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| ELSE > SEC Filings for ELSE > Form 10-K on 23-Mar-2009 | All Recent SEC Filings |
23-Mar-2009
Annual Report
The preparation of our financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make decisions based upon estimates, assumptions, and factors it considers relevant to the circumstances. Such decisions include the selection of applicable accounting principles and the use of judgment in their application, the results of which impact reported amounts and disclosures. Changes in economic conditions or other business circumstances may affect the outcomes of management's estimates and assumptions.
RESULTS OF OPERATIONS
Comparison of Fiscal Year 2008 vs. Fiscal Year 2007
Net Revenues
Net revenues for fiscal year 2008 decreased $363,000 to $6,729,000, or 5.1%, when compared to net revenues for fiscal year 2007.
Net revenues for the Production Monitoring Division decreased to $6,193,000, a decrease of $301,000, or 4.6%, when comparing fiscal year 2008 to fiscal year 2007. The Production Monitoring Division experienced a decrease in net sales for the year ended December 31, 2008 due in large part to fluctuations of commodity grain and feed product prices worldwide, which has decreased the demand for biofuels. We have also been impacted by a slowing of capital spending on plant construction and expansion projects in 2008, which has affected all product categories. The recent economic turmoil has resulted in a slowdown in spending across all of our major market segments, which management expects to continue into 2009. In 2008, two new exclusive distributors were added internationally and, effective January 1, 2009, a new manufacturer's representative was added and assigned two states to continue to develop our sales and marketing channel. We have continued to expand the joint sales calls and training with all of our partners in order to increase their knowledge and effectiveness. Throughout 2009, we expect to continue to expand the number of manufacturer's representatives and exclusive distributors. Our corporate web sites provide significant information and product application knowledge to prospects and customers and also direct knowledge to our sales partners. New products developed and added to the product line in 2008 include the Electro-Sentry system, shaft tach speed sensor, rub block inspection doors, and new versions of several sensors for hazardous location installations. The Electro Sentry system integrates a touch screen and programmable logic controller with our sensors to allow users to very quickly identify where a problem is occurring in the customer's production systems.
We will continue to develop new products that broaden the line and provide complete monitoring solutions to our customers. The customers for our Production Monitoring Division have diverse applications for our products in the grain, feed, biofuels, power generation, mining, chemical, and other processing areas. We are continuing to look for new industries to expand sales for our Production Monitoring Division. We may also consider acquiring compatible businesses as part of our growth strategy.
Net revenues for the AutoData Systems Division decreased to $536,000, a decrease of $62,000, or 10.4%, when comparing fiscal year 2008 to fiscal year 2007. This decrease is primarily due to decreased sales of the ExpertScan and Scannable Office software products and related hardware needs.
NetE-nable, the web add-on to ExpertScan software, was released at the end of August 2007. ExpertScan with NetE-nable makes automated data collection faster, easier and more cost-effective. Because of a number of established online form competitors, sales of NetE-nable began slowly during the last four months of 2007 and sales remained steady throughout 2008. However, NetE-nable has the competitive advantage of offering one software program for both paper and electronic forms, and AutoData expects additional revenue from sales of NetE-nable to gradually increase during 2009, augmenting revenue from the ExpertScan and Scannable Office software programs.
Cost of Sales
Our cost of sales decreased from $2,569,000 to $2,546,000, a difference of $23,000, or 0.9%, when comparing fiscal year 2008 to fiscal year 2007. This decrease was primarily a result of decreased sales offset by an increase in material costs and the additional development costs for the Electro Sentry systems. We continue our efforts to maintain or reduce production costs by manufacturing products in the most cost effective manner. We continually look for lower cost sources of raw materials and outsource PC Board assembly when appropriate.
Gross Margins
Gross margin for the fiscal year 2008 was 62.2% versus 63.8% for the prior fiscal year. This slight decrease in margin was due to higher material and shipping costs. Gross margin for the Production Monitoring Division for the fiscal year ending December 31, 2008 and 2007 was 59.8% and 62.5%, respectively. The primary cause of the decrease in the gross margin was due to the new Electro Sentry systems, which contained a significant amount of costs related to customer training and internal staff development. The remaining variances were due to raw material expenses rising slightly faster than sales. Gross margin for the AutoData Systems Division for the fiscal year ending December 31, 2008 and 2007 was 89.1% and 77.6%, respectively. The increase was due to a smaller hardware sales dollar volume in fiscal year 2008. Gross margins on hardware are smaller than the gross margins on software.
Operating Expenses
Total operating expenses increased by $93,000, or 2.9%, when comparing fiscal year 2008 to fiscal year 2007. Of this increase, the Production Monitoring Division contributed an increase in operating expenses of $145,000, or 5.4%, when comparing fiscal year 2008 to fiscal year 2007. The AutoData Systems Division had a decrease in operating expenses of $52,000, or 10.5%, when comparing fiscal year 2008 to fiscal year 2007.
Selling and marketing costs increased by $91,000, or 6.6%, when comparing fiscal year 2008 to fiscal year 2007. Of this increase, the Production Monitoring Division had an increase of $101,000, or 8.4%. The AutoData Systems Division had a decrease of $10,000, or 5.6%. The increase from the Production Monitoring Division was due to an increase in salaries and wages and benefit expense because of a new hire and increased efforts in marketing our products through manufacturer's representatives, additional advertising in trade publications and websites, and trade shows and related marketing. We increased the number of sales trips to customers, including outside sales representatives when possible. We continue to grow our email product update notification in order to generate awareness and interest. The decrease from the AutoData Systems Division was due to decreases in salaries and wages and benefit expense due to a decrease in personnel in marketing.
General and administrative costs decreased by $56,000, or 4.6%, in fiscal year 2008 compared to fiscal year 2007. Of this decrease, the Production Monitoring Division had a decrease of $18,000, or 1.6%. This decrease was primarily due to contractor expenses (which were replaced by new hires), recruitment expenses, and accounting and other professional fees, including fees associated with Sarbanes-Oxley Section 404 documentation and testing. This was offset by increases in wages and benefits because of a new hire, depreciation expense on the upgrade of the enterprise software and related hardware, and computer maintenance and supplies. The AutoData Systems Division had a decrease of $38,000, or 33.9%. The decrease for the AutoData Systems Division was due to decreased use of contract personnel, accounting and other professional fees, including fees associated with Sarbanes-Oxley Section 404 documentation and testing and a decline in the allowance for doubtful accounts, offset by an increase in computer supplies and maintenance.
Research and development costs increased $58,000, or 10.1%, in fiscal year 2008 when compared with fiscal year 2007. The Production Monitoring Division research and development costs increased $62,000, or 16.8%, and AutoData Systems Division had a decrease of $4,000, or 2.0%. The increase in research and development costs in the Production Monitoring Division was due to additional product prototypes, mainly for the Electro Sentry system, wage and benefit increases in the engineering department, and legal fees related to patents. The decrease in the AutoData Systems Division was due to a decrease in computer maintenance and supplies.
Operating Income (Loss)
Operating income for fiscal year 2008 was $918,000, compared to last year's operating income of $1,351,000, a decrease of $433,000 or 32.1%.
The Production Monitoring Division had operating income of $882,000 compared to operating income of $1,380,000 in 2007, a decrease of $498,000, or 36.1%. The decrease in operating income was mainly due to a decrease in net sales (due in large part to fluctuations of commodity grain and feed product prices worldwide), a decrease in the gross margin (from 62.5% to 59.8%, primarily due to the new Electro Sentry systems), and an increase in the percentage of operating expenses to net sales (from 41.3% of net sales in 2007 to 45.6% of net sales in 2008).
The AutoData Systems Division had 2008 operating income of $36,000 compared to an operating loss of $29,000 for 2007, an increase of $65,000, or 224.1%. This increase in operating income was due primarily to an increase in the gross margin percentage due to increased sales of software and support and decreased sales of hardware.
Non-Operating Income
ESI Investment Company continues to provide us with an alternative source of earnings through investments in available-for-sale securities; however, our intent is to remain an operations-based company. Our investments in available-for-sale securities are subject to significant positive and negative changes in value. In addition to income from the sale of investments, we also realize interest income from our short-term holdings.
Investment income for fiscal year 2008 decreased by $178,000 to $72,000. The decrease was driven by a decrease in interest income and the recognized loss on a $35,000 investment in Minn Shares, Inc, (MSHS). Minn Shares, Inc. has been liquidated and we do not believe that we will receive any additional return of our investment. The decrease of 60.8% or $146,000 in interest income earned on temporary cash investments was a result of decreased interest rates on Treasury Bills, which were 4.89% in January 2007 and 0.06% in December 2008.
Available-for-sale securities are stated at fair value, and unrealized holding gains and losses, net of the related deferred tax effect, are reported as a separate component of stockholders' equity. Dividends on marketable equity securities are recognized in income when declared. Investments in unregistered securities are reported at original cost.
Realized gains and losses, including losses from declines in value of specific securities determined by management to be other-than-temporary, are included in income. Realized gains and losses are determined on the basis of the specific securities sold.
Net Income After Tax
We reported net income after tax for fiscal year 2008 of $606,000, as compared to net income of $1,196,000 in 2007, a decrease of $590,000, or 49.3%. Income per share was $0.18 in 2008 compared to earnings per share of $0.36 in 2007.
OFF-BALANCE SHEET ARRANGEMENTS
We are not a party to any off-balance sheet transactions, arrangements or obligations that have, or are reasonably likely to have, a material effect on our financial condition, changes in the financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
LIQUIDITY AND CAPITAL RESOURCES
The net decrease in our cash and cash equivalents was $250,000 during fiscal year 2008.
Cash from operating activities of $278,000 for the twelve months ended December 31, 2008 was primarily a result of our net income adjusted for depreciation expense on capital assets, accounts receivable, inventories, accrued expenses, income tax activity and realized loss on an investment. Cash from operating activities decreased $810,000 for the twelve month period ended December 31, 2008 when compared to the twelve month ended December 31, 2007 due to a decrease of $590,000 in net income and a $518,000 decrease in accrued income taxes, offset by a $473,000 increase in trade receivables.
Cash provided by investing activities was $5,000 for the twelve-month period ended December 31, 2008 compared to cash used in investing activities of $269,000 for the year ended December 31, 2007. Cash used for capital expenditures was $269,000 for the twelve months ended December 31, 2007. There were no capital expenditures during the twelve months ended December 31, 2008.
Cash used in financing activities was $533,000 and $491,000 for the twelve months ended December 31, 2008 and 2007, respectively. During the twelve months ended December 31, 2008 and 2007, we paid aggregate dividends of $539,000 and $538,000, respectively. During the twelve months ended December 31, 2008 and 2007, we had $6,000, each year, in stock purchases under the Employee Stock Purchase Plan. Also, in the year ended December 31, 2007, $41,000 in stock options were exercised.
Our ongoing cash requirements will be primarily for capital expenditures, acquisitions, research and development in both the Production Monitoring and AutoData divisions, and working capital. Management believes that cash on hand and any cash provided by operations will be sufficient to meet our cash requirements through at least the next 12 months.
Our primary investments are 343,267 shares of Rudolph Technologies, Inc. ("Rudolph"), listed on the Nasdaq stock market and 551,759 shares of PPT Vision, Inc ("PPT"), listed on the Pink Sheets. The Rudolph investment is accounted for using the available-for-sale method. The PPT investment is accounted for under the equity method of accounting. The fair value of the Rudolph investment totaled $1,212,000 and $3,886,000 as of December 31, 2008 and 2007, respectively. The fair value of the PPT investment totaled $33,000 and $66,000 as of December 31, 2008 and 2007, respectively. These stocks are subject to fluctuations in price and could have a negative effect on our liquidity. Liquid securities are periodically sold as deemed appropriate by management. The market value of PPT and Rudolph stock as of February 27, 2009 was $28,000 and $930,000, respectively.
CRITICAL ACCOUNTING ESTIMATES
Management uses estimates and assumptions in preparing our financial statements in accordance with generally accepted accounting principles. These estimates affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. As described in the notes to the financial statements, significant accounting estimates which are critical at this time are the economic lives of property and equipment, realizability of accounts receivable, valuation of deferred tax assets/liabilities, valuation of inventory and valuation of investments.
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