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

12 Months Ended

Dec. 31, 2014

Policies

Basis of Presentation

Basis of Presentation

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

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 receivable, allowance for deferred income tax assets, 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

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, 2014, cash deposits per bank statements, including restricted cash, exceeded the federally insured limits by approximately $7,848.

Restricted Cash

Restricted Cash

Restricted cash 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 a long-term other asset.  There was $0 and $90 of restricted cash included in other assets as of December 31, 2014 and 2013, respectively.

Marketable Securities

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 income (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

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 receivable.  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 when management determines the probability of collection is remote.

The table below represents changes in E&S’s allowance for doubtful accounts receivable for the years ended December 31:

	2014	2013
Beginning balance	$277	$324
Write-off of accounts receivable	(47)	(159)
Increase (reduction) in estimated losses on accounts receivable	(13)	112
Ending balance	$217	$277

Inventories

Inventories

Inventories include materials at standard costs, which approximate actual 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 reduce inventories to net realizable values.  Revisions of these estimates could impact net income (loss).

During the years ended December 31, 2014 and 2013, E&S recognized losses on inventory impairment of $197 and $349 for obsolete and excess quantities of inventory, primarily related to the Evans & Sutherland Laser Projector.

Inventories as of December 31, were as follows:

	2014	2013
Raw materials	$5,468	$5,587
Work-in-process	1,678	234
Finished goods	233	223
Reserve for obsolete inventory	(3,216)	(3,019)
Total inventories, net	$4,163	$3,025

Property and Equipment

Property and Equipment

Property and equipment are stated at cost.  Depreciation and amortization are 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 based on the shorter of their useful lives or the term of the related leases, 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 values are removed from the property and equipment and the related accumulated depreciation and amortization accounts.  Depreciation and amortization are included in cost of sales, research and development or selling, general and administrative expenses depending on the nature of the asset.

Depreciation expense was $418 and $528 for the years ended December 31, 2014 and 2013, 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	2014	2013
Land	n/a	$2,250	$2,250
Buildings and improvements	5 - 40 years	3,028	9,712
Manufacturing machinery and equipment	3 - 8 years	5,183	5,382
Office furniture and equipment	3 - 8 years	779	779
Total		11,240	18,123
Less accumulated depreciation and amortization		(6,437)	(10,718)
Net property and equipment		$4,803	$7,405

Goodwill and Intangible Assets

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.  Amortization expense was $47 and $53 for the years ended December 31, 2014 and 2013, respectively.

Software Development Costs

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 were not material during the years presented.

Impairment of Long-lived Assets

Impairment of Long-Lived Assets

Long-lived assets are reviewed for impairment when events or changes in circumstances indicate the carrying values 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 estimates the 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

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 ended December 31:

Revenue Recognition

Revenue Recognition

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

	2014	2013
Percentage of completion	$14,085	$14,831
Completed contract	10,670	13,102
Other	1,711	1,650
Total sales	$26,466	$29,583

The following methods are used to record revenue:

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 the 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 reasonably assured.

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

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. Potentially dilutive securities from stock options are discussed in Note 10.

Income Taxes

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

Other Comprehensive Loss

On a net basis for 2014 and 2013, 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 income (loss) is zero.  Therefore, the Company has included no income tax expense or benefit in relation to items reflected in other comprehensive income (loss).

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

	2014	2013
Additional minimum pension liability	$(33,625)	$(17,608)
Net unrealized holding losses on marketable securities	-	(1)
Total accumulated other comprehensive loss	$(33,625)	$(17,609)

Leases

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.

Recent Accounting Pronouncements

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers ("ASU 2014-09"). ASU 2014-09 provides for a single, principles-based model for revenue recognition that replaces existing revenue recognition guidance. ASU 2014-09 is effective for annual and interim periods beginning on or after December 15, 2016. It permits the use of either a retrospective or cumulative effect transition method and early adoption is not permitted. The Company has not yet selected a transition method and is in the process of evaluating the effect this standard will have on its consolidated financial statements and related disclosures.

In August 2014, the FASB issued ASU No. 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. This standard sets forth management’s responsibility to evaluate, each reporting period, whether there is substantial doubt about the entity’s ability to continue as a going concern, and if so, to provide related footnote disclosures. The standard is effective for annual reporting periods beginning after December 15, 2016, and interim periods within annual periods ending after December 15, 2016. The Company is currently assessing the impact, if any, of implementing this guidance.

Liquidity

Liquidity

The Company has experienced recurring annual losses since 2007 except for 2013. Furthermore, as of December 31, 2014, the unfunded obligation of the Company’s qualified defined benefit pension plan (“Pension Plan”), as measured for accounting purposes, amounted to $35,111, contributing to a total stockholders’ deficit of $30,703 as of December 31, 2014.  Aided by prior cost reduction efforts and improved 2013 sales volume, the Company reported annual net income for 2013 but incurred a net loss of $1,305 for 2014. The Company does not believe it can sustain and improve annual profitability at sufficient levels to fund its existing Pension Plan obligation. In order to preserve the liquid resources required to operate the business, the Company stopped making cash payments due to the Pension Plan trust beginning in October 2012. 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”) which it believes will result in a settlement of its Pension Plan liabilities on terms that are feasible for the Company to continue in business as a going concern through 2015 and beyond. Because of the payments due to the Pension Trust, a lien in favor of the Pension Plan has arisen against the assets of the Company. On October 3, 2014, the lender for the Company’s Spitz Inc. (“Spitz”) subsidiary’s mortgage notes, a commercial bank, notified the Company that the liens placed on the Company assets by the Pension Plan constituted an event of default under the mortgage notes’ credit agreements.  Citing cross default terms, the bank suspended borrowings on the Spitz $1,100 working capital line of credit. The bank has not elected to accelerate the payment of the mortgage loan balance or exercise any other remedies available upon an event of default. The bank expressed interest in a continuing credit relationship upon satisfactory settlement of the pension liabilities and agreed to forbear from exercising any further remedies until March 31, 2015. The mortgage balances totaled $2,362 as of December 31, 2014. The Company has not used the Spitz $1,100 working capital line of credit since 2011 and, if necessary, the Company believes that it will have sufficient funds to satisfy the Spitz mortgage note balances if the bank were to accelerate the maturity under its default remedy. However, the Company further believes that it will conclude a satisfactory settlement with the PBGC within a time frame acceptable to the bank. The Company continues to progress through the termination process toward a settlement; however, as of the date of this filing, the Company is uncertain of the timing or the ultimate outcome and it cannot provide assurance that its expectations set forth above will occur in a timely manner or at all.