NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
All dollar amounts are in thousands except share and per share information or unless otherwise indicated.
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
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. Certain prior year amounts have been reclassified to conform to the current year presentation.
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
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, 2017, cash deposits as reported by the banks, including restricted cash, exceeded the federally insured limits by approximately $5,230.
Restricted Cash
The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the consolidated balance sheets that sum to the total of the same such amounts shown in the statements of cash flows.
|
|
|
2017
|
|
2016
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
$ 5,276
|
|
$ 6,823
|
Restricted cash
|
|
|
312
|
|
603
|
|
|
|
|
|
|
Total cash, cash equivalents, and restricted cash shown in the statements of cash flows
|
|
|
$ 5,588
|
|
$ 7,426
|
Amounts included in restricted cash represent those required to be set aside by a contractual agreement. 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.
22
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:
|
|
|
2017
|
|
2016
|
|
|
|
|
|
|
Beginning balance
|
|
|
$ 259
|
|
$ 286
|
Write-off of accounts receivable
|
|
|
(7)
|
|
(47)
|
Increase (decrease) in estimated losses on accounts receivable
|
|
|
(143)
|
|
20
|
Ending balance
|
|
|
$ 109
|
|
$ 259
|
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 loss.
During the years ended December 31, 2017 and 2016, E&S recognized impairment losses on inventory of $105 and $344, respectively.
Inventories as of December 31, were as follows:
|
|
|
2017
|
|
2016
|
|
|
|
|
|
|
Raw materials
|
|
|
$ 5,458
|
|
$ 5,427
|
Work in process
|
|
|
1,011
|
|
1,120
|
Finished goods
|
|
|
423
|
|
326
|
Reserve for obsolete inventory
|
|
|
(2,919)
|
|
(3,122)
|
Inventories, net
|
|
|
$ 3,973
|
|
$ 3,751
|
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 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.
23
Depreciation expense was $259 and $267 for the years ended December 31, 2017 and 2016, 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
|
|
2017
|
|
2016
|
|
|
|
|
|
|
Land
|
n/a
|
|
$ 2,250
|
|
$ 2,250
|
Buildings and improvements
|
5 - 40 years
|
|
3,065
|
|
3,065
|
Manufacturing machinery and equipment
|
3 - 8 years
|
|
5,582
|
|
5,434
|
Office furniture and equipment
|
3 - 8 years
|
|
779
|
|
779
|
Total
|
|
|
11,676
|
|
11,528
|
Less accumulated depreciation and amortization
|
|
|
(7,149)
|
|
(6,890)
|
Net property and equipment
|
|
|
$ 4,527
|
|
$ 4,638
|
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 $27 for the year ended December 31, 2016, which completed the amortization of intangible assets, so there was no amortization expense in 2017.
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 for the years presented.
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
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.
24
The table below represents changes in E&S’s warranty reserve for the years ended December 31:
|
|
|
2017
|
|
2016
|
|
|
|
|
|
|
Beginning balance
|
|
|
$ 123
|
|
$ 127
|
Additions to warranty reserve
|
|
|
249
|
|
227
|
Warranty costs
|
|
|
(233)
|
|
(231)
|
Ending balance
|
|
|
$ 139
|
|
$ 123
|
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:
|
|
|
2017
|
|
2016
|
|
|
|
|
|
|
Percentage of completion
|
|
|
$ 17,653
|
|
$ 18,248
|
Completed contract
|
|
|
11,041
|
|
12,845
|
Other
|
|
|
1,814
|
|
1,851
|
Total sales
|
|
|
$ 30,508
|
|
$ 32,944
|
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.
25
Stock-Based Compensation
The Company records compensation expense in the financial statements for stock-based awards based on the grant date fair value of those awards that are ultimately expected to vest. As such, the value of the award is reduced for the estimated forfeitures at the date of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The Company determines the grant date fair value of the options using the Black-Scholes option-pricing model. Stock-based compensation expense is recognized over the requisite service periods of the awards on a ratable basis, which recognizes expense for each vesting tranche of each grant starting on the grant date and finishing on the vest date for that tranche.
Net Income per Common Share
Basic net income per common share represents income available to common shareholders divided by the weighted-average number of common shares outstanding during the period. Diluted net income per common share reflects additional common shares that would have been outstanding if dilutive potential common shares had been issued. Potential common shares include shares that may be issued by the Company for outstanding stock options determined using the treasury stock method. In periods resulting in a net loss, potential common shares are anti-dilutive and therefore are not included.
Net income per common share has been computed based on the following:
|
2017
|
|
2016
|
|
|
|
|
Numerator
|
|
|
|
Net Income
|
$ 1,481
|
|
$ 1,743
|
|
|
|
|
Denominator
|
|
|
|
Weighted-average number of common shares outstanding - basic
|
11,353
|
|
11,214
|
Incremental shares assumed for stock options
|
661
|
|
622
|
Weighted-average number of common shares outstanding - dilutive
|
12,014
|
|
11,836
|
Basic net income per common share
|
$ 0.13
|
|
$ 0.16
|
Diluted net income per common share
|
$ 0.12
|
|
$ 0.15
|
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 Income
On a net basis for 2017 and 2016, there were deferred income tax assets resulting from items reflected in comprehensive income. 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 is zero. Therefore, the Company has included no income tax expense or benefit in relation to items reflected in other comprehensive income. The accumulated other comprehensive loss at the end of 2016 and 2017 consists of minimum pension liability attributable to the Supplemental Executive Retirement Plan (“SERP”) (see Note 6).
Recent Accounting Pronouncements
In November 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-18,
Statement of Cash Flows (Topic 230)
Restricted Cash
(“ASU 2016-18”). ASU 2016-18 changes the cash flow presentation and disclosures of restricted cash. The Company implemented this update in the presented financial statements.
26
In February 2016, the FASB issued ASU No. 2016-02,
Leases (Topic 842)
(“ASU 2016-02”). ASU 2016-02 changes the accounting for leases. In particular, lessees will recognize lease assets and lease liabilities for operating leases. ASU 2016-02 is not effective until 2019. The Company is currently assessing the impact 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 was effective for the Company on January 1, 2018. It permits the use of either a retrospective or cumulative effect transition method and early adoption is not permitted. The Company will use the cumulative effect transition method. Because revenue will be recognized under the new standards as costs are incurred for most of our contracts, certain revenues and associated operating earnings will be accelerated into the year ended December 31, 2017. The adjustment will result in a cumulative adjustment to increase retained earnings as of January 1, 2018; however, based on our initial assessment we do not believe the cumulative adjustment will exceed $600.
Note 2 – Goodwill
Goodwill of $635 resulted from the acquisition of the Company’s wholly owned subsidiary, Spitz, and was measured as the excess of the $2,884 purchase consideration paid over the fair value of the net assets acquired. The Company has made its annual assessment of impairment of goodwill and has concluded that goodwill is not impaired as of December 31, 2017.
Note 3 - Costs and Estimated Earnings on Uncompleted Contracts
Comparative information with respect to uncompleted contracts as of December 31:
|
|
|
2017
|
|
2016
|
|
|
|
|
|
|
Total accumulated costs and estimated earnings on uncompleted contracts
|
|
$ 31,548
|
|
$ 31,634
|
Less total billings on uncompleted contracts
|
|
|
(33,359)
|
|
(35,096)
|
Ending balance
|
|
|
$ (1,811)
|
|
$ (3,462)
|
The above amounts are reported in the consolidated balance sheets as of December 31 as follows:
|
|
|
2017
|
|
2016
|
|
|
|
|
|
|
Costs and estimated earnings in excess of billings on uncompleted contracts
|
|
$ 2,763
|
|
$ 3,038
|
Billings in excess of costs and estimated earnings on uncompleted contracts
|
|
(4,574)
|
|
(6,500)
|
Ending balance
|
|
|
$ (1,811)
|
|
$ (3,462)
|
Note 4 – Lease Receivable
In 2016, the Company entered into a lease agreement with a customer whereby the Company will be the Lessor and the customer will be the lessee of a Planetarium System produced, delivered and installed by the Company. The lease term is 5 years and requires the customer to make rent payments to the Company over the lease term in accordance with the fixed schedule in the agreement. The equipment will be returned to the Company at the end of the lease term at which time the Company estimates that the system will have no residual value. The customer obtained control of the leased assets upon delivery and acceptance of the system on December 7, 2016. The lease is accounted for as a sales-type lease since the lease term is for substantially all of the economic life of the system, the present value of the lease payments amounts to substantially all of the fair value of the underlying assets, and the customer will retain the control with substantially all of the risks and awards of ownership of the system. The discounted present value of the payments to be made under the lease agreement, using an annual rate of 6%, amounts to $1,754. This amount represents the fair value of the equipment of $1,678 and the maintenance services E&S is to provide over the terms of the lease valued at $76. In 2016, the Company recorded the sale of the system of $1,678 and $76 of deferred revenue representing the value of the maintenance services. In 2017, the Company
27
collected $307 in lease payments of which $55 was recorded as interest income and $252 as principal reduction of the lease receivable.
The balance of lease receivable as of December 31, 2017 is recorded as follows:
|
|
|
2017
|
|
|
|
|
Lease receivable
|
|
|
$ 247
|
Lease receivable long term
|
|
|
836
|
Total
|
|
|
$ 1,083
|
Note 5 – Leases and deferred gain on disposal of building assets
The Company occupies real property and uses certain equipment under lease arrangements that are accounted for as operating leases. The Company’s real property leases contain escalation clauses. Rental expense for all operating leases for 2017 and 2016 was $148 and $194, respectively.
In November 2014, the Company agreed to an extension of its lease for its corporate office buildings and its interest in the lease for the land occupied by the buildings for a term of 5 years. Base annual rent is $549 until April 1, 2018 when the base annual rent increases to $570. The annual rent expense on a straight-line basis is $555. The new lease obligation is recorded as an operating lease for a term of five years which commenced November 1, 2014. The accounting for the lease extension resulted in a $620 gain on the disposition of leased assets under the prior lease which was deferred and is being amortized over the five-year term of the new operating lease. There was also a $1,526 gain from the extinguishment of a deferred rent credit related to the underlying land lease which is being amortized over the five-year term of the new operating lease. The amortization of the deferred gain and deferred rent credit reduces the rent expense attributable to the cash rent payments.
Future minimum rent expense payments under the new operating lease and the remaining deferred gain from the disposal of the building assets and deferred rent credit to be recognized are as follows:
Years Ending
|
|
Minimum Lease
|
|
Gain on
|
|
Deferred
|
|
Net Rent
|
December 31,
|
|
Payments
|
|
Building
|
|
Rent Credit
|
|
Expense
|
|
|
|
|
|
|
|
|
|
2018
|
|
$ 565
|
|
$ (124)
|
|
$ (314)
|
|
$ 127
|
2019
|
|
475
|
|
(106)
|
|
(264)
|
|
105
|
Total
|
|
$ 1,040
|
|
$ (230)
|
|
$ (578)
|
|
$ 232
|
There are no other lease obligations that have initial or remaining non-cancelable lease terms in excess of one year.
Note 6 - Employee Retirement Benefit Plans
Settlement of Pension Plan Liabilities
On April 21, 2015, the Company, as the administrator of its qualified defined benefit pension plan (“Pension Plan”), and the Pension Benefit Guaranty Corporation (“PBGC”) entered into an Agreement for Appointment of Trustee and Termination of Plan (the “Termination Agreement”) (a) terminating the Pension Plan, (b) establishing March 8, 2013 as the Plan’s termination date and (c) appointing the PBGC as statutory trustee of the Pension Plan.
In connection with the Termination Agreement, on April 21, 2015, the Company entered into the Pension Settlement Agreement with the PBGC to settle all liabilities of the Pension Plan including any termination premium resulting from the Pension Plan termination (the “Settled ERISA Liabilities”). Pursuant to the Pension Settlement Agreement, the Company agreed to (a) pay to the PBGC a total of $10,500, with $1,500 due within ten days following the effective date of the Pension Settlement Agreement and the remainder paid in twelve annual installments of $750 beginning on October 31, 2015
(the “Pension Settlement Obligation”) and (b) issue within ten days following the effective date of the Pension Settlement Agreement 88,117 shares of the Company’s treasury stock in the name of the PBGC. The Pension Settlement Agreement further provides that the PBGC will be deemed to have released the Company from all Settled ERISA Liabilities upon payment of the Pension Settlement Obligation. In the event of a default by the Company of its obligations under the Pension Settlement Agreement or the underlying agreements which secure the Pension Settlement Obligation, the PBGC may enforce payment of the Settled ERISA Liabilities, which would accrue interest at various rates until payment is made and be reduced by any payments made by the Company pursuant to the Pension Settlement Agreement. The estimated total Settled ERISA Liabilities as of the settlement date is $46,000.
To secure the Company’s obligations under the Pension Settlement Agreement, on April 21, 2015, the Company also entered into a Security Agreement with the PBGC (the “Security Agreement”), and executed an Open-End Mortgage in favor of the PBGC (the “Mortgage”) on certain real property owned by the Company’s subsidiary, Spitz, Inc. (“Spitz”). The Security Agreement and Mortgage grant to the PBGC a security interest on all of the Company’s presently owned and after-acquired property and proceeds thereof, free and clear of all liens and other encumbrances, except those described therein (the “Senior Liens”). The PBGC’s security interest in the Company’s property is subordinate to the Company’s two senior lenders pursuant to the Security Agreement and agreements between the PBGC and the lenders (the “Intercreditor Agreements”). The Intercreditor Agreements provide for the lenders to extend credit to the Company, secured by the Senior Liens, up to specified limits. The Intercreditor Agreement between the lender of the mortgage notes and line of credit (see Note 7) and the PBGC provides for total aggregate loans of up to $6,500 secured by Senior Liens on Spitz assets. The second Intercreditor Agreement between another lender and the PBGC provides for up to $3,000 of letter of credit indebtedness secured by Senior Liens on cash deposits.
The balance of the Pension Settlement Obligation is recorded on the balance sheet as of December 31, 2017 and 2016 as follows:
|
2017
|
|
2016
|
Current portion of pension settlement obligation
|
$ 409
|
|
$ 382
|
Pension settlement obligation, net of current portion
|
4,478
|
|
4,886
|
Total Pension Settlement Obligation
|
$ 4,887
|
|
$ 5,268
|
|
|
|
|
Supplemental Executive Retirement Plan (SERP)
The SERP provides eligible former executives, employed by the Company prior to 2002, defined pension benefits based on average salary, years of service and age at retirement. The SERP was amended in 2002 to discontinue further SERP gains from future salary increases and close the SERP to new participants.
401(k) Deferred Savings Plan
The Company has a deferred savings plan that qualifies under Section 401(k) of the Internal Revenue Code. The 401(k) plan covers all employees of the Company who have at least one year of service and who are age 18 or older. Matching contributions of 50% are made on the first 6% of employee contributions after the employee has achieved one year of service. Extra matching contributions can be made based on profitability and other financial and operational considerations. Effective January 1, 2017, the Company started making a 3% contribution in addition to the matching contribution. Contributions to the 401(k) plan for 2017 and 2016 were $451 and $182, respectively.
Obligations and Funded Status for SERP
E&S uses a December 31 measurement date for the SERP.
29
Information concerning the obligations, plan assets and funded status of employee retirement defined benefit plans are provided below:
Changes in benefit obligation
|
2017
|
|
2016
|
|
|
|
|
Projected benefit obligation - beginning of year
|
$ 4,851
|
|
$ 5,320
|
Interest cost
|
156
|
|
190
|
Actuarial loss (gain)
|
103
|
|
(184)
|
Benefits paid
|
(460)
|
|
(475)
|
Projected benefit obligation - end of year
|
$ 4,650
|
|
$ 4,851
|
Changes in plan assets
|
2017
|
|
2016
|
|
|
|
|
Contributions
|
$ 460
|
|
$ 475
|
Benefits paid
|
(460)
|
|
(475)
|
Fair value of plan assets - end of year
|
$ -
|
|
$ -
|
Net amount recognized
|
2017
|
|
2016
|
|
|
|
|
Unfunded status
|
$ (4,650)
|
|
$ (4,851)
|
Unrecognized net actuarial loss
|
2,176
|
|
2,146
|
Net amount recognized
|
$ (2,474)
|
|
$ (2,705)
|
Amounts recognized in the consolidated balance sheets consisted of:
|
2017
|
|
2016
|
|
|
|
|
Accrued liability
|
$ (4,650)
|
|
$ (4,851)
|
Accumulated other comprehensive loss
|
2,176
|
|
2,146
|
Net amount recognized
|
$ (2,474)
|
|
$ (2,705)
|
Components of net periodic benefit cost:
|
2017
|
|
2016
|
|
|
|
|
Interest cost
|
$ 156
|
|
$ 190
|
Amortization of actuarial loss
|
75
|
|
82
|
Amortization of prior year service cost
|
-
|
|
(10)
|
Net periodic benefit expense
|
$ 231
|
|
$ 262
|
Additional information
Pension expense was $231 for the year ended December 31, 2017, which consisted of net periodic benefit expense of $231 for the SERP. Pension expense was $262 for the year ended December 31, 2016, which consisted of net periodic benefit expense of $262 for the SERP.
The SERP minimum liability recorded in other comprehensive loss increased $30 in 2017 compared to a decrease of $258 in 2016. The increase in 2017 was caused by a decrease in the discount rate, partly offset by a change to the mortality table. The decrease in 2016 was primarily due to the death of one participant.
30
Assumptions
The weighted average assumptions used to remeasure benefit obligations as of December 31, 2017 and 2016 included a discount rate of 3.4% and 3.7%, respectively, for the SERP. The weighted average assumptions used to determine net periodic cost for the years ended December 31, 2017 and 2016 included a discount rate of 3.4% and 3.7%, respectively, in each year for the SERP.
Cash Flows
Employer contributions
The Company is not currently required to fund the SERP. All benefit payments are made by E&S 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 benefits of approximately $500 related to the SERP in 2018.
Estimated future benefit payments
As of December 31, 2017, the following benefits are expected to be paid based on actuarial estimates and prior experience:
Years Ending
|
|
|
December 31,
|
|
SERP
|
2018
|
|
$ 500
|
2019
|
|
427
|
2020
|
|
421
|
2021
|
|
415
|
2022
|
|
408
|
2023-2027
|
|
$ 1,806
|
Note 7 –Debt
Long-term debt consisted of the following as of December 31, 2017 and 2016:
|
2017
|
|
2016
|
First mortgage note payable due in monthly installments of $23 (interest
at 5.75%) through January 1, 2024; payment and rate subject to
adjustment every 3 years, next adjustment January 14, 2019
|
$ 1,422
|
|
$ 1,611
|
Second mortgage note payable due in monthly installments of $4 (interest
at 5.75%) through October 1, 2028; payment and rate subject to
adjustment every 5 years, next adjustment October 1, 2018
|
342
|
|
364
|
Total debt
|
1,764
|
|
1,975
|
Current portion of long-term debt
|
(224)
|
|
(211)
|
Long-term debt, net of current portion
|
$ 1,540
|
|
$ 1,764
|
31
Principal maturities on total debt are as follows:
Years Ending
|
|
|
|
December 31,
|
|
|
|
2018
|
|
|
$ 224
|
2019
|
|
|
237
|
2020
|
|
|
251
|
2021
|
|
|
267
|
2022
|
|
|
283
|
Thereafter
|
|
|
502
|
Total debt
|
|
|
$ 1,764
|
Mortgage Notes
The first mortgage note payable represents the balance on a $3,200 note (“First Mortgage Note”) issued on January 14, 2004 by Spitz. The First Mortgage Note requires repayment in monthly installments of principal and interest over 20 years. On each third anniversary of the First Mortgage Note, the interest rate is adjusted to the greater of 5.75% or 3% over the Three-Year Constant Maturity Treasury Rate published by the United States Federal Reserve (“3YCMT”). The monthly installment is recalculated on the first month following a change in the interest rate. The recalculated monthly installment is equal to the monthly installment sufficient to repay the principal balance, as of the date of the change in the interest rate, over the remaining portion of the original 20-year term. On January 14, 2016, the 3YCMT was 1.14% and the interest rate on the First Mortgage Note remained at 5.75% per annum. As a result, the monthly installment amount remained at $23.
The second mortgage note payable represents the balance on a $500 note (“Second Mortgage Note”) issued on September 11, 2008 by Spitz. The Second Mortgage Note requires repayment in monthly installments of principal and interest over 20 years. On each fifth anniversary of the Second Mortgage Note, the interest rate is adjusted to the greater of 5.75% or 3% over 3YCMT. The monthly installment is recalculated on the first month following a change in the interest rate. The recalculated monthly installment is equal to the monthly installment sufficient to repay the principal balance, as of the date of the change in the interest rate, over the remaining portion of the original 20-year term. On September 11, 2013, the fifth anniversary of the Second Mortgage Note, the 3YCMT was 0.88%. As a result, interest continues at 5.75% until possible adjustment on the next 5-year anniversary. The monthly installment also remains unchanged at $4.
The Mortgage Notes are secured by the real property occupied by Spitz pursuant to a Mortgage and Security Agreement. The real property had a carrying value of $4,090 as of December 31, 2017. The Mortgage Notes are guaranteed by E&S.
Line of Credit
The Company is a party to a line-of-credit agreement with a commercial bank which permits borrowings of up to $1,100 to fund Spitz working capital requirements. Under the line of credit agreement, interest is charged on amounts borrowed at the lender’s prime rate less 0.25%. Any borrowings under the Credit Agreement are secured by Spitz real and personal property and all of the outstanding shares of Spitz common stock. The line-of-credit agreement and mortgage notes (with the same commercial bank) contain cross default provisions whereby a default on either agreement will result in a default on both agreements. There were no borrowings outstanding under the line-of-credit agreement as of December 31, 2017.
32
Note 8 - Income Taxes
Income tax for 2017 and 2016 consisted of a benefit of $(111) and an expense of $93, respectively, of federal and state income taxes. The actual expense differs from the expected tax provision (benefit) as computed by applying the U.S. federal statutory income tax rate of 34 percent for 2017 and 2016, as follows:
|
|
|
2017
|
|
2016
|
|
|
|
|
|
|
Income tax provision at U.S. federal statutory rate
|
|
|
$ 466
|
|
$ 624
|
State tax provision, net of federal income tax
|
|
|
48
|
|
48
|
Change in valuation allowance attributable to operations
|
|
|
(25,093)
|
|
(936)
|
Change in effective tax rate
|
|
|
22,311
|
|
-
|
Pension settlement
|
|
|
-
|
|
(213)
|
Stock compensation
|
|
|
570
|
|
-
|
True-up adjustments and expiration of tax carryforwards and credits
|
|
1,568
|
|
548
|
Other, net
|
|
|
19
|
|
22
|
Income tax provision (benefit)
|
|
|
$ (111)
|
|
$ 93
|
The tax effects of temporary differences that give rise to significant portions of the deferred income tax assets and liabilities as of December 31, 2017 and 2016 are as follows:
|
|
|
2017
|
|
2016
|
|
|
|
|
|
|
Property and equipment, principally due to differences in depreciation
|
|
$ 71
|
|
$ (643)
|
Inventory reserves and other inventory-related temporary basis differences
|
|
361
|
|
614
|
Warranty, vacation, deferred rent and other liabilities
|
|
|
371
|
|
687
|
Retirement liabilities
|
|
|
645
|
|
1,032
|
Net operating loss carryforwards
|
|
|
38,536
|
|
62,484
|
Credit carryforwards
|
|
|
27
|
|
36
|
Other
|
|
|
143
|
|
1,037
|
Total deferred income tax
|
|
|
40,154
|
|
65,247
|
Less valuation allowance
|
|
|
(40,154)
|
|
(65,247)
|
Net deferred income tax
|
|
|
$ -
|
|
$ -
|
Worldwide income before income taxes consisted of the following:
|
|
|
2017
|
|
2016
|
|
|
|
|
|
|
United States
|
|
|
$ 1,370
|
|
$ 1,836
|
International
|
|
|
-
|
|
-
|
Total
|
|
|
$ 1,370
|
|
$ 1,836
|
33
Income tax benefit (provision) consisted of the following:
|
|
|
2017
|
|
2016
|
Current
|
|
|
|
|
|
U.S. federal
|
|
|
$ (8)
|
|
$ 10
|
State
|
|
|
(103)
|
|
83
|
Total current expense (benefit)
|
|
|
$ (111)
|
|
$ 93
|
Deferred
|
|
|
|
|
|
U.S. federal
|
|
|
$ 23,012
|
|
$ 937
|
State
|
|
|
2,081
|
|
(1)
|
Total
|
|
|
25,093
|
|
936
|
Valuation allowance increase
|
|
|
(25,093)
|
|
(936)
|
Total deferred expense (benefit)
|
|
|
-
|
|
-
|
|
|
|
|
|
|
Total income tax expense (benefit)
|
|
|
$ (111)
|
|
$ 93
|
The Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority.
E&S has total federal net operating loss carryforwards of approximately $169,100 which expire from 2020 through 2036. The Company has federal minimum tax credit carryforwards of approximately $27 which do not expire. The Company has $3,200 of federal research credits that begin to expire in 2019 and $1,800 of state research credits that begin to expire in 2018. The Company has not recorded a benefit for these research credits in the financial statements because it does not meet the more-likely-than-not position recognition threshold. E&S also has state net operating loss carryforwards of approximately $70,400 that expire at various dates depending on the rules of the states to which the loss or credit is allocated.
The Company evaluates its deferred tax assets for realizability based on all of the available positive and negative evidence. Due to cumulative losses and the significance of the carryforwards, the Company determined that it is more likely than not that the deferred tax assets will not be realized. Accordingly, a valuation allowance has been established to offset the net deferred tax assets. During the years ended December 31, 2017 and 2016, the valuation allowance on deferred tax assets decreased by $25,093 and $936, respectively.
The Company is subject to audit by the IRS and various states for tax years dating back to 2014. No federal or state tax return are currently under audit. The Company recognizes interest and penalties, if any, related to unrecognized tax benefits in income tax expense.
Note 9 - Commitments and Contingencies
Letters of Credit
Under
the terms of financing arrangements for letters of credit, E&S is required to maintain a balance in a specific cash account equal to or greater than the outstanding value of all letters of credit or bank guarantees issued, plus other amounts necessary to adequately secure obligations with the financial institution. As of December 31, 2016, there were outstanding letters of credit and bank guarantees of $600 which expired in 2017. As of December 31, 2017, there were outstanding letters of credit and bank guarantees of $312 which are scheduled to expire in 2018.
Note 10 - Stock Option Plan
In 2014, stockholders approved the adoption of the Evans & Sutherland Computer Corporation 2014 Stock Incentive Plan (“2014 Plan”) which replaced the expired 2004 Stock Incentive Plan of Evans & Sutherland Computer Corporation (“2004 Plan”). The 2014 Plan is a stock incentive plan that provides for the grant of options and
34
restricted stock awards to employees and for the grant of options to non-employee directors essentially the same as the 2004 Plan. Under the 2014 Plan, non-employee directors may continue to receive an annual option grant for no more than 10,000 shares. New non-employee directors may also continue to receive an option grant for no more than 10,000 shares upon their appointment or election. With the adoption of the 2014 Plan, no additional options can be issued under the 2004 Plan. Options granted under the 2004 Plan are still held by recipients and will continue to be subject to the terms and conditions of the 2004 plan which are essentially the same as the 2014 Plan. The 2014 Plan continues a minimum exercise price for options of 110% of fair market value on the date of grant. Restricted stock awards may be qualified as a performance-based award that conditions a participant’s award upon achievement by the Company or its subsidiaries of performance goals established by the Board of Directors’ Compensation Committee.
The number of shares, terms, and exercise periods of option grants are determined by the Board of Directors on an option-by-option basis. Options generally vest ratably over three years and expire ten years from the date of grant. As of December 31, 2017, options to purchase 989,081 shares of common stock were authorized and reserved for future grant.
A summary of activity follows (shares in thousands):
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
|
|
Weighted-
|
|
|
|
Weighted-
|
|
|
|
Average
|
|
|
|
Average
|
|
Number
|
|
Exercise
|
|
Number
|
|
Exercise
|
|
of Shares
|
|
Price
|
|
of Shares
|
|
Price
|
|
|
|
|
|
|
|
|
Outstanding as of beginning of the year
|
1,625
|
|
$ 0.88
|
|
1,470
|
|
$ 1.53
|
Granted
|
141
|
|
1.39
|
|
512
|
|
0.90
|
Exercised
|
-
|
|
-
|
|
(175)
|
|
0.40
|
Forfeited or expired
|
(156)
|
|
3.61
|
|
(182)
|
|
6.59
|
Outstanding as of end of the year
|
1,610
|
|
0.66
|
|
1,625
|
|
0.88
|
|
|
|
|
|
|
|
|
Exercisable as of end of the year
|
1,089
|
|
0.51
|
|
1,056
|
|
0.95
|
The weighted average fair value of options granted during 2017 and 2016 was $1.14 and $0.79, respectively. As of December 31, 2017, options exercisable and options outstanding had a weighted average remaining contractual term of 4.4 and 5.8 years with aggregate intrinsic value of $566 and $637, respectively. As of December 31, 2016, options exercisable and options outstanding had a weighted average remaining contractual term of 4.1 and 5.8 years with aggregate intrinsic value of $728 and $1,038, respectively. The aggregate intrinsic value of the options exercised in 2016 was $137.
The fair value of each option grant is estimated on the date of the grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for the grants made in 2017 and 2016:
|
2017
|
|
2016
|
Expected life (in years)
|
3.5
|
|
3.5
|
Risk free interest rate
|
1.47%
|
|
1.04%
|
Expected volatility
|
175%
|
|
229%
|
Expected option lives and volatilities are based on historical data of the Company. The risk free interest rate is calculated as the average US Treasury bill rate that corresponds with the option life. Historically, the Company has not declared dividends and there are no plans to do so.
35
As of December 31, 2017, there was approximately $140 of total unrecognized share-based compensation cost related to grants collectively under the 2004 Plan and 2014 Plan that will be recognized over a weighted-average period of 2.4 years. As of December 31, 2016, there was approximately $198 of total unrecognized share-based compensation cost related to grants collectively under the 2004 Plan and 2014 Plan that will be recognized over a weighted-average period of 3.8 years.
Share-based compensation expense, from awards collectively under the 2004 Plan and 2014 Plan for the years ended December 31, 2017 and 2016 amounted to $177 and $171, respectively, and was included in general and administrative expense on the statements of comprehensive income.
Note 11 - Preferred Stock
Class A Preferred Stock
The Company has 5,000,000 authorized shares of Class A Preferred stock. As of December 31, 2017 and 2016, there were no Class A Preferred shares outstanding.
Class B Preferred Stock
The Company has 5,000,000 authorized shares of Class B Preferred stock. As of December 31, 2017 and 2016, there were no Class B Preferred shares outstanding.
Note 12 - Geographic Information
The table below presents sales by geographic location:
|
2017
|
|
2016
|
|
|
|
|
United States
|
$ 15,429
|
|
$ 24,994
|
International
|
15,079
|
|
7,950
|
Total sales
|
$ 30,508
|
|
$ 32,944
|
Note 13 - Significant Customers
As of December 31, 2017, Customers A and B each represented 10% of accounts receivable, and Customer F represented 30% of costs and estimated earnings in excess of billings.
As of December 31, 2016, Customers C and D represented 19% and 29% of accounts receivable, respectively, and Customers E and A represented 48% and 18% of costs and estimated earnings in excess of billings, respectively.
For the year ended December 31, 2017, Customer F represented 11% of total sales. For the year ended December 31, 2016, Customer E represented 23% of total sales.
36