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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

__________________________________________________

FORM 10-Q

(Mark One)

For the quarterly period ended September 30, 2016

or

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 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 3, 2016 was 11,352,516.

FORM 10-Q

Evans & Sutherland Computer Corporation

Quarter Ended September 30, 2016

 

PART I – FINANCIAL INFORMATION

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.

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.

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.

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" or "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, 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's financial position, results of operations and cash flows.  The results of operations for the three and nine months ended September 30, 2016 are not necessarily indicative of the results to be expected for the full year ending December 31, 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'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.

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'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. Stock options are considered to be common stock 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:

		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

2.	STOCK OPTION PLAN

 

As of September 30, 2016, options to purchase 1,034,081 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 30, 2016 follows (shares in thousands):

						Weighted-
						Average
		Number				Exercise
		of Shares				Price
Outstanding as of beginning of the period			1,470			$	1.53
Granted			452				0.85
Exercised			-				-
Forfeited or expired			(182	)			6.59
Outstanding as of end of the period			1,740				0.82
Exercisable as of end of the period			1,215			$	0.87

As of September 30, 2016, options exercisable and options outstanding had a weighted average remaining contractual term of 4.59 and 5.99 years, respectively, and had an aggregate intrinsic value of $936 and $1,273, 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 2016, 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.

As of September 30, 2016, there was approximately $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 3.87 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 $30, 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 $10, respectively.

 

3.	EMPLOYEE RETIREMENT BENEFIT PLANS

 

 Settlement of Pension Plan Liabilities

 

On April 21, 2015, the Company entered into a series of agreements to terminate its defined pension plan (the "Pension Plan") and settle the resulting liabilities. Pursuant to the agreements, as of September 30, 2016, the Company is obligated to pay remaining 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. 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's only remaining pension obligation is the Supplemental Executive Retirement Plan ("SERP").

 

Employer Contributions

 

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 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
		September 30,				October 2,				September 30,				October 2,
For the nine months ended:		2016				2015				2016				2015
Service cost		$	-			$	-			$	-			$	-
Interest cost			-				617				143				132
Expected return on assets			-				(585	)			-				-
Amortization of actuarial loss			-				195				62				51
Amortization of prior year service cost			-				-				(8	)			(36	)
Net periodic benefit expense			-				227				197				147
Insurance premium due PBGC			-				99				-				-
		$	-			$	326			$	197			$	147

For the nine-month period ended October 2, 2015, the Company reclassified $195 of actuarial loss from accumulated other comprehensive loss that was included in pension expense in the statements of comprehensive loss for the same period.

 

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

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

All dollar amounts are in thousands.

Executive Summary

Sales for third quarter of 2016 improved compared to the third quarter of 2015, while the sales for the first nine months of 2016 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 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 2016 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 months 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 costs 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, 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 2016 which supports an encouraging outlook for the remainder of 2016 and into 2017. With the healthy backlog and sales prospects, we anticipate sales at levels that should continue to produce profitable results for the remainder of 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 sales and gross profits from our current product line at annual levels sufficient to cover or exceed operating expenses and meet our obligations including the Pension Settlement Obligation. With the settlement of the Pension Plan liabilities, we expect our improved financial position to present opportunities for better results through the availability of credit and stronger qualification for customer projects.

 

Critical Accounting Policies

Certain accounting policies are considered by management to be critical to an understanding of our condensed consolidated financial statements.  Their application requires significant management judgment, with financial reporting results relying on estimates about the effect of matters that are inherently uncertain.  A summary of critical accounting policies can be found in our Form 10-K for the year ended December 31, 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
		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 were higher than the same period in 2015 while the sales for the first nine months of 2016 were lower than the same periods in 2015. The variations in sales between the periods presented were attributable to timing of deliveries on customer contracts.

Revenue backlog was $23,288 as of September 30, 2016, compared to $26,298 as of December 31, 2015. The decline in the revenue backlog is attributed to a low volume of new orders booked in the first quarter of 2016, which was partially offset by a higher volume of new orders booked in the second and third quarters. Sales prospects support the outlook for a strong volume of new orders through the remainder of 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
		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	%

The 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 periods presented.

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

 

Selling, general and administrative expenses were higher for the three and nine months ended September 30, 2016 compared to the same periods in 2015, primarily due to the severance costs associated with changes in our management team.  In the 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 September 30, 2016 were slightly higher compared to the same periods in 2015 due primarily to increased labor costs and expenditures on product improvement projects.

Pension expense declined in the nine month period of 2016 compared to 2015 due to the 2015 termination of the Pension Plan. The 2016 pension expenses are attributable to the SERP. The pension expense was higher in the third 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 Liabilities below.

Other Expense, net

The following table summarizes our other expense:

		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

 

For the three months ended September 30, 2016, other expense, net, was less than the same period in 2015 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 of interest expense on the pension settlement obligation in 2016 compared to five months in 2015 beginning in April 2015. The higher 2016 interest expense was partially offset by the 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 in the second quarter of 2015.  The other pension related charges in 2015 recorded in other comprehensive income were attributable to the accounting 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 the SERP liabilities for much less significant amounts than 2015.

 

Liquidity and Capital Resources

Outlook

 

As discussed in the executive summary 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.

Cash used in investing activities was $145 for the first nine months ended September 30, 2016 compared to $71 for the same period of 2015.  Investing activities for both periods presented consisted entirely of property and equipment purchases.

For the nine months ended September 30, 2016, financing activities used $148 of cash compared to $156 during the same period in 2015 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"). Under the line of credit agreement, interest is charged on amounts borrowed at the 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. There were no borrowings outstanding under the line-of-credit agreement as of 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 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, 2017.

Mortgage Notes

 

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

 

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 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.

PART II - OTHER INFORMATION

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.

 

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 period ended 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.

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 4, 2016	By:     /s/ Paul Dailey
		Paul Dailey, Chief Financial Officer
		and Corporate Secretary
		(Authorized Officer)
		(Principal Financial and Accounting Officer)