UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

[X]Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934,

For the quarterly period ended September 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)

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 (Sec.232.405(§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 or an emerging growth company.  See definitions of "large“large accelerated filer," "accelerated” “accelerated filer,"” “smaller reporting company” and "smaller reporting company"“emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  [  ]                                                                                                Accelerated filer [  ]

FORM 10-Q

Evans & Sutherland Computer Corporation

Quarter Ended September 30, 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)

EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited) (In thousands)

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

EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited) (In thousands)

1.GENERAL

Basis of Presentation

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:

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

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 Income (Loss) Per Common Share

Basic net income (loss) per common share is computed based on the weighted-average number of common shares outstanding during the period.  Diluted net income 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 in computing diluted net income per share, when applicable.equivalents. When the Company incurs a loss, potentially dilutive common stock equivalents are excluded as their effect would be anti-dilutive, thereby decreasing the net loss per common share.  

Inventories, net

Inventories consisted of the following:

EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

consolidated financial statements related to percent-complete contracts.  The Company is in the process of evaluating the impact of the new standard on its contracts that are accounted for on the completed-contract method and anticipates that the revenue recognition for these contracts will change to an over-time method using the percent-complete method with cost-to-cost measurement of progress consistent with the Company’s current percent-complete contracts. The Company expects that after accounting for the transition, this change will reduce period to period fluctuations in reported sales.  The Company also expects its revenue recognition disclosure to significantly expand due to the new qualitative and quantitative requirements under the standard.  The Company plans to adopt the new standard effective January 1, 2018 using the modified retrospective approach with the cumulative effect of initially applying the new standard recognized in retained earnings at the date of adoption.  The Company has begun to analyze its existing revenue agreements to evaluate the impact of adoption.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) ("ASU 2016-02"). ASU 2016-02 changes the accounting for leases. In particular, lessees will recognize lease assets and lease liabilities for operating leases. This update will have a minimal effect on lessor accounting. ASU 2016-02 is not effective until 2019. The Company is currently assessing the impact on its financial reporting of implementing this guidance.

2.STOCK OPTION PLAN

As of September 30, 2016,29, 2017, options to purchase 1,034,081988,781 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 September 30, 201629, 2017 follows (shares in thousands):

As of September 30, 2016,29, 2017, options exercisable and options outstanding had a weighted average remaining contractual term of 4.594.64 and 5.996.00 years, respectively, and had an aggregate intrinsic value of $936$548 and $1,273,$613, 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 2016,2017, were based on estimates as of the date of grant as follows:

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.

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EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

As of September 30, 2016,29, 2017, there was approximately $189$186 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 3.872.63 years.

Share-based compensation expense included in selling, general and administrative expense in the statements of comprehensive income (loss)operations for each of the nine-month periods ended September 29, 2017 and September 30, 2016 was $132 and October 2, 2015 was $125, and $30, respectively. Share-based compensation expense included in selling, general and administrative expense in the statements of comprehensive income (loss)operations for each of the three-month periods ended September 29, 2017 and September 30, 2016 was $46 and October 2, 2015 was $52, respectively.

3.EMPLOYEE RETIREMENT BENEFIT PLANS

Pension and $10, respectively.

In 2015, the Company entered intoterminated a series of agreements to terminate its defined pension plan (the "Pension Plan") and settlesettled the resulting liabilities. Pursuant toliabilities in exchange for a fixed obligation secured by the agreements, asCompany’s assets (the “Pension Settlement Obligation”). The remaining payments due under the Pension Settlement Obligation consist of September 30, 2016, the Company is obligated to pay remainingten installments of $750 to the Pension 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 Pension Settlement Obligation, the Company granted to the PBGC a security interest on all of the Company's assets, subordinate to certain senior liens held by the Company's two senior lenders.31. The Pension Settlement Obligation is recorded net of imputed interest expense at 7%, as a liability on the balance sheet.

The Company recorded pension expense of $326 attributable to the Pension Plan for the first quarter of 2015, which was prior to the April 2015 plan termination. As a result of the termination Pension Plan, the Company'sCompany’s only remaining pension obligation is the Supplemental Executive Retirement Plan ("SERP"(“SERP”).

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 $551$500 in the next 12 months.

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.

EXECUTIVE SUMMARY

The third quarter of 2016 improved compared to2017 produced $8,049 of sales, which was less than the exceptionally strong $10,306 of sales reported in the third quarter of 2015, while2016. In 2017, improved gross profit percentage and reduced operating expenses overshadowed the lower sales, producing net income of $767 for the third quarter of 2017 compared to $561 for the third quarter of 2016. Sales for the first nine months of 20162017 were $22,836, which was slightly lower than the comparable period$23,474 in 2016; however, the Company experienced improved gross profit and reduced operating expenses, resulting in net income of 2015. The lower sales$781 for the first nine month period in 2016 were due to unusually low sales in the second quartermonths of 2016. The variation in sales volume in the periods presented was attributable to the timing of customer deliveries of planetarium systems and work completed on a theme park attraction.  Operating expenses in the third quarter of 2016 increased due to accrued severance costs related to changes in our management team.  As a result we reported $561 of net income in the third quarter of 20162017 compared to $921 of net income in the third quarter of 2015.  The 2016 third quarter net income reduced the net loss reported in the first half of the year to a net loss of $172 for the first nine monthscomparable period of 2016. The loss for the nine months ended 2016 is an improvement to the net loss of $1,676 for the comparable period of 2015. The 2016 third quarter included $600 of expense related to accrued severance costsvariability in sales and related legal fees resulting from changes in our management team, while 2015 included a second quarter non-recurring charge of $3,620 for the 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,gross profit are within the range expected for our current business environment. The reduced operating expense for 2017 reflects the natureimplementation of our business.a leaner executive management structure completed in 2016. The current sales backlog decreased but remained healthy at the end of the third quarter of 2016 which supportsand prospects with our current cost structure provide an encouraging outlook for profitable annual results which are slowly improving our financial position. As our recovery progresses from a large stockholders’ deficit eliminated mainly by the remainder of 2016 and into 2017. With the healthy backlog and sales prospects,2014 Pension Settlement, we anticipate sales at levels that shouldwill continue to produce profitable results for the remainder of 2016.

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, 2015.2016.  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:

Sales for the third quarter were higher than the same period in 2015 while the sales for theand first nine months of 20162017 were lower than the same periods in 2015.2016. The variations inlower 2017 sales between the periods presented were attributable to timinga decrease in the sales of deliveries on customer contracts.

Revenue backlog was $23,288increased to $26,094 as of September 30, 2016,29, 2017, compared to $26,298$24,444 as of December 31, 2015.2016. The declineincrease in the revenue backlog is mainly attributed to a lowhigh volume of new orders booked in the first quarterhalf of 2016, which was partially offset by a higher volume of new orders booked in the second2017. The sales backlog and third quarters. Sales prospects support the outlook for a strong volume of new orders through the remainder of 2016 and into 2017.

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

Operating Expenses

The following table summarizes our operating expenses:

Other Expense, net

The following table summarizes our other expense:

Other expense decreased in 2017 compared to 2016 other expense, net, was less than the same period in 2015mainly due to lower losses from foreign currency transactions.  For the nine  months ended September 30, 2016, other expense, net, was more than the same period in 2015 due to nine months ofdeclining interest expense on the pension settlement obligation in 2016 compared to five months in 2015 beginning in April 2015. The higher 2016Pension Settlement Obligation and mortgage notes along with offsetting increase of interest expense was partially offset by the lower lossesincome from foreign currency transactions.

LIQUIDITY AND CAPITAL RESOURCES

Outlook

Cash Flows

In the first nine months of 2017, $1,792 of cash used in operating activities was attributable to $1,099 of cash provided by the net income for the period, after the effect of $318 of non-cash items and an unfavorable change to working capital of $2,891. The change to working capital was driven by increases in receivables and costs and estimated earnings in excess of billings on uncompleted contracts.  These increases are attributable to the timing of billings, customer payments and new customer orders.   The change in working capital was also affected by an increase in prepaid expenses and other assets and a decrease in restricted cash for a performance guarantee that was released upon completion of the project.

In the first 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.

Cash used in investing activities was $145$100 for the first nine months ended September 30, 201629, 2017 compared to $71$145 for the same period of 2015.2016.  Investing activities for both periods presented consisted entirely of property and equipment purchases.

For the nine months ended September 30, 2016,29, 2017, financing activities used $148$157 of cash compared to $156 during the same period$148 in 20152016 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 the working capital requirements of our subsidiary Spitz, Inc. ("Spitz").Spitz. Under the line of credit agreement, interest is charged on amounts borrowed at the lender'slender’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. There were no borrowings outstanding under the line-of-credit agreement as of September 30, 2016.

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Letters of Credit

Underthe 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 September 30, 201629, 2017 there were outstanding letters of credit and bank guarantees of $600,$312, which are scheduled to expire during the year ending December 31, 2017.

Mortgage Notes

As of September 30, 2016,29, 2017, Spitz had obligations totaling $2,026$1,818 under its two mortgage notes payable.

Item 4.CONTROLS AND PROCEDURES

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

Due to the material weakness disclosed in the prior quarter and to enhance our overall financial control environment, management implemented the following changes in our internal control:

·Reassigned primary responsibility for preparation of initial customer contract cost estimates from the accounting staff to the project manager who is more familiar with the scope of work and related costs under the contract.

·Educated employees on the importance of including estimates for costs of contract deliverables when vendor quotes are not readily available.

·Reviewed project accounting transactions from the end of the reporting period until the published date of the financial statements to identify any material transactions that could affect contract accounting.  

·Conducted additional reviews of all customer contracts with the Chief Financial Officer, Chief Operating Officer, project manager and the controller in attendance, including review of actual cost incurred, estimated cost to complete and status of contract obligations to enable accurate and timely update of accounting records.  

Other than the improvements noted above, there has been no change in our internal control over financial reporting identified in connection with the evaluation of disclosure controls and procedures discussed above that occurred during the quarter ended September 30, 2016,29, 2017, 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.

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

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 2, 2017By:    /s/ Paul Dailey       

Paul Dailey, Chief Financial Officer

and Corporate Secretary

(Authorized Officer)

(Principal Financial and Accounting Officer)

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