bryn Mawr Trust Company dated October 3, 2014
|
|
|
31.1
|
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act, as amended, filed herewith.
|
|
|
31.2
|
Certification of Chief Financial Officer pursuant to Rule 13a-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 September 26, 2014, are formatted in XBRL (Extensible Business Reporting Language) and filed 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.
|
17
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: November 7, 2014
|
By:
|
/s/ Paul Dailey | |
|
Paul Dailey, Chief Financial Officer
and Corporate Secretary
(Authorized Officer)
(Principal Financial and Accounting Officer)
|
|||
18