EVANS & SUTHERLAND COMPUTER CORP - FORM 10-Q

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EXCEL - IDEA: XBRL DOCUMENT - EVANS & SUTHERLAND COMPUTER CORP	Financial_Report.xls
EX-31.1 - EXHIBIT 31.1 - EVANS & SUTHERLAND COMPUTER CORP	ex311.htm
EX-32.1 - EXHIBIT 32.1 - EVANS & SUTHERLAND COMPUTER CORP	ex321.htm
EX-31.2 - EXHIBIT 31.2 - EVANS & SUTHERLAND COMPUTER CORP	ex312.htm

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 27, 2013

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

For the transition period from _____ to _____

Commission file number 001-14677

__________________________________________________

EVANS & SUTHERLAND COMPUTER CORPORATION

(Exact Name of Registrant as Specified in Its Charter)

Utah (State or Other Jurisdiction of Incorporation or Organization)	87-0278175 (I.R.S. Employer Identification No.)

770 Komas Drive, Salt Lake City, Utah (Address of Principal Executive Offices)	84108 (Zip Code)

Registrant's Telephone Number, Including Area Code: (801) 588-1000

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ____

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

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

Large accelerated filer [ ] Accelerated filer [ ]

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

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

Yes ___ No X

The number of shares of the registrant’s Common Stock (par value $0.20 per share) outstanding on November 7, 2013 was 11,089,199.

FORM 10-Q

Evans & Sutherland Computer Corporation

Quarter Ended September 27, 2013

		Page No.

	PART I – FINANCIAL INFORMATION

Item 1.	Condensed Consolidated Financial Statements (unaudited)

	Condensed Consolidated Balance Sheets as of September 27, 2013 and December 31, 2012	3

	Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended September 27, 2013 and September 28, 2012	4

	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 27, 2013 and September 28, 2012	5

	Notes to Condensed Consolidated Financial Statements	6

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	12

Item 4.	Controls and Procedures	16

	PART II – OTHER INFORMATION

Item 1.	Legal Proceedings	17

Item 6.	Exhibits	17

SIGNATURE		18

PART I – FINANCIAL INFORMATION

Item 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited) (In thousands, except share and per share data)

	September 27,			December 31,
	2013			2012
ASSETS
Current assets:
Cash and cash equivalents	$	3,240		$	2,111
Restricted cash		1,038			705
Marketable securities		345			712
Accounts receivable, less allowances for doubtful receivables of $257
and $324, respectively		5,202			3,972
Costs and estimated earnings in excess of billings on uncompleted contracts		1,636			2,474
Inventories, net		3,914			3,125
Prepaid expenses and deposits		638			453
Total current assets		16,013			13,552
Property, plant and equipment, net		7,353			7,735
Goodwill		635			635
Definite-lived intangible assets, net		128			168
Other assets		1,342			2,160
Total assets	$	25,471		$	24,250
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities:
Accounts payable	$	1,886		$	1,197
Accrued liabilities		1,174			1,274
Billings in excess of costs and estimated earnings on uncompleted contracts		3,506			2,531
Customer deposits		3,599			3,180
Current portion of retirement obligations		492			517
Current portion of long-term debt		175			167
Total current liabilities		10,832			8,866
Pension and retirement obligations, net of current portion		32,845			33,369
Long-term debt, net of current portion		5,169			5,148
Deferred rent obligation		1,509			1,511
Total liabilities		50,355			48,894
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		54,481			54,466
Common stock in treasury, at cost: 352,467 shares		(4,709	)		(4,709	)
Accumulated deficit		(49,818	)		(49,025	)
Accumulated other comprehensive loss		(27,126	)		(27,664	)
Total stockholders' deficit		(24,884	)		(24,644	)
Total liabilities and stockholders' deficit	$	25,471		$	24,250

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

EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited) (In thousands, except per share data)

	Three Months Ended						Nine Months Ended
	September 27,			September 28,			September 27,			September 28,
	2013			2012			2013			2012

Sales	$	8,509		$	5,359		$	18,428		$	17,922
Cost of sales		4,981			3,299			11,858			11,387
Gross profit		3,528			2,060			6,570			6,535
Operating expenses:
Selling, general and administrative (excluding pension)		1,545			1,658			4,291			4,409
Research and development		529			662			1,873			1,926
Pension		249			590			618			1,699
Total operating expenses		2,323			2,910			6,782			8,034
Operating income (loss)		1,205			(850	)		(212	)		(1,499	)
Other expense, net		(185	)		(200	)		(540	)		(601	)
Income (loss) before income tax provision		1,020			(1,050	)		(752	)		(2,100	)
Income tax provision		(31	)		(21	)		(41	)		(95	)
Net income (loss)	$	989		$	(1,071	)	$	(793	)	$	(2,195	)
Net income (loss) per common share – basic and diluted	$	0.09		$	(0.10	)	$	(0.07	)	$	(0.20	)

Weighted average common shares outstanding – basic		11,089			11,089			11,089			11,089
Weighted average common shares outstanding –diluted		11,155			11,089			11,089			11,089

Comprehensive income (loss):
Net income (loss)	$	989		$	(1,071	)	$	(793	)	$	(2,195	)
Other comprehensive income (loss):
Amortization of deferred pension expense		182			-			546			-
Unrealized gain (loss) on marketable securities		3			90			(8	)		194
Comprehensive income (loss)	$	1,174		$	(981	)	$	(255	)	$	(2,001	)

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

EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited) (In thousands)

	Nine Months Ended
	September 27,			September 28,
	2013			2012
Cash flows from operating activities:
Net loss	$	(793	)	$	(2,195	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization		452			569
Amortization of deferred pension expense		546			-
Other		471			766
Change in assets and liabilities:
Decrease (increase) in restricted cash		(333	)		282
Decrease (increase) in accounts receivable, net		(1,287	)		362
Increase in inventories		(1,062	)		(632	)
Decrease (increase) in costs and estimated earnings in excess of billings on uncompleted contracts		1,813			(1,665	)
Decrease (increase) in prepaid expenses and deposits		633			(472	)
Increase (decrease) in accounts payable		689			(452	)
Decrease in accrued liabilities		(102	)		(246	)
Decrease in pension and retirement obligations		(549	)		(188	)
Increase in customer deposits		419			636
Net cash provided by (used in) operating activities		897			(3,235	)

Cash flows from investing activities:
Purchases of property, plant and equipment		(30	)		(96	)
Proceeds from sale of marketable securities		385			1,011
Net cash provided by investing activities		355			915

Cash flows from financing activities:
Principal payments on long-term debt		(123	)		(116	)
Net cash used in financing activities		(123	)		(116	)

Net increase (decrease) in cash and cash equivalents		1,129			(2,436	)
Cash and cash equivalents as of beginning of the period		2,111			3,932
Cash and cash equivalents as of end of the period	$	3,240		$	1,496

Supplemental Disclosures of Cash Flow Information:
Cash paid for interest	$	397		$	405
Cash paid for income taxes		26			43

Non-cash investing and financing activities:
Unrealized gain (loss) on marketable securities	$	(8	)	$	194

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)

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

GENERAL

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of Evans & Sutherland Computer Corporation and subsidiaries (collectively, the “Company” and “E&S”) have been prepared in accordance with the instructions to Form 10-Q and, therefore, do not include all information and notes necessary for a complete presentation of financial position, results of operations, and cash flows, in conformity with U.S. generally accepted accounting principles (“US GAAP”). This report on Form 10-Q should be read in conjunction with the Company’s annual report on Form 10-K for the year ended December 31, 2012.

The accompanying unaudited condensed consolidated balance sheets, statements of comprehensive income (loss), and statements of cash flows reflect all normal recurring adjustments that are, in the opinion of management, necessary for a fair presentation of the Company’s financial position, results of operations and cash flows. The results of operations for the three and nine months ended September 27, 2013 are not necessarily indicative of the results to be expected for the full year ending December 31, 2013. The Company operates on a calendar year with the first three fiscal quarters ending on the last Friday of the calendar 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’s estimate of total gross profit at completion for each contract. The Company routinely reviews estimates related to percentage-of-completion contracts and adjusts for changes in the period the revisions are made. Billings on uncompleted percentage-of-completion contracts may be greater than or less than incurred costs and estimated earnings and are recorded as an asset or liability in the accompanying condensed consolidated balance sheets.

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

Completed Contract. Contract arrangements which typically require a relatively short period of time to complete the production, modification, and customization of products are accounted for using the completed contract method. Accordingly, revenue is recognized upon delivery of the completed product, provided persuasive evidence of an arrangement exists, title and risk of loss have transferred to the customer, the fee is fixed or determinable, and collection is reasonably assured.

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

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

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, offsetting amounts as contract costs are incurred.

Stock-Based Compensation

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

Net Income (Loss) 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 (loss) per common share is computed based on the weighted-average number of common shares and dilutive common stock equivalents outstanding during the period. Stock options are considered to be common stock equivalents. When the Company incurs a loss, potentially dilutive common stock equivalents are excluded as their effect would be anti-dilutive, thereby decreasing the net loss per common share.

Inventories, net

Inventories consisted of the following:

	September 27,			December 31,
	2013			2012

Raw materials	$	6,115		$	5,255
Work in process		372			287
Finished goods		370			253
Reserve for obsolete inventory		(2,943	)		(2,670	)
Inventories, net	$	3,914		$	3,125

Liquidity

As of September 27, 2013, the total stockholders’ deficit was $24,884 as compared to $24,644 as of December 31, 2012. While the Company believes existing sources of liquidity and expected results of operations will be adequate to fund its pension and operational obligations through at least September 30, 2014, it has stopped making payments due on its pension obligation, and is seeking, through a legal process described more fully in Note 4, to restructure its pension obligations in order to sustain operations for a longer term. As such, in January 2013, the Company initiated an application process for the distress termination of its pension plan in accordance with provisions of the Employee Retirement Income Security Act of 1974 (“ERISA”). If the distress termination is approved, the ERISA Title IV insurance fund, which is administered by the Pension Benefit Guaranty Corporation (“PBGC”), would take possession of the assets in the pension plan trust and pay future pension plan benefits. Through this process, the Company will seek to negotiate, with the PBGC, a settlement of its pension plan liabilities on terms that are feasible for the Company to continue in business as a going concern for the long term, which is consistent with the purposes of the provisions of ERISA. Because the Company has stopped making payments due on its pension obligation, a lien in favor of the PBGC has arisen against the assets of the Company. The lien secures aggregate unpaid contributions to the pension plan trust, with interest, which has accumulated to $2,129 as of October 15, 2013. The Company’s legal counsel has advised that the PBGC usually does not take enforcement action under its lien rights while it is still considering the application for the distress termination and the Company believes that the lien on its assets will not have a significant adverse effect on its business operations. Aided by improving sales backlog and business prospects, the Company believes improving results should produce sufficient funds to satisfy the increasing debt secured by the PBGC lien through at least September 30, 2014; however, it also believes payment of the debt, to the extent that it threatens the ability to sustain operations for the long term, will not be in the best interest of the Company or its creditors, including the pension plan and the PBGC. The Company believes the improving operating results and the distress termination process will enable the management of its short-term pension debt and the continuity of operations through at least September 30, 2014. There can be no assurance that the PBGC will not take additional action to enforce

EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

the lien and that the Company will be successful in these efforts. The condensed consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

2.	FAIR VALUE MEASUREMENTS

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. To increase the comparability of fair value measures, the following hierarchy prioritizes the inputs according to valuation methodologies used to measure fair value:

Level 1—Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets

that the Company has the ability to access at the measurement date.

Level 2—Observable inputs other than Level 1 including quoted prices for similar assets or liabilities, quoted prices

in less active markets, or other observable inputs that can be corroborated by observable market data.

Level 3—Unobservable inputs which are supported by little or no market activity.

The Company’s marketable securities are classified within Level 1 because the underlying investments have readily available market prices. Marketable securities measured at fair value on a recurring basis are summarized below:

September 27, 2013	Total		Level 1		Level 2		Level 3

Mutual funds – equity securities	$	-	$	-	$	-	$	-
Mutual funds – debt securities		301		301		-		-
Money market mutual funds		44		44		-		-
Total	$	345	$	345	$	-	$	-

December 31, 2012	Total		Level 1		Level 2		Level 3

Mutual funds – equity securities	$	367	$	367	$	-	$	-
Mutual funds – debt securities		298		298		-		-
Money market mutual funds		47		47		-		-
Total	$	712	$	712	$	-	$	-

EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

3. STOCK OPTION PLAN

As of September 27, 2013, options to purchase 1,538,913 shares of common stock under the Company’s stock option plan were authorized and reserved for future grant. A summary of activity in the stock option plan for the nine months ended September 27, 2013 follows (shares in thousands):

				Weighted-
				Average
	Number			Exercise
	of Shares			Price

Outstanding as of beginning of the period		1,169		$	3.19
Granted		150			0.03
Exercised		-			-
Forfeited or expired		(84	)		5.82
Outstanding as of end of the period		1,235			2.62

Exercisable as of the end of the period		974		$	3.28

As of September 27, 2013, options exercisable and options outstanding had a weighted average remaining contractual term of 3.8 and 4.8 years, respectively, and aggregate intrinsic value of $0 and $6, respectively.

The Black-Scholes option-pricing model is used to estimate the fair value of options under the Company’s stock option plan. The weighted 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 2013, were based on estimates as of the date of grant as follows:

Risk-free interest rate	0.38	%
Dividend yield	0.00	%
Volatility	377	%
Expected life (in years)	3.50

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 September 27, 2013, there was approximately $10 of total unrecognized share-based compensation cost related to grants under the stock option plan that will be recognized over a weighted-average period of 2.1 years.

Share-based compensation expense included in selling, general and administrative (excluding pension) expense in the statements of comprehensive income (loss) for each of the three and nine months ended September 27, 2013 was $4 and $14, respectively. Share-based compensation expense included in selling, general and administrative (excluding pension) expense in the statements of comprehensive income (loss) for each of the three and nine months ended September 28, 2012 was $8 and $25, respectively.

4.	EMPLOYEE RETIREMENT BENEFIT PLANS

Distress Termination of Pension Plan

On January 7, 2013, the Company submitted a PBGC Form 600 Distress Termination, Notice of Intent to Terminate, to the PBGC. The notice filing initiates an application process by the Company with the PBGC for the distress termination of the pension plan. The pension plan is a defined benefit pension plan sponsored by the Company whose benefits are guaranteed by the ERISA Title IV insurance fund, which is administered by the PBGC. In the

EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

application process, the Company intends to demonstrate to the PBGC that it qualifies 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 must demonstrate to the satisfaction of the PBGC that, unless the termination occurs, the Company will be unable to pay its debts when they come due and will be unable to continue in business, or that the costs of the pension plan have become unreasonably burdensome solely as a result of a decline in the workforce covered by the Plan. A distress termination under Section 4041(c)(2) of ERISA would transfer the pension plan’s benefit obligations to the PBGC, up to ERISA guaranteed limits, without requiring reorganization under bankruptcy law. The pension plan’s actuary has informed the Company that following termination of the 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.

The unfunded pension and retirement obligation of the pension plan, as reported on the Company’s financial statements was $28,025 as of September 27, 2013. The Company believes business operations could produce adequate funds to make the payments to the pension plan trust in sufficient amounts to satisfy regulatory funding standards through at least September 30, 2014; however, it believes making the payments would deplete liquid resources to a level that would risk its ability to operate the business for the longer term. For this reason, the Company has stopped making such payments beginning in October 2012 in order to maintain adequate working capital to sustain long-term business operations. The Company also believes it will not be able to meet the estimated payments required beyond 2014 to satisfy the total pension plan obligation.

If the distress termination application is approved by the PBGC, the PBGC will take possession of the assets in the pension plan trust and pay future pension plan benefits beginning upon trusteeship of the pension plan, up to ERISA guaranteed limits. In this event, the Company’s unfunded obligation of the pension plan would be replaced by a new pension plan termination liability to the PBGC, determined by the pension plan’s underfunding on a termination basis pursuant to ERISA, PBGC regulations, and other applicable legal authority, along with an ERISA special termination premium. The Company would also be liable for any unpaid contributions to the pension plan (which in substance is a subset of plan termination liability) and annual insurance premiums for the pension plan, along with any interest and penalties. While the full pension plan termination and other pension related liabilities to the PBGC would likely be greater than the unfunded obligation of the pension plan as currently reported in the Company’s financial statements, the Company will seek to negotiate a settlement of such liabilities on terms that are feasible for the Company to continue in business as a going concern, which is consistent with the purposes of the statute.

The Company’s goal in seeking a distress termination of the pension plan is to ensure that the pension benefits of all pension plan participants are paid up to federally guaranteed limits and that the Company continues to operate as a going concern while avoiding the costly damage and disruption to the business which would result from bankruptcy reorganization. The Company has proposed a termination date of March 8, 2013 and intends to pursue a conclusion of the process and settlement with the PBGC of any resulting liabilities as quickly as feasible. The proposed termination date that was selected was the earliest possible date that was legally available as determined by the date of notification provided to participants and beneficiaries and the PBGC that an application was being filed with the PBGC to terminate the Plan. The proposed date of plan termination, if adopted by the PBGC, would be the effective date upon which the Plan ended. The Company is unable to determine the timing or the ultimate outcome as of the date of this filing.

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 to sustain the business operations for the long term. Payments of future contributions to satisfy regulatory funding standards likely will be affected by the application process to the PBGC for the distress termination of the pension plan.

Independent actuarial valuations have determined that contributions before additional interest, totaling $2,077 are due through the end of 2013 in order to satisfy regulatory funding standards. By the Company’s not making the contributions to satisfy regulatory funding standards where periodically required unpaid contributions plus interest exceed $1,000, by operation of law a lien arises against the assets of the Company. On July 15, 2013, the aggregate

EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

unpaid contributions with interest reached approximately $1,410. As a result, the PBGC is entitled by law to enforce the lien that has arisen. The amounts secured by the lien increase for any additional future unpaid contributions plus interest. As of October 15, 2013 the total unpaid contributions to satisfy regulatory funding standards including interest, secured by the lien, has accumulated to $2,129. The Company’s legal counsel has advised that the PBGC typically files tax lien notices to perfect such liens and, in discussions with the Company’s legal counsel, the PBGC has indicated that it plans to perfect the lien that has arisen. As of the date of this filing the Company has not been notified that the PBGC has filed tax lien notices to perfect the liens. The Company’s legal counsel has also advised that the PBGC usually does not take any additional enforcement action while it is still considering the application for the distress termination; however, there can be no assurance that the PBGC will not take additional action to enforce the lien.

The Company is not currently required to fund the Supplemental Executive Retirement Plan (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 $492 in the next 12 months.

Components of Net Periodic Benefit Expense

	Pension Plan						Supplemental Executive Retirement Plan
For the three months ended:	September 27, 2013			September 28, 2012			September 27, 2013			September 28, 2012

Service cost	$	-		$	-		$	-		$	-
Interest cost		398			467			41			52
Expected return on assets		(460	)		(454	)		-			-
Amortization of actuarial loss		177			171			17			14
Amortization of prior year service cost		-			-			(12	)		(12	)
Settlement charge		-			352			-			-
Net periodic benefit expense	$	115		$	536		$	46		$	54

	Pension Plan						Supplemental Executive Retirement Plan
For the nine months ended:	September 27, 2013			September 28, 2012			September 27, 2013			September 28, 2012

Service cost	$	-		$	-		$	-		$	-
Interest cost		1,195			1,402			123			155
Expected return on assets		(1,381	)		(1,361	)		-			-
Amortization of actuarial loss		531			511			51			42
Amortization of prior year service cost		-			-			(36	)		(36	)
Settlement charge		-			986			-			-
Net periodic benefit expense	$	345		$	1,538		$	138		$	161

Pension expense was $618 for the nine-month period ended September 27, 2013, which included net periodic benefit expense of $345 for the pension, $138 for the SERP, $47 of insurance premium due to the PBGC and $88 of federal excise tax related to non-payment of minimum pension funding requirements. For the three and nine months ended September 27, 2013, the Company reclassified $182 and $546, respectively, of actuarial loss from accumulated other comprehensive loss that was included in pension expense on the statement of comprehensive income (loss) for the same periods.

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 notes of Evans & Sutherland Computer Corporation and subsidiaries (collectively, the “Company,” “E&S,” “we,” “us” and “our”) included in Item 1 of Part I of this Form 10-Q. In addition to the historical information contained herein, this quarterly report on Form 10-Q includes certain "forward-looking” statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. You can identify these forward-looking statements by the fact they use words such as “should,” “expect,” “anticipate,” “estimate,” “target,” “may,” “project,” “guidance,” “intend,” “plan,” “believe” and other words and terms of similar meaning and expression in connection with any discussion of future operating or financial performance. One can also identify forward-looking statements by the fact that they do not relate strictly to historical or current facts. Such forward-looking statements are based on current expectations and involve inherent risks and uncertainties, including factors that could delay, divert or change any of them, and could cause actual outcomes to differ materially from current expectations. These statements are likely to relate to, among other things, the Company’s goals, plans and projections regarding its financial position, results of operations, cash flows, market position, product development, sales efforts, expenses, performance or results of current and anticipated products and the outcome of contingencies such as legal proceedings and financial results, which are based on current expectations that involve inherent risks and uncertainties, including internal or external factors that could delay, divert or change any of them in the next several years.

Although the Company believes it has been prudent in its plans and assumptions, no assurance can be given that any goal or plan set forth in forward-looking statements can be achieved and readers are cautioned not to place undue reliance on such statements, which speak only as of the date made. The Company undertakes no obligation to release publicly any revisions to forward-looking statements as a result of new information, future events or otherwise.

All dollar amounts are in thousands.

Executive Summary

Sales for the third quarter of 2013 were significantly higher than the comparable period of 2012 as result of increased sales bookings and the timing of customer deliveries. The higher third quarter sales were expected and resulted in sales for the first nine months of 2013 that were slightly higher than the comparable period of 2012. The improved customer bookings increased the sales backlog to $22,123 as of September 27, 2013 compared to $15,511 as of December 31, 2012. The forecasted bookings and customer deliveries indicate that sales levels for the remainder of the year will also be strong. The gross profit percentage for the third quarter of 2013 also improved compared to the third quarter 2012 and contributed to gross margins for the first nine months of 2013 comparable to 2012. We expect the gross profit percentage and results for the remainder of 2013 to be similar to the results of the third quarter of 2013. We do not believe the third quarter sales volume is an indication of any long-term trend, but rather a typical fluctuation that can be expected occasionally from the timing of orders and deliveries. For the long term, we believe the existing markets we serve will yield annual sales at various levels comparable to the sales reported from 2009 through 2012. We have found it challenging to find opportunities for significant sales growth from new markets due to our current resource limitations and the worldwide economic environment.

Total operating expenses in the third quarter and first nine months of 2013 decreased compared to the same periods in 2012 due primarily to a decrease in pension expense. The reduction in pension expense was attributable to high settlement charges for 2012 lump sum distributions. Since filing the application for distress termination in January 2013, the pension plan is prohibited from making lump sum distributions. Otherwise operating expenses were comparable in the periods presented.

A higher amount of sales resulted in net income reported for the third quarter and a reduction of the net loss for the first nine months of 2013. The net loss for the first nine months of 2013 was significantly lower than the comparable period in 2012 primarily due to decreased pension expense. With our improved sales backlog and anticipated customer deliveries for the remainder of 2013, we expect annual results for 2013 to be close to break even. For the long term we continue to expect variable but reasonably consistent future sales and gross profit from our current product line at annual levels sufficient to cover or exceed operating expenses, excluding the pension expense.

As a result of the net loss for the first nine months of 2013, our stockholders’ deficit increased to $24,884 as of September 27, 2013 compared to $24,644 as of December 31, 2012. We continue to believe we can manage this deficit for the short term; however for the long term, we believe we can overcome the deficit only with a reasonable settlement of our pension liabilities. The Company continues to pursue a reasonable settlement of its pension liabilities through the distress termination application process. However, the Company is unable to determine the timing or the ultimate outcome as of the date of this filing.

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, 2012. For all of these policies, management cautions that future results rarely develop exactly as forecasted, and the best estimates routinely require modification.

Results of Operations

Sales and Backlog

The following table summarizes our sales:

	For the Three Months Ended				For the Nine Months Ended
	September 27, 2013		September 28, 2012		September 27, 2013		September 28, 2012
Sales	$	8,509	$	5,359	$	18,428	$	17,922

Sales for the first nine months of 2013 were 3% higher than the same period in 2012 while sales for the third quarter of 2013 were 59% higher than the same quarter in 2012. The contrasting comparison of the two periods is attributable to strong sales for the third quarter of 2013. The higher third quarter 2013 sales were due to a recent influx in customer orders as well as the timing of customer deliveries.

We have seen a significant improvement in new customer orders in 2013, as evidenced by the change in our revenue backlog which increased to $22,123 as of September 27, 2013, compared to $15,511 as of December 31, 2012. We expect sales for the fourth quarter of 2013 to be similar to the third quarter of 2013 based on customer delivery schedules and the improved revenue backlog along with strong sales prospects.

Gross Profit

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

	For the Three Months Ended						For the Nine Months Ended
	September 27, 2013			September 28, 2012			September 27, 2013			September 28, 2012
Gross profit	$	3,528		$	2,060		$	6,570		$	6,535
Gross profit percentage		41	%		38	%		36	%		36	%

Gross profit for the third quarter was favorably affected by high sales volume which absorbed fixed overhead as well as specific contracts with high margins. Our gross profit for the first nine months of 2013 was comparable to the same period in 2012.

Operating Expenses

The following table summarizes our operating expenses:

	For the Three Months Ended				For the Nine Months Ended
	September 27, 2013		September 28, 2012		September 27, 2013		September 28, 2012
Selling, general and administrative (excluding pension)	$	1,545	$	1,658	$	4,291	$	4,409
Research and development		529		662		1,873		1,926
Pension		249		590		618		1,699
Total operating expenses	$	2,323	$	2,910	$	6,782	$	8,034

In 2013, selling, general and administrative expenses (excluding pension) were reduced for the nine-month period by a credit from the receipt of $320 in the second quarter for settlement of a claim against a subcontractor for damages on a customer project. The Company has been pursuing the claim for four years and the settlement served to recover expenses incurred in pursuit of the claim. As a result, selling, general and administrative expenses (excluding pension) were slightly lower for the first nine months of 2013 compared to the same period in 2012.

Research and development expenses were comparable for both periods presented with a slight reduction in the three and nine month periods of 2013 attributable primarily to engineering resources being redirected from research and development activities to customer projects. Pension expense for both the three and nine months ended September 27, 2013 was substantially lower than the comparable periods of 2012 due primarily to settlement charges incurred in 2012 resulting from lump-sum distributions.

Other Expense, net

The following table summarizes our other expense:

	For the Three Months Ended				For the Nine Months Ended
	September 27, 2013		September 28, 2012		September 27, 2013		September 28, 2012
Total other expense, net	$	185	$	200	$	540	$	601

For the three and nine months ended September 27, 2013, other expense, net, was slightly lower than for the same periods in 2012 due to lower realized loss from marketable securities, higher foreign currency gains and lower bank fees.

Liquidity and Capital Resources

Cash Flows

In the first nine months of 2013, $897 of cash provided by operating activities was attributable to $676 of cash provided by the net loss for the period, after the effect of $1,469 of non-cash items plus a favorable change to working capital of $221. The change to working capital was driven by improvement in progress payments from customer contracts, reflecting our increase to customer orders and revenue backlog in the third quarter of 2013.

In the first nine months of 2012, the $3,235 of cash used in operating activities was attributable to $2,375 of cash absorbed by changes in working capital and $860 absorbed by the net loss for the period, after the effect of $1,335 of non-cash items. Most of the cash absorbed by changes in working capital was driven by customer contract activity as progress payments did not keep pace with costs and earnings reported during the period.

Cash provided by investing activities was $355 in the first nine months of 2013 compared to $915 for the same period of 2012, representing cash provided by the sale of marketable securities, offset by purchases of property,

plant and equipment of $30 and $96 in 2013 and 2012, respectively. The overall decrease was due to a larger liquidation of marketable securities in 2012 in the amount of $1,011 compared to $385 in 2013.

In the first nine months of 2013, financing activities used $123 of cash compared to $116 in 2012, for principal payments on mortgage notes.

Credit Facilities

The Company is a party to a credit agreement with a commercial bank which permits borrowings of up to $1,100 to fund working capital requirements. Interest is charged on amounts borrowed at the lender’s prime rate. As of September 27, 2013, there were no borrowings outstanding under the credit agreement.

The Company has a finance arrangement which facilitates the issuance of letters of credit and bank guarantees. Under the terms of the arrangement, we are required to maintain a balance in a specific bank account equal to or greater than the outstanding value of all letters of credit issued, plus other amounts necessary to adequately secure our obligations with the financial institution. As of September 27, 2013, we had outstanding letters of credit totaling $1,128. The cash collateral for these letters of credit was classified as $1,038 of restricted cash and $90 of restricted cash included in other assets.

Mortgage Notes

As of September 27, 2013, our wholly owned Spitz subsidiary had obligations totaling $2,583 under its two mortgage notes payable.

Sale-Leaseback Financing

As of September 27, 2013, the principal balance on the debt obligation recorded from the sale-leaseback financing transaction was $2,761. The cash payment required to repurchase the property on September 27, 2013 was $2,727 consisting of $2,852 repurchase price under the agreement less a credit for the $125 security deposit. Accordingly, if we had exercised our option to repurchase the property on September 27, 2013, we would have recorded a discount of approximately 1% in the amount of $34 under the $2,761 balance of the debt.

Pension obligation

As more fully described in Note 4 to the condensed consolidated financial statements, the Company believes it will not be able to satisfy the total obligation of a defined benefit pension plan sponsored by the Company and is seeking to negotiate a settlement of such liabilities through an application process for a distress termination of the pension plan in accordance with provisions of ERISA. The amount of the unfunded pension obligation as reported on the balance sheet totaled $28,025 as of September 27, 2013. Payments related to the obligation totaling approximately $2,129 became past due as of October 15, 2013. As a result, a lien in favor of the pension plan has arisen against the assets of the Company to secure the $2,129 amount past due. The Company believes that the lien on its assets will not have a significant adverse effect on its existing contractual agreements. The Company also believes that the current revenue backlog and liquid resources are sufficient to satisfy the obligation secured by the PBGC lien and sustain operations through at least September 30, 2014; however, it believes that by not paying the pension contributions, it is preserving liquid resources to continue operating for the longer term. A reasonable settlement of our pension liabilities is critical to ensure we have adequate liquidity and capital resources to operate for the long term. We believe our distress termination application is meritorious and that it will lead to a reasonable settlement of our pension liabilities resulting in adequate liquidity and capital resources to operate for the long term. However, there can be no assurance that the Company will be successful in these efforts.

Trademarks Used In This Form 10-Q

ESLP is a registered trademark of Evans & Sutherland Computer Corporation. All other products, services, or trade names or marks are the properties of their respective owners.

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

Changes in Internal Control over Financial Reporting

There has been no change in our internal control over financial reporting identified in connection with the evaluation of disclosure controls and procedures discussed above that occurred during the quarter ended September 27, 2013, 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

31.1

Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended, filed herewith.

31.2

Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended, filed herewith.

32.1

Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith.

101

The following materials from this Quarterly Report on Form 10-Q for the periods ended September 27, 2013, 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, tagged as blocks of text.

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 8, 2013

By: /s/ Paul Dailey

Paul Dailey, Chief Financial Officer

and Corporate Secretary

(Authorized Officer)

(Principal Financial and Accounting Officer)

EVANS & SUTHERLAND COMPUTER CORP - FORM 10-Q - November 8, 2013

Attached files

EVANS & SUTHERLAND COMPUTER CORP Reports