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, 2015September 30, 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(Sec.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, 20153, 2016 was 11,177,316.

11,352,516.

FORM 10-Q

Evans & Sutherland Computer Corporation

Quarter Ended October 2, 2015September 30, 2016

  Page No.
   
 
PART I – FINANCIAL INFORMATION
 
   
Item 1.
Financial Statements
 
   
 
Condensed Consolidated Balance Sheets as of October 2, 2015 September 30, 2016
and
3
December 31, 20142015 (Unaudited)
Condensed Consolidated Statements of Comprehensive Income
(Loss) for the Three and Nine Months Ended October 2, 2015
and September 26, 2014 (Unaudited)
43
   
 
Condensed Consolidated Statements of Cash FlowsComprehensive Income
(Loss) for the
Three and Nine Months Ended September 30, 2016
and October 2, 2015 and
September 26, 2014 (Unaudited)
 
54
   
 
Notes to Condensed Consolidated Financial Statements of Cash Flows for the Nine
Months Ended September 30, 2016 and October 2, 2015 (Unaudited)
6
Item 2.
Management's Discussion and Analysis of Financial
Condition and Results of Operations
 
135
Item 4.
Controls and Procedures
17
   
 
Notes to Condensed Consolidated Financial Statements (Unaudited)
6
Item 2.
Management's Discussion and Analysis of Financial
Condition and Results of Operations
10
Item 4.
Controls and Procedures
14
PART II – OTHER INFORMATION 
   
Item 1.
Legal Proceedings
1815
   
Item 6.
Exhibits
1815
 
SIGNATURE
1916


2

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)
  September 30,  December 31, 
  2016  2015 
ASSETS      
Current assets:      
Cash and cash equivalents $5,557  $3,734 
Restricted cash  602   601 
Accounts receivable, net  6,125   4,825 
Costs and estimated earnings in excess of billings on        
uncompleted contracts  1,511   2,695 
Inventories, net  3,708   4,072 
Prepaid expenses and deposits  646   1,038 
Total current assets  18,149   16,965 
Property and equipment, net  4,681   4,735 
Goodwill  635   635 
Intangible assets, net  7   27 
Other assets  1,205   1,082 
Total assets $24,677  $23,444 
         
LIABILITIES AND STOCKHOLDERS' DEFICIT        
Current liabilities:        
Accounts payable $803  $1,062 
Accrued liabilities  2,200   1,031 
Billings in excess of costs and estimated earnings on        
uncompleted contracts  5,179   3,995 
Customer deposits  2,994   3,232 
Current portion of retirement obligations  551   480 
Current portion of pension settlement obligation  356   356 
Current portion of long-term debt  226   199 
Total current liabilities  12,309   10,355 
Pension and retirement obligations, net of current portion  4,657   4,839 
Pension settlement obligation, net of current portion  5,268   5,268 
Long-term debt, net of current portion  1,800   1,975 
Deferred rent obligation  1,336   1,653 
Total liabilities  25,370   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;        
11,441,866 and 11,441,666 shares issued, respectively  2,288   2,288 
Additional paid-in-capital  53,559   53,434 
Common stock in treasury, at cost, 264,350 shares  (3,532)  (3,532)
Accumulated deficit  (50,604)  (50,432)
Accumulated other comprehensive loss  (2,404)  (2,404)
Total stockholders' deficit  (693)  (646)
Total liabilities and stockholders' deficit $24,677  $23,444 
         
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
  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 
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 
  September 30,  October 2,  September 30,  October 2, 
  2016  2015  2016  2015 
             
Sales $10,306  $9,375  $23,474  $27,666 
Cost of sales  (6,627)  (6,049)  (15,523)  (17,956)
     Gross profit  3,679   3,326   7,951   9,710 
Operating expenses:                
     Selling, general and administrative  (2,273)  (1,535)  (5,710)  (5,132)
     Research and development  (606)  (563)  (1,762)  (1,702)
     Pension  (66)  (49)  (197)  (473)
     Pension settlement  -   -   -   (3,620)
          Total operating expenses  (2,945)  (2,147)  (7,669)  (10,927)
                 
          Operating income (loss)  734   1,179   282   (1,217)
                 
Other expense, net  (157)  (231)  (417)  (404)
Income (loss) before income tax provision  577   948   (135)  (1,621)
     Income tax benefit  (16)  (27)  (37)  (55)
          Net income (loss) $561  $921  $(172) $(1,676)
                 
Net income (loss) per common share – basic and diluted $0.05  $0.08  $(0.02) $(0.15)
                 
Weighted average common shares outstanding – basic  11,177   11,177   11,177   11,141 
Weighted average common shares outstanding – diluted  11,790   11,705   11,177   11,141 
                 
Comprehensive income (loss), net of tax:                
Net income (loss) $561  $921  $(172) $(1,676)
Other comprehensive income (loss):                
  Reclassification of pension expense to net income  -   -   -   195 
  Pension settlement  -   -   -   31,776 
    Other comprehensive income  -   -   -   31,971 
          Total comprehensive income (loss) $561  $921  $(172) $30,295 

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 30,  October 2, 
  2016  2015 
       
Cash flows from operating activities:      
Net loss $(172) $(1,676)
Adjustments to reconcile net loss to net cash provided by        
(used in) operating activities:        
Depreciation and amortization  219   216 
Amortization of deferred pension costs  -   195 
Pension settlement charge  -   3,620 
Provision for excess and obsolete inventory  236   76 
Other  143   72 
Changes in assets and liabilities:        
Decrease (increase) in restricted cash  (1)  111 
Increase in accounts receivable  (1,318)  (2,054)
Decrease (increase) in inventories  128   (936)
Decrease (increase) in costs and estimated earnings in        
excess of billings on uncompleted contracts, net  2,368   (1,542)
Decrease (increase) in prepaid expenses and other assets  269   (76)
Increase (decrease) in accounts payable  (259)  315 
Increase in accrued liabilities  1,169   510 
Decrease in pension and retirement obligations  (111)  (100)
Decrease in pension settlement obligation  -   (1,485)
Decrease in customer deposits  (238)  (79)
Decrease in deferred rent obligation  (317)  (318)
Net cash provided by (used in) operating activities  2,116   (3,151)
         
Cash flows from investing activities:        
Purchases of property and equipment  (145)  (71)
Net cash used in investing activities  (145)  (71)
         
Cash flows from financing activities:        
Principal payments on long-term debt  (148)  (156)
Net cash used in financing activities  (148)  (156)
         
Net increase (decrease) in cash and cash equivalents  1,823   (3,378)
Cash and cash equivalents as of beginning of the period  3,734   7,038 
Cash and cash equivalents as of end of the period $5,557  $3,660 
         
Supplemental disclosures of cash flow information:        
Cash paid during the period for:        
Interest $93  $126 
Income taxes  11   12 
         
Supplemental disclosures of non-cash investing and financing        
activities:        
Settlement of pension liability $-  $35,870 

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

35

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)

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 
  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
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
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”"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, 2015September 30, 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.

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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 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 (Loss) Per Common Share

Basic net lossincome (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.equivalents in computing diluted net income per share, when applicable. 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:

  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 
         
Liquidity
  September 30,  December 31, 
  2016  2015 
       
Raw materials $5,959  $5,958 
Work in process  953   1,265 
Finished goods  403   220 
Reserve for obsolete inventory  (3,607)  (3,371)
Inventories, net $3,708  $4,072 
         

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.


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



2.STOCK OPTION PLAN
 
As of October 2, 2015,September 30, 2016, options to purchase 1,312,6131,034,081 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 nine months ended October 2, 2015September 30, 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   452   0.85 
Exercised  -   -   -   - 
Forfeited or expired  (83)  7.26   (182)  6.59 
Outstanding as of end of the period  1,461   1.53   1,740   0.82 
                
Exercisable as of end of the period  1,063  $2.02   1,215  $0.87 

As of October 2, 2015,September 30, 2016, options exercisable and options outstanding had a weighted average remaining contractual term of 3.634.59 and 5.035.99 years, respectively, and had an aggregate intrinsic value of $307$936 and $555,$1,273, 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 nine months of 2015,2016, were based on estimates as of the date of grant as follows:
 
Risk-free interest rate0.91%       0.98%
Dividend yield0.00%       0%
Volatility343%   235%
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.

As of October 2, 2015,September 30, 2016, there was approximately $37$189 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 2.13.87 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 September 30, 2016 and October 2, 2015 was $125 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 September 30, 2016 and October 2, 2015 was $52 and September 26, 2014 was $10, and $4, respectively.

8

3.EMPLOYEE RETIREMENT BENEFIT PLANS
 
 Settlement 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 was to demonstrate 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, all of the benefits earned by participants as of the date of plan termination are expected to fall within ERISA guaranteed limits.

8
EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)


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 a series of agreements to terminate its defined pension plan (the "Pension Plan") and settle 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”).liabilities. Pursuant to the Settlement Agreement,agreements, as of September 30, 2016, the Company agreedis obligated 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 annualremaining installments of $750 beginningto the Pension Benefit Guaranty Corporation (the "PBGC") due annually on October 31 2015of each year from 2016 through 2026 (the “Pension"Pension Settlement Obligation”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. As security for 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 grantgranted 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 isCompany's assets, subordinate to certain senior liens held by the Company’sCompany's two senior lenders pursuant tolenders. The Pension Settlement Obligation is recorded net of imputed interest expense at 7%, as a liability on 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)

balance sheet.

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).
10
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$551 in the next 12 months.

Components of Net Periodic Benefit Expense
 
        Supplemental Executive 
  Pension Plan  Retirement Plan 
  September 30,  October 2,  September 30,  October 2, 
For the three months ended: 2016  2015  2016  2015 
             
Service cost $-  $-  $-  $- 
Interest cost  -   -   48   44 
Expected return on assets  -   -   -   - 
Amortization of actuarial loss  -   -   21   17 
Amortization of prior year service cost  -   -   (3)  (12)
Net periodic benefit expense  -   -   66   49 
Insurance premium due PBGC  -   -   -   - 
  $-  $-  $66  $49 
       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        Supplemental Executive 
 Pension Plan  Retirement Plan  Pension Plan  Retirement Plan 
 October 2,  September 26,  October 2,  September 26,  September 30,  October 2,  September 30,  October 2, 
For the nine months ended:  2015   2014   2015   2014  2016  2015  2016  2015 
                            
Service cost $-  $-  $-  $-  $-  $-  $-  $- 
Interest cost  617   1,706   132   164   -   617   143   132 
Expected return on assets  (585)  (1,724)  -   -   -   (585)  -   - 
Amortization of actuarial loss  195   304   51   37   -   195   62   51 
Amortization of prior year service cost  -   -   (36)  (36)  -   -   (8)  (36)
Net periodic benefit expense  227   286   147   165   -   227   197   147 
Insurance premium due PBGC  99   326   -   -   -   99   -   - 
 $326  $612  $147  $165  $-  $326  $197  $147 

For the three-month periodsnine-month period ended October 2, 2015, and September 26, 2014, the Company reclassified $0 and $101, respectively,$195 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, 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.
period.
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EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)

4.Debt
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.


12

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 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.
TheSales for third quarter of 2015 reported2016 improved sales volume and $921 of net income compared to the third quarter of 2014, which reported a net income2015, while the sales for the first nine months of $639.  Although2016 were lower than the comparable period of 2015. The lower sales for the nine month period in 2016 were due to unusually low sales in the second quarter of 2016. The variation in sales volume improved,in the gross profit contributionperiods presented was comparableattributable to the timing of customer deliveries of planetarium systems and work completed on a theme park attraction.  Operating expenses in the third quarter of 20142016 increased due to unfavorable margins on some large unrelated projectsaccrued severance costs related to changes in 2015. Reduced operating expenses, primarily pension related, contributed to the higherour management team.  As a result we reported $561 of net income in the third quarter of 20152016 compared to 2014.$921 of net income in the third quarter of 2015.  The 2016 third quarter net income reduced the net loss reported in the first nine monthshalf of 2015 reported improved sales volume and $9,710the year to a net loss of gross profit as compared to$172 for the first nine months of 2014, which reported gross profit2016. The loss for the nine months ended 2016 is an improvement to the net loss of $7,371.$1,676 for the comparable period of 2015. The stronger sales2016 third quarter included $600 of expense related to accrued severance costs and improved gross profitrelated legal fees resulting from changes in our management team, while 2015 was attributable to stronger sales bookings overincluded a second quarter non-recurring charge of $3,620 for the prior year.pension settlement.  We do not expect any additional severance-related expenses in the foreseeable future.  The variable results, other than the severance costs and pension settlement described above, are within the range expected for the nature of our business. The sales backlog decreased but remained healthy at the end of the third quarter of 20152016 which supports an encouraging outlook for the remainder of 20152016 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. Also, we were profitable in each of the first three quarters of 2015 before the non-recurring pension related charges.2017. With the healthy backlog and sales prospects, we anticipate sales at levels that should continue to yieldproduce profitable results for the remainder of 2015.2016.

The net income for the third quarter of 2016 was not sufficient to completely eliminate our stockholders' deficit.  We expect continued progress with profitable results to eliminate the deficit toward our goal of building shareholder value. For the longer term, 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 reported net income forexpenses and meet our obligations including the third 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.Pension Settlement Obligation. 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.
 

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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  Nine Months Ended 
  September 30, 2016  October 2, 2015  September 30, 2016  October 2, 2015 
             
Sales $10,306  $9,375  $23,474  $27,666 

Sales for the third quarter of 2015 were 22% higher than the same period in 2014. Sales2015 while the sales for the first nine months of 20152016 were 38% higherlower than the same periodperiods in 2014.2015. The higher 2015variations in sales between the periods presented were attributable to progress andtiming of deliveries on larger customer contracts as compared to the same period of 2014.contracts.

Revenue backlog improved to $29,152was $23,288 as of October 2, 2015,September 30, 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 nine monthsquarter of 2015 have already exceeded total sales during all of 2014 and we expect2016, which was partially offset by a healthyhigher volume of salesnew orders booked in the fourth quarter of 2015 to add to this improvement.second and third quarters. Sales prospects support the outlook for maintaining a strong revenue backlogvolume of new orders through the endremainder of 2015.2016 and into 2017.

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

  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%
  
  Three Months Ended  Nine Months Ended 
  September 30, 2016  October 2, 2015  September 30, 2016  October 2, 2015 
             
Gross profit $3,679  $3,326  $7,951  $9,710 
Gross profit percentage  36%  35%  34%  35%

GrossThe variability in the gross profit percentage was due to volume related efficiencies, 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.
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Operating Expenses
 
The following table summarizes our operating expenses:

  Three Months Ended  Nine Months Ended 
  September 30, 2016  October 2, 2015  September 30, 2016  October 2, 2015 
             
Selling, general and            
administrative $2,273  $1,535  $5,710  $5,132 
Research and development  606   563   1,762   1,702 
Pension  66   49   197   473 
Pension settlement  -   -   -   3,620 
Total operating expenses $2,945  $2,147  $7,669  $10,927 
  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 were higher for the three and nine months ended October 2, 2015 were slightly lowerSeptember 30, 2016 compared to 2014. This wasthe same periods in 2015, primarily due to the reduction of selling related travel expense and professional feesseverance costs associated with changes in our management team.  In the pension settlement.third quarter of 2016, we incurred approximately $600 in severance compensation and legal costs related to executive employment contracts.  Share based compensation also increased $42 and $95 for the three and nine month periods, respectively, mostly as a result of accelerated vesting of a retired executive's stock options.

Research and development expenses for the three and nine months ended October, 2015September 30, 2016 were slightly higher compared to the same periods in 20142015 due primarily to increased labor costs and expenditures on product improvement projects.

Pension expense declined in the third quarter and first nine monthsmonth period of 2016 compared to 2015 due to the 2015 termination of the Pension Plan. The third quarter2016 pension expenses in 2015 are attributable to the SERP. WithThe pension expense was higher in the terminationthird quarter of 2016 compared to 2015 due to changes in actuarial assumptions in measuring the SERP obligation.

See Other Comprehensive Income (Loss) and the Settlement of 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 pension liabilities.Liabilities below.

Other Expense, net

The following table summarizes our other expense:

  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 
  Three Months Ended  Nine Months Ended 
  September 30, 2016  October 2, 2015  September 30, 2016  October 2, 2015 
             
Total other expense, net $157  $231  $417  $404 
 
The changes inFor the three months ended September 30, 2016, other expense, net, forwas less than the periods presented were attributablesame period in 2015 due to interest expense.lower losses from foreign currency transactions.  For the three-month periodnine  months ended October 2, 2015, interestSeptember 30, 2016, other expense, net, was greatermore than the prior yearsame period in 2015 due to nine months of interest expense on the pension settlement obligation recorded in 2016 compared to five months in 2015 beginning in April 2015. For the nine-month period of 2015,The higher 2016 interest expense was less thanpartially offset by the prior year period due to 2014 interest expense on a financing lease obligation which was extinguished in October 2014.lower losses from foreign currency transactions.

Other Comprehensive Income (Loss) and the Settlement of Pension Plan Liabilities
 
The settlement of Pension Plan liabilities resulted in a charge to the statement of operations of $3,620 which was offset by other comprehensive income of $31,776 for a total gain of $28,156 recorded in the second quarter of 2015.  This was the primary contributionThe other pension related charges in 2015 recorded in other comprehensive income were attributable to the totalaccounting for actuarial valuations of the pension liabilities. Other comprehensive income (loss) in future years is expected to be limited to accounting for potential changes in the actuarial valuation of $30,295 reportedthe SERP liabilities for the nine-month period presented formuch less significant amounts than 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,above, we have made significant progress in our effort to reverse our long history of operating losses.  We believe that the termination of the Pension Plan together with the settlement of the underlying pension liabilities achieved our goal of reducing our obligations to levels that allow the business 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. 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 nine months of 2016, the $2,116 of cash provided by operating activities was attributable to $426 of cash absorbed by the net loss for the period, after the effect of $598 of non-cash items and an increase in cash from changes to working capital of $1,690.  The working capital changes contributing to the increase in cash consisted primarily of an increase in accrued expenses attributable to severance compensation and payroll schedules plus increased progress payments from customer contracts.

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.

Cash used in investing activities was $71$145 for the first nine months ended October 2, 2015September 30, 2016 compared to $60$71 for the same period of 2014.  The Company had purchases2015.  Investing activities for both periods presented consisted entirely 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.purchases.

For the first nine months of 2015,ended September 30, 2016, financing activities used $156$148 of cash compared to $131$156 during the same period in 20142015 for principal payments on mortgage notes.

Line of Credit

The Company is a party to a line-of-credit agreement with a commercial bank which permits borrowings of up to $1,100 to fund Spitzthe working capital requirements.requirements of our subsidiary Spitz, Inc. ("Spitz"). Under the line of credit agreement, interest is charged on amounts borrowed at the Wall Street Journal Prime Rate.lender's prime rate less 0.25%.  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 line-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. In September 2015 the bank confirmed that the defaults were cured as a result of the settlement of the pension liabilities. There were no borrowings outstanding under the line-of-credit agreement as of October 2, 2015.September 30, 2016.

Letters of Credit

Under the terms of financing arrangements for letters of credit, the Company is required to maintain a balance in a specific cash account equal to or greater than the outstanding value of all letters of credit issued, plus other amounts necessary to adequately secure obligations with the financial institutions who issue the letters of credit.  As of October 2, 2015,September 30, 2016 there were outstanding letters of credit and bank guarantees of $600, which are scheduled to expire during the year ending December 31, 2016.2017.

Mortgage Notes
 
As of October 2, 2015,September 30, 2016, Spitz had obligations totaling $2,206$2,026 under its two mortgage notes payable.

 
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Item 4.CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and 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”"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 October 2, 2015,September 30, 2016, 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 6.EXHIBITS
 
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.
101The following materials from this Quarterly Report on Form 10-Q for the periodsperiod ended October 2, 2015,September 30, 2016, 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 9, 20154, 2016
By:     /s/ Paul Dailey
  Paul Dailey, Chief Financial Officer
  and Corporate Secretary
  (Authorized Officer)
  (Principal Financial and Accounting Officer)
 

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