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 October 2, 2015April 1, 2016
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"large accelerated filer,” “accelerated" "accelerated filer,”" and “smaller"smaller reporting company”company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] Accelerated filer [ ] Large 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’sregistrant's Common Stock (par value $0.20 per share) outstanding on November 5, 2015May 2, 2016 was 11,177,316.
Evans & Sutherland Computer Corporation
Quarter Ended October 2, 2015April 1, 2016
PART I – FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (In thousands, except share and per share data)
| | October 2, | | | December 31, | | | April 1, | | | December 31, | |
| | 2015 | | | 2014 | | | 2016 | | | 2015 | |
ASSETS | | | | | | | | | | | | |
Current assets: | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 3,660 | | | $ | 7,038 | | | $ | 5,292 | | | $ | 3,734 | |
Restricted cash | | | 600 | | | | 711 | | | | 601 | | | | 601 | |
Accounts receivable, net | | | 6,598 | | | | 4,586 | | | | 3,163 | | | | 4,825 | |
Costs and estimated earnings in excess of billings on | | | | | | | | | |
uncompleted contracts | | | 3,045 | | | | 1,699 | | |
Costs and estimated earnings in excess of billings on uncompleted contracts | | | | 2,327 | | | | 2,695 | |
Inventories, net | | | 5,023 | | | | 4,163 | | | | 3,666 | | | | 4,072 | |
Prepaid expenses and deposits | | | 773 | | | | 635 | | | | 934 | | | | 1,038 | |
Total current assets | | | 19,699 | | | | 18,832 | | | | 15,983 | | | | 16,965 | |
Property and equipment, net | | | 4,689 | | | | 4,803 | | | | 4,691 | | | | 4,735 | |
Goodwill | | | 635 | | | | 635 | | | | 635 | | | | 635 | |
Intangible assets, net | | | 37 | | | | 68 | | | | 20 | | | | 27 | |
Other assets | | | 1,056 | | | | 1,118 | | | | 1,124 | | | | 1,082 | |
Total assets | | $ | 26,116 | | | $ | 25,456 | | | $ | 22,453 | | | $ | 23,444 | |
| | | | | | | | | | | | | | | | |
LIABILITIES AND STOCKHOLDERS’ DEFICIT | | | | | | | �� | | |
LIABILITIES AND STOCKHOLDERS' DEFICIT | | | | | | | | | |
Current liabilities: | | | | | | | | | | | | | | | | |
Accounts payable | | $ | 1,025 | | | $ | 710 | | | $ | 1,220 | | | $ | 1,062 | |
Accrued liabilities | | | 1,652 | | | | 1,142 | | | | 1,322 | | | | 1,031 | |
Billings in excess of costs and estimated earnings on | | | | | | | | | |
uncompleted contracts | | | 4,980 | | | | 5,176 | | |
Billings in excess of costs and estimated earnings on uncompleted contracts | | | | 3,574 | | | | 3,995 | |
Customer deposits | | | 4,002 | | | | 4,081 | | | | 2,160 | | | | 3,232 | |
Current portion of retirement obligations | | | 435 | | | | 535 | | | | 500 | | | | 480 | |
Current portion of pension settlement obligation | | | 534 | | | | - | | | | 356 | | | | 356 | |
Current portion of long-term debt | | | 197 | | | | 2,362 | | | | 203 | | | | 199 | |
Total current liabilities | | | 12,825 | | | | 14,006 | | | | 9,335 | | | | 10,355 | |
Pension and retirement obligations, net of current portion | | | 4,207 | | | | 40,076 | | | | 4,781 | | | | 4,839 | |
Pension settlement obligation, net of current portion | | | 5,624 | | | | - | | | | 5,268 | | | | 5,268 | |
Long-term debt, net of current portion | | | 2,009 | | | | - | | | | 1,906 | | | | 1,975 | |
Deferred rent obligation | | | 1,759 | | | | 2,077 | | | | 1,548 | | | | 1,653 | |
Total liabilities | | | 26,424 | | | | 56,159 | | | | 22,838 | | | | 24,090 | |
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 | | |
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 | | | | 53,459 | | | | 53,434 | |
Common stock in treasury, at cost, 264,350 shares | | | (3,532 | ) | | | (4,709 | ) | | | (3,532 | ) | | | (3,532 | ) |
Accumulated deficit | | | (50,833 | ) | | | (49,157 | ) | | | (50,196 | ) | | | (50,432 | ) |
Accumulated other comprehensive loss | | | (1,654 | ) | | | (33,625 | ) | | | (2,404 | ) | | | (2,404 | ) |
Total stockholders’ deficit | | | (308 | ) | | | (30,703 | ) | |
Total liabilities and stockholders’ deficit | | $ | 26,116 | | | $ | 25,456 | | |
Total stockholders' deficit | | | | (385 | ) | | | (646 | ) |
Total liabilities and stockholders' deficit | | | $ | 22,453 | | | $ | 23,444 | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
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 | | | Three Months Ended | |
| | October 2, | | | September 26, | | | October 2, | | | September 26, | | | April 1, | | | April 3, | |
| | 2015 | | | 2014 | | | 2015 | | | 2014 | | | 2016 | | | 2015 | |
| | | | | | | | | | | | | | | | | | |
Sales | | $ | 9,375 | | | $ | 7,656 | | | $ | 27,666 | | | $ | 20,040 | | | $ | 7,900 | | | $ | 8,002 | |
Cost of sales | | | (6,049 | ) | | | (4,371 | ) | | | (17,956 | ) | | | (12,669 | ) | | | (5,197 | ) | | | (5,011 | ) |
Gross profit | | | 3,326 | | | | 3,285 | | | | 9,710 | | | | 7,371 | | | | 2,703 | | | | 2,991 | |
Operating expenses: | | | | | | | | | | | | | | | | | | | | | | | | |
Selling, general and administrative | | | (1,535 | ) | | | (1,637 | ) | | | (5,132 | ) | | | (5,211 | ) | | | (1,671 | ) | | | (1,842 | ) |
Research and development | | | (563 | ) | | | (537 | ) | | | (1,702 | ) | | | (1,608 | ) | | | (587 | ) | | | (595 | ) |
Pension | | | (49 | ) | | | (359 | ) | | | (473 | ) | | | (777 | ) | | | (66 | ) | | | (375 | ) |
Pension settlement | | | - | | | | - | | | | (3,620 | ) | | | - | | |
Total operating expenses | | | (2,147 | ) | | | (2,533 | ) | | | (10,927 | ) | | | (7,596 | ) | | | (2,324 | ) | | | (2,812 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Operating income (loss) | | | 1,179 | | | | 752 | | | | (1,217 | ) | | | (225 | ) | |
Operating income | | | | 379 | | | | 179 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Other expense, net | | | (231 | ) | | | (192 | ) | | | (404 | ) | | | (567 | ) | | | (128 | ) | | | (25 | ) |
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 | ) | |
Income before income tax provision | | | | 251 | | | | 154 | |
Income tax provision | | | | (15 | ) | | | (51 | ) |
Net income | | | $ | 236 | | | $ | 103 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Net income (loss) per common share – basic and diluted | | $ | 0.08 | | | $ | 0.06 | | | $ | (0.15 | ) | | $ | (0.07 | ) | |
Net income per common share – basic and diluted | | | $ | 0.02 | | | $ | 0.01 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Weighted average common shares outstanding – basic | | | 11,177 | | | | 11,089 | | | | 11,141 | | | | 11,089 | | | | 11,177 | | | | 11,089 | |
Weighted average common shares outstanding – diluted | | | 11,705 | | | | 11,435 | | | | 11,141 | | | | 11,089 | | | | 11,801 | | | | 11,477 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
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 | | | | - | | |
Comprehensive income, net of tax: | | | | | | | | | |
Net income | | | $ | 236 | | | $ | 103 | |
Other comprehensive income: | | | | | | | | | |
Reclassification of pension expense to net income | | | | - | | | | 195 | |
Other comprehensive income | | | - | | | | 101 | | | | 31,971 | | | | 305 | | | | - | | | | 195 | |
Total comprehensive income (loss) | | $ | 921 | | | $ | 740 | | | $ | 30,295 | | | $ | (475 | ) | |
Total comprehensive income | | | $ | 236 | | | $ | 298 | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In thousands)
| | Nine Months Ended | | | Three Months Ended | |
| | October 2, | | | September 26, | | | April 1, | | | April 3, | |
| | 2015 | | | 2014 | | | 2016 | | | 2015 | |
| | | | | | | | | | | | |
Cash flows from operating activities: | | | | | | | | | | | | |
Net loss | | $ | (1,676 | ) | | $ | (780 | ) | |
Adjustments to reconcile net loss to net cash provided by | | | | | | | | | |
(used in) operating activities: | | | | | | | | | |
Net income | | | $ | 236 | | | $ | 103 | |
Adjustments to reconcile net income to net cash provided by (used in) operating activities: | | | | | | | | | |
Depreciation and amortization | | | 216 | | | | 376 | | | | 73 | | | | 71 | |
Amortization of deferred pension costs | | | 195 | | | | 305 | | | | - | | | | 195 | |
Pension settlement charge | | | 3,620 | | | | - | | |
Provision for excess and obsolete inventory | | | 76 | | | | - | | | | 60 | | | | 10 | |
Other | | | 72 | | | | 294 | | | | 46 | | | | 19 | |
Changes in assets and liabilities: | | | | | | | | | | | | | | | | |
Decrease in restricted cash | | | 111 | | | | 289 | | |
Increase in restricted cash | | | | - | | | | (21 | ) |
Decrease (increase) in accounts receivable | | | (2,054 | ) | | | 726 | | | | 1,641 | | | | (1,627 | ) |
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 inventories | | | | 346 | | | | (1,685 | ) |
Increase in costs and estimated earnings in excess of billings on uncompleted contracts, net | | | | (53 | ) | | | (177 | ) |
Decrease (increase) in prepaid expenses and other assets | | | (76 | ) | | | 402 | | | | 62 | | | | (299 | ) |
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 in accounts payable | | | | 158 | | | | 200 | |
Increase in accrued liabilities | | | | 291 | | | | 155 | |
Increase (decrease) in pension and retirement obligations | | | | (38 | ) | | | 53 | |
Increase (decrease) in customer deposits | | | (79 | ) | | | 445 | | | | (1,072 | ) | | | 458 | |
Decrease in deferred rent obligation | | | (318 | ) | | | - | | | | (105 | ) | | | (107 | ) |
Net cash provided by (used in) operating activities | | | (3,151 | ) | | | 798 | | | | 1,645 | | | | (2,652 | ) |
| | | | | | | | | | | | | | | | |
Cash flows from investing activities: | | | | | | | | | | | | | | | | |
Purchases of property and equipment | | | (71 | ) | | | (289 | ) | | | (22 | ) | | | (14 | ) |
Proceeds from sale of marketable securities | | | - | | | | 229 | | |
Net cash used in investing activities | | | (71 | ) | | | (60 | ) | | | (22 | ) | | | (14 | ) |
| | | | | | | | | | | | | | | | |
Cash flows from financing activities: | | | | | | | | | | | | | | | | |
Principal payments on long-term debt | | | (156 | ) | | | (131 | ) | | | (65 | ) | | | (62 | ) |
Net cash used in financing activities | | | (156 | ) | | | (131 | ) | | | (65 | ) | | | (62 | ) |
| | | | | | | | | | | | | | | | |
Net increase (decrease) in cash and cash equivalents | | | (3,378 | ) | | | 607 | | | | 1,558 | | | | (2,728 | ) |
Cash and cash equivalents as of beginning of the period | | | 7,038 | | | | 3,376 | | | | 3,734 | | | | 7,038 | |
Cash and cash equivalents as of end of the period | | $ | 3,660 | | | $ | 3,983 | | | $ | 5,292 | | | $ | 4,310 | |
| | | | | | | | | | | | | | | | |
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 | | | $ | 42 | | | $ | 45 | |
Income taxes | | | 12 | | | | 45 | | | | 11 | | | | 11 | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
All dollar amounts (except share and per share amounts) in thousands.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of Evans & Sutherland Computer Corporation and subsidiaries (collectively, the “Company”"Company" or “E&S”"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”GAAP"). This report on Form 10-Q should be read in conjunction with the Company’sCompany's annual report on Form 10-K for the year ended December 31, 2014.2015.
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’sCompany's financial position, results of operations and cash flows. The results of operations for the three and nine months ended October 2, 2015April 1, 2016 are not necessarily indicative of the results to be expected for the full year ending December 31, 2015.2016. The Company operates on a calendar year with the first three fiscal quarters ending on the last Friday of the thirteenth 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 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’sCompany'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’sCompany'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.
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 cost 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’sCompany's current estimates.
Net LossIncome Per Common Share
Basic net loss per common share is computed based on the weighted-average number of common shares outstanding during the period. Diluted net 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. Stock options produced common stock equivalents of 623,958 and 388,135 used to compute diluted net income per share for the three months ended April 1, 2016 and April 3, 2015, respectively.
Inventories, net
Inventories consisted of the following:
| | October 2, | | | December 31, | | | April 1, | | | December 31, | |
| | 2015 | | | 2014 | | | 2016 | | | 2015 | |
| | | | | | | | | | | | |
Raw materials | | $ | 6,992 | | | $ | 5,468 | | | $ | 5,975 | | | $ | 5,958 | |
Work in process | | | 1,106 | | | | 1,678 | | | | 890 | | | | 1,265 | |
Finished goods | | | 217 | | | | 233 | | | | 232 | | | | 220 | |
Reserve for obsolete inventory | | | (3,292 | ) | | | (3,216 | ) | | | (3,431 | ) | | | (3,371 | ) |
Inventories, net | | $ | 5,023 | | | $ | 4,163 | | | $ | 3,666 | | | $ | 4,072 | |
| | | | | | | | | | | | | | | | |
Liquidity
The Company has experienced recurring annual losses since 2007, except for 2013. In order to preserve the liquid resources required to operate the business, the Company stopped making cash payments due to the trust for the Company’s defined benefit pension plan (the “Pension Plan”) beginning in October 2012. In 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”) with the goal of settling its Pension Plan liabilities on terms that are feasible for the Company to continue in business as a going concern. On April 21, 2015, the Company executed an agreement (the “Settlement Agreement”) which terminated the Pension Plan and settled the Pension Plan’s liabilities in exchange for an obligation to pay to the Pension 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 new 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 but is responsible for fixed annual installment payments of $750 to the PBGC. 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 Settlement Agreement, through at least September 30, 2016.
As of October 2, 2015,April 1, 2016, options to purchase 1,312,6131,066,068 shares of common stock under the Company’sCompany's stock option plan were authorized and reserved for future grant. A summary of activity in the stock option plan for the ninethree months ended October 2, 2015April 1, 2016 follows (shares in thousands):
| | | | | Weighted- | | | | | | Weighted- | |
| | | | | Average | | | | | | Average | |
| | Number | | | Exercise | | | Number | | | Exercise | |
| | of Shares | | | Price | | | of Shares | | | Price | |
| | | | | | | | | | | | |
Outstanding as of beginning of the period | | | 1,333 | | | $ | 2.08 | | | | 1,470 | | | $ | 1.53 | |
Granted | | | 211 | | | | 0.36 | | | | 225 | | | | 0.89 | |
Exercised | | | - | | | | - | | | | - | | | | | |
Forfeited or expired | | | (83 | ) | | | 7.26 | | | | (95 | ) | | | 6.58 | |
Outstanding as of end of the period | | | 1,461 | | | | 1.53 | | | | 1,600 | | | | 1.14 | |
| | | | | | | | | | | | | | | | |
Exercisable as of end of the period | | | 1,063 | | | $ | 2.02 | | | | 1,157 | | | $ | 1.34 | |
As of October 2, 2015,April 1, 2016, options exercisable and options outstanding had a weighted average remaining contractual term of 3.634.19 and 5.035.59 years, respectively, and had an aggregate intrinsic value of $307$467 and $555,$604, respectively.
The Black-Scholes option-pricing model is used to estimate the fair value of options under the Company’sCompany's stock option plan. The weighted average values of employee stock options granted under the stock option plan, as well as the weighted average assumptions used in calculating these values during the first ninethree months of 2015,2016, were based on estimates as of the date of grant as follows:
Risk-free interest rate | 0.91 | % 1.17% |
Dividend yield | 0.00 | % 0.00% |
Volatility | 343 | % 258% |
Expected life | | 3.5 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.
As of October 2, 2015,April 1, 2016, there was approximately $37$161 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 2.12.5 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 $12, 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,April 1, 2016 and April 3, 2015 was $25 and September 26, 2014 was $10 and $4,$9, respectively.
3. | EMPLOYEE RETIREMENT BENEFIT PLANS |
Settlement of Pension Plan Liabilities
On January 7, 2013,April 21, 2015, the Company submittedentered into a PBGC Form 600 Distress Termination, Noticeseries of Intentagreements to Terminate,terminate its defined pension plan (the "Pension Plan") and settle the resulting liabilities. Pursuant to the PBGC. The notice filing initiated an application process byagreements, as of April 1, 2016, the Company withis obligated to pay eleven remaining installments of $750 to the PBGCPension Benefit Guaranty Corporation (the "PBGC") due annually on October 31 of each year from 2016 through 2026 (the "Pension Settlement Obligation"). As security for the distress termination ofPension Settlement Obligation, 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 was to demonstrategranted to the PBGC that it qualified 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 had to demonstrate to the satisfaction of the PBGC that, unless the termination occurred, the Company would be unable to pay its debts when they come due and would be unable to continue in business, or that the costs of the Pension Plan had 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 transfers 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 informed the Company that following termination of the Pension Plan and subject to the PBGC’s review of participant benefits,security interest on all of the benefits earnedCompany's assets, subordinate to certain senior liens held by participantsthe Company's two senior lenders. The Pension Settlement Obligation is recorded net of imputed interest expense at 7%, as ofa liability on the date of plan termination are expected to fall within ERISA guaranteed limits.
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 reorganization.
Pursuant to a determination by the PBGC that the requirements of the distress termination of the Pension 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.
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The terminationCompany recorded pension expense of the Pension Plan and settlement of its underlying liabilities enables the Company to satisfy the previously disclosed unfunded liability$326 attributable to the Pension Plan byfor the issuingfirst quarter of 2015, which was prior 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 Pension 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 the Balance Sheet as follows as of October 2, 2015:
Current portion of pension settlement obligation | | $ | 534 | |
Pension settlement obligation, net of current portion | | | 5,624 | |
Total Pension Settlement Obligation | | $ | 6,158 | |
plan termination. As a result of the settlement oftermination Pension Plan, liabilities on April 21, 2015, the Company’sCompany's only remaining pension obligation is the Supplemental Executive Retirement Plan (“SERP”("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 was placed against the assets of the Company to secure aggregate unpaid contributions which amounted to $6,979, including interest, as of January 15, 2015, which is the date the most recent contribution was due. However, under the Settlement Agreement all of the Pension Plan’s liabilities, including the unpaid 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 Company’s senior lenders (see Settlement of Pension Plan Liabilities above).
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The Company is not currently required to fund the 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 $435$500 in the next 12 months.
Components of Net Periodic Benefit Expense
| | | | | | | | Supplemental Executive | | | | | | | | | Supplemental Executive | |
| | Pension Plan | | | Retirement Plan | | | Pension Plan | | | Retirement Plan | |
| | October 2, | | | September 26, | | | October 2, | | | September 26, | | | April 1, | | | April 3, | | | April 1, | | | April 3, | |
For the three months ended: | | 2015 | | | 2014 | | | 2015 | | | 2014 | | | 2016 | | | 2015 | | | 2016 | | | 2015 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Service cost | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | |
Interest cost | | | - | | | | 569 | | | | 44 | | | | 55 | | | | - | | | | 617 | | | | 48 | | | | 44 | |
Expected return on assets | | | - | | | | (574 | ) | | | - | | | | - | | | | - | | | | (585 | ) | | | - | | | | - | |
Amortization of actuarial loss | | | - | | | | 101 | | | | 17 | | | | 12 | | | | - | | | | 195 | | | | 21 | | | | 17 | |
Amortization of prior year service cost | | | - | | | | - | | | | (12 | ) | | | (12 | ) | | | - | | | | - | | | | (3 | ) | | | (12 | ) |
Net periodic benefit expense | | | - | | | | 96 | | | | 49 | | | | 55 | | | | - | | | | 227 | | | | 66 | | | | 49 | |
Insurance premium due PBGC | | | - | | | | 208 | | | | - | | | | - | | | | - | | | | 99 | | | | - | | | | - | |
| | $ | - | | | $ | 304 | | | $ | 49 | | | $ | 55 | | | $ | - | | | $ | 326 | | | $ | 66 | | | $ | 49 | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | Supplemental Executive | | |
| | Pension Plan | | | Retirement Plan | | |
| | October 2, | | | September 26, | | | October 2, | | | September 26, | | |
For the nine months ended: | | | 2015 | | | | 2014 | | | | 2015 | | | | 2014 | | |
| | | | | | | | | | | | | | | | | |
Service cost | | $ | - | | | $ | - | | | $ | - | | | $ | - | | |
Interest cost | | | 617 | | | | 1,706 | | | | 132 | | | | 164 | | |
Expected return on assets | | | (585 | ) | | | (1,724 | ) | | | - | | | | - | | |
Amortization of actuarial loss | | | 195 | | | | 304 | | | | 51 | | | | 37 | | |
Amortization of prior year service cost | | | - | | | | - | | | | (36 | ) | | | (36 | ) | |
Net periodic benefit expense | | | 227 | | | | 286 | | | | 147 | | | | 165 | | |
Insurance premium due PBGC | | | 99 | | | | 326 | | | | - | | | | - | | |
| | $ | 326 | | | $ | 612 | | | $ | 147 | | | $ | 165 | | |
For the three-month periodsperiod ended October 2,April 3, 2015, and September 26, 2014, the Company reclassified $0 and $101, respectively,$195, of actuarial loss from accumulated other comprehensive loss thatrelated to the Pension Plan which 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, the Company reclassified $195 and $305, 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.income.
Mortgage Notes
On October 3, 2014, the holder of the mortgage notes, a 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 note 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 August 31, 2015 by which time the process of withdrawing the Pension Plan liens was completed in accordance with terms of the Settlement Agreement (see Note 3) curing the default. The agreement to forbear from exercising any further remedies was 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 note agreements effective immediately and continuing until the mortgage 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 in compliance with the additional covenants in future periods based on forecasts and management of intercompany accounts payable and receivable.
Lines of Credit
Because of cross default provisions, the October 3, 2014 notice of default under the mortgage notes included notification by the commercial bank that it is no longer obligated to make advances under its line-of-credit agreement with Spitz and its election to suspend future advances. In September 2015 the bank confirmed that the defaults were cured as a result of the settlement of the pension liabilities. As of October 2, 2015, there were no borrowings outstanding under the credit agreement and there have been no borrowings outstanding since February 2011.
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"Company," "E&S,” “we,” “us”" "we," "us" and “our”"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”"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”"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’sCompany'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
On 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 terminationfirst three months 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 reported2016 produced slightly lower sales but improved sales volume and $921 of net income compared to the third quartersame period of 2014, which reported a net income of $639. Although sales volume improved, the2015. Weaker 2016 gross profit contribution was comparablemargins were more than offset by lower 2016 operating expenses compared to 2015. The 2016 weaker gross profit margins were due to variability in product mix within a normal range. Operating expenses were lower in 2016 due to the third quartercessation of 2014 due to unfavorable margins on some large unrelated projects in 2015. Reduced operating expenses primarily pension related contributed to the higher net incomePension Plan which was terminated in April 2015. The revenue backlog decreased but remained relatively healthy at April 1, 2016. The decrease in the third quarter of 2015 compared to 2014. The first nine months of 2015 reported improved sales volume and $9,710 of gross profit as compared to the first nine months of 2014, which reported gross profit of $7,371. The stronger sales and improved gross profit in 2015revenue backlog was attributable to strongera low volume of new sales bookings overdue mostly to the prior year.timing of prospective customer decisions. The April 1, 2016 revenue backlog and a strong sales backlog remained healthy at the end of the third quarter of 2015 which supportsprospect list support an encouraging outlook for the remainder of 2015 and into 2016. Operating expenses, except for a $3,620 charge forThe first quarter 2016 results continue to illustrate the settlementprofit potential of our business without the burden 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. Also, 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 yield profitable results for the remainder of 2015.
Pension Plan.
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. Although we reportedexpenses and meet our obligations including the Pension Settlement Obligation. The net income for the third quarter, we had a net loss for the first ninethree months of 2015 due2016 brings us closer to the pension settlement chargeelimination of $3,620. However, the pension settlement contributed largely to total comprehensive income which amounted to $30,295 for the first nine monthsour stockholders' deficit and our goal 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.building shareholder value. With the settlement of the Pension Plan liabilities, we expect anour improved financial position that mayto 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, 2014.2015. 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:
| | 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 | |
| | Three Months Ended | |
| | April 1, 2016 | | | April 3, 2015 | |
| | | | | | |
Sales | | $ | 7,900 | | | $ | 8,002 | |
Sales for the thirdfirst quarter of 20152016 were 22% higherslightly lower than the same period in 2014. Sales for the first nine months of 2015 were 38% higher than the same period in 2014.2015. The higher 2015lower 2016 sales were attributable to progresstiming of deliveries and deliverieswork completed on larger customer contracts as compared to the same period of 2014.contracts.
Revenue backlog improveddeclined to $29,152$22,293 as of October 2, 2015,April 1, 2016, compared to $28,173$26,298 as of December 31, 2014. Sales for2015. The decline in the revenue backlog is attributed to a low volume of new orders booked in the first ninethree 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 add to this improvement.2016. Sales prospects support the outlook for maintaining a strong revenue backloghigher volume of new orders through the endremainder of 2015.2016.
The following table summarizes our gross profit and the gross profit as a percentage of total sales:
| | Three Months Ended | | Nine Months Ended | | | Three Months Ended | |
| | October 2, 2015 | | September 26, 2014 | | October 2, 2015 | | September 26, 2014 | | | April 1, 2016 | | | April 3, 2015 | |
| | | | | | | | | | | | | | | | | | |
Gross profit | | $ | 3,326 | | | $ | 3,285 | | | $ | 9,710 | | | $ | 7,371 | | | $ | 2,703 | | | $ | 2,991 | |
Gross profit percentage | | | 35 | % | | | 43 | % | | | 35 | % | | | 37 | % | | | 34 | % | | | 37 | % |
GrossThe variability in the gross profit percentage was due to the mix of products delivered and the types of customer contracts that contributed to the revenue recognized for the three and nine months ended October 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 absorption of fixed overhead and by favorable margins on other sales projects.periods presented.
Operating Expenses
The following table summarizes our operating expenses:
| | Three Months Ended | |
| | April 1, 2016 | | | April 3, 2015 | |
| | | | | | |
Selling, general and administrative | | $ | 1,671 | | | $ | 1,842 | |
Research and development | | | 587 | | | | 595 | |
Pension | | | 66 | | | | 375 | |
Total operating expenses | | $ | 2,324 | | | $ | 2,812 | |
| | 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 | |
Selling, general and administrative expenses for the three and nine months ended October 2, 2015 were slightly lower in 2016 compared to 2014.2015. 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 higherslightly lower in 2016 compared to the same periods in 20142015. This was due primarily to increased labor costs and expenditures onan increase in the use of engineering resources for customer delivery activities as opposed to product improvement projects.
Pension expense declined in the third quarter and first nine months of2016 compared to 2015 due to the 2015 termination of the Pension Plan. The third quarter2016 pension expenses in 2015 are attributable to the SERP. With the termination