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, 2014October 2, 2015

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)

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.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Evans & Sutherland Computer Corporation

Quarter Ended September 26, 2014October 2, 2015

EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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 periodsthree and nine months ended September 26, 2014October 2, 2015 are not necessarily indicative of the results to be expected for the full year ending December 31, 2014.2015.  The Company operates on a calendar year with the first three fiscal quarters ending on the last Friday of the calendarthirteenth week in the quarter.

Sales include revenues from system hardware and the related integrated software, database products and service contracts.  The following methods are used to recognize revenue:determine revenue recognition:

In those arrangements where software is a significant component of the contract, the Company uses the percentage-of-completion method as described above.

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.

Basic net income (loss)loss per common share is computed based on the weighted-average number of common shares outstanding during the period.  Diluted net income (loss)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.

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 measured2007, except 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.2013. In order to preserve the liquid resources required to operate the business, the Company stopped making cash payments due to the Pension Plan trust for the Company’s defined benefit pension plan (the “Pension Plan”) beginning in October 2012. TheIn January 2013, the Company initiated an application process for the distress termination of the Pension Plan in accordance with provisions of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”) which it believes will result in a settlementwith the goal of settling  its Pension Plan liabilities on terms that are feasible for the Company to continue in business as a going concern through 2014concern. On April 21, 2015, the Company executed an agreement (the “Settlement Agreement”) which terminated the Pension Plan and beyond. Because ofsettled the payments duePension Plan’s liabilities in exchange for an obligation to pay to the Pension Trust,Benefit Guaranty Corporation (“PBGC”) $10,500 over twelve years and issue to the PBGC 88,117 shares of E&S treasury stock (see Note 3). In addition, the Settlement Agreement has led to a lien in favornew banking relationship and improved credit capacity. Aided by prior cost reduction efforts and improved sales volume, for the nine months ended October 2, 2015, the Company has generated profitable results before recording the pension expense and a charge for the settlement of the Pension Plan. The Company is no longer incurring expenses related to the terminated Pension Plan has arisen againstbut is responsible for fixed annual installment payments of $750 to the assetsPBGC. The Company’s unrestricted cash balances totaling $3,660 as of October 2, 2015, improved credit capacity and forecasted operations indicate sufficient resources will be available to meet its obligations, including the terms 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 ofSettlement Agreement, through at least 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.30, 2016.

As of September 26, 2014,October 2, 2015, options to purchase 1,439,9131,312,613 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, 2014October 2, 2015 follows (shares in thousands):

As of September 26, 2014,October 2, 2015, options exercisable and options outstanding had a weighted average remaining contractual term of 3.73.63 and 5.05.03 years, respectively, and had an aggregate intrinsic value of $26$307 and $76,$555, 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-averageweighted average values of employee stock options granted under the stock option plan, as well as the weighted-averageweighted average assumptions used in calculating these values during the first nine months of 2014,2015, were based on estimates as of the date of grant as follows:

As of September 26, 2014,October 2, 2015, there was approximately $14$37 of total unrecognized share-based compensation cost related to grants under the stock option plan that will be recognized over a weighted-average period of 2.1 years.

Share-based compensation expense included in selling, general and administrative expense in the statements of comprehensive income (loss) for each of the nine-month periods ended October 2, 2015 and September 26, 2014 was $30 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 October 2, 2015 and September 26, 2014 was $10 and September 27, 2013 was $4.$4, respectively.

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 beenwas to demonstrate to the PBGC that it qualifiesqualified 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 musthad to demonstrate to the satisfaction of the PBGC that, unless the termination occurs,occurred, the Company willwould be unable to pay its debts when they come due and willwould be unable to continue in business, or that the costs of the Pension Plan havehad 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 transfertransfers 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.

Pursuant to a conclusiondetermination by the PBGC that the requirements of the process and a settlementdistress termination of the resulting liabilities. Based upon ongoing correspondencePension Plan had been met, on April 21, 2015, the Company, as the administrator of the Pension Plan, and the PBGC entered into an Agreement For Appointment of Trustee and Termination of Plan (the “Termination Agreement”) (a) terminating the Plan, (b) establishing March 8, 2013 as the Plan’s termination date and (c) appointing the PBGC as statutory trustee of the Plan.

In connection with the Termination Agreement, on April 21, 2015, the Company entered into the Settlement Agreement (the “Settlement Agreement”) with the PBGC to settle all liabilities of the Pension Plan including any termination premium resulting from the Pension Plan termination (the “Settled ERISA Liabilities”). Pursuant to the Settlement Agreement, the Company agreed to (a) pay to the PBGC a total of $10,500, with $1,500 due within ten days following the effective date of the Settlement Agreement and the remainder paid in twelve annual installments of $750 beginning on October 31, 2015 (the “Pension Settlement Obligation”) and (b) issue within ten days following the effective date of the Settlement Agreement 88,117 shares of the Company’s treasury stock in the name of the PBGC. On April 23, 2015, the Company issued to the PBGC the 88,117 shares of stock and on May 1, 2015 it paid the initial $1,500 amount due to the PBGC. On October 22, 2015, the Company made the first of the twelve annual installments.  The Settlement Agreement further provides that the PBGC will be deemed to have released the Company from all Settled ERISA Liabilities upon payment of the Pension Settlement Obligation. In the event of a default by the Company of its obligations under the Settlement Agreement or the underlying agreements which secure the Pension Settlement Obligation, the PBGC may enforce payment of the Settled ERISA Liabilities, which would accrue interest at various rates until payment is made and be reduced by any payments made by the Company pursuant to the Settlement Agreement.  The estimated total Settled ERISA Liabilities as of the settlement date is $46,000.

The termination of the Pension Plan and settlement of its underlying liabilities enables the Company to satisfy the previously disclosed unfunded liability attributable to the Pension Plan by the issuing to the PBGC the 88,117 shares of stock from treasury and making the fixed installment payments of the Pension Settlement Obligation. As of the date of the Settlement Agreement, the balance of the unfunded liability attributable to the Pension Plan, which was previously reported with Pension and Retirement Obligations, was $35,870, of which $31,776 was attributable to accumulated other comprehensive loss. The market value of the 88,117 shares of stock issued to the PBGC from treasury on April 23, 2015 was $71. The Pension Settlement Obligation was recorded as a liability of the Company as of April 21, 2015 in the amount of $7,643, reflecting the present value of the installments at an interest rate 7%, which the Company believes represents the fair market interest rate for junior secured debt with similar secured terms of the Security Agreement. The unfunded Pension Plan liability of $35,870 exceeded the $7,714 combined value of the stock issued to the PBGC and the Pension Settlement Obligation by $28,156. There are no income tax consequences of the settlement since no tax deduction was taken for the pension expense that gave rise to the application process will likely result in aPension Plan liability. Accordingly, the settlement of the Pension Plan Liabilities was recorded as of April 21, 2015 as follows:

After applying the first $1,500 installment made on May 1, 2015 and recording imputed interest expense at 7%, the balance of the Pension Settlement Obligation is recorded with liabilities on terms that will enable the Company to continue to operateBalance Sheet as a going concern. However,follows as of the date of this filing, the Company is uncertainOctober 2, 2015:

As a result of the timing orsettlement of Pension Plan liabilities on April 21, 2015, the ultimate outcome.Company’s only remaining pension obligation is the Supplemental Executive Retirement Plan (“SERP”). The Company recorded expense of $326 related to the Pension Plan for the first quarter prior to the Termination Agreement executed on April 21, 2015.

The Company is not currently required to fund the Supplemental Executive Retirement Plan (SERP).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$435 in the next 12 months.

For the three-month periods ended October 2, 2015 and September 26, 2014, and September 27, 2013, the Company reclassified $101$0 and $182,$101, 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 October 2, 2015 and September 26, 2014, and September 27, 2013, the Company reclassified $305$195 and $546,$305, respectively, of actuarial loss from accumulated other comprehensive loss that was included in pension expense in the statements of comprehensive income (loss)loss for the same periods.

The following discussion should be read in conjunction with the condensed consolidated financial statements and related notes of Evans & Sutherland Computer Corporation and subsidiaries (collectively, the “Company,”  “E&S,” “we,” “us” and “our”) included in Item 1 of Part I of this quarterly report on 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.

Executive Summary

The third quarter of 2015 reported improved sales volume and $921 of net income forcompared to the third quarter of 2014, was slightly lower thanwhich reported a net income of $639.  Although sales volume improved, the comparable period of 2013. For the 9 month periods presented, sales and gross profit contributions improved in 2014; however the net losscontribution was comparable to the third quarter of 2014 due to higherunfavorable margins on some large unrelated projects in 2015. Reduced operating expenses, primarily pension related, contributed to the higher net income in the third quarter of 2015 compared to 2014. The higher 2014 operating expenses were due largely to a credit from a settlementfirst nine months of a dispute which reduced expenses in the second quarter2015 reported improved sales volume and $9,710 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 favorablygross profit as compared to the first two quartersnine months of 2014.2014, which reported gross profit of $7,371.  The improvementstronger sales and improved gross profit in 2015 was attributable to stronger sales bookings over the timing of work and deliveries on customer projects rather than a negative trend in the overall business.prior year. The sales backlog and prospects remain strongremained healthy at the end of the third quarter of 2015 which supports an encouraging outlook for the remainder of 20142015 and into 2016. Operating expenses, except for a $3,620 charge for the settlement of the pension liabilities, were lower for the periods presented primarily due to decreased pension expense in the period. The charge for the settlement of the pension liabilities is not a recurring expense item. Absent this charge, results would have been profitable for both the three- and nine-month periods ended October 2, 2015. Cash balances are expected toAlso, we were profitable in each of the first three quarters of 2015 before the non-recurring pension related charges.  With the healthy backlog and sales prospects, we anticipate sales at levels that should continue to be variable as result of the timing of progress payments on customer orders. We continue to believe that sales and overallyield profitable results for 2014 will be comparable to 2013.the remainder of 2015.

We continue to expect variable but reasonably consistent future sales and gross profits from our current product line at annual levels sufficient to cover or exceed operating expenses excludingexpenses.  Although we reported net income for the current expensethird quarter, we had a net loss for the first nine months of 2015 due to the pension settlement charge of $3,620. However, the pension settlement contributed largely to total comprehensive income which amounted to $30,295 for the first nine months of 2015. This nearly eliminated our stockholders deficit, which was reduced from $30,703 as of December 31, 2014 to $308 as of October 2, 2015. With the settlement of the Pension Plan. The success of our efforts to settle our pensionPlan liabilities, for an amount that the business can satisfy remains critical to the long-term viability of the Company. We believewe expect an improved financial position that would result from relief of the Pension Plan burden may present opportunities for better results through the availability of credit and stronger qualification for customer projects.

Critical Accounting Policies

Certain accounting policies are considered by management to be critical to an understanding of our condensed consolidated financial statements.  Their application requires significant management judgment, with financial reporting results relying on estimates about the effect of matters that are inherently uncertain.  A summary of critical accounting policies can be found in our Form 10-K for the year ended December 31, 2013.2014.  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

The following table summarizes our sales:

Sales for the third quarter of 20142015 were slightly lower compared to22% higher than the same period in 2013.2014. Sales for the first nine months of 20142015 were 9%38% higher than the same period in 2013 due2014.  The higher 2015 sales were attributable to an increase in the volume of ordersprogress and deliveries on larger customer contracts as compared to the same period of all of our products.  2014.

Revenue backlog was $19,857improved to $29,152 as of September 26, 2014,October 2, 2015, compared to $17,165$28,173 as of December 31, 2013.  We expect sales2014.  Sales for the remainderfirst nine months of 2015 have already exceeded total sales during all of 2014 and we expect a healthy volume of sales in the fourth quarter of 2015 to result in total annual sales comparableadd to 2013 based on delivery schedules fromthis improvement.  Sales prospects support the improvedoutlook for maintaining a strong revenue backlog as well as strong sales prospects.through the end of 2015.

The following table summarizes our gross profit and the gross profit as a percentage of total sales:

The following table summarizes our operating expenses:

The following table summarizes our other expense:

The settlement of Pension Plan liabilities resulted in a charge to the same periodsstatement of operations of $3,620 which was offset by other comprehensive income of $31,776 for a total gain of $28,156 recorded in 2013.the second quarter of 2015. This was the primary contribution to the total comprehensive income of $30,295 reported for the nine-month period presented for 2015.

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 reducereverse our long history of operating losses and welosses.  We believe that we will settle ourthe termination of the Pension Plan together with the settlement of the underlying pension liabilities on termsachieved our goal of reducing our obligations to levels that allow the business can fulfill.to be viable. As a result, we believe existing liquidity resources and funds generated from forecasted revenue will be sufficient to meet our current and long-term obligations upon adjustment for the settlement of the pension liabilities.obligations. 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.

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.

For 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 Company is a party to a creditline-of-credit agreement with a commercial bank to providewhich permits borrowings of up to $1,100 to fund Spitz working capital requirements. InterestUnder the line of credit agreement, interest is charged on any amounts borrowed at the lender’s prime rate.Wall Street Journal Prime Rate.  Any borrowings under the Credit Agreement are secured by Spitz real and personal property and all of the outstanding shares of Spitz common stock. The line-of-credit agreement and mortgage notes (with the same commercial bank) contain cross default provisions whereby a default on either agreement will result in a default on both agreements. On October 3, 2014, the commercial bank notified the Company that it is no longer obligated to make advances under the creditline-of-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 expectsIn September 2015 the bank confirmed that uponthe defaults were cured as a result of the 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, thereliabilities. There were no borrowings outstanding under the creditline-of-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.

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.

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,October 2, 2015, or subsequent to that date, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. Our process for evaluating controls and procedures is continuous and encompasses constant improvement of the design and effectiveness of established controls and procedures and the remediation of any deficiencies which may be identified during this process.

 

In the normal course of business, we become involved in various legal proceedings.  Although the final outcome of such proceedings cannot be predicted with certainty, we believe the ultimate disposition of any such proceedings will not have a material adverse effect on our consolidated financial position, liquidity, or results of operations.