-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Wh6LIN4gLUNIMLiFBQutBqbll5P1wNFK9ERPT9CkF3vtUtGFoV8zjXYUMJN13UF9 tflR1hFlApOOnClGL0p0dw== 0000912057-02-038691.txt : 20021015 0000912057-02-038691.hdr.sgml : 20021014 20021015170909 ACCESSION NUMBER: 0000912057-02-038691 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20020831 FILED AS OF DATE: 20021015 FILER: COMPANY DATA: COMPANY CONFORMED NAME: VIDEO DISPLAY CORP CENTRAL INDEX KEY: 0000758743 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRONIC COMPONENTS & ACCESSORIES [3670] IRS NUMBER: 581217564 STATE OF INCORPORATION: GA FISCAL YEAR END: 0228 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-13394 FILM NUMBER: 02789607 BUSINESS ADDRESS: STREET 1: 1868 TUCKER INDUSTRIAL DR CITY: TUCKER STATE: GA ZIP: 30084 BUSINESS PHONE: 7709382080 MAIL ADDRESS: STREET 1: 1868 TUCKER INDUSTRIAL DR CITY: TUCKER STATE: GA ZIP: 30084 10-Q 1 a2091377z10-q.txt 10-Q 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 AUGUST 31, 2002 Commission File Number 0-13394 VIDEO DISPLAY CORPORATION (Exact name of registrant as specified on its charter) GEORGIA 58-1217564 (State or other jurisdiction of (I.R.S.Employer incorporation or organization) 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 X No --- 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 AUGUST 31, 2002 - ------------------------------ ------------------------------ Common Stock, No Par Value 4,761,833
1 VIDEO DISPLAY CORPORATION AND SUBSIDIARIES INDEX
PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated balance sheets - August 31, 2002 (unaudited) and February 28, 2002 (audited) 3-4 Consolidated statements of income - Three and six months ended August 31, 2002 and 2001 (unaudited) 5 Consolidated statements of shareholders' equity and comprehensive income - Twelve months ended February 28, 2002 (audited) and the six months ended August 31, 2002 (unaudited) 6 Consolidated statements of cash flows - Six months ended August 31, 2002 and 2001 (unaudited) 7 Notes to consolidated financial statements - August 31, 2002 (unaudited) 8-11 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12-16 Item 3. Quantitative and Qualitative Disclosure About Market Risk 17 Item 4. Controls and Procedures 17 PART II. OTHER INFORMATION Item 1. Legal Proceedings 18 Item 2. Changes in Securities and Use of Proceeds 18 Item 3. Defaults upon its Senior Securities 18 Item 4. Submission of Matters to a Vote of Security Holders 18 Item 5. Other Information 18 Item 6. Exhibits and Reports on Form 8-K 1 SIGNATURES 19
2 VIDEO DISPLAY CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
AUGUST 31, FEBRUARY 28, 2002 2002 (UNAUDITED) (NOTE A) ------------- -------------- ASSETS Current Assets Cash and cash equivalents $ 2,276,000 $ 1,615,000 Accounts receivable, less allowance for possible losses of $525,000 and $343,000 12,504,000 12,712,000 Inventories (Note D) 32,841,000 31,920,000 Prepaid expenses 3,227,000 3,276,000 ------------ ------------ Total current assets 50,848,000 49,523,000 ------------ ------------ Property, plant and equipment: Land 600,000 600,000 Buildings 6,970,000 6,814,000 Machinery and equipment 19,289,000 18,845,000 ------------ ------------ 26,859,000 26,259,000 Accumulated depreciation and amortization (17,607,000) (16,891,000) ------------ ------------ Net property, plant, and equipment 9,252,000 9,368,000 ------------ ------------ Other assets 2,862,000 2,950,000 ------------ ------------ Total assets $ 62,962,000 $ 61,841,000 ============ ============
The accompanying notes are an integral part of these statements. 3 VIDEO DISPLAY CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
AUGUST 31, FEBRUARY 28, 2002 2002 (UNAUDITED) (NOTE A) ------------ -------------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Accounts payable $ 6,373,000 $ 4,808,000 Accrued liabilities 3,978,000 4,800,000 Lines of credit (Note F) 9,524,000 3,779,000 Notes payable to shareholders 7,319,000 7,124,000 Current maturities of long-term debt (Note E) 2,711,000 1,443,000 ------------ ------------ Total current liabilities 29,905,000 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) 6,122,000 4,955,000 Notes payable to shareholders, less current maturities 169,000 217,000 Deferred income taxes 113,000 113,000 ------------ ------------ Total liabilities 37,309,000 37,024,000 ------------ ------------ Minority interests 176,000 158,000 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; 4,767,000 and 4,749,000 issued and outstanding 3,791,000 3,826,000 Additional paid in capital 92,000 92,000 Retained earnings 22,830,000 22,134,000 Accumulated other comprehensive loss (1,336,000) (1,393,000) ------------ ------------ Total shareholders' equity 25,377,000 24,659,000 ------------ ------------ Total liabilities and shareholders' equity $ 62,962,000 $ 61,841,000 ============ ============
The accompanying notes are an integral part of these statements. 4 VIDEO DISPLAY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED AUGUST 31, AUGUST 31, ---------------------------- ---------------------------- 2002 2001 2002 2001 ------------ ------------ ------------ ------------ Net sales $ 19,607,000 $ 18,821,000 $ 38,426,000 $ 36,300,000 Cost of goods sold 13,930,000 13,012,000 26,643,000 25,090,000 ------------ ------------ ------------ ------------ Gross profit 5,677,000 5,809,000 11,783,000 11,210,000 ------------ ------------ ------------ ------------ Operating expenses Selling and delivery 1,914,000 1,711,000 3,941,000 3,179,000 General and administrative 2,747,000 3,143,000 6,104,000 6,200,000 ------------ ------------ ------------ ------------ 4,661,000 4,854,000 10,045,000 9,379,000 ------------ ------------ ------------ ------------ Operating profit 1,016,000 955,000 1,738,000 1,831,000 ------------ ------------ ------------ ------------ Other income (expense) Interest expense (455,000) (450,000) (706,000) (928,000) Other, net (16,000) 74,000 92,000 46,000 ------------ ------------ ------------ ------------ (471,000) (376,000) (614,000) (882,000) ------------ ------------ ------------ ------------ Income before minority interest 545,000 579,000 1,124,000 949,000 Minority interest expense 6,000 2,000 12,000 3,000 ------------ ------------ ------------ ------------ Income before income taxes 539,000 577,000 1,112,000 946,000 ------------ ------------ ------------ ------------ Income tax expense 182,000 225,000 416,000 361,000 ------------ ------------ ------------ ------------ Net income $ 357,000 $ 352,000 $ 696,000 $ 585,000 ============ ============ ============ ============ Basic earnings per share of common stock $ 0.07 $ 0.07 $ 0.15 $ 0.13 ============ ============ ============ ============ Diluted earnings per share of common stock $ 0.07 $ 0.07 $ 0.14 $ 0.12 ============ ============ ============ ============ Basic weighted average shares outstanding 4,764,000 4,747,000 4,760,000 4,654,000 ============ ============ ============ ============ Diluted weighted average shares outstanding 5,105,000 5,009,000 5,105,000 5,004,000 ============ ============ ============ ============
The accompanying notes are an integral part of these statements. 5 VIDEO DISPLAY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME FOR THE TWELVE MONTHS ENDED FEBRUARY 28, 2002 (AUDITED) AND THE SIX MONTHS ENDED AUGUST 31, 2002 (UNAUDITED)
ACCUMULATED CURRENT ADDITIONAL OTHER PERIOD COMMON PAID IN COMPREHENSIVE RETAINED COMPREHENSIVE STOCK CAPITAL INCOME EARNINGS INCOME ----- ------- ------ -------- ------ 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 income for the period -- -- -- 696,000 $ 696,000 Unrealized loss on marketable equity securities -- -- (4,000) -- (4,000) Foreign currency translation adjustment -- -- 61,000 -- 61,000 ------------ Total comprehensive income $ 753,000 ============ Issuance of common stock under stock option plan 11,000 -- -- -- Repurchase of common stock (46,000) -- -- -- ------------ ------------ ------------ ------------ ------------ Balance at August 31, 2002 $ 3,791,000 $ 92,000 $ (1,336,000) $ 22,830,000 ============ ============ ============ ============ ============
The accompanying notes are an integral part of these statements. 6 VIDEO DISPLAY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED AUGUST 31, ---------------------------- 2002 2001 ------------ ------------ RECONCILIATION OF NET INCOME TO NET CASH USED IN OPERATING ACTIVITIES Net income $ 696,000 $ 585,000 ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH USED IN OPERATIONS: Depreciation and amortization 716,000 875,000 Provision for bad debts 182,000 (37,000) CHANGES IN WORKING CAPITAL, NET OF EFFECTS FROM ACQUISITIONS: Accounts receivable 26,000 (1,248,000) Inventories (821,000) (583,000) Prepaid expenses 49,000 (414,000) Accounts payable and accrued liabilities 743,000 (227,000) Minority interests 18,000 3,000 ------------ ------------ Net cash provided by (used in) operating activities $ 1,609,000 $ (1,046,000) ------------ ------------ INVESTING ACTIVITIES Capital expenditures (600,000) (1,008,000) Other investing activities 88,000 (1,280,000) ------------ ------------ Net cash used in investing activities (512,000) (2,288,000) ------------ ------------ FINANCING ACTIVITIES Proceeds from long-term debt and lines of credit 7,776,000 15,862,000 Proceeds from exercise of stock options 11,000 5,000 Repurchase of shares of common stock (46,000) -- Payments on long-term debt and lines of credit (8,234,000) (14,846,000) ------------ ------------ Net cash provided by (used in) financing activities (493,000) 1,021,000 ------------ ------------ Effect of exchange rates on cash 57,000 18,000 ------------ ------------ Net increase (decrease) in cash 661,000 (2,295,000) Cash, beginning of period 1,615,000 4,137,000 ------------ ------------ Cash, end of period $ 2,276,000 $ 1,842,000 ============ ============
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 inter-company 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 $80,000 and $160,000 was included in the consolidated financial statements for the three and six months ended August 31, 2001, respectively. Had goodwill amortization expense not been recognized in 2001, basic earnings per share would have increased from $0.07 per share to $0.08 per share for the three months ended August 31, 2001, and from $0.13 per share to $0.15 per share for the six months ended August 31, 2001. As of August 31, 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 August 31, 2002, the net book value recorded for goodwill was $1,142,000. 8 VIDEO DISPLAY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE C - ACCOUNTING STANDARDS NOT YET ADOPTED In June 2001, the Financial Accounting Standards Board 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 financial statements. In October 2001, the Financial Accounting Standards Board 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 is in the process of evaluating the impact this standard will have on its financial statements. In April 2002, the Financial Accounting Standards Board 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 Financial Accounting Standards Board 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 financial statements. NOTE D - INVENTORIES Inventories are stated at the lower of cost (first in, first out) or market. Inventories consist of:
AUGUST 31, FEBRUARY 28, 2002 2002 ------------ ------------- Raw materials and work-in-process $ 13,375,000 $ 14,478,000 Finished goods 21,347,000 19,082,000 ------------ ------------ 34,722,000 33,560,000 Reserves for obsolescence (1,881,000) (1,640,000) ------------ ------------ $ 32,841,000 $ 31,920,000 ============ ============
9 VIDEO DISPLAY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE E - LONG-TERM DEBT Long-term debt consisted of the following:
AUGUST 31, FEBRUARY 28, 2002 2002 ----------- ------------ Term loan facility; floating interest rate based on an adjusted LIBOR rate (4.75% as of August 31, 2002), quarterly principal payments Commenced November 1999 and maturing November 2005; collateralized by assets of Aydin Display, Inc. $4,063,000 $4,375,000 Term loan facility; interest rate of prime (4.75% as of August 31, 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. 2,745,000 -- Note payable to bank; interest rate of prime (4.75% as of August 31, 2002) plus 1.5% monthly principal payments of $9,000 payable through May 2010; collateralized by assets of XKD Corporation 626,000 656,000 Mortgage payable to bank; interest not to exceed 7.5% and maturing December 2003; collateralized by land and building of Fox International, Inc. 612,000 627,000 Mortgage 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. 594,000 509,000 Other 193,000 231,000 ---------- ---------- 8,833,000 6,398,000 Less current portion 2,711,000 1,443,000 ---------- ---------- $6,122,000 $4,955,000 ========== ==========
NOTE F - LINES OF CREDIT AND SHORT-TERM DEBT 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 "Primary Line"). The interest rate on the Primary Line is based on a floating LIBOR rate (4.32% at August 31, 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 August 31, 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 negotiates changes to the Primary Line. Advance rates remain the same as under the previous line, including a commitment fee of 0.25% for the unused portion. The new 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. The Secondary Line was to expire on December 31, 2001. On February 28, 2002, the Company negotiated an amendment to the Secondary Line. The term was extended until July 31, 2002 with principal reductions to $3,150,000 on March 31, 2002 and additional monthly principal payments of $100,000 from April through July 2002. On August 1, 2002, the Company further amended the Secondary Line and converted it to a term debt note with principal payments of $57,000 and interest rate of Prime (4.75% as of August 31, 2002) plus 1.75% that matures on July 31, 2004. 10 VIDEO DISPLAY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) As of August 31, 2002, the outstanding balances on the Primary Line and Secondary Lines were $9,524,000 and $2,745,000, respectively. NOTE G - SUPPLEMENTAL CASH FLOW INFORMATION
SIX MONTHS ENDED --------------------- AUGUST 31, AUGUST 31, 2002 2001 --------- --------- Cash Paid for: Interest $599,000 $928,000 ======== ======== Income taxes, net of refunds $377,000 $235,000 ======== ======== 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. The following table sets forth the computation of basic and diluted earnings per share for the three and six-month periods ended August 31, 2002 and 2001:
THREE MONTHS ENDED SIX MONTHS ENDED AUGUST 31, AUGUST 31, 2002 2001 2002 2001 ---- ---- ---- ---- NUMERATOR FOR BASIC EPS: Net income $ 357,000 $ 352,000 $ 696,000 $ 585,000 DENOMINATOR FOR BASIC EPS: Beginning shares outstanding 4,749,000 4,559,000 4,749,000 4,559,000 Additional shares issued 20,000 188,000 14,000 95,000 Repurchased shares (5,000) -- (3,000) -- Weighted average shares outstanding - Basic 4,764,000 4,747,000 4,760,000 4,654,000 NUMERATOR FOR DILUTED EPS: Net income $ 357,000 $ 352,000 $ 696,000 $ 585,000 Interest savings, net of tax, on assumed conversion of debentures 12,000 11,000 25,000 24,000 Adjusted net income $ 369,000 $ 363,000 $ 721,000 $ 609,000 DENOMINATOR FOR DILUTED EPS: Weighted average shares outstanding - Basic 4,764,000 4,747,000 4,760,000 4,654,000 Effect of dilutive stock options 95,000 39,000 99,000 39,000 Assumed conversion of debentures 246,000 223,000 246,000 311,000 Weighted average shares outstanding - Diluted 5,105,000 5,009,000 5,105,000 5,004,000
11 PART I 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 six months ended August 31, 2002 and 2001, the percentages which selected items in the Statements of Income bear to total sales:
THREE MONTHS SIX MONTHS ENDED AUGUST 31, ENDED AUGUST 31, 2002 2001 2002 2001 ----------------------------------------------------------------------------------- Sales CRT Segment Data Display CRT's 14.1 % 15.1 % 13.3 % 16.5 % Entertainment CRT's 7.8 8.3 8.6 8.8 Electron Guns and Components 1.8 1.2 1.7 1.8 Monitors 54.3 58.1 55.4 54.1 ---------------- --------------- --------------- ---------------- Total CRT Segment 78.1 % 82.7 % 79.0 % 81.2 % Wholesale Consumer Parts Segment 21.9 17.3 21.0 18.9 ---------------- --------------- --------------- ---------------- 100.0 % 100.0 % 100.0 % 100.0 % Costs and expenses Cost of goods sold 71.0 % 69.1 % 69.3 % 69.1 % Selling and delivery 9.8 9.1 10.3 8.8 General and administrative 14.0 16.7 15.9 17.1 ---------------- --------------- --------------- ---------------- 94.8 % 94.9 % 95.5 % 95.0 % Income from Operations 5.2 % 5.1 % 4.5 % 5.0 % Interest expense 2.3 % 2.4 % 1.8 % 2.6 % Other income (expense) (0.1) 0.4 0.2 0.2 ---------------- --------------- --------------- ---------------- Income before income taxes 2.8 % 3.1 % 2.9 % 2.6 % Provision for income taxes 0.7 1.2 1.0 1.0 ---------------- --------------- --------------- ---------------- Net Income 2.1 % 1.9 % 1.9 % 1.6 % ================ =============== =============== ================
NET SALES Consolidated net sales increased $786,000 and $2,126,000 for the three and six months ended August 31, 2002 as compared to the same period ended August 31, 2001. CRT division sales decreased $254,000 for the three-month comparative period ended August 31, 2002 and increased $910,000 for the six-month comparative period ended August 31, 2002. Wholesale division sales increased $1,040,000 and $1,216,000 for the same comparative periods. 12 CRT segment sales included decreases for the three-month comparative periods of $106,000 for the display and entertainment divisions, $276,000 for the monitor division, and increases of $128,000 in the component division. Six month comparative results consisted of increases of $1,773,000 in the monitor, entertainment and component divisions, offset by declines of $863,000 in the display division. Declines in revenues within the display division reflect the reduction of sales primarily in the Company's international locations due to general economic slowdowns. The Mexican location has been negatively impacted from the reduction of revenues for its projection tube rework for OEMs who have decided to do the procedures performed in Mexico in-house. The sales revenue of the entertainment division was relatively flat for the second quarter comparative periods. Year-to-date comparative sales show a slight net increase. Projection tube sales for use in home theater and commercial applications have increased $183,000 and $366,000 for the three and six-month periods ended August 31, 2002 as compared to one year ago. Increased Internet marketing efforts and enhancements to the Company's website have increased exposure and sales volume. Television CRT revenue has shown a decline of $203,000 and $273,000 for the three and six month comparative periods. The Company continues to maintain a greater than 90% market share for replacement tubes. The decline is due to a decrease in sales to several of the Company's larger customers for replacement tubes. The monitor division, while up for the comparative six-month period, posted slight declines for the comparative quarter a year ago. The Display System location that sells projection units for use primarily in simulation settings continues to show substantial growth. Revenues from this location increased $1,429,000 and $2,294,000 for the three and six-month periods ended August 31, 2002 as compared to August 31, 2001. The company's Aydin and Z-Axis locations posted declines in revenues of $1,301,000 and $1,879,000 for the three and six month comparative periods. These companies continue to seek alternate products to satisfy customers' flat panel technology needs. The Wolcott, CT location was in a phase-out period during the second quarter of fiscal 2002 and officially closed its doors and transferred its operations to the Company's Lexington, KY facility at the end of August. Additional monitor division locations posted declines in revenue of $369,000 and $251,000 for the three and six month comparative periods. The component division posted increased revenues for the three and six month period primarily attributed to increased volume due to the acquisition of inventory and equipment and corresponding customer base of a small electron gun distributor. This acquisition has added customers in the international arena from which the Company had previously had restricted exposure. The increase in sales in the wholesale parts segment of $1,040,000 and $1,216,000 for the three and six month comparative periods ended August 31, 2002 is a result of the distribution agreement with Applica, Incorporated signed in the second quarter of fiscal 2002. Additionally, the Company has signed an agreement with Norelco. These distribution agreements added $736,000 and $931,000 for the three and six month periods as compared to one year ago. GROSS MARGINS Consolidated gross profit margins decreased from 30.9% to 29.0% and from 30.9% to 30.7% for the three and six months ended August 31,2002 as compared to August 31, 2001. CRT segment margins decreased from 29.2% to 25.6% and from 29.5% to 27.3% for the three and six month comparative periods. The wholesale parts segment increased from 38.3% to 41.3% and from 36.6% to 43.5% for the same comparative periods. CRT segment margins where impacted during the second quarter by costs associated with the continued downsizing of the Mexican operations. Volume in that location has declined significantly, but there are continuing overhead costs. 13 Late in the second quarter, the Company was notified that the projection rework being performed by the Mexican operation for major OEMs was to be discontinued. The operation should be completely shut down by December 2002. There were other variances in the entertainment and monitor divisions within the CRT segment due to fluctuations both in volume and overhead. The wholesale parts segment margins increased primarily due 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 70% profit margin before the effects of offsetting operating expenses. Excluding the effects of the distribution agreement revenues, gross margins would be 28.7% and 34.5% for the three and six month comparative periods. OPERATING EXPENSES Operating expenses as a percentage of sales decreased to 23.8% from 25.8% for the three months and increased to 26.2% from 25.9% for the six months ended August 31, 2002 as compared to a year ago. CRT segment expenses increased $28,000 and the wholesale parts segment increased $694,000 for the six months ended August 31, 2002 as compared to a year ago. The increases to the wholesale parts segment include increases to selling and delivery charges, warehouse rent and labor charges in the amount of approximately $610,000 for the six months ended August 31, 2002 in conjunction with the increase in volume associated with the new distribution agreements. INTEREST EXPENSE Interest expense increased $5,000 and decreased $222,000 for the three months and six months ended August 31, 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. Rates were lower than the previous comparative periods by as much as two percent. Outstanding borrowings did increase $1,895,000 for the comparative periods, but due to the lower rates and the timing of the increased borrowings, the overall effect was a decline in expense for the six-month period. Outstanding debt to officers, which is financed at prime plus one, increased approximately $2,500,000 over the comparative reporting period one year ago. The secondary line of credit, with a balance of approximately $2,700,000, had a rate increase of 1% during the comparative six-month period. INCOME TAXES The effective rate for the six months ended August 31, 2002 as compared to August 31, 2001 is 37.4% as compared to 38.1%. FOREIGN CURRENCY TRANSLATION The Company's Mexican subsidiary reports on the basis of the functional currency as being the US dollar. Any exchange gains or losses due to the actual exchange of pesos and US dollars are currently reflected in the Company's income statements. There was a $49,000 currency loss as compared to a $50,000 currency gain reflected in the six-month periods ended August 31, 2002 and August 31, 2001. 14 LIQUIDITY AND CAPITAL RESOURCES As of August 31, 2002, the Company had total cash and cash equivalents of $2,276,000. The Company's working capital was $20,943,000 and $27,569,000 at August 31, 2002 and February 28, 2002. Included in the decrease in working capital were effects of reclassifications of the Primary Line from long-term to current and the conversion of the Secondary Line, previously reported as current, to a term not maturing in 2004. These reclassifications reduced working capital by $6,963,000. The offsetting increase in working capital of $336,000 is primarily the result of increases to inventory funded by increases to accounts payable and better collection of accounts receivable and short-term debt. Cash provided by operations for the six-month period ended August 31, 2002 was $1,609,000 as compared to cash used in operations of $1,046,000 in the same period a year ago. Net income for the six months ended August 31, 2002, adjusted for non-cash items provided cash of $1,594,000. Increases in inventories used cash of $821,000 for the six months ended August 31, 2002. Decreases in accounts receivables and prepaid expenses provided cash of $75,000. Increases in accounts payable and accrued liabilities provided cash of $761,000. During the six months ended August 31, 2001, net income adjusted for non-cash items provided $1,423,000. Increases in inventories, prepaids and accounts receivable used cash of $2,245,000. Decreases in accounts payable used cash of $224,000. Fluctuations in receivables and inventories are primarily a function of sales levels and better collection results during the first six months of fiscal 2003. Investing activities used $512,000 for the six months ended August 31, 2002. Included in this amount was $600,000 of additions to property, plant and equipment. Building addition construction costs were $132,000 of this total. Financing activities used cash of $493,000 for the six months period ended August 31, 2002. Of this amount $46,000 was used to repurchase Company stock and the remainder was used to repay long-term debt. The Company is in the process of consolidating its Horsham, PA location into the newly enlarged Birdsboro, PA facility. Additional construction costs of approximately $200,000 are expected to be incurred prior to the end of the current fiscal year. The Company is in the process of obtaining low interest financing from the Pennsylvania Industrial Development Authority to assist in covering these costs. Additional financing in the amount of approximately $500,000 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 been impacted by growth in certain divisions, requiring investment in inventories. Additionally, the Company has had to fund costs associated with shutdowns and relocation of two 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. 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: 15 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. Management is also able to observe the production trends of the OEMs and the new products that are being promoted. ALLOWANCE FOR BAD DEBTS The allowance 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. USE OF ESTIMATES The company incorporates many years of historical data into the determination of each of these estimates. The company has a proven history of using accurate estimates and sound assumptions to calculate and record appropriate reserves. Actual results may differ from these estimates under different assumptions or conditions. 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 forecasts 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. 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. 16 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 $26,845,000 of outstanding debt at August 31, 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 $269,000 in pre-tax net income assuming no further changes in the amount of borrowings subject to variable rate interest from amounts outstanding at August 31, 2002. The Company does not trade in derivative financial instruments. The Company reports 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 are with the parent with accounts receivable and accounts payable settled in U.S. dollars. Additionally, the subsidiary leases 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 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 a) Evaluation of disclosure controls and procedures: The Company's Chief Executive Officer and its Chief Financial Officer, after evaluating the effectiveness of the Company's disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 ( c) and 15-d-14 ( c)) as of a date within 90 days of filing date of the quarterly report (the "Evaluation Date"), have concluded that as of the Evaluation Date, the Company's disclosure controls and procedures were adequate and effective to ensure that material information relating to the Company would be made known to them by others within the Company. b) Changes in internal controls: There were no significant changes in the Company's internal controls or in other factors that could significantly affect the Company's internal controls and procedures subsequent to the Evaluation Date, nor any significant deficiencies or material weaknesses in such internal controls and procedures requiring corrective actions. 17 PART II Item 1. Legal Proceedings No new legal proceedings or material changes in existing litigation occurred during the quarter ended August 31, 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 a) The Company held its annual meeting of stockholders on August 23, 2002 and solicited votes by proxy in conjunction with such meeting. b) The following matter was approved by the shareholders: (i) The approval of management's nominees to the Board of Directors with the nominees receiving the following votes:
FOR WITHHELD ABSTAIN ---------- -------- ------- Ronald D. Ordway 4,643,412 9,200 57,773 Ervin Kuczogi 4,652,612 -- 57,773 Ronald G. Moyer 4,652,592 20 57,773 Murray Fox 4,487,756 164,856 57,773 Carolyn Howard 4,652,612 -- 57,773 Carleton E. Sawyer 4,592,070 60,542 57,773
Item 5. Other information 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 June 30, 2002. 18 SIGNATURES 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 October 15, 2002 By: /S/ RONALD D. ORDWAY --------------------------- Ronald D. Ordway Chief Executive Officer By: /S/ CAROL D. FRANKLIN -------------------------- Carol D. Franklin Chief Financial Officer and Secretary 19 -----END PRIVACY-ENHANCED MESSAGE-----