10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

__________________________________________________

FORM 10-Q

(Mark One)

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

For the quarterly period ended October 1, 2010

or

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

For the transition period from _____ to _____

Commission file number 001-14677

__________________________________________________

EVANS & SUTHERLAND COMPUTER CORPORATION

(Exact Name of Registrant as Specified in Its Charter)

Utah (State or Other Jurisdiction of Incorporation or Organization)	87-0278175 (I.R.S. Employer Identification No.)
770 Komas Drive, Salt Lake City, Utah (Address of Principal Executive Offices)	84108 (Zip Code)
Registrant's Telephone Number, Including Area Code:  (801) 588-1000

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).      Yes ¨  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 5, 2010 was 11,089,199.

FORM 10-Q

Evans & Sutherland Computer Corporation

Quarter Ended October 1, 2010

		Page No.
	PART I – FINANCIAL INFORMATION
Item 1.	Condensed Consolidated Financial Statements (unaudited)
	Condensed Consolidated Balance Sheets as of October 1, 2010 and December 31, 2009	3
	Condensed Consolidated Statements of Operations for the three and nine months ended October 1, 2010 and September 25, 2009	4
	Condensed Consolidated Statements of Cash Flows for the nine months ended October 1, 2010 and September 25, 2009	5
	Notes to Condensed Consolidated Financial Statements	6
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	11
Item 4.	Controls and Procedures	16
	PART II – OTHER INFORMATION
Item 1.	Legal Proceedings	17
Item 6.	Exhibits	17
SIGNATURES		18

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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 data)

	October 1,			December 31,
	2010			2009
ASSETS
Current assets:
Cash and cash equivalents	$	719		$	2,600
Restricted cash		1,336			1,597
Marketable securities		2,699			-
Accounts receivable, less allowances for doubtful receivables of $750
and $965, respectively		3,774			4,024
Costs and estimated earnings in excess of billings on uncompleted contracts		2,360			2,073
Inventories		4,830			7,159
Prepaid expenses and deposits		1,305			1,346
Total current assets		17,023			18,799
Property, plant and equipment, net		9,784			10,608
Restricted marketable securities		-			3,248
Goodwill		635			635
Intangible assets, net		377			479
Other assets		946			849
Total assets	$	28,765		$	34,618
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities:
Accounts payable	$	2,359		$	1,624
Accrued liabilities		2,184			3,433
Billings in excess of costs and estimated earnings on uncompleted contracts		3,244			3,667
Customer deposits		2,723			3,483
Current portion of retirement obligations		634			643
Current portion of long-term debt		456			452
Total current liabilities		11,600			13,302
Deferred rent obligation		1,448			1,432
Long-term debt		5,309			5,332
Pension and retirement obligations		21,407			20,522
Total liabilities		39,764			40,588
Commitments and contingencies
Stockholders' deficit:
Preferred stock, no par value; authorized 10,000,000 shares;
no issued and outstanding shares		-			-
Common stock, $0.20 par value; 30,000,000 shares authorized; 11,441,666
shares issued		2,288			2,288
Additional paid-in-capital		54,379			54,355
Common stock in treasury, at cost; 352,467 shares		(4,709	)		(4,709	)
Accumulated deficit		(45,485	)		(39,997	)
Accumulated other comprehensive loss		(17,472	)		(17,907	)
Total stockholders' deficit		(10,999	)		(5,970	)
Total liabilities and stockholders' deficit	$	28,765		$	34,618

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

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EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(In thousands, except per share data)

	Three Months Ended						Nine Months Ended
	October 1,			September 25,			October 1,			September 25,
	2010			2009			2010			2009
Sales	$	7,027		$	6,034		$	18,700		$	17,966
Cost of sales		4,195			3,758			12,138			11,523
Loss on inventory impairment		65			46			1,638			1,220
Gross profit		2,767			2,230			4,924			5,223
Expenses:
Selling, general and administrative excluding pension expense		1,679			1,584			4,963			5,216
Research and development		752			1,421			3,416			5,218
Pension expense – general and administrative		449			840			1,345			2,520
Operating expenses		2,880			3,845			9,724			12,954
Operating loss		(113	)		(1,615	)		(4,800	)		(7,731	)
Other income (expense)		(210	)		351			(616	)		242
Loss from operations before income taxes		(323	)		(1,264	)		(5,416	)		(7,489	)
Income tax expense		(23	)		(5	)		(72	)		(62	)
Net loss		(346	)	$	(1,269	)	$	(5,488	)	$	(7,551	)
Net loss per common share – basic and diluted:	$	(0.03	)	$	(0.11	)	$	(0.49	)	$	(0.68	)
Weighted average common shares outstanding – basic and diluted:		11,089			11,089			11,089			11,089

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

4

 

EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 (In thousands)

	Nine Months Ended
	October 1,			September 25,
	2010			2009
Cash flows from operating activities:
Net loss	$	(5,488	)	$	(7,551	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		889			1,131
Provision for excess and obsolete inventory		1,638			1,220
Other		470			(53	)
Change in assets and liabilities:
Decrease in restricted cash		261			326
Decrease in accounts receivable		465			1,301
Decrease (increase) in inventories		691			(326	)
Increase in costs and estimated earnings in excess of billings on uncompleted contracts, net		(710	)		(2,590	)
Increase in prepaid expenses and deposits		(225	)		(239	)
Increase in accounts payable		735			713
Decrease in accrued liabilities		(1,233	)		(352	)
Increase in pension and retirement obligations		876			2,036
Increase (decrease) in customer deposits		(760	)		47
Net cash used in operations		(2,391	)		(4,337	)
Cash flows from investing activities:
Purchases of property, plant and equipment		(71	)		(356	)
Proceeds from sale of marketable securities		683			524
Net cash provided by investing activities		612			168
Cash flows from financing activities:
Principal payments on long-term debt		(102	)		(84	)
Net cash used in financing activities		(102	)		(84	)
Net change in cash and cash equivalents		(1,881	)		(4,253	)
Cash and cash equivalents at beginning of period		2,600			5,757
Cash and cash equivalents at end of period	$	719		$	1,504
Supplemental Disclosures of Cash Flow Information
Cash paid for interest	$	418		$	183
Cash paid for income taxes		52			104

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

 

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EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

All currency amounts in thousands unless otherwise indicated.

1. GENERAL

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of Evans & Sutherland Computer Corporation and its consolidated subsidiaries (the “Company”, “E&S”, “we”, “us”, “our”) have been prepared in accordance with the instructions to Form 10-Q and, therefore, do not include all information and footnotes necessary for a complete presentation of the financial position, results of operations, and cash flows, in conformity with United States generally accepted accounting principles (“GAAP”).  This report on Form 10-Q should be read in conjunction with our annual report on Form 10-K for the year ended December 31, 2009.

The accompanying unaudited condensed consolidated balance sheets, statements of operations, and statements of cash flows reflect all normal recurring adjustments that are, in the opinion of management, necessary for a fair presentation of our financial position, results of operations and cash flows.  The results of operations for the periods ended October 1, 2010 are not necessarily indicative of the results to be expected for the full year ending December 31, 2010.

Certain amounts in the 2009 condensed consolidated financial statements and notes have been reclassified to conform to the 2010 presentation.

Revenue Recognition

Our sales include revenue from system hardware, software, database products and service contracts.  The following methods are used to compute 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, we utilize cost-to-cost methodology whereby we estimate 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) to management’s estimate of total anticipated costs.   This ratio is then utilized to determine the amount of gross profit earned based on management’s estimate of total estimated gross profit at completion.  We routinely review estimates related to percentage-of-completion contracts and adjust for changes in the period 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 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 our 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 has transferred, the fee is fixed and determinable, and collection is reasonably assured.

Other.  Other revenue consists primarily of amounts earned under maintenance contracts that are generally sold as a single element to our customers.  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 becomes known.  After an anticipated loss is recorded, subsequent revenue and cost of sales are recognized in equal, offsetting amounts as contract costs are incurred and do not generate further gross profits.

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Multiple Element Arrangements.  Some of our contracts include multiple 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.

Stock-Based Compensation

Compensation cost for all stock-based awards is measured at fair value on 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 number of share-based awards that are expected to be forfeited. Actual results and future changes in estimates may differ from our current estimates.

Net Loss Per Common Share

Net loss per common share is computed based on the weighted-average number of common shares and, as appropriate, dilutive common stock equivalents outstanding during the period.  Stock options are considered to be common stock equivalents.  Basic loss per common share is based upon the weighted average number of shares of common stock outstanding during the period.  There were no dilutive common stock equivalents for the periods presented. Potentially dilutive securities from stock options are discussed in Note 3.

Inventories

Inventories consisted of the following: 

	October 1,		December 31,
	2010		2009
Raw materials	$	2,918	$	4,886
Work-in-process		643		1,653
Finished goods		1,269		620
	$	4,830	$	7,159

During the nine months ended October 1, 2010 and September 25, 2009, we recognized loss on inventory impairment of $1,638 and $1,220, respectively, for obsolete and excess quantities of inventory primarily related to the Evans & Sutherland Laser Projector (“ESLP”).

Comprehensive Income (Loss)

The components of comprehensive income (loss) for the periods presented were as follows:

	Three Months Ended						Nine Months Ended
	October 1,			September 25,			October 1,			September 25,
	2010			2009			2010			2009
Net loss	$	(346	)	$	(1,269	)	$	(5,488	)	$	(7,551	)
Other comprehensive income (loss):
Unrealized gain on investments		469			511			435			895
Comprehensive income (loss)	$	123		$	(758	)	$	(5,053	)	$	(6,656	)

Liquidity and Restructuring

Liquidity and capital resources have been pressured by past results of operations. We have considered alternative business strategies and have sought external sources of liquidity to sustain operations and continue our research and development efforts to expand the market reach of our products. These efforts proved difficult in the current economic climate and, as a result, we have determined to change the course of our previous plans to expand the business. In March 2010 we began executing a plan whereby we have aggressively cut our operating costs. As a result, our research and development activities have been reduced to the minimum level to sustain the current digital theater business and the Evans & Sutherland Laser Projector (“ESLP”). This will limit opportunities for growth in the foreseeable future but we believe these actions are necessary to preserve liquidity resources for operations.  We believe that with aggressive cost cutting efforts and, if necessary, use of  the marketable securities described in Note 2,  we will have sufficient liquidity to meet our obligations through 2011. In the meantime time we continue to evaluate strategies with the goal to preserve necessary resources and pursue worthwhile opportunities.  The adequacy of current liquidity sources to fund operations through 2011 will also depend on a sufficient stream of new orders with adequate customer progress payments and the ability of the organization to support its operations after reducing its resources.  There can be no assurance that we will be successful in these efforts.  The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

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Pursuant to our plan to aggressively cut costs, in the first quarter of 2010 we recorded severance and other termination costs of $483 related to the reduction in force of 18 employees who were engaged primarily in research and development. We paid severance benefits of $464 during the first nine months of 2010.

2. MARKETABLE SECURITIES

As of July 2, 2010, the Company amended the terms of the Supplemental Executive Retirement Plan (the “SERP” -see Note 4) and the trust used to pay the SERP benefits.  As result of the amendments, the marketable securities held in the trust are available for other working capital requirements if necessary.  As such, the Company has reclassified these investments as available-for-sale marketable securities as of October 1, 2010. Prior to the July 2, 2010 amendments, the investments were presented as long term restricted marketable securities.  The following tables summarize the Company’s available-for-sale securities’ adjusted cost, gross unrealized gain (loss) and fair value:

	October 1, 2010
	Adjusted		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
Money market mutual funds	$	55	$	-	$	-		$	55
Marketable equity securities		2,868		-		(224	)		2,644
Total	$	2,923	$	-	$	(224	)	$	2,699

	December 31, 2009
	Adjusted		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
Money market mutual funds	$	54	$	-	$	-		$	54
Marketable equity securities		3,854		-		(660	)		3,194
Total	$	3,908	$	-	$	(660	)	$	3,248

The Company’s marketable equity securities have been in a continuous loss position for 12 months or more as of October 1, 2010 and December 31, 2009.  The Company considers the declines in market value of its marketable securities to be temporary in nature.  The investments consist of mutual funds selected according to an asset allocation policy of diversification and long-term growth.   When evaluating the investments for other-than-temporary impairment, the Company reviews factors such as the length of time and extent to which fair value has been below cost basis, the financial condition of the issuer and any changes thereto, and the Company’s intent to sell the investment before recovery of the investment’s amortized cost basis. During the three and nine month periods ended October 1, 2010, the Company did not recognize any other-than-temporary impairment charges on outstanding securities. As of October 1, 2010, the Company does not consider any of its investments to be other-than-temporarily impaired.

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3. STOCK OPTION PLAN

As of October 1, 2010, options to purchase 1,635,562 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 October 1, 2010 follows (shares in thousands):

				Weighted-
				Average
	Number			Exercise
	of shares			Price
Outstanding at beginning of period		1,355		$	4.80
Granted		-			-
Exercised		-			-
Cancelled		(217	)		7.46
Outstanding at end of period		1,138			4.29
Exercisable at end of period		961		$	4.98

As of October 1, 2010, options exercisable and options outstanding had a weighted average remaining contractual term of 4.6 and 5.2 years, respectively, and an aggregate intrinsic value of $30 and $89, respectively.

No options were granted during the nine months ended October 1, 2010.

No options were exercised during the nine months ended October 1, 2010. As of October 1, 2010, there was approximately $21 of total unrecognized share-based compensation cost related to grants under our plan that will be recognized over a weighted-average period of 0.9 years.

Share-based compensation expense included in the statement of operations for the nine months ended October 1, 2010 and September 25, 2009 was approximately $24 and $74, respectively.

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4. EMPLOYEE RETIREMENT BENEFIT PLANS

Components of Net Periodic Benefit Cost

	PensionPlan						SupplementalExecutive RetirementPlan
For the three months ended:	October 1, 2010			September25, 2009			October 1,2010			September25, 2009
Service cost	$	-		$	-		$	-		$	-
Interest cost		575			577			74			78
Expected return on assets		(513	)		(462	)		-			-
Amortization of actuarial loss		99			346			5			13
Amortization of prior year service cost		-			-			(12	)		(12	)
Settlement charge		221			300			-			-
Net periodic benefit expense	$	382		$	761		$	67		$	79
	Pension Plan						Supplemental Executive Retirement Plan
For the nine months ended:	October 1, 2010			September 25, 2009			October 1, 2010			September 25, 2009
Service cost	$	-		$	-		$	-		$	-
Interest cost		1,724			1,731			220			233
Expected return on assets		(1,539	)		(1,386	)		-			-
Amortization of actuarial loss		297			1,038			16			40
Amortization of prior year service cost		-			-			(36	)		(36	)
Settlement charge		663			900			-			-
Net periodic benefit expense	$	1,145		$	2,283		$	200		$	237

Employer Contributions

We are not currently required to fund the SERP.  All benefit payments are made by us 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 $634 during the next twelve months.

5. 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.

Level 2—Observable inputs (other than Level 1) that are directly or indirectly observable in the marketplace.

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

Our marketable securities are classified within Level 1 because the underlying investments have readily available market prices.

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Assets and liabilities measured at fair value on a recurring basis are summarized below:

			Fair value measurement at reporting date using
Description	October 1, 2010		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs  (Level 2)		Significant Unobservable Inputs  (Level 3)
Assets:
Marketable equity securities	$	2,644	$	2,644	$	-	$	-
Money market mutual funds		55		55		-		-
Total	$	2,699	$	2,699	$	-	$	-

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 included in Item 1 of Part I of this Form 10-Q.  Except for 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 currency amounts are in thousands unless otherwise indicated.

Executive Summary

Upon evaluating our access to liquidity and capital resources and considering the current economic climate we concluded in the first quarter that we could no longer pursue our plans to expand the business into the wider high-end commercial display market.  As a result, in March 2010, we began executing a plan to reduce our research and development activities to the minimum level to sustain the current digital theater business and the ESLP. We are also reducing overhead structure wherever feasible.  This plan has significantly reduced our research and development activities and operating expenses. This will limit opportunities for growth in the foreseeable future, but we believe these actions are necessary to preserve liquidity resources for operations. We believe that with aggressive cost cutting efforts and, if necessary, use of the marketable securities described in Note 2 of the financial statements, we will have sufficient liquidity to meet our obligations through 2011. In the meantime, we continue to evaluate our strategies with the goal to preserve necessary resources and pursue worthwhile opportunities.

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We will continue to aggressively pursue opportunities in the digital theater and other markets served by our projection products and domes through the Company and our subsidiary, Spitz, Inc. (“Spitz”). This will include the Company’s continued support of the ESLP as well as the development and improvement of new innovative products such as Digistar for planetarium theaters. Spitz will continue to develop and improve its planetarium products targeted for smaller venues in education markets such as its SciDome product. Spitz will also continue to develop and improve its dome products used by planetarium theaters and many other varied applications.  Both E&S and Spitz will continue the production of quality show content for planetarium theaters.  We believe that the ability to include the wide range of complementary products offered by E&S and Spitz in the systems we sell, along with access to the legacy customer base of E&S and Spitz, provides a unique competitive advantage.

Revenue recorded in the first nine months of 2010 increased slightly compared to the first nine months of 2009; however, the gross profit decreased as a result of a loss on inventory impairment, most of which was recorded in the second quarter. Both revenue and gross profit for the third quarter of 2010 increased as compared to 2009 aided by an increase in customer contracts and delivery of components of a large ESLP system. The loss on inventory impairment was attributable to slow-moving and obsolete quantities of ESLP inventory as a result of our outlook for reduced laser product opportunities.  Margins in 2010 were also negatively impacted by the cost of the resources retained to maintain the ESLP. The cost of maintaining sufficient resources to support the ESLP will continue to negatively impact margins with the magnitude of the impact inversely affected by the revenue volume.  Operating expenses were reduced significantly in both presented periods of 2010 as compared to 2009 even with the inclusion of a first quarter charge for termination costs related to our cost cutting plan. The reduction of operating expenses is attributable to various reductions in research and development activities and overhead structure since 2009.  As a result, the net loss in the third quarter and first nine months of 2010 was lower than the loss reported in the comparable periods of 2009.  The improvement was greater in the third quarter of 2010 as higher losses in the first half of 2010 increased the nine month loss. We anticipated low revenue volume and a loss during the first half of 2010 because of low sales bookings in 2009. We also expected the improvement in the second half of 2010 considering increased sales bookings and improvement in the revenue backlog from $13,339 as of December 31, 2009 to $17,630 as of July 2, 2010. The revenue backlog continued to improve to $19,800 as of October 1, 2010. The revenue backlog and strong sales prospects combined with the reduced cost structure is expected to further improve results for the remainder of 2010. Additional actions are being considered to further reduce operating expenses in 2011 in order to reach profitability.

Liquidity and capital resources have been pressured by past results of operations. The loss in the first nine months continued the negative impact on liquidity. The loss combined with effects of non-cash charges and changes in working capital decreased cash by $1,881 to a balance of $719 as of October 1, 2010; however, the cash absorbed by the loss before changes in working capital was mainly attributable to the first two quarters. The improved results in the third quarter 2010 still resulted in a net loss; however, the loss was reduced compared to prior periods and actually contributed slightly to cash when considering the effects of non-cash charges.  There was still a decrease in the cash balance from $1,897 at July 2, 2010 to $719 at October 1, 2010 but it was attributable to changes in working capital rather than the third quarter 2010 loss when considering the effects of non-cash charges. We believe this demonstrates the positive effect of our cost cutting efforts. We expect this positive trend to continue in the fourth quarter of 2010 based on the forecasted operations based on our backlog. The generation of positive cash flow from future operations will depend on our ability to sustain sufficiently profitable sales of our products with reduced ESLP research and development activities as well as our ability to further reduce overhead costs. The 2010 nine month loss includes pension expense which is considered a cash charge but cash payments to the pension trust will be deferred until future periods. We expect to continue to record significant pension expenses for the foreseeable future and we maintain a significant balance sheet obligation to our pension plans; however, no cash payments to the pension trust will become due until 2011. The amount of cash payments required to be made to the pension trusts in 2011 and beyond will depend on investment returns and new guidance emerging from recent legislation which provides funding relief for pension plans.  The adequacy of current liquidity sources to fund operations through 2011 will depend on a sufficient stream of new orders with adequate customer progress payments and the ability of the Company to support its operations after reducing its resources. Beyond 2011, we may also be dependent on many factors that could affect the funding of our pension plan obligations.

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Critical Accounting Policies

Certain accounting policies are considered by management to be critical to an understanding of our consolidated financial statements.  Their application places significant demands on management’s 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, 2009.  For all of these policies, management cautions that future results rarely develop exactly as forecast, and the best estimates routinely require adjustment.

Results of Operations

Sales

The following table summarizes our sales:

	For the Three Months Ended				For the Nine Months Ended
	October 1, 2010		September 25, 2009		October 1, 2010		September 25, 2009
Sales	$	7,027	$	6,034	$	18,700	$	17,966

Sales for the third quarter and first nine months of 2010 increased compared to the prior year due to deliveries of our digital theater and dome products and an increase of orders in 2010.

Gross Profit

The following table summarizes our gross profit and the gross profit percentage to total sales:

	For the Three Months Ended						For the Nine Months Ended
	October 1, 2010			September 25, 2009			October 1, 2010			September 25, 2009
Gross profit	$	2,767		$	2,230		$	4,924		$	5,223
Gross profit percentage		39	%		37	%		26	%		29	%

Our gross profit in the third quarter of 2010 improved in comparison to the third quarter of 2009 due to efficiencies related to the higher volume of revenue in 2010 and a favorable margin on a delivery of components of an ESLP system.  Our gross profit for the first nine months of 2010 decreased in comparison to 2009 due to a larger loss on inventory impairment of $1,638 for the nine months period ended October 1, 2010 compared to $1,220 for the comparable period of 2009. The loss on inventory impairment is due to slow-moving and obsolete quantities of ESLP inventory. Before the effect of the loss on inventory impairment the gross profit was similar in both nine month periods presented.  The effect of the 2010 third quarter improvement on the nine month period was weighed down by a low gross profit margin recorded during the first half of 2010 on the completion of an older ESLP project.

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Operating Expenses

The following table summarizes our operating expenses:

	For the Three Months Ended				For the Nine Months Ended
	October 1, 2010		September 25, 2009		October 1, 2010		September 25 2009
Selling, general and administrative excluding pension expense	$	1,679	$	1,584	$	4,963	$	5,216
Research and development		752		1,421		3,416		5,218
Pension expense – general and administrative		449		840		1,345		2,520
Operating expenses	$	2,880	$	3,845	$	9,724	$	12,954

Selling, general and administrative expenses in the third quarter of 2010 were slightly higher than the third quarter of 2009 due to the timing of expenditures and the allocation of some resources used in research and development activities in 2009 to selling, general and administrative activities in 2010. Selling, general and administrative expenses decreased in the nine month period ended October 1, 2010 compared to the similar period of 2009 due to reductions in overhead costs. The reduction in selling, general and administrative expenses in the nine months ended October 1, 2010 would have been more significant but for the inclusion of a $483 first quarter charge for severance pay and other termination costs resulting from employee terminations related to the resources that were cut. Research and development expenses were significantly lower than prior year periods due to the planned reduction of research and development activities and overhead. We believe the reductions, implemented in late March 2010, cut resources to the minimum level to sustain the current digital theater business and the ESLP.  Pension expense in 2010 decreased from 2009 due to lower net periodic pension cost.

Other Income (Expense)

The following table summarizes our other income (expense):

	For the Three Months Ended					For the Nine Months Ended
	October 1, 2010			September 25, 2009		October 1, 2010			September 25,  2009
Total other income (expense)	$	(210	)	$	351	$	(616	)	$	242

Other income (expense) increased over prior year periods due to recognition of interest expense from the sale-leaseback on the Company’s main headquarters located in Salt Lake City, Utah during 2010, which was accounted for as a financing.  During the third quarter of 2009, other income included a credit from termination of a land lease of $432, partially offset by interest expense.  The land under lease was not utilized and had been available for future development which was unnecessary under our current strategic plans.

Liquidity and Capital Resources

Cash Flow

In the first nine months of 2010 the $2,391 of cash used in operating activities was primarily attributable to $2,491 of cash absorbed by the net loss after the effect of $2,997 of non-cash items. The cash absorbed by the loss was partially offset by $100 of cash provided by fluctuations in working capital.  Significant fluctuations in working capital in the first nine months which used cash included an increase in costs and estimated earnings in excess of billings, and decreases in customer deposits, inventory and accrued liabilities. There was no significant effect from investing and financing activities on cash flow for the first nine months of 2010.

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 Wall Street Prime Rate. As of October 1, 2010 there was $310 of borrowings outstanding under the Credit Agreement.

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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 October 1, 2010, we had outstanding letters of credit and bank guarantees of $1,336.

Mortgage Notes

As of October 1, 2010, our wholly owned Spitz subsidiary had obligations totaling $3,034 under its two mortgage notes payable.  The balance of these mortgage notes payable as of October 1, 2010 was $2,560 and $474.

Sale-Leaseback Financing

As of October 1, 2010 the principal balance on the debt obligation recorded from the sale leaseback financing transaction was $2,421.  The cash payment required to repurchase the property on October 1, 2010 was $2,450 consisting of the $2,575 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 October 1, 2010, we would have recorded a prepayment premium of approximately 1% in the amount of $29 over the $2,421 book balance of the debt.

Other

As discussed in the executive summary above, we have implemented a plan to aggressively cut cost and restructure our operations. By implementing this plan, we believe existing cash and funds generated from forecasted revenue can meet our 2010 obligations.  However, no assurance can be provided that we will be successful in these efforts.  The outlook beyond 2010 depends on the continued success of the digital theater business and its ability to generate sufficient cash to meet our obligations, most significantly the pension obligation. 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.

Backlog

On October 1, 2010 our backlog was $19,800 compared with $13,339 at December 31, 2009.

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.

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Item 4.    CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures.

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)) 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 recognized 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 have been detected.

Changes in Internal Control over Financial Reporting

There has been no change since December 31, 2009 in our internal control over financial reporting identified in connection with the evaluation of disclosure controls and procedures discussed above that occurred during the nine months ended October 1, 2010 or subsequent to that date that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II - OTHER INFORMATION

Item 1.    LEGAL PROCEEDINGS

In the normal course of business, we become involved in various legal proceedings.  Although the final outcome of such proceedings cannot be predicted, we believe the ultimate disposition of any such proceedings will not have a material adverse effect on our consolidated financial condition, 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 here with.

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 here with.

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 here with.

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	EVANS & SUTHERLAND COMPUTER CORPORATION
Date:       November 5, 2010	By:	/s/ Paul Dailey
		Paul Dailey, Chief Financial Officer
		and Corporate Secretary
		(Authorized Officer)
		(Principal Financial Officer)

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EX-31.1

Exhibit 31.1

Rule 13a-14 Certification

CERTIFICATIONS*

I, David H. Bateman, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Evans & Sutherland Computer Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: November 5, 2010

/s/ David H. Bateman

David H. Bateman

Chief Executive Officer

(Principal Executive Officer)

EX-31.2

Exhibit 31.2

Rule 13a-14 Certification

CERTIFICATIONS*

I, Paul L. Dailey, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Evans & Sutherland Computer Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: November 5, 2010

/s/ Paul L. Dailey

Paul L. Dailey

 Chief Financial Officer

(Principal Financial Officer)

EX-32.1

Exhibit 32.1

Certification Pursuant to 18 U.S.C. 1350,

as Adopted Pursuant Section 906 of the

Sarbanes-Oxley Act of 2002

I, David H. Bateman, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Form 10-Q of Evans & Sutherland Computer Corporation for the quarter ended October 1, 2010, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of Evans & Sutherland Computer Corporation.

Date: November 5, 2010	By:	/s/ David H. Bateman
		David H. Bateman
		Chief Executive Officer

I, Paul L. Dailey, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Form 10-Q of Evans & Sutherland Computer Corporation for the quarter ended October 1, 2010 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of Evans & Sutherland Computer Corporation.

Date: November 5, 2010	By:	/s/ Paul L. Dailey
		Paul L. Dailey
		Chief Financial Officer

The foregoing certifications are being furnished solely to accompany the Report pursuant to 18 U.S.C. §1350, and are not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and are not to be incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing.