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)

Utah
(State or Other Jurisdiction of
Incorporation or Organization)
87-0278175
(I.R.S. Employer
Identification No.)
  
770 Komas Drive, Salt Lake City, Utah
(Address of Principal Executive Offices)
84108
(Zip Code)
  
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 X  No ____

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).      Yes  X  No ___

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

        Large accelerated filer [  ]                                                                                                Accelerated filer [  ]
Accelerated filer [  ]
       Non-accelerated filer [  ]   (Do not check if a smaller reporting company)Smaller reporting company [X]

       Non-accelerated filer [  ]   (Do not check if a smaller reporting company)                     Smaller reporting company [X]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ___ No   X   

The number of shares of the registrant’s Common Stock (par value $0.20 per share) outstanding on November 5, 20142015 was 11,089,199.11,177,316.

 
 

 

FORM 10-Q

Evans & Sutherland Computer Corporation

Quarter Ended September 26, 2014October 2, 2015

  Page No.
   
  
   
 
   
 
December 31, 2014 (Unaudited)
   
 
   
 
 
   
 
   
 
   
   
  
   
   
 
SIGNATURE
1819


 
2


PART I – FINANCIAL INFORMATION

Item 1.                      CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited) (In thousands, except share and per share data)

  September 26,  December 31, 
  2014  2013 
ASSETS 
Current assets:      
Cash and cash equivalents $3,983  $3,376 
Restricted cash  731   1,020 
Marketable securities  -   229 
Accounts receivable, less allowances for doubtful receivables of $246        
and $277, respectively  4,810   5,552 
Costs and estimated earnings in excess of billings on uncompleted contracts  2,178   2,391 
Inventories, net  4,063   3,025 
Prepaid expenses and deposits  506   568 
Total current assets  16,271   16,161 
Property, plant and equipment, net  7,339   7,405 
Goodwill  635   635 
Definite-lived intangible assets, net  80   115 
Other assets  1,046   1,386 
Total assets $25,371  $25,702 
LIABILITIES AND STOCKHOLDERS’ DEFICIT 
Current liabilities:        
Accounts payable $837  $1,433 
Accrued liabilities  1,150   1,183 
Billings in excess of costs and estimated earnings on uncompleted contracts  3,661   3,358 
Customer deposits  2,602   2,157 
Current portion of retirement obligations  519   531 
Current portion of long-term debt  2,408   2,995 
Total current liabilities  11,177   11,657 
Pension and retirement obligations, net of current portion  23,525   23,567 
Long-term debt, net of current portion  3,004   2,362 
Deferred rent obligation  1,526   1,514 
Total liabilities  39,232   39,100 
Commitments and contingencies (Note 4)        
Stockholders' deficit:        
Preferred stock, no par value: 10,000,000 shares authorized;        
no shares outstanding  -   - 
Common stock, $0.20 par value: 30,000,000 shares authorized;     
11,441,666 shares issued  2,288   2,288 
Additional paid-in capital  54,496   54,484 
Common stock in treasury, at cost: 352,467 shares  (4,709)  (4,709)
Accumulated deficit  (48,632)  (47,852)
Accumulated other comprehensive loss  (17,304)  (17,609)
Total stockholders' deficit  (13,861)  (13,398)
Total liabilities and stockholders' deficit $25,371  $25,702 
  October 2,  December 31, 
  2015  2014 
ASSETS      
Current assets:      
Cash and cash equivalents $3,660  $7,038 
Restricted cash  600   711 
Accounts receivable, net  6,598   4,586 
Costs and estimated earnings in excess of billings on        
uncompleted contracts  3,045   1,699 
Inventories, net  5,023   4,163 
Prepaid expenses and deposits  773   635 
Total current assets  19,699   18,832 
Property and equipment, net  4,689   4,803 
Goodwill  635   635 
Intangible assets, net  37   68 
Other assets  1,056   1,118 
Total assets $26,116  $25,456 
         
LIABILITIES AND STOCKHOLDERS’ DEFICIT      �� 
Current liabilities:        
Accounts payable $1,025  $710 
Accrued liabilities  1,652   1,142 
Billings in excess of costs and estimated earnings on        
uncompleted contracts  4,980   5,176 
Customer deposits  4,002   4,081 
Current portion of retirement obligations  435   535 
Current portion of pension settlement obligation  534   - 
Current portion of long-term debt  197   2,362 
Total current liabilities  12,825   14,006 
Pension and retirement obligations, net of current portion  4,207   40,076 
Pension settlement obligation, net of current portion  5,624   - 
Long-term debt, net of current portion  2,009   - 
Deferred rent obligation  1,759   2,077 
Total liabilities  26,424   56,159 
Commitments and contingencies        
Stockholders’ deficit:        
Preferred stock, no par value: 10,000,000 shares authorized;        
no shares outstanding  -   - 
Common stock, $0.20 par value: 30,000,000 shares authorized;        
11,441,666 shares issued  2,288   2,288 
Additional paid-in-capital  53,423   54,500 
Common stock in treasury, at cost, 264,350 shares  (3,532)  (4,709)
Accumulated deficit  (50,833)  (49,157)
Accumulated other comprehensive loss  (1,654)  (33,625)
Total stockholders’ deficit  (308)  (30,703)
Total liabilities and stockholders’ deficit $26,116  $25,456 

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

 
3


EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited) (In thousands, except per share data)
  Three Months Ended  Nine Months Ended 
  October 2,  September 26,  October 2,  September 26, 
  2015  2014  2015  2014 
             
Sales $9,375  $7,656  $27,666  $20,040 
Cost of sales  (6,049)  (4,371)  (17,956)  (12,669)
     Gross profit  3,326   3,285   9,710   7,371 
Operating expenses:                
     Selling, general and administrative  (1,535)  (1,637)  (5,132)  (5,211)
     Research and development  (563)  (537)  (1,702)  (1,608)
     Pension  (49)  (359)  (473)  (777)
     Pension settlement  -   -   (3,620)  - 
          Total operating expenses  (2,147)  (2,533)  (10,927)  (7,596)
                 
          Operating income (loss)  1,179   752   (1,217)  (225)
                 
Other expense, net  (231)  (192)  (404)  (567)
Income (loss) before income tax benefit (provision)  948   560   (1,621)  (792)
     Income tax benefit (provision)  (27)  79   (55)  12 
          Net income (loss) $921  $639  $(1,676) $(780)
                 
Net income (loss) per common share – basic and diluted $0.08  $0.06  $(0.15) $(0.07)
                 
Weighted average common shares outstanding – basic  11,177   11,089   11,141   11,089 
Weighted average common shares outstanding – diluted  11,705   11,435   11,141   11,089 
                 
Comprehensive income (loss), net of tax:                
Net income (loss) $921  $639  $(1,676) $(780)
Other comprehensive income (loss):                
  Reclassification of pension expense to net income (loss)  -   101   195   305 
  Pension settlement  -   -   31,776   - 
    Other comprehensive income  -   101   31,971   305 
          Total comprehensive income (loss) $921  $740  $30,295  $(475)

  Three Months Ended  Nine Months Ended 
  September 26,  September 27,  September 26,  September 27, 
  2014  2013  2014  2013 
             
Sales $7,656  $8,509  $20,040  $18,428 
Cost of sales  4,371   4,981   12,669   11,858 
    Gross profit  3,285   3,528   7,371   6,570 
Operating expenses:                
    Selling, general and administrative  1,637   1,545   5,211   4,291 
    Research and development  537   529   1,608   1,873 
    Pension  359   249   777   618 
        Total operating expenses  2,533   2,323   7,596   6,782 
        Operating income (loss)  752   1,205   (225)  (212)
Other expense, net  (192)  (185)  (567)  (540)
   Income (loss) before income tax provision  560   1,020   (792)  (752)
Income tax (provision) benefit  79   (31)  12   (41)
        Net income (loss) $639  $989  $(780) $(793)
 
Net income (loss) per common share – basic and diluted
 $0.06  $0.09  $(0.07) $(0.07)
                 
Weighted average common shares outstanding – basic  11,089   11,089   11,089   11,089 
Weighted average common shares outstanding – diluted  11,435   11,155   11,089   11,089 
                 
Comprehensive income (loss):                
Net income (loss) $639  $989  $(780) $(793)
Other comprehensive income:                
    Reclassification of realized gains from sale of marketable securities to net income (loss)  -   -   -   (26)
    Unrealized gain on marketable securities  -   3   -   18 
    Reclassification of pension expense to net income (loss)  101   182   305   546 
      Other comprehensive income, net of tax  101   185   305   538 
        Total comprehensive income (loss) $740  $1,174  $(475) $(255)
The accompanying notes are an integral part of these condensed consolidated financial statements.

 
4


EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) (In thousands)
 
  Nine Months Ended 
  September 26,  September 27, 
  2014  2013 
Cash flows from operating activities:      
Net loss $(780) $(793)
   Adjustments to reconcile net loss to net cash provided by
 operating activities:
     
     Depreciation and amortization  376   452 
     Amortization of deferred pension expense  305   546 
     Other  294   471 
     Change in assets and liabilities:        
     Decrease (increase) in restricted cash  289   (333)
     Decrease (increase) in accounts receivable, net  726   (1,287)
     Increase in inventories  (1,104)  (1,062)
     Decrease in costs and estimated earnings in excess of billings
        on uncompleted contracts
  516   1,813 
     Decrease in prepaid expenses and deposits  402   633 
     Increase (decrease) in accounts payable  (596)  689 
     Decrease in accrued liabilities  (21)  (102)
     Decrease in pension and retirement obligations  (54)  (549)
     Increase in customer deposits  445   419 
   Net cash provided by operating activities  798   897 
         
Cash flows from investing activities:        
Purchases of property, plant and equipment  (289)  (30)
Proceeds from sale of marketable securities  229   385 
       Net cash (used in) provided by investing activities  (60)  355 
         
Cash flows from financing activities:        
Principal payments on long-term debt  (131)  (123)
        Net cash used in financing activities  (131)  (123)
         
Net increase in cash and cash equivalents  607   1,129 
Cash and cash equivalents as of beginning of the period  3,376   2,111 
Cash and cash equivalents as of end of the period $3,983  $3,240 
         
Non-cash investing and financing activities:        
      Reclassification of realized gains from sale of marketable securities to net loss $-  $(26)
      Unrealized gain on marketable securities  -   18 
Supplemental disclosures of cash flow information:        
Cash paid for interest $390  $397 
Cash paid for income taxes  45   26 
         
  Nine Months Ended 
  October 2,  September 26, 
  2015  2014 
       
Cash flows from operating activities:      
Net loss $(1,676) $(780)
Adjustments to reconcile net loss to net cash provided by        
(used in) operating activities:        
Depreciation and amortization  216   376 
Amortization of deferred pension costs  195   305 
Pension settlement charge  3,620   - 
Provision for excess and obsolete inventory  76   - 
Other  72   294 
Changes in assets and liabilities:        
Decrease in restricted cash  111   289 
Decrease (increase) in accounts receivable  (2,054)  726 
Increase in inventories  (936)  (1,104)
Decrease (increase) in costs and estimated earnings in        
excess of billings on uncompleted contracts, net  (1,542)  516 
Decrease (increase) in prepaid expenses and other assets  (76)  402 
Increase (decrease) in accounts payable  315   (596)
Increase (decrease) in accrued liabilities  510   (21)
Decrease in accrued pension and retirement liabilities  (100)  (54)
Decrease in pension settlement obligation  (1,485)  - 
Increase (decrease) in customer deposits  (79)  445 
Decrease in deferred rent obligation  (318)  - 
Net cash provided by (used in) operating activities  (3,151)  798 
         
Cash flows from investing activities:        
Purchases of property and equipment  (71)  (289)
Proceeds from sale of marketable securities  -   229 
Net cash used in investing activities  (71)  (60)
         
Cash flows from financing activities:        
Principal payments on long-term debt  (156)  (131)
Net cash used in financing activities  (156)  (131)
         
Net increase (decrease) in cash and cash equivalents  (3,378)  607 
Cash and cash equivalents as of beginning of the period  7,038   3,376 
Cash and cash equivalents as of end of the period $3,660  $3,983 
         
Supplemental disclosures of non-cash investing and financing        
activities:        
Settlement of pension liability $35,870  $- 
         
Supplemental disclosures of cash flow information:        
Cash paid during the period for:        
Interest $126  $390 
Income taxes  12   45 

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

 
5

Notes to Condensed Consolidated Financial Statements
(Unaudited)


All dollar amounts (except share and per share amounts) in thousands.

1.GENERAL

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of Evans & Sutherland Computer Corporation and subsidiaries (collectively, the “Company” andor “E&S”) have been prepared in accordance with the instructions to Form 10-Q and, therefore, do not include all information and notes necessary for a complete presentation of financial position, results of operations, and cash flows, in conformity with U.S. generally accepted accounting principles (“US GAAP”).  This report on Form 10-Q should be read in conjunction with the Company’s annual report on Form 10-K for the year ended December 31, 2013.2014.

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.

Revenue Recognition

Sales include revenues from system hardware and the related integrated software, database products and service contracts.  The following methods are used to recognize revenue:determine revenue recognition:
 
Percentage of Completion. In arrangements that are longer in term and require significant production, modification or customization, revenue is recognized using the percentage-of-completion method.  In applying this method,  the Company utilizes cost-to-cost methodology whereby it estimates the percent complete by calculating the ratio of costs incurred (consisting of material, labor and subcontracting costs, as well as an allocation of indirect costs) for each contract to its total anticipated costs for that contract.   This ratio is then utilized to determine the amount of gross profit earned based on the Company’s estimate of total gross profit at completion for each contract.  The Company routinely reviews estimates related to percentage-of-completion contracts and adjusts for changes in the period the revisions are made.  Billings on uncompleted percentage-of-completion contracts may be greater than or less than incurred costs and estimated earnings and are recorded as an asset or liability in the accompanying condensed consolidated balance sheets.
 
In those arrangements where software is a significant component of the contract, the Company uses the percentage-of-completion method as described above.
 
Completed Contract. Contract arrangements which typically require a relatively short period of time to complete the production, modification, and customization of products are accounted for using the completed contract method.  Accordingly, revenue is recognized upon delivery of the completed product, provided persuasive evidence of an arrangement exists, title and risk of loss have transferred to the customer, the fee is fixed or determinable, and collection is reasonably assured.

Multiple Element Arrangements.  Some contracts include multiple elements.  Significant deliverables in such arrangements commonly include various hardware components of the Company’s visual display systems, domes, show content and various service and maintenance elements.  Revenue earned on elements such as products, services and maintenance contracts are allocated to each element based on the relative fair values of the elements.  Relative fair values of elements are generally determined based on actual and estimated selling price.  Delivery times of such contracts typically occur within a three to six-month time period.

Other.  Other revenue consists primarily of amounts earned under maintenance contracts that are generally sold as a single element.  Revenue from product maintenance contracts, including separately priced extended warranty contracts, is deferred and recognized over the period of performance under the contract.

 
6

EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)



Anticipated Losses.  For contracts with anticipated losses at completion, a provision is recorded when the loss is probable.  After an anticipated loss is recorded, subsequent revenues and costscost of sales are recognized in equal and offsetting amounts as contract costs are incurred.

Stock-Based Compensation

Compensation cost for all stock-based awards is measured at fair value on the date of grant and is recognized over the service period for awards expected to vest.  Determining the fair value of share-based awards at the grant date requires judgment, including estimating the value of share-based awards that are expected to be forfeited. Actual results and future estimates may differ from the Company’s current estimates.

Net Income (Loss)Loss Per Common Share

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.

Inventories, net
 
Inventories consisted of the following:
  September 26,  December 31, 
  2014  2013 
       
Raw materials $5,871  $5,587 
Work in process  1,001   234 
Finished goods  276   223 
Reserve for obsolete inventory  (3,085)  (3,019)
     Inventories, net $4,063  $3,025 

Recent Accounting Pronouncements
  October 2,  December 31, 
  2015  2014 
       
Raw materials $6,992  $5,468 
Work in process  1,106   1,678 
Finished goods  217   233 
Reserve for obsolete inventory  (3,292)  (3,216)
Inventories, net $5,023  $4,163 
         

In May 2014, the Financial Accounting Standards Board issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers ("ASU 2014-09"). ASU 2014-09 provides for a single, principles-based model for revenue recognition that replaces existing revenue recognition guidance. ASU 2014-09 is effective for annual and interim periods beginning on or after December 15, 2016. It permits the use of either a retrospective or cumulative effect transition method and early adoption is not permitted. The Company has not yet selected a transition method and is in the process of evaluating the effect this standard will have on its consolidated financial statements and related disclosures.

Liquidity

The Company has experienced recurring annual losses since 2007. Furthermore, as of September 26, 2014, the unfunded obligation of the Company’s qualified defined benefit pension plan (“Pension Plan”), as 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.


 
7

EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)



2.STOCK OPTION PLAN
 
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):

     Weighted- 
     Average 
  Number  Exercise 
  of Shares  Price 
       
Outstanding as of beginning of the period  1,235  $2.62 
Granted  200   0.13 
Exercised  -   - 
Forfeited or expired  (101)  4.85 
Outstanding as of end of the period  1,334   2.08 
         
Exercisable as of the end of the period  993   2.76 
     Weighted- 
     Average 
  Number  Exercise 
  of Shares  Price 
       
Outstanding as of beginning of the period  1,333  $2.08 
Granted  211   0.36 
Exercised  -   - 
Forfeited or expired  (83)  7.26 
Outstanding as of end of the period  1,461   1.53 
         
Exercisable as of end of the period  1,063  $2.02 

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:
 
Risk-free interest rate0.740.91%
Dividend yield0.00%
Volatility340343%
Expected life3.5 years

Expected option life and volatility are based on historical data of the Company.   The risk-free interest rate is calculated based on the average US Treasury bill rate that corresponds with the option life.  Historically, the Company has not declared dividends and there are no foreseeable plans to do so.

8

EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)


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.

3.EMPLOYEE RETIREMENT BENEFIT PLANS
 
 Distress Termination ApplicationSettlement of Pension Plan Liabilities
 
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.
 

If the distress termination application is approved, the Company’s unfunded obligation
8

EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
Notes to the PBGC, determined by the Pension Plan’s underfunding on a termination basis pursuant to ERISA, PBGC regulations, and other applicable legal authority, along with an ERISA special termination premium.  The Company would also be liable for any unpaid contributions to the Pension Plan (which in substance is a subset of plan termination liability) and annual insurance premiums for the Pension Plan, along with any interest and penalties. While the full Pension Plan termination liability and other pension related liabilities due to the PBGC would likely be greater than the unfunded obligation of the Pension Plan as currently reported in the Company’s financial statements, the Company is in discussions with the PBGC to negotiate a settlement of such liabilities on terms that are feasible for the Company to continue in business as a going concern, which is consistent with the purposes of the statute.Condensed Consolidated Financial Statements
(Unaudited)


The Company’s goal in seeking a distress termination of the Pension Plan iswas to ensure that the pension benefits of all Pension Plan participants are paid up to federally guaranteed limits and that the Company continues to operate as a going concern while avoiding the costly damage and disruption to the business which would result from bankruptcy reorganization. The Company has been pursuing
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.

To secure the Company’s obligations under the Settlement Agreement, on April 21, 2015, the Company also entered into a Security Agreement with the PBGC (the “Security Agreement”), and executed an Open-End Mortgage in favor of the PBGC (the “Mortgage”) on certain real property owned by the Company’s subsidiary, Spitz, Inc. (“Spitz”). The Security Agreement and Mortgage grant to the PBGC a security interest on all of the Company’s presently owned and after-acquired property and proceeds thereof, free and clear of all liens and other encumbrances, except those described therein (the “Senior Liens”). The PBGC’s security interest in the Company’s property is subordinate to the Company’s two senior lenders pursuant to the Security Agreement and agreements between the PBGC and the lenders (the “Intercreditor Agreements”). The Intercreditor Agreements provide for the lenders to extend credit to the Company, secured by the Senior Liens, up to specified limits. The Intercreditor Agreement between the lender of the mortgage notes and line of credit (see Note 4) provides for total aggregate loans of up to $6,500 secured by Senior Liens on Spitz assets. The second Intercreditor Agreement between another lender and the PBGC provides for up to $3,000 of letter of credit indebtedness secured by Senior Liens on cash deposits. The Settlement Agreement also required that the PBGC withdraw all lien notices with respect to the statutory liens it previously perfected on behalf of the Pension Plan with respect to all real and personal property of the Company as soon as reasonably practicable after the 91st day after the perfection of all consensual liens granted to the PBGC by the Security Agreement and Mortgage.  In August 2015, the PBGC’s lien notices with respect to the statutory liens were withdrawn.
9

EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)


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:

Unfunded Pension Plan Liability $35,870 
     
Market value of common shares issued from treasury  (71)
Pension Settlement Obligation  (7,643)
Total consideration to PBGC  (7,714)
     
Total gain from settlement of  Pension Plan Liabilities $28,156 
     
Gain recorded as:    
Charge to statement of operations $(3,620)
Other comprehensive Income  31,776 
Contribution to total comprehensive income $28,156 

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:

Current portion of pension settlement obligation $534 
Pension settlement obligation, net of current portion  5,624 
Total Pension Settlement Obligation $6,158 

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.
 
Employer Contributions
 
Through September 15, 2012, the Company’s funding policy was to contribute to the Pension Plan trust amounts sufficient to satisfy regulatory funding standards, based upon independent actuarial valuations. Beginning in October 2012, the Company discontinued this policy in order to preserve the necessary liquidity for its operations. As a result, a lien in favor of the PBGC has arisenwas placed against the assets of the Company to secure aggregate unpaid contributions which amountamounted to $6,307,$6,979, including interest, as of OctoberJanuary 15, 2014. Independent actuarial valuations have determined that additional contributions of approximately $3,900 will become due through October 15, 2015. The Company’s legal counsel has advised that the PBGC usually does not take enforcement action under its lien rights while it is still considering the application for the distress termination2015, which is consistent with the Company’s dialog withdate the PBGC throughmost recent contribution was due. However, under the application process. Based upon ongoing correspondence with the PBGC, the Company believes that the application process will likely result in a settlementSettlement Agreement all of the Pension PlanPlan’s liabilities, on terms that will enableincluding the Company to continue to operate as a going concern, although there can be no assurance asunpaid contributions were settled for an amount substantially less than the total and the PBGC lien was withdrawn in favor of new consensual liens which are subordinate to the timing and ultimate outcomeCompany’s senior lenders (see Settlement of such settlement discussions.Pension Plan Liabilities above).
 

 
910

EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)


The Company is not currently required to fund the Supplemental Executive Retirement Plan (SERP).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.

Components of Net Periodic Benefit Expense
 
  Pension Plan  Supplemental Executive Retirement Plan 
For the three months ended: September 26, 2014  September 27, 2013  September 26, 2014  September 27, 2013 
             
Service cost $-  $-  $-  $- 
Interest cost  569   398   55   41 
Expected return on assets  (574)  (460)  -   - 
Amortization of actuarial loss  101   177   12   17 
Amortization of prior year service cost  -   -   (12)  (12)
Net periodic benefit expense  96   115   55   46 
Other pension related expense  208   88   -   - 
  $304  $203  $55  $46 

       Supplemental Executive 
 Pension Plan  Retirement Plan 
 October 2,  September 26,  October 2,  September 26, 
For the three months ended: 2015  2014  2015  2014 
            
Service cost $-  $-  $-  $- 
Interest cost  -   569   44   55 
Expected return on assets  -   (574)  -   - 
Amortization of actuarial loss  -   101   17   12 
Amortization of prior year service cost  -   -   (12)  (12)
Net periodic benefit expense  -   96   49   55 
Insurance premium due PBGC  -   208   -   - 
 $-  $304  $49  $55 
                
                
                
                
         Supplemental Executive 
 Pension Plan  Retirement Plan 
 Pension Plan  Supplemental Executive Retirement Plan  October 2,  September 26,  October 2,  September 26, 
For the nine months ended: September 26, 2014  September 27, 2013  September 26, 2014  September 27, 2013   2015   2014   2015   2014 
                            
Service cost $-  $-  $-  $-  $-  $-  $-  $- 
Interest cost  1,706   1,195   164   123   617   1,706   132   164 
Expected return on assets  (1,724)  (1,381)  -   -   (585)  (1,724)  -   - 
Amortization of actuarial loss  304   531   37   51   195   304   51   37 
Amortization of prior year service cost  -   -   (36)  (36)  -   -   (36)  (36)
Net periodic benefit expense  286   345   165   138   227   286   147   165 
Other pension related expense  326   135   -   - 
Insurance premium due PBGC  99   326   -   - 
 $612  $480  $165  $138  $326  $612  $147  $165 

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.

 
1011

EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)


4.           
4.Debt
 
Mortgage Notes
 
On October 3, 2014, the lender forholder of the Spitz mortgage notes, a commercial bank, notified the Company that the liens placed on the CompanyCompany’s assets by the Pension Plan wereconstituted an event of default under the mortgage loannote agreements. Pursuant to the notification, the Company and the bank entered into an agreement whereby theThe commercial bank agreed to forbear from exercising any further remedies, other than the suspension of advances under the working capital line of credit, until January 15,August 31, 2015 whileby which time the Company negotiatesprocess of withdrawing the settlementPension Plan liens was completed in accordance with terms of its pension liabilities,the Settlement Agreement (see Note 3) curing the default.  The agreement to forbear from exercising any further remedies was subject to certain conditions agreed to by the Company. The conditions  the Company agreed to include continuing to make debt service payments under the mortgage loannote agreements, the occurrence of no further adverse events in the condition of the Company and the Company’s agreement to the incorporation of the financial covenants ofin the line of credit agreement  between the bank and Spitz dated March 15, 2012 as additional covenants in the mortgage loannote agreements effective immediately and continuing until the loansmortgage notes are paid in full. One of the covenants requires Spitz to maintain tangible net worth of at least $6,000 measured upon issuance of quarterly and annual financial statements. As of the end of the second and third quarters of 2014, Spitz’s tangible net worth measured $5,914 and $5,801, respectively. As of December 31, 2014, Spitz’s tangible net worth measured $5,744.  The commercial bank granted a waiver of the event of default for the failure to maintain Spitz’s tangible net worth of at least $6,000 as of the end of the second and third quarters of 2014 and as of December 31, 2014. At the end of each fiscal quarter of 2015 Spitz tangible net worth exceeded the $6,000 covenant compliance threshold.  The Company believes that it will be able to complyin compliance with the additional covenants in future periods based on forecasts and upon settlementmanagement of the pension liabilities, the pension plan liens will be replaced by consensual liens in favor of the PBGC which will be subordinate to the commercial bank’s lien under terms agreeable to the commercial bank. However, no assurance can be given that the Company will be able to comply with the additional covenants or that the pension plan liens will be replaced by consensual liens in favor of the PBGC.intercompany accounts payable and receivable.
 
LineLines of Credit

Because of cross default provisions, the October 3, 2014 notice of default ofunder the mortgage notenotes included notification by the commercial bank that it is no longer obligated to make advances under its line of creditline-of-credit agreement with Spitz and that it electedits election to suspend future advances.  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 reach agreement with the commercial bank to permit new borrowings for future potential working capital requirements. However, no assurance can be given that the Company will be able to reach agreement with the commercial bank to permit new borrowings under the line of credit.liabilities. As of September 26, 2014,October 2, 2015, there were no borrowings outstanding under the credit agreement and there have been no borrowings outstanding since February 2011.

Sale/Leaseback Financing

On July 31, 2014, the Company provided notice to Wasatch Research Park I, LLC (“Wasatch”) to exercise its option to repurchase the buildings it occupies under agreements with Wasatch. The repurchase price, net of a credit due for a lease deposit, would have been $3,027. The repurchase transaction required completion by October 31, 2014. On November 4, 2014, the Company agreed to an extension of its current lease for a term of 5 years. As a condition of the extension the Company will no longer have a right to repurchase the buildings. Base annual rent for the extended 5-year term will be $549. Base annual rent prior to the lease extension was $509.

The extension of the lease for 5 years without a repurchase option is expected to result in recording the disposition of building assets and the extinguishment of both the sale-leaseback debt and the deferred rent obligation in the fourth quarter of 2014. The new lease obligation is expected to be accounted for as an operating lease commencing November 1, 2014.

 
1112


Item 2.                      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 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.

All dollar amounts are in thousands.

Executive Summary

SalesOn April 21, 2015, the Company executed the Settlement Agreement to terminate its pension plan and to settle the underlying pension liabilities. This is a major milestone and completes a process that began over two years ago.  The Company’s goal in seeking a distress termination of the Pension Plan was to ensure that the pension benefits of all Pension Plan participants are paid up to federally guaranteed limits and that the Company continues to operate as a going concern while avoiding the costly damage and disruption to the business which would result from bankruptcy reorganization. We believe the Settlement Agreement has achieved that goal.
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.
 

 
1213


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

Sales and Backlog

The following table summarizes our sales:

  For the Three Months Ended  For the Nine Months Ended 
 ��September 26, 2014  September 27, 2013  September 26, 2014  September 27, 2013 
Sales $7,656  $8,509  $20,040  $18,428 
  Three Months Ended  Nine Months Ended 
  
October 2,
2015
 
September 26,
2014
 
October 2,
2015
 
September 26,
2014
 
             
Sales $9,375  $7,656  $27,666  $20,040 

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.

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

  For the Three Months Ended  For the Nine Months Ended 
  September 26, 2014  September 27, 2013  September 26, 2014  September 27, 2013 
Gross profit $3,285  $3,528  $7,371  $6,570 
Gross profit percentage  43%  41%  37%  36%
  Three Months Ended Nine Months Ended 
  
October 2,
2015
 
September 26,
2014
 
October 2,
2015
 
September 26,
2014
 
             
Gross profit $3,326  $3,285  $9,710  $7,371 
Gross profit percentage  35%  43%  35%  37%

Gross profit percentages for the three-three and nine-month periodsnine months ended September 26, 2014 were comparableOctober 2, 2015 was unfavorably affected by higher than expected cost to complete two theme park projects. This unfavorable effect on gross profit was offset by higher sales volume which improved the same periods in 2013.absorption of fixed overhead and by favorable margins on other sales projects.

14

Operating Expenses
 
The following table summarizes our operating expenses:

  For the Three Months Ended  For the Nine Months Ended 
  September 26, 2014  September 27, 2013  September 26, 2014  September 27, 2013 
Selling, general and
  administrative
 $1,637  $1,545  $5,211  $4,291 
Research and development  537   529   1,608   1,873 
Pension  359   249   777   618 
    Total operating expenses $2,533  $2,323  $7,596  $6,782 
  Three Months Ended  Nine Months Ended 
  
October 2,
2015
  
September 26,
2014
  
October 2,
2015
  
September 26,
2014
 
             
Selling, general and            
administrative $1,535  $1,637  $5,132  $5,211 
Research and development  563   537   1,702   1,608 
Pension  49   359   473   777 
Pension settlement  -   -   3,620   - 
Total operating expenses $2,147  $2,533  $10,927  $7,596 

GeneralSelling, general and administrative expenses were higher for the three-three and nine-month periodsnine months ended September 26, 2014October 2, 2015 were slightly lower compared to 2014. This was primarily due to the reduction of selling related travel expense and professional fees associated with the pension settlement.

Research and development expenses for the three and nine months ended October, 2015 were higher compared to the same periods in 20132014 due largelyprimarily to a receiptincreased labor costs and expenditures on product improvement projects.

Pension expense declined in the secondthird quarter and first nine months of 2013 that was recorded as a credit for2015 due to the recoverytermination of legal fees pursuantthe Pension Plan.  The third quarter pension expenses in 2015 are attributable to athe SERP. With the termination of the Pension Plan, future pension expense will be reduced to the expenses attributable to the SERP.

The $3,620 charge to operating expense reported in the first nine months of 2015 is related to the settlement of a dispute with a subcontractor for a customer project.  Also, sales and marketing expenses were higher due to increased tradeshow activity and the redirection of resources from content software production to sales and marketing activities. Research and development costs for the nine month period ended September 26, 2014 were lower than the same period in 2013 primarily due to engineering resources being redirected from research and development activities to customer projects and selling expenses. Pension expense was higher for the three- and nine-month periods ended September 26, 2014 compared to the same periods in 2013 due to an increase in other pension related expense attributable to accounting for the distress termination process.

liabilities.
13


Other Expense, net

The following table summarizes our other expense:

  For the Three Months Ended  For the Nine Months Ended 
  September 26, 2014  September 27, 2013  September 26, 2014  September 27, 2013 
Total other expense, net $192  $185  $567  $540 

  Three Months Ended  Nine Months Ended 
  
October 2,
2015
 
September 26,
2014
 
October 2,
2015
 
September 26,
2014
 
             
Total other expense, net $231  $192  $404  $567 
For the three- and nine-month periods ended September 26, 2014,
The changes in other expense, net, for the periods presented were attributable to interest expense. For the three-month period ended October 2, 2015, interest expense was comparablegreater than the prior year period due to interest on the pension settlement obligation recorded in 2015.  For the nine-month period of 2015, interest expense was less than the prior year period due to 2014 interest expense on a financing lease obligation which was extinguished in October 2014.

Settlement of Pension Plan Liabilities
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.


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Liquidity and Capital Resources

Outlook
 
As discussed above in the executive summary and the notes to the condensed consolidated financial statements, we have made significant progress in our effort to 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.
 
Cash Flows

In the first nine months of 2015, $3,151 of cash used in operating activities was attributable to $2,503 of cash from the net loss for the period, after the effect of $4,179 of non-cash items, mostly related to the pension settlement, less an unfavorable change to working capital of $5,654. The cash effect of the change to working capital was driven primarily by the timing of customer progress payments, payment on the pension settlement obligation and, to a lesser degree, the acquisition of inventory for upcoming customer deliveries.

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.

InCash used in investing activities was $71 for the nine months ended October 2, 2015 compared to $60 for the same period of 2014.  The Company had purchases of property and equipment of $71 in 2015 and no proceeds from sale of marketable securities.  The Company had purchases of property and equipment of $289 in 2014 which were largely offset by $229 in proceeds from marketable securities.

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 change in working capital in both periods presented was driven by improvement in progress payments from customer contracts, attributable to the timing of billings and an increase in customer orders.

Cash used by investing activities was $60 in the first nine months of 2014 compared to $355 of cash that was provided by investing activities for the same period of 2013, representing cash provided by the sale of marketable securities offset by purchases of property, plant and equipment of $289 and $30 in 2014 and 2013, respectively.

In the first nine months of 2014,2015, financing activities used $131$156 of cash compared to $123$131 in 2013,2014 for principal payments on mortgage notes.

Line of Credit Facilities

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.

as of October 2, 2015.
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Letters of Credit

The Company has a finance arrangement which provided for the issuance of letters of credit and bank guarantees. Under the terms of financing arrangements for letters of credit, the arrangement, we areCompany is required to maintain a balance in a specific bankcash 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.institutions who issue the letters of credit.  As of September 26, 2014, we hadOctober 2, 2015, there were outstanding letters of credit totaling $731.  The cash collateral for these lettersand bank guarantees of credit was classified as restricted cash.$600, which are scheduled to expire during the year ending December 31, 2016.

Mortgage Notes
 
As of September 26, 2014, our wholly ownedOctober 2, 2015, Spitz subsidiary had obligations totaling $2,408$2,206 under its two mortgage notes payable to a commercial bank. On October 3, 2014, the commercial bank notified the Company that the liens placed on the Company’s assets by the Pension Plan constituted an event of default under the mortgage notes’ loan agreements. The commercial bank agreed to forbear from exercising any further remedies, other than suspension of advances under the working capital line of credit, until January 15, 2015 while the Company negotiates the settlement of its pension liabilities. The agreement to forbear from exercising any further remedies is subject to the Company continuing to make debt service payments under the mortgage note agreements, the occurrence of no further adverse events in the condition of the Company and the Company’s agreement to the incorporation of the financial covenants in the line of credit agreement as additional covenants in the mortgage loan agreements effective immediately and continuing until the loans are paid in full. The Company believes that it will be able to comply with the additional covenants and, upon settlement of the pension liabilities, the Pension Plan liens will be replaced by consensual liens in favor of the PBGC which will be subordinate to the commercial bank’s lien under terms agreeable to the commercial bank. If necessary, the Company believes that it will have sufficient funds to satisfy the Spitz mortgage note balances if the bank were to accelerate the maturity under its default remedy. However, the Company further believes that it will conclude a satisfactory settlement with the PBGC by January 15, 2015 or within an extended time frame acceptable to the bank. The Company continues to progress through the termination process toward a settlement; however, as of the date of this filing, the Company is uncertain of the timing or the ultimate outcome and it cannot provide assurance that its expectations set forth above will occur in a timely manner or at all.payable.

Sale-Leaseback Financing

On July 31, 2014, the Company provided notice to Wasatch Research Park I, LLC (“Wasatch”) to exercise the Company’s option to repurchase the buildings it occupies under agreements with Wasatch. The repurchase price, net of a credit due for a lease deposit, would have been $3,027. The repurchase transaction required completion by October 31, 2014. On November 4, 2014, the Company agreed to an extension of its current lease for a term of 5 years. As a condition of the extension the Company will no longer have a right to repurchase the buildings. Base annual rent for the extended 5-year term will be is $548. Base annual rent prior to the lease extension was $509.

As of September 26, 2014, the principal balance on the debt obligation recorded from the sale-leaseback financing transaction was $3,004. The extension of the lease for 5 years without a repurchase option is expected to be recorded as a disposition of building assets along with the extinguishment of the sale-leaseback debt obligation and the deferred rent obligation.  The new lease obligation is expected to be recorded as an operating lease commencing November 1, 2014.


 
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Item 4.                      CONTROLS AND PROCEDURES
 
Evaluation of Disclosure Controls and Procedures.Procedures

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)) as of the end of the period covered by this report.  Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures as of the end of the period covered by this report were effective at the reasonable assurance level such that the information required to be disclosed by us in reports filed under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission and (ii) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls system cannot provide absolute assurance that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company are detected.

Changes in Internal Control over Financial Reporting

There has been no change in our internal control over financial reporting identified in connection with the evaluation of disclosure controls and procedures discussed above that occurred during the quarter ended September 26, 2014,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.

 
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PART II - OTHER INFORMATION


Item 1.                 LEGAL PROCEEDINGS

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.

Item 5.                 Other Information

On November 4, 2014, the Company entered into an agreement (“the Amendment”) to amend the Sublease Agreement dated November 13, 2009 with Wasatch Research Park I, LLC (“Wasatch”), under which the Company leases the land and buildings which serve as its principal executive, engineering, manufacturing and operations facilities in the University of Utah Research Park in Salt Lake City, Utah. The Amendment extends the term of the Sublease Agreement for 5 years expiring on October 31, 2019. Base annual rent for the 5 year extended term is $548,719, payable monthly. The annual rent prior to the Amendment was $509,142. The Company will pay, as additional rent, any increase in rent to be paid by Wasatch under the escalation provision of its land lease agreement with the University of Utah Research Park. The Company had previously exercised its option to purchase the buildings from Wasatch under the Repurchase Option Agreement dated November 13, 2009.  By agreeing to extend the term of the lease, the Company has elected not to complete the purchase of the buildings and it will retain no purchase option or rights to ownership of the buildings through the extended term of the lease.

Item 6.                 EXHIBITS
 
10.1First Amendment to Sublease Agreement dated November 4, 2014, by and between Evans & Sutherland Computer Corporation and Wasatch Research Park I, LLC, filed herewith.
10.2Line of Credit Agreement between Spitz, Inc. and Bryn Mawr Trust Company dated March 15, 2012
10.3Loan Forbearance Agreement between Evans & Sutherland Computer Corporation, Spitz, Inc. and Bryn Mawr Trust Company dated October 3, 2014
 31.1Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended, filed herewith.
 31.2Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended, filed herewith.
 32.1Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith.
 
101
The following materials from this Quarterly Report on Form 10-Q for the periods ended September 26, 2014, areOctober 2, 2015, formatted in XBRL (Extensible Business Reporting Language) and filed electronically herewith: (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Comprehensive Income (Loss), (iii) the Condensed Consolidated Statements of Cash Flows, and (iv) Notes to Condensed Consolidated Financial Statements.



 
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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 7, 2014By:/s/ Paul Dailey
Paul Dailey, Chief Financial Officer
and Corporate Secretary
(Authorized Officer)
(Principal Financial and Accounting Officer)
   
   
Date: November 9, 2015
By:     /s/ Paul Dailey
Paul Dailey, Chief Financial Officer
and Corporate Secretary
(Authorized Officer)
(Principal Financial and Accounting Officer)
 

 
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