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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