UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
ý Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934,
For the quarterly period ended September 30, 2005
or
o 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 0-8771
EVANS & SUTHERLAND COMPUTER CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
Utah |
| 87-0278175 |
|
|
|
600 Komas Drive, Salt Lake City, Utah |
| 84108 |
|
|
|
Registrant’s Telephone Number, Including Area Code: (801) 588-1000 |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes o No ý
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No ý
The number of shares of the registrant’s Common Stock (par value $0.20 per share) outstanding at October 28, 2005 was 10,528,775.
FORM 10-Q
Evans & Sutherland Computer Corporation
Quarter Ended September 30, 2005
|
|
|
|
|
|
|
| ||
|
|
|
|
|
|
| Condensed Consolidated Balance Sheets as of September 30, 2005 and December 31, 2004 |
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
| Management’s Discussion and Analysis of Financial Condition and Results of Operations |
|
| |
|
|
|
|
|
|
|
| ||
|
|
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
|
|
|
| ||
|
|
|
|
|
|
|
| ||
|
|
|
|
|
|
|
2
PART I – FINANCIAL INFORMATION
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except share amounts)
|
| September 30, |
| December 31, |
| ||
|
| 2005 |
| 2004 |
| ||
|
|
|
|
|
| ||
ASSETS |
|
|
|
|
| ||
Current assets: |
|
|
|
|
| ||
Cash |
| $ | 6,157 |
| $ | 10,147 |
|
Restricted cash |
| 1,069 |
| 3,414 |
| ||
Accounts receivable, less allowances for doubtful receivables of $568 and $650, respectively |
| 9,783 |
| 15,102 |
| ||
Costs and estimated earnings in excess of billings on uncompleted contracts |
| 8,154 |
| 5,616 |
| ||
Inventories |
| 12,169 |
| 10,802 |
| ||
Assets held for sale |
| 3,820 |
| — |
| ||
Prepaid expenses and deposits |
| 3,707 |
| 4,655 |
| ||
Total current assets |
| 44,859 |
| 49,736 |
| ||
Property, plant and equipment, net |
| 15,273 |
| 20,753 |
| ||
Investments |
| 1,269 |
| 1,933 |
| ||
Other assets |
| 1,327 |
| 1,349 |
| ||
Total assets |
| $ | 62,728 |
| $ | 73,771 |
|
|
|
|
|
|
| ||
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) |
|
|
|
|
| ||
Current liabilities: |
|
|
|
|
| ||
Accounts payable |
| $ | 8,278 |
| $ | 6,454 |
|
Accrued liabilities |
| 9,044 |
| 11,032 |
| ||
Customer deposits |
| 4,871 |
| 2,968 |
| ||
Billings in excess of costs and estimated earnings on uncompleted contracts |
| 7,945 |
| 11,703 |
| ||
Total current liabilities |
| 30,138 |
| 32,157 |
| ||
Convertible subordinated notes |
| 18,015 |
| 18,015 |
| ||
Pension and retirement obligations |
| 20,190 |
| 19,836 |
| ||
Total liabilities |
| 68,343 |
| 70,008 |
| ||
Commitments and contingencies |
|
|
|
|
| ||
|
|
|
|
|
| ||
Stockholders’ equity (deficit): |
|
|
|
|
| ||
Preferred stock, no par value; authorized 10,000,000 shares; no issued and no outstanding shares |
| — |
| — |
| ||
Common stock, $0.20 par value; 30,000,000 shares authorized; 10,880,590 and 10,864,042 shares issued, respectively |
| 2,176 |
| 2,173 |
| ||
Additional paid-in-capital |
| 49,792 |
| 49,707 |
| ||
Common stock in treasury, at cost; 352,500 shares |
| (4,709 | ) | (4,709 | ) | ||
Accumulated deficit |
| (46,826 | ) | (38,015 | ) | ||
Accumulated other comprehensive loss |
| (6,048 | ) | (5,393 | ) | ||
Total stockholders’ equity (deficit) |
| (5,615 | ) | 3,763 |
| ||
Total liabilities and stockholders’ equity (deficit) |
| $ | 62,728 |
| $ | 73,771 |
|
3
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share amounts)
|
| Three Months Ended |
| Nine Months Ended |
| ||||||||
|
| September 30, |
| October 1, |
| September 30, |
| October 1, |
| ||||
|
| 2005 |
| 2004 |
| 2005 |
| 2004 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Sales |
| $ | 21,148 |
| $ | 15,882 |
| $ | 55,433 |
| $ | 50,488 |
|
Cost of sales |
| 13,691 |
| 10,681 |
| 35,499 |
| 32,544 |
| ||||
Gross profit |
| 7,457 |
| 5,201 |
| 19,934 |
| 17,944 |
| ||||
Expenses: |
|
|
|
|
|
|
|
|
| ||||
Selling, general and administrative |
| 4,836 |
| 5,498 |
| 14,501 |
| 17,636 |
| ||||
Research and development |
| 3,563 |
| 4,126 |
| 11,835 |
| 13,283 |
| ||||
Restructuring charge (recovery) |
| — |
| — |
| 1,926 |
| (491 | ) | ||||
Operating expenses |
| 8,399 |
| 9,624 |
| 28,262 |
| 30,428 |
| ||||
Gain on sale of assets held for sale |
| — |
| — |
| — |
| 3,488 |
| ||||
Gain on sale of assets |
| — |
| — |
| — |
| 155 |
| ||||
Operating loss |
| (942 | ) | (4,423 | ) | (8,328 | ) | (8,841 | ) | ||||
Other income (expense), net |
| (450 | ) | (433 | ) | (856 | ) | (1,257 | ) | ||||
Loss before income taxes |
| (1,392 | ) | (4,856 | ) | (9,184 | ) | (10,098 | ) | ||||
Income tax expense (benefit) |
| 12 |
| 38 |
| (373 | ) | 134 |
| ||||
Net loss |
| $ | (1,404 | ) | $ | (4,894 | ) | $ | (8,811 | ) | $ | (10,232 | ) |
|
|
|
|
|
|
|
|
|
| ||||
Net loss per common share: |
|
|
|
|
|
|
|
|
| ||||
Basic and diluted |
| $ | (0.13 | ) | $ | (0.47 | ) | $ | (0.84 | ) | $ | (0.97 | ) |
Weighted average common shares outstanding: |
|
|
|
|
|
|
|
|
| ||||
Basic and diluted |
| 10,525 |
| 10,501 |
| 10,520 |
| 10,494 |
|
4
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
|
| Nine Months Ended |
| ||||
|
| September 30, |
| October 1, |
| ||
|
| 2005 |
| 2004 |
| ||
Cash flows from operating activities: |
|
|
|
|
| ||
Net loss |
| $ | (8,811 | ) | $ | (10,232 | ) |
Adjustments to reconcile net loss to net cash provided by (used in) operating activities: |
|
|
|
|
| ||
|
|
|
|
|
| ||
Depreciation and amortization |
| 3,255 |
| 3,906 |
| ||
Gain on assets held for sale |
| — |
| (3,488 | ) | ||
Gain on sale of assets |
| — |
| (155 | ) | ||
Gain on sale of investment securities |
| (692 | ) | (133 | ) | ||
Loss on disposal of property, plant and equipment |
| 179 |
| 17 |
| ||
Income from equity investment in joint venture |
| (350 | ) | — |
| ||
Provision (recovery) for losses on accounts receivable |
| (81 | ) | 203 |
| ||
Provision for excess and obsolete inventory |
| 1,177 |
| 1,526 |
| ||
Provision for warranty expense |
| 715 |
| 1,160 |
| ||
Other |
| 37 |
| 139 |
| ||
Change in assets and liabilities: |
|
|
|
|
| ||
Decrease in accounts receivable |
| 5,400 |
| 6,078 |
| ||
Decrease (increase) in inventories |
| (2,503 | ) | 733 |
| ||
Decrease (increase) in costs and estimated earnings in excess of billings on uncompleted contracts, net |
| (6,296 | ) | 5,947 |
| ||
Decrease in prepaid expenses and deposits |
| 933 |
| 432 |
| ||
Increase (decrease) in accounts payable |
| 1,873 |
| (2,595 | ) | ||
Decrease in accrued liabilities |
| (2,351 | ) | (3,419 | ) | ||
Increase in customer deposits |
| 1,905 |
| 171 |
| ||
Net cash provided by (used in) operations |
| (5,610 | ) | 290 |
| ||
Cash flows from investing activities: |
|
|
|
|
| ||
Proceeds from sale of assets held for sale |
| — |
| 8,288 |
| ||
Proceeds from sale of investment securities |
| 778 |
| 633 |
| ||
Purchases of property, plant and equipment |
| (1,923 | ) | (1,664 | ) | ||
Proceeds from sale of property, plant and equipment |
| 69 |
| — |
| ||
Dividends from equity investment in joint venture |
| 273 |
| — |
| ||
Increase in other assets |
| — |
| (871 | ) | ||
Net cash provided by (used in) investing activities |
| (803 | ) | 6,386 |
| ||
Cash flows from financing activities: |
|
|
|
|
| ||
Net repayments on line of credit agreements |
| — |
| (4,485 | ) | ||
Decrease (increase) in restricted cash |
| 2,346 |
| (2,382 | ) | ||
Proceeds from issuances of common stock |
| 77 |
| 97 |
| ||
Net cash provided by (used in) financing activities |
| 2,423 |
| (6,770 | ) | ||
|
|
|
|
|
| ||
Net change in cash |
| (3,990 | ) | (94 | ) | ||
Cash at beginning of period |
| 10,147 |
| 9,714 |
| ||
Cash at end of period |
| $ | 6,157 |
| $ | 9,620 |
|
|
|
|
|
|
| ||
Supplemental Disclosures of Cash Flow Information |
|
|
|
|
| ||
Cash paid for interest |
| $ | 1,189 |
| $ | 944 |
|
Cash paid for income taxes |
| 52 |
| 29 |
|
5
EVANS & SUTHERLAND COMPUTER CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
All currency amounts in thousands unless otherwise indicated.
1. GENERAL
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of Evans & Sutherland Computer Corporation have been prepared in accordance with the instructions to Form 10-Q and, therefore, do not include all information and footnotes necessary for a complete presentation of the results of operations, the financial position, and cash flows, in conformity with accounting principles generally accepted in the United States of America. This report on Form 10-Q for the three and nine months ended September 30, 2005, should be read in conjunction with our annual report on Form 10-K for the year ended December 31, 2004.
The accompanying unaudited condensed consolidated balance sheets, statements of operations, and cash flows reflect all normal recurring adjustments that are, in the opinion of management, necessary for a fair presentation of our financial position, results of operations and cash flows. The results of operations for the three and nine month periods ended September 30, 2005, are not necessarily indicative of the results to be expected for the full year ending December 31, 2005.
Certain amounts in the 2004 condensed consolidated financial statements and notes have been reclassified to conform to the 2005 presentation.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. The accounting estimates that require management’s most difficult and subjective judgments include revenue recognition based on the percentage-of-completion method, inventory reserves, accruals for liquidated damages and late penalties, allowance for doubtful accounts, warranty reserves, income tax valuation allowance, restructuring charges, and useful life of depreciable assets. Actual results could differ from those estimates.
Recent Accounting Pronouncements
In November 2004, the Financial Accounting Standards Board (“FASB”) issued Financial Accounting Standard No. 151, “Inventory Costs—an amendment to ARB No. 43, Chapter 4” (“SFAS 151”). SFAS 151 amends ARB No. 43, Chapter 4, “Inventory Pricing,” to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). Paragraph 5 of ARB 43, Chapter 4, previously stated that “. . . under some circumstances, items such as idle facility expense, excessive spoilage, double freight, and rehandling costs may be so abnormal as to require treatment as current period charges. . . .” SFAS 151 requires that those items be recognized as current-period charges regardless of whether they meet the criterion of “so abnormal.” In addition, SFAS 151 requires that allocation of fixed production overhead to the costs of conversion be based on the normal capacity of the production facilities. SFAS 151 is effective for inventory costs incurred during fiscal years beginning after June 15, 2005 and earlier application is permitted. We do not expect the adoption of this statement to have a material impact on our financial statements.
In December 2004, FASB issued Financial Accounting Standard No. 153, “Exchanges of Nonmonetary Assets—an amendment of APB Opinion No. 29” (“SFAS 153”). The guidance in APB Opinion No. 29, “Accounting for Nonmonetary Transactions,” is based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged. The guidance in that Opinion, however, included certain exceptions to that principle. SFAS 153 amends APB Opinion 29 to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. SFAS 153 is effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005 and earlier application is permitted. We do not expect the adoption of this statement to have a material impact on our financial statements.
In December 2004, FASB issued Statement of Financial Accounting Standards No. 123R, “Share-Based Payment” (“SFAS 123R”). SFAS 123R is a revision of SFAS 123. SFAS 123R establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services. Primarily, SFAS 123R focuses on accounting for transactions in which an entity obtains employee services in share-based payment transactions. It also addresses transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entity’s equity instruments or that may be settled by the issuance of those equity instruments.
6
SFAS 123R requires us to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award (with limited exceptions). That cost will be recognized over the period during which an employee is required to provide service in exchange for the award—the requisite service period (usually the vesting period). No compensation cost is recognized for equity instruments for which employees do not render the requisite service. Therefore, if an employee does not ultimately render the requisite service, the costs recognized related to unvested options would be reversed.
The SEC has permitted companies subject to its oversight additional time to implement the requirements of SFAS 123R. Accordingly, we will implement the guidance of SFAS 123R at the beginning of our next fiscal year, January 1, 2006. We do not expect the adoption of SFAS 123R to have a material impact on our financial position or cash flows; however it will have a material impact on our results of operations as we are required to recognize stock-based compensation to our employees as compensation expense under the fair value method over their service period.
2. RESTRICTED CASH
Restricted cash represents bank deposits securing certain of our financial obligations. As of September 30, 2005 restricted cash consisted of $963 securing outstanding letters of credit that mature or expire within one year and $106 securing a bond for importation of goods into the United Kingdom by Evans & Sutherland Computer Ltd., our wholly-owned subsidiary. As of September 30, 2005, other assets included restricted cash of $814 securing outstanding letters of credit which mature or expire after one year.
3. NET LOSS PER COMMON SHARE
Net loss per common share is computed based on the weighted-average number of common shares and, as appropriate, dilutive common stock equivalents outstanding during the period. Stock options and the 6% Convertible Subordinated Debentures due in 2012 (“6% Debentures”) are considered to be common stock equivalents.
Basic net loss per common share is the amount of net loss for the period attributable to each share of common stock outstanding during the reporting period. Diluted net loss per share is the amount of net loss for the period attributable to each share of common stock outstanding during the reporting period and to each share that would have been outstanding assuming the issuance of common shares for all dilutive potential common shares outstanding during the period.
In calculating net loss per common share, the net loss was the same for both the basic and diluted calculation. The diluted weighted average number of common shares outstanding during the three and nine months ended September 30, 2005 and October 1, 2004 excludes common stock issuable pursuant to outstanding stock options and the 6% Debentures because inclusion of these common stock equivalents would have had an anti-dilutive effect on loss per common share. The total number of common stock equivalents excluded from diluted loss per share was 2,678,246 and 2,798,160 for the three and nine months ended September 30, 2005 and October 1, 2004, respectively.
7
4. STOCK-BASED COMPENSATION
We have stock incentive plans that provide for the grant of options to officers, employees, consultants, and independent contractors. We have adopted the footnote disclosure provisions of SFAS No. 123, “Accounting for Stock Based Compensation” (“SFAS 123”) and SFAS No. 148, “Accounting for Stock Based Compensation – Transition and Disclosure – an amendment of FASB Statement No. 123” (“SFAS 148”). SFAS 123 encourages entities to adopt a fair value based method of accounting for stock options or similar equity instruments. However, it also allows an entity to continue measuring compensation cost for stock-based compensation using the intrinsic-value method of accounting prescribed by Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”). We have elected to continue to apply the provisions of APB 25 and provide pro forma footnote disclosures required by SFAS 123 and SFAS 148.
Stock-based compensation granted to non-employees (consultants and independent contractors) is determined as either the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable. The measurement date for these issuances is the earlier of either the date at which a commitment by the recipient to earn the equity instruments is reached or the date at which the recipient’s performance is complete.
We account for our stock options granted to employees under APB 25, whereby no compensation cost has been recognized as all options granted have an exercise price equal to or greater than the market value of the underlying common stock on the date of grant. Had compensation cost for these options been determined consistent with SFAS 123, our net loss and loss per common share would have been changed to the following pro forma amounts (in thousands, except per share amounts):
|
| Three Months Ended |
| Nine Months Ended |
| ||||||||
|
| September 30, |
| October 1, |
| September 30, |
| October 1, |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Net loss |
| $ | (1,404 | ) | $ | (4,894 | ) | $ | (8,811 | ) | $ | (10,232 | ) |
|
|
|
|
|
|
|
|
|
| ||||
Deduct: Total stock-based employee compensation expense determined under fair value method for all awards |
| (131 | ) | (66 | ) | (436 | ) | (282 | ) | ||||
Pro forma net loss |
| $ | (1,535 | ) | $ | (4,960 | ) | $ | (9,247 | ) | $ | (10,514 | ) |
|
|
|
|
|
|
|
|
|
| ||||
Net loss per common share: |
|
|
|
|
|
|
|
|
| ||||
Basic and diluted – as reported |
| $ | (0.13 | ) | $ | (0.47 | ) | $ | (0.84 | ) | $ | (0.97 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted – pro forma |
| $ | (0.15 | ) | $ | (0.47 | ) | $ | (0.88 | ) | $ | (1.00 | ) |
5. INVENTORIES
Inventories consist of the following:
|
| September 30, |
| December 31, |
| ||
|
|
|
|
|
| ||
Raw materials |
| $ | 5,265 |
| $ | 5,078 |
|
Work-in-process |
| 1,369 |
| 1,117 |
| ||
Finished goods |
| 5,535 |
| 4,607 |
| ||
|
|
|
|
|
| ||
|
| $ | 12,169 |
| $ | 10,802 |
|
8
6. OTHER COMPREHENSIVE LOSS
Other comprehensive loss consists of the following:
|
| Three Months Ended |
| Nine Months Ended |
| ||||||||
|
| September 30, |
| October 1, |
| September 30, |
| October 1, |
| ||||
|
| 2005 |
| 2004 |
| 2005 |
| 2004 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Net loss |
| $ | (1,404 | ) | $ | (4,894 | ) | $ | (8,811 | ) | $ | (10,232 | ) |
Other comprehensive income: |
|
|
|
|
|
|
|
|
| ||||
Reclassification adjustment due to realization of gain on sale of marketable securities |
| — |
| — |
| (722 | ) | — |
| ||||
Unrealized gain (loss) on marketable securities |
| — |
| 28 |
| 154 |
| 31 |
| ||||
Foreign currency translation |
| (23 | ) | — |
| (87 | ) | — |
| ||||
Other comprehensive income (loss) |
| (23 | ) | 28 |
| (655 | ) | 31 |
| ||||
Comprehensive loss |
| $ | (1,427 | ) | $ | (4,866 | ) | $ | (9,466 | ) | $ | (10,201 | ) |
7. GEOGRAPHIC INFORMATION
The following table presents sales by geographic location of our customers. Sales to individual countries greater than 10% of consolidated sales are shown separately:
|
| Three Months Ended |
| Nine Months Ended |
| ||||||||
|
| September 30, |
| October 1, |
| September 30, |
| October 1, |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
United States |
| $ | 10,876 |
| $ | 6,519 |
| $ | 27,926 |
| $ | 20,470 |
|
United Kingdom |
| 3,548 |
| 4,841 |
| 11,530 |
| 11,406 |
| ||||
Europe (excluding United Kingdom) |
| 2,355 |
| 3,045 |
| 5,619 |
| 11,681 |
| ||||
Pacific Rim |
| 3,637 |
| 1,259 |
| 8,137 |
| 5,857 |
| ||||
Other |
| 732 |
| 218 |
| 2,221 |
| 1,074 |
| ||||
Total sales |
| $ | 21,148 |
| $ | 15,882 |
| $ | 55,433 |
| $ | 50,488 |
|
The following table presents net property, plant and equipment by geographic location based on the location of the assets:
|
| September 30, |
| December 31, |
| ||
|
|
|
|
|
|
|
|
United States |
| $ | 14,948 |
| $ | 20,512 |
|
United Kingdom |
| 325 |
| 241 |
| ||
Total property, plant and equipment, net |
| $ | 15,273 |
| $ | 20,753 |
|
8. RESTRUCTURING CHARGES
During the first quarter of 2005, we initiated a restructuring plan in order to improve our profitability and cash flow from operations. During the first quarter of 2005, we recorded a restructuring charge of $1,891which included $1,601 of termination benefits, $134 of operating lease termination costs, $105 of relocation costs and $51 of outplacement costs. During the second quarter of 2005, we recorded an additional restructuring charge of $35, which represents additional operating lease termination costs incurred as part of the first quarter restructuring. As
9
of September 30, 2005, a liability of $254 remains for this restructuring plan and we estimate that no additional obligations will be incurred.
During the first quarter of 2004, we recovered $491 of accruals from restructuring plans initiated in 2001, 2002 and 2003, due to re-evaluation of our estimated obligation and paid severance benefits of $1,066. As of September 30, 2005, a liability of $54 remains for these restructuring plans and we estimate that no additional obligations will be incurred in relation to these restructuring plans. Accrued restructuring costs have been reported as accrued liabilities in the accompanying condensed consolidated balance sheets.
The following table represents restructuring provision activity for 2005:
|
| Beginning |
| Restructuring |
| Amounts |
| Ending |
| ||||
|
| Balance |
| Accrual |
| Paid |
| Balance |
| ||||
Three months ended September 30, 2005 |
| $ | 625 |
| $ | — |
| $ | (317 | ) | $ | 308 |
|
Nine months ended September 30, 2005 |
| $ | 61 |
| $ | 1,926 |
| $ | (1,679 | ) | $ | 308 |
|
9. WARRANTY RESERVES
We provide a warranty reserve for estimated future costs of servicing products under warranty agreements usually extending for periods from 90 days to several years. Anticipated costs for product warranties are based upon estimates derived from experience factors and are recorded as a cost of sales at the time of sale or over the contract period for long-term contracts. Warranty reserves are classified as accrued liabilities in the accompanying financial statements.
The following table provides the changes in our warranty reserves for the first nine months of 2005:
|
| Balance at |
| Provision for |
| Warranty |
| Balance at |
| ||||
|
| December 31, |
| warranty |
| charges against |
| September 30, |
| ||||
|
| 2004 |
| expense |
| the reserve |
| 2005 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warranty reserves |
| $ | 1,471 |
| $ | 715 |
| $ | (1,174 | ) | $ | 1,012 |
|
10. EMPLOYEE RETIREMENT BENEFIT PLANS
Components of Net Periodic Benefit Cost
For the three months ended:
|
| Pension Plan |
| Supplemental Executive |
| ||||||||
|
| September 30, |
| October 1, |
| September 30, |
| October 1, |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Service cost |
| $ | — |
| $ | — |
| $ | 37 |
| $ | 130 |
|
Interest cost |
| 600 |
| 625 |
| 121 |
| 127 |
| ||||
Expected return on assets |
| (572 | ) | (591 | ) | — |
| — |
| ||||
Amortization of actuarial loss |
| 28 |
| 17 |
| — |
| — |
| ||||
Amortization of prior year service cost |
| — |
| — |
| — |
| (15 | ) | ||||
Net periodic benefit cost |
| $ | 56 |
| $ | 51 |
| $ | 158 |
| $ | 242 |
|
10
For the nine months ended:
|
| Pension Plan |
| Supplemental Executive |
| ||||||||
|
| September 30, |
| October 1, |
| September 30, |
| October 1, |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Service cost |
| $ | — |
| $ | — |
| $ | 110 |
| $ | 390 |
|
Interest cost |
| 1,800 |
| 1,874 |
| 363 |
| 381 |
| ||||
Expected return on assets |
| (1,716 | ) | (1,772 | ) | — |
| — |
| ||||
Amortization of actuarial loss |
| 84 |
| 50 |
| — |
| — |
| ||||
Amortization of prior year service cost |
| — |
| — |
| — |
| (45 | ) | ||||
Net periodic benefit cost |
| $ | 168 |
| $ | 152 |
| $ | 473 |
| $ | 726 |
|
Employer Contributions
We made no contributions to the Pension Plan during the first nine months of 2005. We do not anticipate making contributions in the remaining three months of 2005 unless required to do so by statutory funding requirements.
We contributed $299 to the Supplemental Executive Retirement Plan (“SERP”) to pay $299 in benefits. We are not required by statutory funding requirements to fund the SERP nor do we fund it. All benefit payments are made directly to SERP beneficiaries and for reporting purposes are accounted for as both contributions made and benefits paid. We anticipate paying SERP benefits of $100 for the remainder of fiscal year 2005.
11. ASSETS HELD FOR SALE
During June 2005, we vacated and placed for sale a building and its related assets to help decrease operating costs. We expect to sell the building within one year. The building and related assets were classified as an asset held for sale as of July 1, 2005. The asset group includes the following major classes of assets, stated at the lower of cost or fair value:
|
|
|
| Accumulated |
| Net Carrying |
| |||
Asset Class |
| Cost |
| Depreciation |
| Value |
| |||
Buildings and improvements |
| $ | 8,644 |
| $ | (4,836 | ) | $ | 3,808 |
|
Manufacturing machinery and equipment |
| 271 |
| (259 | ) | 12 |
| |||
Office furniture and equipment |
| 284 |
| (284 | ) | — |
| |||
Total |
| $ | 9,199 |
| $ | (5,379 | ) | $ | 3,820 |
|
11
| MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The following discussion should be read in conjunction with the condensed consolidated financial statements and notes included in Item 1 of Part I of this Form 10-Q. All currency amounts are presented in thousands unless otherwise indicated. Except for the historical information contained herein, this quarterly report on Form 10-Q includes certain “forward-looking statements” within the meaning of that term in Section 27A of the Securities Act of 1933 and Section 21E of the Exchange Act of 1934, including, among others, those statements preceded by, followed by, or including the words “estimates,” “believes,” “expects,” “anticipates,” “plans,” “projects,” or similar expressions.
These forward-looking statements are based largely on our current expectations and are subject to a number of risks and uncertainties. These forward-looking statements include, but are not limited to:
• Our belief that sales will increase in future quarters.
• Our belief that gross margins on sales to service and support customers will increase in future quarters.
• Our belief that we will continue to reduce our operating expenses as a result of completion of initial product development and headcount reductions attributable to the restructuring that occurred in the first quarter of 2005.
• Our belief that existing cash, restricted cash, expected cash from future operations and new credit facilities will be sufficient to meet our anticipated working capital needs, routine capital expenditures and current debt service obligations for the next twelve months.
These forward-looking statements are based largely on our current expectations and are subject to a number of risks and uncertainties. Our actual results could differ materially from these forward-looking statements. Recent trends are not necessarily reliable indicators of future stock prices or financial performance and there can be no assurance that the events contemplated by the forward-looking statements contained in this quarterly report will, in fact, occur. For further information, refer to the business description and additional risk factors sections included in our Form 10-K for the year ended December 31, 2004, as filed with the Securities and Exchange Commission.
12
BUSINESS OVERVIEW
Evans & Sutherland produces high-quality visual systems used to rapidly and accurately display computer-generated images of the real world. With a 37-year history in computer graphics, we are widely regarded as both a pioneer and a leader in providing the world’s most realistic visual systems. We design, manufacture, market and support our visual systems to provide simulation training for a wide range of military and commercial applications, as well as for planetariums, science centers, and entertainment venues. We use a wide range of hardware from desktop personal computers (PCs) to what we believe are the most advanced image generation and display components in the world.
For more than 30 years, we have had a significant share of the overall market for visual systems. We estimate that our market share has ranged from 20% to 60%, depending on the specific market. We estimate that the size of the market for visual systems is approximately $300 million annually.
We operate as one business, providing visual simulation solutions to an international customer base. Our simulation solutions can be categorized into four customer markets: military simulation, commercial simulation, digital theater, and service & support.
EXECUTIVE SUMMARY
Our third quarter of 2005 financial results showed continued improvement as we achieved both higher revenues and a smaller loss compared to the first two quarters of 2005 and also the third quarter of 2004. Our revenues increased as a result of continued growth in our military market and our robust sales and growth in our planetarium market as a result of our Digistar 3 visual systems. We expect to see further sales growth in the fourth quarter of 2005 as a result of strong orders receipts during the third quarter of 2005 and scheduled backlog deliveries, including the initial shipments of our laser projector. Our gross margins also improved compared to the third quarter of 2004 as a result of solid military, commercial, and planetarium program cost execution and also from improvements in our manufacturing costs driven by increased throughput. We reduced our operating expenses as we again achieved cost savings from our first quarter restructuring action. Our cash decreased from the second quarter due to execution on certain programs where we had received advanced payments during the first quarter. Our balance sheet remains free of any short-term debt.
CRITICAL ACCOUNTING POLICIES
Certain accounting policies are considered by management to be critical to an understanding of our financial statements. Their application places significant demands on management’s 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, 2004. For all of these policies, management cautions that future results rarely develop exactly as forecast, and the best estimates routinely require adjustment.
RESULTS OF OPERATIONS
Third Quarter and Nine Months 2005 Compared to Third Quarter and Nine Months 2004
Consolidated Sales
The following table summarizes our consolidated sales for the three and nine months ended:
|
| For the Three Months Ended |
| For the Nine Months Ended |
| ||||||||
|
| September 30, |
| October 1, |
| September 30, |
| October 1, |
| ||||
Sales |
| $ | 21,148 |
| $ | 15,882 |
| $ | 55,433 |
| $ | 50,488 |
|
13
Third Quarter 2005 Compared to Third Quarter 2004
Our third quarter 2005 sales increased 33% compared to the third quarter of 2004 primarily as a result of growth in the military and planetarium markets. Sales to military customers increased 66% over the prior year as a result of the continuing delivery of several large ground warfare training visual systems. We believe the military market will continue to improve over the course of 2005 and 2006 as military training requirements increase. Our sales to planetarium customers increased 104% compared to prior year sales as a result of the continued success of our Digistar 3 technology in the planetarium market. We expect to see consistent, solid growth in the planetarium market going forward. Sales to our commercial market customers were down 7% compared to the prior year. We expect sales to the commercial market to remain consistent over the remainder of 2005 and increase in 2006 as a result of large deliveries scheduled for the fourth quarter and an overall increase in new airplane purchases. We experienced a 4% decrease in our sales to the service and support markets. These decreasing service and support sales continue to result from two factors: improved product reliability reducing the need for service in the commercial and military simulation markets and lower commercial and military market system sales over the past few years reducing the demand for spare parts.
First Three Quarters of 2005 Compared to First Three Quarters of 2004
Our year-to-date 2005 sales increased 10% compared to year-to-date 2004. Sales to military customers increased 23% and sales to planetarium customers increased 94% compared to the same period in 2004. The military increase is due to increased business in the ground warfare sector of the market, and the increase in the planetarium sales is driven by the strong performance of our Digistar 3 technology in that market. We believe the military market will continue to improve in the fourth quarter of 2005 and into 2006 as military training requirements increase, and we expect to see consistent, solid growth in the planetarium market going forward. Sales increases to military and planetarium customers were offset by decreases in sales to our commercial and service and support customers. Sales to our commercial market customers were down 23% compared to the same period in the prior year. This decrease was largely caused by three large commercial market deliveries in the first half of 2004 comprising over $3,000 in sales. No commercial deliveries of this magnitude were made during the first three quarters of 2005. We expect commercial market sales to remain consistent in the fourth quarter of 2005 and 2006 as a result of large deliveries scheduled for the fourth quarter and an overall increase in new airplane purchases. We experienced a 20% decrease in our sales to the service and support markets. This decrease in service and support sales is the result of two factors: improved product reliability reducing the need for service in the commercial and military simulation markets and lower commercial and military market system sales over the past few years reducing the demand for spare parts.
Gross Margin
The following table summarizes our gross margin and the percentage to total sales during the three and nine months ended:
|
| For the Three Months Ended |
| For the Nine Months Ended |
| ||||||||
|
| September 30, |
| October 1, |
| September 30, |
| October 1, |
| ||||
Gross margin |
| $ | 7,457 |
| $ | 5,201 |
| $ | 19,934 |
| $ | 17,944 |
|
Gross margin percentage |
| 35.3 | % | 32.7 | % | 36.0 | % | 35.5 | % | ||||
Third Quarter 2005 Compared to Third Quarter 2004
Our gross margin increased 2.6% from the third quarter of 2004 to the third quarter of 2005. Gross margins improved across all our markets as we realize benefits from our cost reduction efforts and the consolidation of operations and facilities and make significant improvements in our warranty costs. Our military market, commercial market, and planetarium market gross margins all experienced improvement over Q3 of 2004, by 2.1%, 4.3%, and 4.3% respectively. These increases were due to strong cost performance and execution on programs. Service and support gross margins increased 7.4% in the third quarter of 2005 as a result of several high gross margin deliveries
14
made during the third quarter of 2005, and improved performance on maintenance contracts in the third quarter of 2005. We expect gross margins on sales to service and support customers to increase in the fourth quarter of 2005 as our higher margin spares shipments increase and as our maintenance costs improve.
First Three Quarters of 2005 Compared to First Three Quarters of 2004
Our gross margin increased 0.5% from the first three quarters of 2004 to the first three quarters of 2005. Increases in military market and planetarium gross margins were offset by decreases in the commercial market. Military gross margins were 4.2% greater than the same period in 2004 due to the completion of three large contracts in the military market where we achieved strong cost performance in Q2 of 2005. Our gross margin on sales to the planetarium market has been essentially flat, increasing 1.1%. These increases are a result of benefits achieved from our cost reduction effort and the consolidation of operations and facilities. Our commercial market gross margins were also essentially flat, decreasing 0.7%. Service and support gross margins declined 7.2% in the first three quarters of 2005 as a result of increasing costs on maintenance programs. We expect these gross margins on sales to service and support customers to improve over the remainder of 2005 as our higher margin spares shipments increase and our maintenance costs improve.
Operating Expenses
The following table summarizes our operating expenses during the three and nine months ended:
|
| For the Three Months Ended |
| For the Nine Months Ended |
| ||||||||
|
| September 30, |
| October 1, |
| September 30, |
| October 1, |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative |
| $ | 4,836 |
| $ | 5,498 |
| $ | 14,501 |
| $ | 17,636 |
|
Research and development |
| 3,563 |
| 4,126 |
| 11,835 |
| 13,283 |
| ||||
Restructuring charge (recovery) |
| — |
| — |
| 1,926 |
| (491 | ) | ||||
Operating expenses |
| $ | 8,399 |
| $ | 9,624 |
| $ | 28,262 |
| $ | 30,428 |
|
Third Quarter 2005 Compared to Third Quarter 2004
Operating expenses decreased 13% in the third quarter of 2005 compared to the third quarter of 2004. Selling, general and administrative (“SG&A”) expenses decreased by $662 primarily as a result of a $695 reduction in labor and labor-related costs, a $166 reduction in marketing and advertising expenses, a $159 reduction in bad debt expense, a $125 reduction in travel costs associated with headcount reductions, and $21 of decreases in various other expenses. These SG&A decreases were partially offset by a $381 increase in costs for consulting and selling agents commissions as a result of our increase in orders and a $123 increase in legal costs for an insurance claim we initiated. Research and development (“R&D”) expenses decreased $563 primarily as a result of $963 decrease in labor and labor-related costs as a result of our cost reduction measures. This decrease was offset by increases in expenditures related to our laser projector development of $400. We expect continued reductions in our operating expenses as we benefit from the completion of new product development and significant savings from the headcount reductions taken in the first quarter of 2005.
First Three Quarters of 2005 Compared to First Three Quarters of 2004
Operating expenses decreased 7.1% in the first three Quarters of 2005 compared to the first three quarters of 2004. SG&A expenses decreased by $3,135 primarily as a result of $2,980 reduction in labor and labor related costs, a $470 reduction in depreciation and amortization, a $485 reduction in marketing and advertising expenses, a $331 decrease in travel expenses related to headcount reductions, and a $284 reduction in bad debt expense. These reductions were partially offset by an $862 increase in consultancy and selling agent commissions and a $544 increase in legal costs for an insurance claim we initiated. R&D expenses decreased $1,448 as a result of a $1,101 decrease in labor and labor-related costs, a $395 reduction in consultancy expenses, which were offset by $48 of increases in various other expenses.
15
In order to improve our profitability and cash flow based on our projections for 2005, we initiated a restructuring plan in March 2005 to reduce cost of sales and operating expenses and to improve our cash flow from operations. The largest cost in our business is labor and labor-related costs. As a result, we reduced our aggregate labor force by approximately 60 full-time equivalent employees and recorded a restructuring charge of $1,891, which was increased $35 in the second quarter for an additional lease termination cost. We expect this action to reduce our labor and labor-related costs by approximately $5,140 per year. Due to the timing of the restructuring, we expect to reduce our costs approximately $3,860 in 2005. This restructuring charge in Q1 of 2005 of $1,891, and the $35 addition in Q2 of 2005, represents an increase over the same period in 2004 of $2,417. In the first quarter of 2004 we realized $491 savings from the reduction of accruals for costs associated with restructuring events prior to 2004.
Gain on Sale of Assets Held for Sale
In June 2004, we sold an office building previously classified as an asset held for sale and recognized a gain in the amount of $3,488. During 2005 we did not realize any gains on sale of assets held for sale.
|
| For the Three Months Ended |
| For the Nine Months Ended |
| ||||||||
|
| September 30, |
| October 1, |
| September 30, |
| October 1, |
| ||||
Gain on assets held for sale |
| $ | — |
| $ | — |
| $ | — |
| $ | 3,488 |
|
Other Income and Expense
The following table summarizes our other income and expense during the three and nine months ended:
|
| For the Three Months Ended |
| For the Nine Months Ended |
| ||||||||
|
| September 30, |
| October 1, |
| September 30, |
| October 1, |
| ||||
Other income (expense), net |
| $ | (450 | ) | $ | (433 | ) | $ | (856 | ) | $ | (1,257 | ) |
Other income (expense), net for the third quarter of 2005 was 4% higher than the third quarter of 2004. Other income (expense), net for the third quarter of 2005 included $299 of interest expense, $141 of foreign currency loss, and was partially offset by interest income of $63 and earnings from investment in a joint venture of $38. Losses from foreign currency exchange increased $85 compared to third quarter of 2004 due to strengthening of the U.S. dollar compared to the Great Britain Pound and the Euro.
Other income (expense), net was 32% lower during the first three quarters of 2005 compared to the first three quarters of 2004. The decrease to other income (expense), net for the first three quarters of 2005 was primarily attributable to a $522 increase of gain from sale of investments, a decrease in bank fees of $360 due to a termination of a line of credit during 2004, an increase in earnings from investment in joint venture of $288, and an increase in interest income of $226, which were partially offset by a $896 increase in foreign currency loss due to the strengthening of the U.S dollar during the second and third quarters.
Income Taxes
The following table summarizes our income tax expense (benefit) during the three and nine months ended:
|
| For the Three Months Ended |
| For the Nine Months Ended |
| ||||||||
|
| September 30, |
| October 1, |
| September 30, |
| October 1, |
| ||||
Income tax expense (benefit) |
| $ | 12 |
| $ | 38 |
| $ | (373 | ) | $ | 134 |
|
Our income tax expense (benefit) in the first nine months of 2005 was $(373) net benefit due to a favorable resolution of certain worldwide income tax contingencies, compared to an income tax expense of $134 during the first nine months of 2004. Our income tax expense (benefit) for the three months ended September 30, 2005 was $12 due to accrual of income tax expense compared to $38 during the three months ended September 30, 2005.
16
LIQUIDITY AND CAPITAL RESOURCES
Liquidity and Capital Resources Summary
Summary information about our financial position as of September 30, 2005 and December 31, 2004, is presented in the following table:
|
| September 30, |
| December 31, |
| ||
Cash |
| $ | 6,157 |
| $ | 10,147 |
|
Restricted cash |
| 1,069 |
| 3,414 |
| ||
Total cash |
| 7,226 |
| 13,561 |
| ||
Convertible subordinated notes |
| (18,015 | ) | (18,015 | ) | ||
Net indebtedness |
| $ | (10,789 | ) | $ | (4,454 | ) |
|
|
|
|
|
| ||
Stockholders’ equity (deficit) |
| $ | (5,615 | ) | $ | 3,763 |
|
Cash Flow
In the first nine months of 2005, cash used in our operating activities of $5,610 was primarily attributable to a decrease in our costs and estimated earnings in excess of billings on uncompleted contracts as we executed several large programs on which we had received large down payments in previous quarters. Other fluctuations in working capital included a decrease in accounts receivable, an increase in inventories, a decrease in accrued liabilities, an increase in customer deposits and a decrease in accounts payable.
In the first nine months of 2005, cash used in our investing activities of $803 was primarily due to purchases of property, plant, and equipment of $1,923, partially offset by receipt of a $273 dividend from our equity investment in a joint venture and $778 of proceeds from the sale of investments.
In the first nine months of 2005, cash provided by our financing activities of $2,423 was primarily due to a $2,346 decrease to restricted cash as a result of reductions in outstanding letters of credit and cash backed guarantees used for customs.
Credit Facilities
During 2004, we had two secured line of credit facilities, one of which provided for borrowings and the issuance of letters of credit up to $25,000 and the other provided for borrowings up to $2,500.
Our credit facilities expired in December 2004 and we are currently evaluating opportunities to obtain new credit facilities. However, there can be no assurances that we will be successful in obtaining lines of credit on terms we find acceptable.
The ability to issue letters of credit and bank guarantees has become more important to our business as sales in countries other than in North America and Western Europe have increased. Letters of credit and bank guarantees in many countries are required as part of any final contract. Letters of credit and bank guarantees are issued to ensure our performance to third parties.
We currently have one 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 cash 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. The arrangement provides a first priority security interest in the
17
specific cash account. Certain of the terms of the arrangement prohibit us from creating, incurring, assuming or permitting to exist any indebtedness or liabilities resulting from borrowings, loans or advances; merging into, consolidating with any other entity, or making any substantial change in the nature of our business; or making new loans or advances to or investments in any other entity without prior written consent from the financial institution.
As of September 30, 2005, our outstanding letters of credit totaled $1,772. Letters of credit that expire in 2005 total $865 and those that expire in 2006-2007 total $907.
Rental Guarantee
In the second quarter of 2004, we entered into a three year building rental guarantee with the buyer of a building that was available for sale. Under terms of the rental guarantee, our maximum obligation will be reduced as the buyer leases out space in this building. As of September 30, 2005, we had accrued $1,270 for this obligation and approximately 50% of the space in this building was available. If we are obligated for the maximum remaining amount, we would expect to make payments of $168 over the remainder of 2005, $626 in 2006, and $476 in 2007.
Other Information
As of September 30, 2005, $18,015 of 6% Convertible Subordinated Debentures (the “6% Debentures”) was outstanding. The 6% Debentures, due in 2012, are unsecured and are convertible at each bondholder’s option into shares of our common stock at a conversion price of $42.10 per share for an aggregate of 428,000 shares of our common stock if all outstanding 6% Debentures are converted, subject to adjustment. The 6% Debentures are redeemable at our option, in whole or in part, at par.
Our Board of Directors has authorized the repurchase of 1,600,000 shares of our common stock. As of September 30, 2005, 463,500 shares remained available for repurchase under the plans approved by the Board of Directors. No shares were repurchased during 2005, 2004, or 2003. Stock may be acquired on the open market or through negotiated transactions depending on market conditions, share price and other factors. However we have no current plans to repurchase shares.
We also maintain trade credit arrangements with certain of our suppliers. The unavailability of a significant portion of, or the loss of, our various borrowing facilities or trade credit from suppliers would have a material adverse effect on our financial condition and operations.
In the event we were unable to make timely deliveries of products pursuant to the terms of various agreements with third parties or certain of our contracts were adversely impacted for failure to meet delivery requirements, we may be unable to meet our anticipated working capital needs, routine capital expenditures, and current debt service obligations on a short-term and long-term basis.
We believe our existing cash, restricted cash, letter of credit availability under our current arrangement, and expected cash from future operations and new credit facilities will be sufficient to meet our anticipated working capital needs, routine capital expenditures and current debt service obligations. At September 30, 2005, our total indebtedness was $18,015 consisting of long-term debt represented by the 6% Debentures. Our cash is available for working capital needs, capital expenditures, strategic investments, mergers and acquisitions, stock repurchases and other potential cash needs as they may arise.
CONTRACTUAL OBLIGATIONS
There were no material changes in our contractual obligations in the first nine months of 2005 compared to contractual obligations reported in our 2004 Annual Report on Form 10-K.
BACKLOG
On September 30, 2005, our backlog was $68,852 compared with $84,232 on December 31, 2004.
18
RECENT ACCOUNTING PRONOUNCEMENTS
In November 2004, the Financial Accounting Standards Board (“FASB”) issued Financial Accounting Standard No. 151, “Inventory Costs—an amendment to ARB No. 43, Chapter 4” (“SFAS 151”). SFAS 151 amends ARB No. 43, Chapter 4, “Inventory Pricing,” to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). Paragraph 5 of ARB 43, Chapter 4, previously stated that “. . . under some circumstances, items such as idle facility expense, excessive spoilage, double freight, and rehandling costs may be so abnormal as to require treatment as current period charges. . . .” SFAS 151 requires that those items be recognized as current-period charges regardless of whether they meet the criterion of “so abnormal.” In addition, SFAS 151 requires that allocation of fixed production overhead to the costs of conversion be based on the normal capacity of the production facilities. SFAS 151 is effective for inventory costs incurred during fiscal years beginning after June 15, 2005 and earlier application is permitted. We do not expect the adoption of this statement to have a material impact on our financial statements.
In December 2004, FASB issued Financial Accounting Standard No. 153, “Exchanges of Nonmonetary Assets—an amendment of APB Opinion No. 29” (“SFAS 153”). The guidance in APB Opinion No. 29, “Accounting for Nonmonetary Transactions,” is based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged. The guidance in that Opinion, however, included certain exceptions to that principle. SFAS 153 amends APB Opinion 29 to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. SFAS 153 is effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005 and earlier application is permitted. We do not expect the adoption of this statement to have a material impact on our financial statements.
In December 2004, FASB issued Statement of Financial Accounting Standards No. 123R (“SFAS 123R”), “Share-Based Payment.” SFAS 123R is a revision of SFAS 123. SFAS 123R establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services. Primarily, SFAS 123R focuses on accounting for transactions in which an entity obtains employee services in share-based payment transactions. It also addresses transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entity’s equity instruments or that may be settled by the issuance of those equity instruments.
SFAS 123R requires us to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award (with limited exceptions). That cost will be recognized over the period during which an employee is required to provide service in exchange for the award—the requisite service period (usually the vesting period). No compensation cost is recognized for equity instruments for which employees do not render the requisite service. Therefore, if an employee does not ultimately render the requisite service, the costs recognized related to unvested options will be reversed.
The SEC has permitted companies subject to its oversight additional time to implement the requirements of SFAS 123R. Accordingly, we will implement the guidance of SFAS 123R at the beginning of our next fiscal year, which will be January 1, 2006. We do not expect the adoption of SFAS 123R to have a material impact on our financial position or cash flows; however it will have a material impact on our results of operations as we are required to recognize stock-based compensation to our employees as compensation expense over their service period.
TRADEMARKS USED IN THIS FORM 10-Q
Digistar 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.
19
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The principal market risks to which we are exposed are changes in foreign currency exchange rates and changes in interest rates. Our international sales, which accounted for 51% of our total sales in the nine months ended September 30, 2005, are concentrated in the United Kingdom, continental Europe, and Asia. In general, we enter into sale agreements with our international customers denominated in U.S. dollars. Foreign currency purchase and sale contracts may be entered into for periods consistent with related underlying exposures and do not constitute positions independent of those exposures. We do not enter into foreign currency contracts for trading purposes and do not use leveraged contracts. As of September 30, 2005, we had sales contracts in Euros with approximately €1,821 remaining to collect and sales contracts in GBP with approximately £1,099 remaining to collect.
We reduce our exposure to changes in interest rates by maintaining a high proportion of our debt in fixed-rate instruments. As of September 30, 2005, our fixed-rate instruments consist solely of our 6% convertible subordinated debentures due in 2012, which had an outstanding balance and fair value, based on quoted market prices, as of September 30, 2005 of $18,015 and $12,070, respectively. We had no variable-rate instruments.
Item 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our President and Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2005 pursuant to Rule 13a-15(b) of the Securities Exchange Act. Disclosure controls and procedures are designed to ensure that material information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and ensure that such material information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Based on their evaluation, our Chief Executive Officer and Chief Financial Officer concluded that as of September 30, 2005, our disclosure controls and procedures were effective.
Changes in Internal Controls over Financial Reporting
During the quarter ended September 30, 2005, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
20
PART II - OTHER INFORMATION
In the normal course of business, we have various other legal claims and other contingent matters. Although the final outcome of such matters cannot be predicted, we believe the ultimate disposition of these matters will not have a material adverse effect on our consolidated financial condition, 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 herein. |
31.2 |
| Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended, filed herein. |
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 herein. |
21
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
| EVANS & SUTHERLAND COMPUTER CORPORATION | |||
|
|
| |||
|
|
| |||
Date | November 14, 2005 |
| By: | /s/ Kevin A. Paprzycki |
|
|
|
| Kevin A. Paprzycki, Chief Financial Officer, | ||
|
|
| and Corporate Secretary | ||
|
|
| (Authorized Officer) | ||
|
|
| (Principal Financial Officer) | ||
22