SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended November 30, 2002 Commission File Number 0-13394
VIDEO DISPLAY CORPORATION
(Exact name of registrant as specified on its charter)
| Georgia (State or other jurisdiction of incorporation or organization) |
58-1217564 (I.R.S.Employer Identification No.) |
1868 Tucker Industrial Drive, Tucker, Georgia 30084
(Address of principal executive offices)
Registrant's telephone number including area code: 770-938-2080
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days.
Yes ý No o
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practical date:
| Class |
Outstanding at November 30, 2002 |
|
|---|---|---|
| Common Stock, No Par Value | 4,761,833 |
Video Display Corporation and Subsidiaries
| |
|
|
Page |
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|---|---|---|---|---|---|---|
| PART I. FINANCIAL INFORMATION | ||||||
Item 1. Financial Statements |
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Consolidated balance sheets— November 30, 2002 (unaudited) and February 28, 2002 (audited) |
3-4 |
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Consolidated statements of operations— Three and nine months ended November 30, 2002 and 2001 (unaudited) |
5 |
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Consolidated statements of shareholders' equity and comprehensive income (loss)— Twelve months ended February 28, 2002 (audited) and the nine months ended November 30, 2002 (unaudited) |
6 |
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Consolidated statements of cash flows— Nine months ended November 30, 2002 and 2001 (unaudited) |
7 |
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Notes to consolidated financial statements— November 30, 2002 (unaudited) |
8-12 |
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations |
13-17 |
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Item 3. Quantitative and Qualitative Disclosure About Market Risk |
18 |
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Item 4. Controls and Procedures |
18 |
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PART II. OTHER INFORMATION |
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Item 1. Legal Proceedings |
19 |
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Item 2. Changes in Securities and Use of Proceeds |
19 |
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Item 3. Defaults upon its Senior Securities |
19 |
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Item 4. Submission of Matters to a Vote of Security Holders |
19 |
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Item 5. Other Information |
19 |
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Item 6. Exhibits and Reports on Form 8-K |
19 |
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SIGNATURES |
20 |
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2
Video Display Corporation and Subsidiaries
Consolidated Balance Sheets
| |
November 30, 2002 (unaudited) |
February 28, 2002 (Note A) |
||||||
|---|---|---|---|---|---|---|---|---|
| Assets | ||||||||
| Current assets | ||||||||
| Cash and cash equivalents | $ | 1,894,000 | $ | 1,615,000 | ||||
| Accounts receivable, less allowance for possible losses of $515,000 and $343,000 | 12,696,000 | 12,712,000 | ||||||
| Inventories (Note D) | 29,978,000 | 31,920,000 | ||||||
| Prepaid expenses | 4,072,000 | 3,276,000 | ||||||
| Total current assets | 48,640,000 | 49,523,000 | ||||||
Property, plant and equipment: |
||||||||
| Land | 600,000 | 600,000 | ||||||
| Buildings | 7,050,000 | 6,814,000 | ||||||
| Machinery and equipment | 18,323,000 | 18,845,000 | ||||||
| 25,973,000 | 26,259,000 | |||||||
| Accumulated depreciation and amortization | (17,222,000 | ) | (16,891,000 | ) | ||||
| Net property, plant, and equipment | 8,751,000 | 9,368,000 | ||||||
Other assets |
2,567,000 |
2,950,000 |
||||||
| Total assets | $ | 59,958,000 | $ | 61,841,000 | ||||
The accompanying notes are an integral part of these statements.
3
Video Display Corporation and Subsidiaries
Consolidated Balance Sheets
| |
November 30, 2002 (unaudited) |
February 28, 2002 (Note A) |
||||||
|---|---|---|---|---|---|---|---|---|
| Liabilities and Shareholders' Equity | ||||||||
| Current liabilities | ||||||||
| Accounts payable | $ | 6,860,000 | $ | 4,808,000 | ||||
| Accrued liabilities | 4,147,000 | 4,800,000 | ||||||
| Lines of credit (Note F) | 9,191,000 | 3,779,000 | ||||||
| Notes payable to shareholders | 7,617,000 | 7,124,000 | ||||||
| Current maturities of long-term debt (Note E) | 2,739,000 | 1,443,000 | ||||||
| Total current liabilities | 30,554,000 | 21,954,000 | ||||||
Convertible subordinated debentures |
1,000,000 |
1,000,000 |
||||||
| Lines of credit (Note F) | — | 8,785,000 | ||||||
| Long-term debt, less current maturities (Note E) | 5,965,000 | 4,955,000 | ||||||
| Notes payable to shareholders, less current maturities | 151,000 | 217,000 | ||||||
| Deferred income taxes | 113,000 | 113,000 | ||||||
| Total liabilities | 37,783,000 | 37,024,000 | ||||||
Minority interests |
188,000 |
158,000 |
||||||
| Redeemable common stock | 100,000 | — | ||||||
Commitments |
— |
— |
||||||
Shareholders' Equity |
||||||||
| Preferred stock, no par value—2,000,000 shares authorized; none issued and outstanding | — | — | ||||||
| Common stock, no par value—10,000,000 shares authorized; 4,762,000 and 4,749,000 issued and outstanding | 3,791,000 | 3,826,000 | ||||||
| Additional paid in capital | 92,000 | 92,000 | ||||||
| Retained earnings | 19,338,000 | 22,134,000 | ||||||
| Accumulated other comprehensive loss | (1,334,000 | ) | (1,393,000 | ) | ||||
| Total shareholders' equity | 21,887,000 | 24,659,000 | ||||||
| Total liabilities and shareholders' equity | $ | 59,958,000 | $ | 61,841,000 | ||||
The accompanying notes are an integral part of these statements.
4
Video Display Corporation and Subsidiaries
Consolidated Statements of Operations (unaudited)
| |
Three Months Ended November 30, |
Nine Months Ended November 30, |
||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
2002 |
2001 |
2002 |
2001 |
||||||||||
| Net sales | $ | 18,240,000 | $ | 17,034,000 | $ | 56,666,000 | $ | 53,334,000 | ||||||
| Cost of goods sold | 17,079,000 | 11,248,000 | 43,722,000 | 36,338,000 | ||||||||||
| Gross profit | 1,161,000 | 5,786,000 | 12,944,000 | 16,996,000 | ||||||||||
| Operating expenses | ||||||||||||||
| Selling and delivery | 1,926,000 | 1,601,000 | 5,867,000 | 4,780,000 | ||||||||||
| General and administrative | 3,714,000 | 3,091,000 | 9,818,000 | 9,292,000 | ||||||||||
| 5,640,000 | 4,692,000 | 15,685,000 | 14,072,000 | |||||||||||
| Operating profit (loss) | (4,479,000 | ) | 1,094,000 | (2,741,000 | ) | 2,924,000 | ||||||||
| Other income (expense) | ||||||||||||||
| Interest expense | (382,000 | ) | (324,000 | ) | (1,088,000 | ) | (1,252,000 | ) | ||||||
| Other, net | 66,000 | (24,000 | ) | 158,000 | 24,000 | |||||||||
| (316,000 | ) | (348,000 | ) | (930,000 | ) | (1,228,000 | ) | |||||||
| Income (loss) before minority interest | (4,795,000 | ) | 746,000 | (3,671,000 | ) | 1,696,000 | ||||||||
| Minority interest expense | 18,000 | 2,000 | 30,000 | 6,000 | ||||||||||
| Income (loss) before income taxes | (4,813,000 | ) | 744,000 | (3,701,000 | ) | 1,690,000 | ||||||||
| Income tax expense (benefit) | (1,321,000 | ) | 291,000 | (905,000 | ) | 652,000 | ||||||||
| Net income (loss) | $ | (3,492,000 | ) | $ | 453,000 | $ | (2,796,000 | ) | $ | 1,038,000 | ||||
| Basic earnings per share of common stock | $ | (0.73 | ) | $ | 0.10 | $ | (0.59 | ) | $ | 0.22 | ||||
| Diluted earnings per share of common stock | $ | (0.73 | ) | $ | 0.10 | $ | (0.59 | ) | $ | 0.22 | ||||
| Basic weighted average shares outstanding | 4,761,000 | 4,749,000 | 4,761,000 | 4,685,000 | ||||||||||
| Diluted weighted average shares outstanding | 4,761,000 | 5,024,000 | 4,761,000 | 5,010,000 | ||||||||||
The accompanying notes are an integral part of these statements.
5
Video Display Corporation and Subsidiaries
Consolidated Statements of Shareholders' Equity and Comprehensive Income (Loss)
for the Twelve Months Ended February 28, 2002 (audited) and
the Nine Months Ended November 30, 2002 (unaudited)
| |
Common Stock |
Additional Paid In Capital |
Accumulated Other Comprehensive Loss |
Retained Earnings |
Current Period Comprehensive Income (Loss) |
|||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Balance at February 28, 2001 | $ | 3,034,000 | $ | 92,000 | $ | (1,479,000 | ) | $ | 20,952,000 | |||||||||
Net income for the year |
— |
— |
— |
1,182,000 |
$ |
1,182,000 |
||||||||||||
| Unrealized loss on marketable equity securities | — | — | (2,000 | ) | — | (2,000 | ) | |||||||||||
| Foreign currency translation adjustment | — | — | 88,000 | — | 88,000 | |||||||||||||
| Total comprehensive income | $ | 1,268,000 | ||||||||||||||||
| Issuance of common stock under stock option plan | 17,000 | — | — | — | ||||||||||||||
| Conversion of subordinated debentures to common stock | 775,000 | — | — | — | ||||||||||||||
| Balance at February 28, 2002 | 3,826,000 | 92,000 | (1,393,000 | ) | 22,134,000 | |||||||||||||
Net loss for the period |
— |
— |
— |
(2,796,000 |
) |
$ |
(2,796,000 |
) |
||||||||||
| Unrealized loss on marketable equity securities | — | — | (4,000 | ) | — | (4,000 | ) | |||||||||||
| Foreign currency translation adjustment | — | — | 63,000 | — | 63,000 | |||||||||||||
| Total comprehensive loss | $ | (2,737,000 | ) | |||||||||||||||
| Issuance of common stock under stock option plan | 11,000 | — | — | — | ||||||||||||||
| Repurchase of common stock | (46,000 | ) | — | — | — | |||||||||||||
| Balance at November 30, 2002 | $ | 3,791,000 | $ | 92,000 | $ | (1,334,000 | ) | $ | 19,338,000 | |||||||||
The accompanying notes are an integral part of these statements.
6
Video Display Corporation and Subsidiaries
Consolidated Statements of Cash Flows (unaudited)
| |
Nine Months Ended November 30, |
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|---|---|---|---|---|---|---|---|
| |
2002 |
2001 |
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| Reconciliation of Net Income to Net Cash Provided by (Used in) Operating Activities | |||||||
| Net (loss) income | $ | (2,796,000 | ) | $ | 1,038,000 | ||
| Adjustments to reconcile net income (loss) to net cash used in operations: | |||||||
| Depreciation and amortization | 1,015,000 | 1,239,000 | |||||
| Provision for inventory reserves and write-downs | 4,397,000 | 430,000 | |||||
| Provision for bad debts | 542,000 | (41,000 | ) | ||||
| Loss on disposal of fixed assets | 725,000 | — | |||||
| Deferred income taxes | (55,000 | ) | — | ||||
| Net income allocated to minority interests | 30,000 | 6,000 | |||||
| Changes in working capital, net of effects from acquisitions: | |||||||
| Accounts receivable | (526,000 | ) | (1,461,000 | ) | |||
| Inventories | (2,356,000 | ) | (663,000 | ) | |||
| Prepaid expenses and other assets | (741,000 | ) | (472,000 | ) | |||
| Accounts payable and accrued liabilities | 1,399,000 | (338,000 | ) | ||||
| Net cash provided by (used in) operating activities | 1,634,000 | (262,000 | ) | ||||
| Investing activities | |||||||
| Capital expenditures | (1,123,000 | ) | (1,503,000 | ) | |||
| Purchase of assets of Christie, Inc. | — | (2,700,000 | ) | ||||
| Other investing activities | 380,000 | (387,000 | ) | ||||
| Net cash used in investing activities | (743,000 | ) | (4,590,000 | ) | |||
| Financing activities | |||||||
| Proceeds from long-term debt and lines of credit | 11,456,000 | 23,127,000 | |||||
| Repayments of long-term debt and lines of credit | (12,096,000 | ) | (19,750,000 | ) | |||
| Proceeds from exercise of stock options | 11,000 | 16,000 | |||||
| Repurchase of shares of common stock | (46,000 | ) | — | ||||
| Net cash (used in) provided by financing activities | (675,000 | ) | 3,393,000 | ||||
| Effect of exchange rates on cash | 63,000 | 28,000 | |||||
| Net change in cash and cash equivalents | 279,000 | (1,431,000 | ) | ||||
| Cash and cash equivalents, beginning of period | 1,615,000 | 4,137,000 | |||||
| Cash and cash equivalents, end of period | 1,894,000 | 2,706,000 | |||||
The accompanying notes are an integral part of these statements.
7
Video Display Corporation and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
NOTE A—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principals for interim financial information and in accordance with instructions for Form 10-Q as found in Article 10 of Regulation S-X. Accordingly, such consolidated financial statements do not include all of the information and disclosures required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments necessary for a fair presentation of the results of operations for the periods covered have been reflected in the statements. The accompanying consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto for the year ended February 28, 2002 included in the Company's Annual Report on Form 10-K.
The consolidated financial statements included the accounts of the Company and its majority owned subsidiaries after elimination of all significant intercompany accounts and transactions.
NOTE B—ADOPTION OF RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board (the "FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations", and SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS No. 141 requires the use of the purchase method of accounting and prohibits the use of the pooling-of-interests method of accounting for business combinations initiated after June 30, 2001. This statement also requires that the Company recognize acquired intangible assets apart from goodwill if the acquired intangible assets meet certain criteria. SFAS No. 142 requires, among other things, that companies no longer amortize goodwill, but instead test goodwill for impairment at least annually.
In addition, SFAS No. 142 requires that the Company identify reporting units for purposes of assessing potential future impairments of goodwill, reassess the useful lives of other existing recognized finite-lived intangible assets, and cease amortization of intangible assets with an indefinite useful life. An intangible asset with an indefinite useful life should be tested for impairment in accordance with the guidance in SFAS No. 142. This statement is required to be applied in fiscal years beginning after December 15, 2001, to all goodwill and other intangible assets recognized at that date, regardless of when those assets were initially recognized. SFAS No. 142 requires the Company to complete a transitional goodwill impairment test within six months from the date of adoption and reassess the useful lives of other intangible assets within the first interim quarter after adoption.
The Company adopted SFAS Nos. 141 and 142 on March 1, 2002, and accordingly, ceased amortization of goodwill at that time. Goodwill amortization expense of $81,000 and $243,000 was included in the consolidated financial statements for the three and nine months ended November 30, 2001, respectively. Had goodwill amortization expense not been recognized in 2001, basic earnings per share would have increased from $0.10 per share to $0.11 per share for the three months ended November 30, 2001, and from $0.22 per share to $0.27 per share for the nine months ended November 30, 2001.
As of November 30, 2002, the Company completed the first phase of transitional testing for the potential impairment of goodwill relating to its Monitor division. The Company used a mulitple of EBITDA (earnings before interest, taxes, depreciation and amortization expense) in evaluating the fair value of the Monitor division. As a result of such testing, the Company determined there was no impairment of goodwill that should be included in the accompanying financial statements. At November 30, 2002, the net book value recorded for goodwill was $1,142,000.
8
NOTE C—ACCOUNTING STANDARDS NOT YET ADOPTED
In June 2001, the FASB approved the issuance of SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS 143 establishes accounting standards for the recognition and measurement of legal obligations associated with the retirement of tangible long-lived assets and requires recognition of a liability for an asset retirement obligation in the period in which it is incurred. The provisions of this statement are effective for financial statements issued for fiscal years beginning after June 15, 2002. The Company currently anticipates that adoption of this statement will not have a material impact on its consolidated financial statements.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS 144 addresses financial accounting for the impairment or disposal of long-lived assets. The provisions of this statement are effective for financial statements issued for fiscal years beginning after December 15, 2001. The Company currently anticipates that adoption of this statement will not have a material impact on its consolidatedfinancial statements.
In April 2002, the FASB issued SFAS No. 145, "Rescission of SFAS No. 4, 44, 64, Amendment of SFAS No. 13, and Technical Corrections." SFAS 4, which was amended by SFAS 64, required all gains and losses from the extinguishment of debt to be aggregated and, if material, classified as an extraordinary item, net of related income tax effect. As a result, the criteria in Opinion 30 will now be used to classify those gains and losses. SFAS 13 was amended to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. The adoption of SFAS 145 will not have a current impact on the Company's consolidated financial statements.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." Generally, SFAS 146 provides that defined exit costs (including restructuring and employee termination costs) are to be recorded on an incurred basis rather than on a commitment basis as is presently required. SFAS 146 is effective for exit or disposal activities initiated after December 31, 2002. The Company currently anticipates that adoption of this statement will not have a material impact on its consolidated financial statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation—Transition and Disclosure." SFAS 148 amends the transition and disclosure requirements of SFAS No. 123, "Accounting for Stock-Based Compensation." Certain of the disclosure requirements are required for all companies, regardless if the fair value method or intrinsic value method is used to account for stock-based employee compensation arrangements. The Company continues to account for its incentive stock option plan under the intrinsic value method in accordance with the recognition and measurement principles of APB Opinion No. 25, "Accounting for Stock Issued to Employees." The amendments to SFAS 123 will be effective for financial statements for fiscal years ended after December 15, 2002 and for interim periods beginning after December 15, 2002. The Company anticipates that the adoption of SFAS 148 will not have an impact on the Company's consolidated financial statements.
9
NOTE D—INVENTORIES
Inventories are stated at the lower of cost (first in, first out) or market.
Inventories consist of:
| |
November 30, 2002 |
February 28, 2002 |
|||||
|---|---|---|---|---|---|---|---|
| Raw materials and work-in-process | $ | 7,501,000 | $ | 14,478,000 | |||
| Finished goods | 24,547,000 | 19,082,000 | |||||
| 32,048,000 | 33,560,000 | ||||||
| Reserves for obsolescence | (2,070,000 | ) | (1,640,000 | ) | |||
| $ | 29,978,000 | $ | 31,920,000 | ||||
NOTE E—LONG-TERM DEBT
Long-term debt consisted of the following:
| |
November 30, 2002 |
February 28, 2002 |
||||
|---|---|---|---|---|---|---|
| Term loan facility; floating interest rate based on an adjusted LIBOR rate (4.25% as of November 30, 2002), quarterly principal payments of $313,000 through November 2005; collateralized by assets of Aydin Display, Inc. | $ | 3,750,000 | $ | 4,375,000 | ||
Term loan facility (converted from line of credit on August 1, 2002); interest rate of prime (4.25% as of November 30, 2002) plus 1.75%, monthly principal payments of $57,000 payable through July 31, 2004; collateralized by the receivables and inventory of Fox International, Ltd., Inc. |
2,582,000 |
— |
||||
Note payable to bank; interest rate of prime (4.25% as of November 30, 2002) plus 1.5% monthly, principal payments of $9,000 payable through May 2010; collateralized by assets of XKD Corporation. |
608,000 |
656,000 |
||||
Mortgage note payable to bank; interest not to exceed 7.5% and maturing December 2003; collateralized by land and building of Fox International, Ltd., Inc. |
600,000 |
627,000 |
||||
Mortgage note payable to bank; interest rate of prime plus 0.5%; monthly principal and interest payments of $5,000 commenced in May 2002 and payable through October 2021; collateralized by land and building of Teltron Technologies, Inc. |
591,000 |
509,000 |
||||
Other |
573,000 |
231,000 |
||||
8,704,000 |
6,398,000 |
|||||
Less current maturities |
2,739,000 |
1,443,000 |
||||
$ |
5,965,000 |
$ |
4,955,000 |
|||
NOTE F—LINE OF CREDIT
In May 2001, the Company and its primary bank agreed to consolidate an existing line of credit and term note payable into a $10,000,000 credit facility. The interest rate on the line of credit is based on a floating LIBOR rate (3.9% at November 30, 2002), based on a ratio of debt to EBITDA, as defined. The note matures on July 1, 2003, and accordingly has been classified as current on the
10
November 30, 2002 balance sheet. The amount of credit available for advance was reduced by $500,000 on July 1, 2001. A second scheduled reduction of $500,000 scheduled for July 1, 2002 was extended indefinitely while the company currently negotiates changes to the line of credit. Advance rates remain the same as under the previous line, including a commitment fee of 0.25% for the unused portion. The agreement contains affirmative and negative covenants, including requirements related to tangible net worth and debt service coverage. Additionally, dividend payments, capital expenditures and acquisitions have certain restrictions. Substantially all of the Company's retained earnings are restricted based upon these covenants. As of November 30, 2002, the Company was not in compliance with certain covenants due to the third quarter adjustment and write-off of inventories, equipment, and other assets as a result of the internal reorganization and closure of three facilities. Subsequent to November 30, 2002, the bank has waived those covenant violations with respect to the fiscal quarter ended November 30, 2002. As of November 30, 2002, the outstanding balance on the line of credit was $9,191,000.
NOTE G—SUPPLEMENTAL CASH FLOW INFORMATION
| |
Nine Months Ended |
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|---|---|---|---|---|---|---|
| |
November 30, 2002 |
November 30, 2001 |
||||
| Cash Paid for: | ||||||
| Interest | $ | 759,000 | $ | 1,213,000 | ||
| Income taxes, net of refunds | $ | 477,000 | $ | 1,306,000 | ||
| Non-cash Transactions: | ||||||
| Issuance of redeemable common stock for purchase of inventory | $ | 100,000 | $ | — | ||
| Conversion of convertible debentures to common stock | $ | — | $ | 775,000 | ||
NOTE H—EARNINGS PER SHARE
Basic earnings per share is computed by dividing income available to common shareholders by the weighted average number of shares outstanding during each year. Shares issued or repurchased during the year are weighted for the portion of the year that they were outstanding. Diluted earnings per share is calculated by dividing net income (adjusted for interest savings, net of tax, on assumed subordinated debenture conversion) by the actual shares outstanding and share equivalents that would arise from the exercise of stock options and the assumed conversion of debentures when such assumption have a dilutive effect on the calculation. Out-of-the-money (exercise price higher than market price) stock options are excluded from the calculation because they are anti-dilutive.
11
The following table sets forth the computation of basic and diluted earnings per share for the three and nine-month periods ended November 30, 2002 and 2001:
| |
Three Months Ended November 30, |
Nine Months Ended November 30, |
|||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
2002 |
2001 |
2002 |
2001 |
|||||||||
| Numerator for basic EPS: | |||||||||||||
| Net income (loss) | $ | (3,492,000 | ) | $ | 453,000 | $ | (2,796,000 | ) | $ | 1,038,000 | |||
| Denominator for Basic EPS: | |||||||||||||
| Beginning shares outstanding | 4,764,000 | 4,749,000 | 4,749,000 | 4,561,000 | |||||||||
| Additional shares issued | — | — | 16,000 | 124,000 | |||||||||
| Repurchased shares | (3,000 | ) | — | (4,000 | ) | — | |||||||
| Weighted average shares outstanding—Basic | 4,761,000 | 4,749,000 | 4,761,000 | 4,685,000 | |||||||||
| Numerator for diluted EPS: | |||||||||||||
| Net income (loss) | $ | (3,492,000 | ) | $ | 453,000 | $ | (2,796,000 | ) | $ | 1,038,000 | |||
| Interest savings, net of tax, on assumed conversion of debentures | — | 26,000 | — | 50,000 | |||||||||
| Adjusted net income | (3,492,000 | ) | 479,000 | (2,796,000 | ) | 1,088,000 | |||||||
| Denominator for diluted EPS: | |||||||||||||
| Weighted average shares outstanding—Basic | 4,761,000 | 4,749,000 | 4,761,000 | 4,685,000 | |||||||||
| Effect of dilutive stock options | — | 50,000 | — | 43,000 | |||||||||
| Assumed conversion of debentures | — | 225,000 | — | 282,000 | |||||||||
| Weighted average shares outstanding—Diluted | 4,761,000 | 5,024,000 | 4,761,000 | 5,010,000 | |||||||||
For the three and nine months ended November 30, 2002, stock options and assumed conversion of debentures were not included in the diluted earning per share calculations as their inclusion would have been anti-dilutive because of the net losses experienced in those respective periods.
12
Video Display Corporation and Subsidiaries
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the attached interim consolidated financial statements and with the Company's 2002 Annual Report to Stockholders, which included audited financial statements and notes thereto for the fiscal year ended February 28, 2002, as well as Management's Discussion and Analysis of Financial Condition and Results of Operations.
Results of Operations
The following table sets forth, for the three and nine months ended November 30, 2002 and 2001, the percentages which selected items in the Statements of Operations bear to total sales:
| |
Three Months Ended November 30, |
Nine Months Ended November 30, |
|||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| |
2002 |
2001 |
2002 |
2001 |
|||||||
| Sales | |||||||||||
| CRT Segment | |||||||||||
| Data Display CRT's | 13.5 | % | 12.0 | % | 13.4 | % | 15.1 | % | |||
| Entertainment CRT's | 7.8 | 9.4 | 8.3 | 9.0 | |||||||
| Electron Guns and Components | 2.2 | 2.3 | 1.9 | 1.9 | |||||||
| Monitors | 52.6 | 57.6 | 54.5 | 55.2 | |||||||
| Total CRT Segment | 76.1 | % | 81.3 | % | 78.1 | % | 81.2 | % | |||
| Wholesale Consumer Parts Segment | 23.9 | 18.7 | 21.9 | 18.8 | |||||||
| 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||
Costs and expenses |
|||||||||||
| Cost of goods sold | 93.6 | % | 66.0 | % | 77.2 | % | 68.1 | % | |||
| Selling and delivery | 10.6 | 9.4 | 10.4 | 9.0 | |||||||
| General and administrative | 20.4 | 18.1 | 17.3 | 17.4 | |||||||
| 124.6 | % | 93.5 | % | 104.9 | % | 94.5 | % | ||||
Income (loss) from operations |
(24.6 |
)% |
6.5 |
% |
(4.9 |
)% |
5.5 |
% |
|||
| Interest expense | (2.1 | )% | (1.9 | )% | (1.9 | )% | (2.3 | )% | |||
| Other income (expense) | 0.3 | (0.2 | ) | 0.2 | 0.0 | ||||||
| Income before income taxes | (26.4 | )% | 4.4 | % | (6.6 | )% | 3.2 | % | |||
| Provision for income taxes | (7.2 | ) | 1.7 | (1.6 | ) | 1.3 | |||||
| Net income (loss) | (19.2 | )% | 2.7 | % | (5.0 | )% | 1.9 | % | |||
Net sales
Consolidated net sales increased $1,206,000 and $3,332,000 for the three and nine months ended November 30, 2002 as compared to the same period ended November 30, 2001. CRT segment sales increased $34,000 and $944,000 for the three and nine months comparative periods ended November 30, 2002. The wholesale parts segment increased $1,172,000 and $2,388,000 for the three and nine months comparative periods ended November 30, 2002.
13
Overall CRT segment sales were flat for the third quarter ended November 30, 2002 as compared to one year ago. The data display division sales for the quarter increased $406,000. There were offsetting declines in sales for the quarter within this segment in the entertainment and monitor divisions of $171,000 and $212,000, respectively. The component division sales were relatively flat for the comparative periods.
The increase in comparative quarterly sales for the data display division is primarily attributed to increases within the European market. The Company's UK location posted increases to sales of $343,000 for the quarter.
The decline of entertainment sales is the net result of declines in television tube sales of $301,000 offset by increases in projection tube sales of $130,000. The Company continues to expand its marketing efforts of projection tubes for use in home theater and commercial applications through greater direct sales contact and internet marketing. While the Company continues to maintain its majority of the market share of the television tube replacement market, there continues to be declines due to depressed overall economic conditions. The Company's entertainment sales revenues have been negatively impacted by the reduced volume requirements of two of its largest customers of replacement tubes.
The monitor division's overall decline reflects the impact of the closure of the Wolcott facility and the continued loss of sales at the MegaScan facility accounting for $905,000 of the $212,000 overall decline for the nine month period. The Lexel operations, based in Kentucky, had a decline in sales in the comparable quarter of $699,000, but for the nine month period showed an increase of $747,000 over last year. Lexel had to locate a new source for certain raw materials used in production and had to make adjustments to a manufacturing process that delayed shipments during the third quarter. Lexel began to ship in the latter part of the third quarter against the increased backlog that arose from these delays. The Company's Florida location, which supplies projection display products used in simulation, commercial and home theatre applications, continues to contribute increased revenues in the monitor division. The Florida location increased its sales by $1,359,000 and $3,653,000 for the three and nine months comparatives, respectively.
The wholesale consumer parts segment reflects growth as well in the three and nine month periods ended November 30, 2002. This segment's growth is attributed to the additions of the Applica and Norelco distribution agreements. These distribution agreements added $1,037,000 and $2,900,000 for the three and nine month periods as compared to one year ago.
Gross margins
Consolidated gross profit margins decreased from 34.0% and 31.9% to 6.4% and 22.8% for the three and nine months ended November 30, 2002 as compared to November 30, 2001. Included in the third quarter of fiscal 2003 are write-downs and write-offs of inventories and manufacturing equipment in the amount of $4,692,000 related to the closing of operations in Mexico, Wolcott, MegaScan, and Aydin UK operations. As part of this shutdown and internal reorganization of operations, raw material inventories and equipment used in the manufacturing process of monochrome tubes were written off as the Company elected to outsource the manufacturing of these tubes to overseas vendors. Additionally, the Company decided to close locations that have had declines in business with weak returns and limited potential for future product development. Inventories of approximately $2,481,000 remaining at these locations prior to their closure were written off during the third quarter of fiscal 2003. Another component of the charge to cost of sales was a write down of the carrying cost of inventories previously manufactured by the Mexican operations to net realizable value as well as the write-off of older or large quantity stocks in efforts to prepare for the consolidation of three Georgia warehouse facilities into two.
14
Excluding the fiscal 2003 third quarter write-downs of $4,692,000, the CRT segment margins decreased from 32.8% to 27.6% and from 30.6% to 27.4% for the three and nine month comparative periods. The wholesale consumer parts segment increased to 46.4% from 39.0% and to 44.5% from 37.4% for the same comparative periods.
The decrease in CRT segment margins is primarily attributed to the margin reductions of the Florida location which declined from 50.2% to 38.7% for the nine months ended November 30, 2002 as compared to November 30, 2001. This decline is due to the fact that products sold in the previous year included inventories acquired at significantly reduced costs related to the acquisition of the Marquee™ product line in the third quarter of fiscal 2002. As these inventories have been sold, replacement items have been purchased at current market costs and, thus, have increased the cost of items produced. Margins in the current year of 38.7% are more reflective of what is expected in the future.
The increase in the wholesale consumer parts segment margins is largely attributable to the Applica Inc. and Norelco distribution agreements. The revenues associated with these agreements include primarily handling charges and shipping income, which accounts for an approximately 79% profit margin before the effects of offsetting operating expenses.
Operating expenses
Operating expenses as a percentage of sales increased from 27.5% to 30.9% and from 26.4% to 27.7% for the three and nine months ended November 30, 2002 as compared to November 30, 2001. Included in operating expenses for the third quarter were write-offs in the amount of $498,000 of other assets of the Mexico manufacturing location that has been shut down.
CRT segment operating expenses as a percentage of sales, excluding the $498,000 third quarter adjustment, were 22.8% as compared to 23.0% for the nine months ended November 30, 2002 as compared to a year ago.
The wholesale parts segment operating expenses were up $1,018,000 for the nine month comparative periods, but as a percentage of sales it increased from 40.0% to 40.9%. The increase is a factor of the increased delivery, labor and commission expenses associated with the Applica and Norelco revenue increases.
Interest expense
Interest expense increased $58,000 and decreased $164,000 for the three and nine months ended November 30, 2002 as compared to a year ago. The Company maintains various debt agreements with different interest rates, most of which are based on the prime rate or LIBOR. LIBOR and prime rates were slightly lower during the comparable periods. While overall debt decreased from November 30, 2001 to November 30, 2002 by approximately $620,000, the mix of interest rates changed. There were increased borrowings of $700,000 from an officer of the Company which carries an interest rate of prime plus 1%.
Income taxes
The effective rate for the nine months ended November 30, 2002 as compared to November 30, 2001 is a benefit of 24.5% as compared to charge of 38.6%. Included in the tax benefit for the nine months ended November 30, 2002 is a benefit of $1,471,000 due to the write-off of inventories and other assets recorded in the third quarter of fiscal 2003 related to the Company's shutdown and reorganization of operations. The total benefit includes a reduction due to the write-off of certain deferred tax assets in Mexico that will not be realized.
15
Foreign currency translation
The Company's Mexico subsidiary reported for both comparable periods on the basis of the functional currency as being the U.S. dollar. Any exchange gains or losses due to the actual exchange of pesos and U.S. dollars are currently reflected in the Company's statement of operations. There was a $98,000 currency loss reflected in the nine months ended November 30, 2002.
Liquidity and capital resources
As of November 30, 2002, the Company had total cash and cash equivalents of $1,894,000. The Company's working capital was $18,086,000 and $27,569,000 at November 30, 2002 and February 28, 2002, respectively. Included in the decrease in working capital of $9,483,000 were effects of reclassifications of the line of credit from long-term to current due to the July 1, 2003 maturity date and the conversion of another line of credit previously reported as current, to a term note maturing in 2004. These reclassifications reduced working capital by $5,998,000 for the comparative periods. Additional results of decreases in working capital is a direct result of the fiscal 2003 third quarter adjustment of $3,166,000 (net of tax benefit) of inventories and other current assets as a result of the internal reorganization of the Company. The remaining declines in working capital of $319,000 are primarily the result of increases to inventory funded by increases to accounts payable offset by better collection of accounts receivable as compared to a year ago.
Cash provided by operations for the nine-month period ended November 30, 2002 was $1,634,000 as compared to cash used in operations of $262,000 in the same period a year ago. Net losses for the nine months ended November 30, 2002, adjusted for non-cash items provided cash of $3,858,000. Increases in inventories used cash of $2,356,000 for the nine months ended November 30, 2002. Increases in accounts receivables and prepaid expenses used cash of $1,267,000. Increases in accounts payable and accrued liabilities provided cash of $1,399,000. During the nine months ended November 30, 2001, net income adjusted for non-cash items provided $2,672,000. Increases in inventories, prepaids and accounts receivable used cash of $2,596,000. Decreases in accounts payable used cash of $338,000. Fluctuations in receivables and inventories are primarily a function of sales levels and better collection results during the first nine months of fiscal 2003.
Investing activities used $743,000 for the nine months ended November 30, 2002. Included in this amount was $1,123,000 of additions to property, plant and equipment. Constructions costs for a building addition represented $479,000 of this total.
Financing activities used cash of $675,000 for the nine month period ended November 30, 2002. Of this amount, $46,000 was used to repurchase Company common stock and the remainder was used to repay long-term debt.
The Company has completed the process of consolidating its Horsham, PA location into the newly enlarged Birdsboro, PA facility. Total construction costs included in the nine months ended November 30, 2002 was $157,000. The Company obtained $371,000 of low interest financing from the Pennsylvania Industrial Development Authority to finance these costs. Additional financing in the amount of approximately $175,000 is expected to be completed by the end of the fiscal year. This financing will be used to offset costs already incurred by the Company.
The Company continues to examine its operating cash needs and is currently investigating financing opportunities to ease its current cash and debt situations. The Company has experienced growth in certain divisions, requiring investment in inventories. Additionally, the Company has had to fund costs associated with shutdowns and relocations of three facilities. The Company has obtained financing from the CEO to assist in this short term situation but is in negotiations with its current lender to expand its current line to meet the future operating needs of the Company.
16
Critical Accounting Policies
Management's Discussion and Analysis of Results of Operations and Financial Condition are based upon the Company's consolidated financial statements. These financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. These principles require the use of estimates and assumptions that affect amounts reported and disclosed in the financial statements and related notes. The accounting policies that may involve a higher degree of judgments, estimates, and complexity include reserves on inventories, the allowance for bad debts and warranty reserves. The Company uses the following methods and assumptions in determining its estimates:
Reserves on inventories
Reserves on inventories result in a charge to operations when the estimated net realizable value declines below cost. Management regularly reviews the Company's investment in inventories for declines in value and establishes reserves when it is apparent that the expected realizable value of the inventory falls below its original cost. The age of the inventory is not as significant as is the projected demand for CRTs. Management is able to identify consumer buying trends, such as size and application, well in advance of supplying replacement CRTs. Thus, the Company is able to adjust inventory-stocking levels according to the projected demand. The average life of a CRT is five to seven years, at which time the Company's replacement market develops. These reviews include observations of product development trends of the OEM's, new products being marketed, and technological advances relative to the product capabilities of the Company's existing inventories.
Allowance for bad debts
The allowance for bad debts is determined by reviewing known customer exposures and applying historical credit loss experience to the current receivable portfolio with consideration given to the current condition of the economy, assessment of the financial position of the creditors and overall trends in past due accounts compared to established thresholds. The company monitors credit exposure and assesses the adequacy of the allowance for bad debts on a regular basis.
Warranty reserves
The warranty reserve is determined by recording a specific reserve for known warranty issues and a general reserve based on historical claims experience. Actual claims incurred could differ from the original estimates, requiring adjustments to the reserve.
Other Accounting Policies
Other loss contingencies are recorded as liabilities when it is probable that a liability has been incurred and the amount of the loss is reasonably estimable. Disclosure is required when there is a reasonable possibility that the ultimate loss will exceed the recorded provision. Contingent liabilities are often resolved over long time periods. Estimating probable losses requires analysis of multiple factors that often depend on judgments about potential actions by third parties.
Forward-Looking Information
This report contains forward-looking statements and information that is based on management's beliefs, as well as assumptions made by, and information currently available to management. When used in this document, the words "anticipate", "believe", "estimate", "intends", "will", and "expect" and similar expressions are intended to identify forward-looking statements.
17
Such statements involve a number of risks and uncertainties. Among the factors that could cause actual results to differ materially are the following: business conditions, rapid or unexpected technological changes, product development, inventory risks due to shifts in product demand, competition, domestic and foreign government relations, fluctuations in foreign exchange rates, rising costs for components or unavailability of components, the timing of orders booked, lender relationships, and the risk factors listed from time to time in the Company's reports filed with the Commission.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company's primary market risks include fluctuations in interest rates and variability in interest rate spread relationships, such as prime to LIBOR spreads. Approximately $26,663,000 of outstanding debt at November 30, 2002 related to long-term indebtedness under variable rate debt. Interest on the outstanding balance of this debt will be charged based on a variable rate related to the prime rate or the LIBOR rate. Both rate bases are incremented for margins specified in their agreements. Thus, the Company's interest rate is subject to market risk in the form of fluctuations in interest rates. The effect of a hypothetical one percentage point increase across all maturities of variable rate debt would result in an decrease of approximately $267,000 in pre-tax net income assuming no further changes in the amount of borrowings subject to variable rate interest from amounts outstanding at November 30, 2002. The Company does not trade in derivative financial instruments.
The Company has reported its Mexican subsidiary on the basis of the functional currency being the U.S. dollar as over 90% of the subsidiary's sales and purchases were with the parent with accounts receivable and accounts payable settled in U.S. dollars. Additionally, the subsidiary leased its facilities and incurs rent based upon U.S. dollars. Any exchange gains or losses due to the actual exchange of pesos and U.S. dollars are minimal. The Company's Mexican subsidiary was shut down in the third quarter of fiscal 2003. The Company also has a subsidiary in the U.K., which is not material, but uses the British pound as its functional currency. Due to its limited operations outside of the U.S., the Company's exposure to changes in foreign currency exchange rates between the U.S. dollar and foreign currencies or to weakening economic conditions in foreign markets is not expected to significantly effect the Company's financial position.
ITEM 4. CONTROLS AND PROCEDURES
18
Video Display Corporation and Subsidiaries
No new legal proceedings or material changes in existing litigation occurred during the quarter ended November 30, 2002.
Item 2. Changes in Securities and Use of Proceeds
None.
Item 3. Defaults upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
None
Item 6. Exhibits and Reports on Form 8-K
No reports on Form 8-K were filed or required to be filed during the quarter ended November 30, 2002.
19
Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereto duly authorized.
| VIDEO DISPLAY CORPORATION | ||||
January 21, 2003 |
By: |
/s/ RONALD D. ORDWAY Ronald D. Ordway Chief Executive Officer |
||
By: |
/s/ CAROL D. FRANKLIN Carol D. Franklin Chief Financial Officer and Secretary |
|||
20
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Ronald D. Ordway, certify that:
| Date: January 21, 2003 | /s/ RONALD D. ORDWAY Ronald D. Ordway Chief Executive Officer |
|||
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Carol D. Franklin, certify that:
| Date: January 21, 2003 | /s/ CAROL D. FRANKLIN Carol D. Franklin Chief Financial Officer |
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