Note 1 - Nature of Operations and Summary of Significant Accounting Policies

12 Months Ended

Dec. 31, 2012

Notes

Note 1 - Nature of Operations and Summary of Significant Accounting Policies

Note 1 - Nature of Operations and Summary of Significant Accounting Policies

Nature of Operations

Evans & Sutherland Computer Corporation, referred to in these notes as “Evans & Sutherland,” “E&S,” or the “Company,” produces high-quality advanced visual display systems used primarily in full-dome video projection applications, dome projection screens and dome architectural treatments. E&S also produces unique content for planetariums, schools, science centers and other educational institutions and entertainment venues.  The Company’s products include state of the art planetarium and dome theater systems consisting of proprietary hardware and software, and other unique visual display systems primarily used to project digital video on large curved surfaces.  Additionally, E&S manufactures and installs metal domes with customized optical coatings and acoustical properties that are used for planetarium and dome theaters as well as many other unique custom applications.  The Company operates in one business segment, which is the visual simulation market.

Basis of Presentation

Evans & Sutherland’s fiscal year ends on December 31.  The consolidated financial statements include the accounts of Evans & Sutherland and its wholly owned subsidiaries.  All inter-company accounts and transactions have been eliminated in consolidation. 

Use of Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes.  The accounting estimates that require management’s most difficult and subjective judgments include revenue recognition based on the percentage-of-completion method, inventory reserves, allowance for doubtful accounts, income tax valuation allowance, impairment of long-lived assets, pension and retirement obligations and useful lives of depreciable assets.  Actual results could differ from those estimates.

Cash and Cash Equivalents

The Company considers all highly liquid investments with original maturities of three or fewer months to be cash equivalents.  The Company maintains cash balances in bank accounts that, at times, exceed federally insured limits.  The Company has not experienced any losses in these accounts and believes it is not exposed to any significant risk with respect to cash.  As of December 31, 2012, cash deposits, including restricted cash, exceeded the federally insured limits by approximately $2,725.

Restricted Cash

Restricted cash that guarantees issued letters of credit that mature or expire within one year is reported as a current asset.  Restricted cash that guarantees issued letters of credit that mature or expire in more than one year are reported as long-term other assets.  There was $442 and $352 of restricted cash included in other assets as of December 31, 2012 and 2011.      

Marketable Securities

The Company classifies its marketable debt and equity securities as available-for-sale.  Available-for-sale securities are recorded at fair value. Unrealized holding gains and losses, net of the related tax effect, are excluded from earnings and are reported as a component of accumulated other comprehensive loss until realized.  Dividend and interest income are recognized when earned.  Realized gains and losses from the sale of securities are included in results of operations and are determined on the specific identification basis.  A decline in the market value that is deemed other-than-temporary results in a charge to other income (expense) and the establishment of a new cost basis for the investment. 

Trade Accounts Receivable

In the normal course of business, E&S provides unsecured credit terms to its customers.  Accordingly, the Company maintains an allowance for doubtful accounts for possible losses on uncollectible accounts receivable.  The Company routinely analyzes accounts receivable and costs and estimated earnings in excess of billings, and considers history, customer creditworthiness, facts and circumstances specific to outstanding balances, current economic trends, and changes in payment terms when evaluating the adequacy of the allowance for doubtful accounts.  Changes in these factors could result in material differences to bad debt expense.  Past due balances are determined based on contractual terms and are reviewed individually for collectability. Uncollectible accounts receivable are charged against the allowance for doubtful accounts only after exhaustive efforts have been made to collect. 

The table below represents changes in E&S’s allowance for doubtful receivables during fiscal year:

	2012	2011
Beginning balance	$     470	$       679
Recovery of accounts receivable	(89)	(179)
Reduction in estimated losses on accounts receivable	(57)	(30)
Ending balance	$     324	$       470

Inventories

Inventories include materials at standard costs, which approximate average costs, as well as inventoried costs on programs and long-term contracts.  Inventoried costs include material, direct engineering and production costs, and applicable overhead, not in excess of estimated realizable value.  Spare parts and general stock materials are stated at cost not in excess of realizable value.  E&S periodically reviews inventories for excess supply, obsolescence, and valuations above estimated realizable amounts, and provides a reserve sufficient to cover these items.  Revisions of these estimates could impact net income (loss).

During the years ended December 31, 2012 and 2011, E&S recognized losses on inventory impairment of $409 and $361 for obsolete and excess quantities of inventory, primarily related to the Evans & Sutherland Laser Projector.   

Inventories as of December 31, were as follows:

	2012	2011
Raw materials	$   5,255	$   4,767
Work-in-process	287	547
Finished goods	253	571
Reserve for obsolete inventory	(2,670)	(2,261)
Total inventories, net	$   3,125	$   3,624

Property and Equipment

Property and equipment are stated at cost.  Depreciation is computed using the straight-line method based on the estimated useful lives of the related assets.  Expenditures that materially increase values or capacities or extend useful lives of property and equipment are capitalized.  Leasehold improvements are assigned useful lives the shorter of their useful life or the term of the related lease, including renewal options likely to be exercised.  Routine maintenance, repairs and renewal costs are expensed as incurred.  When property is retired or otherwise disposed of, the carrying value of the property is removed from the property and equipment and the related accumulated depreciation accounts.  Depreciation is included in cost of sales, research and development or selling, general and administrative expenses depending on the nature of the asset. 

Depreciation expense was $688 and $835 for the years ended December 31, 2012 and 2011, respectively.  The cost and estimated useful lives of property and equipment and the total accumulated depreciation and amortization were as follows as of December 31:

	Estimated
	useful lives	2012	2011
Land	-	$    2,250	$     2,250
Buildings and improvements	5 - 40 years	9,717	9,717
Manufacturing machinery and equipment	3 - 8 years	5,613	5,523
Office furniture and equipment	3 - 8 years	779	779
Total		18,359	18,269
Less accumulated depreciation and amortization		(10,624)	(9,966)
Net property and equipment		$    7,735	$     8,303

Goodwill

The Company tests its recorded goodwill for impairment on an annual basis during the fourth quarter, or more often if indicators of potential impairment exist, by determining if the carrying value of each reporting unit exceeds its estimated fair value. Factors that could trigger impairment include, but are not limited to, underperformance relative to historical or projected future operating results, significant changes in the manner of use of the acquired assets or the Company’s overall business and significant negative industry or economic trends. Future impairment reviews may require write-downs in the Company’s goodwill and could have a material adverse impact on the Company’s operating results for the periods in which such write-downs occur.

Intangible Assets

E&S amortizes the cost of intangible assets over their estimated useful lives. Amortizable intangible assets are reviewed at least annually to determine whether events and circumstances warrant a revision to the remaining period of amortization.

Software Development Costs

Software development costs, if material, are capitalized from the date technological feasibility is achieved until the product is available for general release to customers.  Such costs have not been material during the years presented.

Impairment of Long-Lived Assets

Long-lived assets are reviewed for impairment when events or changes in circumstances indicate the carrying value of the assets may not be fully recoverable. When this occurs, the Company reviews the values assigned to long-lived assets by analyzing the anticipated, undiscounted cash flows they generate.  When the expected future undiscounted cash flows from these assets do not exceed their carrying values, the Company determines the estimated fair values of such assets. Impairment is recognized to the extent the carrying values of the assets exceed their estimated fair values.  Assets held for sale are reported at the lower of their carrying values or fair values less costs to sell.

Warranty Reserve

E&S provides a warranty reserve for estimated future costs of servicing products under warranty agreements extending for periods from 90 days to one year.  Anticipated costs for product warranties are based upon estimates derived from experience factors and are recorded at the time of sale or over the period revenues are recognized for long-term contracts.  Warranty reserves are classified as accrued liabilities in the accompanying consolidated balance sheets.

The table below represents changes in E&S’s warranty reserve for the years:

	2012	2011
Beginning balance	$     183	$       162
Change in warranty reserve	69	220
Warranty costs	(107)	(199)
Ending balance	$     145	$       183

Revenue Recognition

Sales includes revenues from system hardware, software, database products and service contracts.  The following table provides information on revenues by recognition method applied during the years:

	2012	2011
Percentage-of-completion	$    14,956	$   16,632
Completed contract	8,429	10,169
Other	1,523	1,524
Total sales	$    24,908	$   28,325

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,  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) to its estimate of total anticipated costs.   This ratio is then utilized to determine the amount of gross profit earned based on its estimate of total gross profit at completion.  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 consolidated balance sheets.

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, the fee is fixed or determinable, and collection is probable.

Multiple Element Arrangements.  Some contracts include multiple elements.  Significant deliverables in such arrangements commonly include various hardware components of 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 to 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 is probable.  After an anticipated loss is recorded, subsequent revenue and cost of sales are recognized in equal, offsetting amounts as contract costs are incurred.

Net Income (Loss) per Common Share

Net income (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 year.  Stock options are common stock equivalents.

Basic income or loss per common share is based upon the average number of shares of common stock outstanding during the year. There were no dilutive shares in 2012 or 2011. Potentially dilutive securities from stock options are discussed in Note 10.

Income Taxes

The Company uses the asset and liability method of accounting for income taxes.  Under the asset and liability method, deferred income tax assets and liabilities are recognized for the future income tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective income tax bases and operating loss and income tax credit carry-forwards.  Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred income tax assets and liabilities of a change in income tax rates is recognized in the period that includes the enactment date.

Other Comprehensive Loss

On a net basis for 2012 and 2011, there were deferred income tax assets resulting from items reflected in comprehensive loss.  However, E&S has determined that it is more likely than not that it will not realize such net deferred income tax assets and has therefore established a valuation allowance against the full amount of the net deferred income tax assets.  Accordingly, the net income tax effect of the items included in other comprehensive loss is zero.  Therefore, the Company has included no income tax expense or benefit in relation to items reflected in other comprehensive loss.

The components of accumulated other comprehensive loss were as follows as of December 31:

	2012	2011
Additional minimum pension liability	$    (27,669)	$    (26,949)
Net unrealized holding gains (losses) on investments	5	(182)
Total accumulated other comprehensive loss	$    (27,664)	$    (27,131)

Leases

The Company recognizes scheduled rent increases on a straight-line basis over the lease term, which may include optional lease renewal terms. Deferred rent income and expense are recognized to reflect the difference between the rent paid or received in the current period and the calculated straight-line amount.

Reclassifications

Certain amounts in the prior year’s consolidated financial statements have been reclassified to conform to the current year’s presentation.

Recent Accounting Pronouncements

In June 2011, the Financial Accounting Standards Board issued Accounting Standards Update No. 2011-05, which requires an entity to present the total of comprehensive income (loss), the components of net income (loss), and the components of other comprehensive income (loss) either in a single continuous statement of comprehensive income (loss) or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income (loss) along with total net income (loss), each component of other comprehensive income (loss) along with a total for other comprehensive income (loss), and a total amount for comprehensive income (loss).  This guidance eliminates the option to present the components of other comprehensive income (loss) as part of the statement of changes in stockholders' deficit. The amendments do not change the items that must be reported in other comprehensive income (loss) or when an item of other comprehensive income (loss) must be reclassified to net income (loss). The amendments should be applied retrospectively. For public entities, the amendments were effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The Company has adopted this standard and presented consolidated statements of comprehensive loss.

Liquidity

Recurring losses continue to produce negative cash flows from operating activities. Furthermore, low market interest rates and the decline of the stock market in late 2008 have significantly increased the unfunded obligation of the Evans & Sutherland Computer Corporation Pension Plan (the “Pension Plan”). Stock markets have been recovering since 2008; however, the pension trust investments’ participation in the recovery has been limited by the timing of liquidations for benefit payments. Also, even with the recovering investment markets, total returns  fall short of assumed returns used for the actuarial valuation of the pension obligation. As of December 31, 2012, the unfunded obligation of the Pension Plan, as measured for accounting purposes, has grown to $28,315 (see Note 6) contributing to a total stockholders’ deficit of $24,644 as of December 31, 2012.  Cost reduction efforts have reduced operating losses but, primarily due to the expense and cash outlays attributable to the Pension Plan, operating losses and net use of cash continued in 2011 and 2012. The Company believes existing sources of liquidity and expected results of operations will be adequate to fund its obligations, including cash payments due to the Pension Plan trust, in amounts sufficient to satisfy regulatory funding standards through 2013 and into the middle of 2014. The Company also believes, based on Pension Plan funding estimates, that it will not be able to meet the total Plan funding amounts expected to become due to satisfy regulatory funding standards as scheduled in 2014 and beyond. In order to preserve the liquid resources required to maintain adequate working capital levels for the business through 2014, the Company stopped making cash payments due to the Pension Plan trust beginning in October 2012. In January 2013, the Company initiated an application process for the distress termination of the Pension Plan in accordance with provisions of the Employee Retirement Income Security Act of 1974 (“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 (see Note 15). 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 through 2014 and beyond, which is consistent with the purposes of the provisions of ERISA. There can be no assurance that the Company will be successful in these efforts.  The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.