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

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.

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.

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.

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, 2015, cash deposits as reported by the banks, including restricted cash, exceeded the federally insured limits by approximately $4,022.

Restricted cash that guarantees letters of credit that mature or expire within one year is reported as a current asset. Restricted cash that guarantees letters of credit that mature or expire after more than one year is reported as a long-term asset. There was no restricted cash included in other assets as of December 31, 2015 and 2014.

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:

	2015	2014

Beginning balance	$217	$277
Write-off of accounts receivable	(64)	(47)
Increase (decrease) in estimated losses on accounts receivable	133	(13)
Ending balance	$286	$217

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 loss.

During the years ended December 31, 2015 and 2014, E&S recognized impairment losses on inventory of $155 and $197, respectively.

	2015	2014

Raw materials	$5,958	$5,468
Work in process	1,265	1,678
Finished goods	220	233
Reserve for obsolete inventory	(3,371)	(3,216)
Inventories, net	$4,072	$4,163

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 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 $250 and $418 for the years ended December 31, 2015 and 2014, 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	2015	2014

Land	n/a	$2,250	$2,250
Buildings and improvements	5 - 40 years	3,028	3,028
Manufacturing machinery and equipment	3 - 8 years	5,301	5,183
Office furniture and equipment	3 - 8 years	779	779
Total		11,358	11,240
Less accumulated depreciation and amortization		(6,623)	(6,437)
Net property and equipment		$4,735	$4,803

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.

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 $41 and $47 for the years ended December 31, 2015 and 2014, respectively.

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 for the years presented.

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.

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:

	2015	2014

Beginning balance	$125	$150
Additions to warranty reserve	149	98
Warranty costs	(147)	(123)
Ending balance	$127	$125

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:

	2015	2014

Percentage of completion	$19,827	$14,085
Completed contract	13,653	10,670
Other	1,818	1,711
Total sales	$35,298	$26,466

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 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 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 9.

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.

On a net basis for 2015 and 2014, 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:

	2015	2014

Additional minimum pension liability	$(2,404)	$(33,625)
Total accumulated other comprehensive loss	$(2,404)	$(33,625)

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.

In November 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update No. 2015-17, Income Taxes (Topic 740) ("ASU 2015-17"). ASU 2015-17 requires that all deferred income tax assets and liabilities be classified as non-current. ASU 2015-17 is not effective until the 2017 fiscal year. The Company is currently assessing the impact, if any, on its financial reporting of implementing this guidance.

In April 2015, the FASB issued ASU No. 2015-03, Interest – Imputation of Interest (Subtopic 835-30), Simplifying the Presentation of Debt Issuance Costs ("ASU 2015-03"). To simplify presentation of debt issuance costs, the amendments in ASU 2015-03 require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in ASU 2015-03. For public companies, ASU 2015-03 is effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Early adoption is permitted for financial statements that have not been previously issued. The Company is currently assessing the impact, if any, on its financial reporting of implementing this guidance.

In May 2014, the FASB issued ASU 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 ASU 2014-09 will have on its consolidated financial statements and related disclosures. During 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers: Deferral of the Effective Date ("ASU 2015-14"), which deferred the date of ASU 2014-09 by one year.

In August 2014, the FASB issued ASU No. 2014-15, Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern ("ASU 2014-15"). 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 note disclosures. ASU 2014-15 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, on its financial reporting of implementing this guidance.

The Company has experienced recurring annual losses since 2007, except for 2013. On April 21, 2015, the Company executed an agreement (the "Pension Settlement Agreement") which terminated its defined benefit pension plan (the "Pension Plan") and settled the Pension Plan's liabilities in exchange for an obligation to pay to the Pension Benefit Guaranty Corporation ("PBGC") $10,500 over twelve years and issue to the PBGC 88,117 shares of E&S treasury stock (see Note 5). In addition, the Pension Settlement Agreement has led to a new banking relationship and improved credit capacity. Aided by prior cost reduction efforts and improved sales volume, for the year ended December 31, 2015, the Company has generated profitable results before recording the pension expense and a charge for the settlement of the Pension Plan. The Company is no longer incurring expenses related to the terminated Pension Plan but as of December 31, 2015 is responsible for eleven annual installment payments of $750 to the PBGC. Management believes that the Company's unrestricted cash balances totaling $3,734 as of December 31, 2015 and improved credit capacity and forecasted operations provide sufficient resources to meet the Company's obligations, including the terms of the Pension Settlement Agreement, through at least the end of 2016.