UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

 

WASHINGTON, DC  20549

 

FORM 10-Q

 

ý  Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For Quarterly Period Ended August 31, 2004

 

Commission File Number 0-13394

 

VIDEO DISPLAY CORPORATION

(Exact name of registrant as specified on its charter)

 

 

1868 TUCKER INDUSTRIAL DRIVE, TUCKER, GEORGIA  30084

(Address of principal executive offices and zip code)

 

770-938-2080

(Registrant’s telephone number including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13  or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes ý  No o

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes o  No ý

 

Shares outstanding of each of the registrant’s classes of common stock at August 31, 2004:

 

 

 

Video Display Corporation and Subsidiaries

Index

 

PART I.	FINANCIAL INFORMATION
	Item 1.  Financial Statements
	Consolidated Balance Sheets – August 31, 2004 (unaudited) and February 29, 2004 (audited)
	Consolidated Statements of Income - Three and six months ended August 31, 2004 and 2003 (unaudited)
	Consolidated Statements of Shareholders’ Equity and Comprehensive Income - Twelve months ended February 29, 2004 (audited) and the six months ended August 31, 2004 (unaudited)
	Consolidated Statements of Cash Flows – Six months ended August 31, 2004 and 2003 (unaudited)
	Notes to consolidated financial statements - August 31, 2004 (unaudited)
	Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 3.  Quantitative and Qualitative Disclosure About Market Risk
	Item 4.  Controls and Procedures
PART II.	OTHER INFORMATION
	Item 1. Legal Proceedings
	Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
	Item 3. Defaults upon its Senior Securities
	Item 4. Submission of Matters to a Vote of Security Holders
	Item 5. Other Information
	Item 6.  Exhibits and Reports on Form 8-K
SIGNATURES
EXHIBIT 31.1 302 CERTIFICATION OF CEO
EXHIBIT 31.2 302 CERTIFICATION OF CFO
EXHIBIT 32.1 906 CERTIFICATION OF CEO
EXHIBIT 32.2 906 CERTIFICATION OF CFO

 

2

 

Video Display Corporation and Subsidiaries

Consolidated Balance Sheets

 

		August 31, 2004			February 29, 2004
		(unaudited)			(Note A)
Assets
Current assets
Cash and cash equivalents		$	3,942,000		$	3,021,000
Accounts receivable, less allowance for possible losses of $312,000 and $251,000		9,013,000			10,910,000
Inventories (Notes C and F)		28,906,000			26,275,000
Deferred income taxes		2,644,000			2,299,000
Prepaid expenses and other current assets		2,060,000			1,639,000
Total current assets		46,565,000			44,144,000
Property, plant and equipment:
Land		540,000			540,000
Buildings		7,090,000			7,016,000
Machinery and equipment		18,884,000			18,564,000
		26,514,000			26,120,000
Accumulated depreciation and amortization		(18,978,000		)	(18,384,000		)
Net property, plant, and equipment		7,536,000			7,736,000
Goodwill		1,318,000			1,227,000
Other assets		1,118,000			1,444,000
Total assets		$	56,537,000		$	54,551,000

 

The accompanying notes are an integral part of these statements.

 

3

 

Video Display Corporation and Subsidiaries

Consolidated Balance Sheets

 

		August 31, 2004				February 29, 2004
		(unaudited)				(Note A)
Liabilities and Shareholders’ Equity
Current liabilities
Accounts payable		$	4,217,000			$	4,103,000
Accrued liabilities		3,736,000				3,506,000
Line of credit (Note E)		2,610,000				2,610,000
Notes payable to shareholders		5,000				19,000
Current maturities of long-term debt (Note D)		1,859,000				1,959,000
Total current liabilities		12,427,000				12,197,000
Line of credit (Note E)		9,596,000				6,199,000
Long-term debt, less current maturities (Note D)		878,000				2,018,000
Notes payable to shareholders, less current maturities		5,016,000				8,272,000
Deferred income taxes		686,000				664,000
Total liabilities		28,603,000				29,350,000
Minority Interests		123,000				123,000
Commitments and Contingencies
Shareholders’ Equity (Note G)
Preferred stock, no par value – 2,000,000 shares authorized; none issued and outstanding		—				—
Common stock, no par value – 10,000,000 shares authorized; 4,834,000 and 4,792,000 issued and outstanding		6,765,000				6,318,000
Additional paid in capital		92,000				92,000
Retained earnings		20,955,000				18,688,000
Accumulated other comprehensive loss		(1,000			)	(20,000		)
Total shareholders’ equity		27,811,000				25,078,000
Total liabilities and shareholders’ equity		$		56,537,000		$	54,551,000

 

The accompanying notes are an integral part of these statements.

 

4

 

Video Display Corporation and Subsidiaries

Consolidated Statements of Income (unaudited)

 

		Three Months Ended August 31,						Six Months Ended August 31,
		2004			2003			2004			2003
Net sales		$	20,667,000		$	19,115,000		$	40,567,000		$	38,128,000
Cost of goods sold		13,832,000			12,485,000			27,146,000			25,267,000
Gross profit		6,835,000			6,630,000			13,421,000			12,861,000
Operating expenses
Selling and delivery		1,761,000			1,685,000			3,508,000			3,464,000
General and administrative		3,017,000			3,081,000			5,929,000			5,998,000
		4,778,000			4,766,000			9,437,000			9,462,000
Operating profit		2,057,000			1,864,000			3,984,000			3,399,000
Other income (expense)
Interest expense		(232,000		)	(322,000		)	(489,000		)	(641,000		)
Other, net		35,000			74,000			162,000			118,000
		(197,000		)	(248,000		)	(327,000		)	(523,000		)
Income before income taxes		1,860,000			1,616,000			3,657,000			2,876,000
Income tax expense		708,000			614,000			1,390,000			1,093,000
Net income		$	1,152,000		$	1,002,000		$	2,267,000		$	1,783,000
Basic earnings per share of common stock (Note G)		$	0.24		$	0.22		$	0.47		$	0.39
Diluted earnings per share of common stock (Note G)		$	0.23		$	0.21		$	0.46		$	0.37
Basic weighted average shares outstanding		4,828,000			4,579,000			4,822,000			4,609,000
Diluted weighted average shares outstanding		4,946,000			4,922,000			4,932,000			4,946,000

 

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 29, 2004 (audited) and

the Six Months Ended August 31, 2004 (unaudited)

 

		Common Shares		Share Amount			Additional Paid In Capital			Accumulated Other Comprehensive Income			Retained Earnings			Current Period Comprehensive Income
Balance at February 28, 2003		4,700,000		$	5,293,000		$	92,000		$	(233,000	)	$	17,004,000
Net income for the year		—		—			—			—			3,165,000			$	3,165,000
Unrealized gain on marketable equity securities		—		—			—			25,000			—			25,000
Foreign currency translation adjustment		—		—			—			62,000			—			62,000
Reclassification adjustment on the sale of marketable equity securities for a loss		—		—			—			126,000			—			126,000
Total comprehensive loss																$	3,378,000
Issuance of common stock under stock option plan		75,000		312,000			—			—			—
Conversion of convertible debentures		240,000		1,000,000			—			—			—
Issuance of common stock		8,000		51,000			—			—			—
Repurchase of common stock		(231,000	)	(338,000		)	—			—			(1,236,000		)
Dividend paid on common stock		—		—			—			—			(245,000		)
Balance at February 29, 2004		4,792,000		6,318,000			92,000			(20,000		)	18,688,000
Net income for the period		—		—			—			—			2,267,000			$	2,267,000
Issuance of common stock under stock option plan		9,000		47,000			—			—			—			47,000
Foreign currency translation adjustment		—		—			—			19,000			—			19,000
Total comprehensive income																$	2,333,000
Issuance of common stock		33,000		400,000			—			—			—
Balance at August 31, 2004		4,834,000		$	6,765,000		$	92,000		$	(1,000	)	$	20,955,000

 

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,
		2004			2003
Operating Activities
Net income		$	2,267,000		$	1,783,000
Adjustments to reconcile net income to net cash provided by operations:
Depreciation and amortization		600,000			612,000
Provision for bad debts		61,000			87,000
Deferred income tax benefit		(323,000		)	—
Changes in working capital:
Accounts receivable		1,836,000			1,139,000
Inventories		(2,352,000		)	616,000
Prepaid expenses and other assets		(2,000		)	543,000
Accounts payable and accrued liabilities		389,000			(110,000		)
Net cash provided by operating activities		2,476,000			4,670,000
Investing activities
Capital expenditures		(314,000		)	(375,000		)
Cash paid for acquisition		(150,000		)	—
Other investing activities		—			47,000
Net cash used in investing activities		(464,000		)	(328,000		)
Financing activities
Proceeds from long-term debt and lines of credit		16,221,000			9,497,000
Payments on long-term debt and lines of credit		(17,333,000		)	(14,181,000		)
Proceeds from exercise of stock options		47,000			13,000
Purchase of common stock under repurchase program		—			(813,000		)
Redemption of redeemable common stock		—			(100,000		)
Proceeds from reissuance of common stock		—			51,000
Net cash used in financing activities		(1,065,000		)	(5,533,000		)
Effect of exchange rates on cash		(26,000		)	(12,000		)
Net change in cash		921,000			(1,203,000		)
Cash, beginning of period		3,021,000			2,392,000
Cash, end of period		$	3,942,000		$	1,189,000

 

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 principles 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 29, 2004 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. Certain prior period balances have been reclassified to conform to the current period presentation.

 

The Company has a subsidiary in the U.K., which uses the British pound as its functional currency. Assets and liabilities of this foreign subsidiary are translated using the exchange rate in effect at the end of the period.  Revenues and expenses are translated using the average of the exchange rates in effect during the period.  Translation adjustments and transaction gains and losses related to long-term intercompany transactions are accumulated as a separate component of shareholders’ equity.

 

NOTE B – ADOPTION OF RECENT ACCOUNTING PRONOUNCEMENTS

 

In January 2003, the FASB issued Financial Accounting Standards Board Interpretation No. 46 (FIN 46), “Consolidation of Variable Interest Entities”, which was revised in December 2003 (FIN 46R).  FIN 46R requires an investor with a majority of the variable interests (primary beneficiary) in a variable interest entity (VIE) to consolidate the entity and also requires majority and significant variable interest investors to provide certain disclosures.  A VIE is an entity in which the voting equity investors do not have a controlling financial interest or the equity investment at risk is insufficient to finance the entity’s activities without receiving additional subordinated financial support from other parties.  The provisions of FIN 46R were effective immediately for all arrangements entered into with new VIEs created after January 31, 2003.  For arrangements entered into with VIEs created before January 31, 2003, the provisions of FIN 46R were effective at the end of the first reporting period ending after March 15, 2004.  The Company has not identified any VIEs and, therefore, the adoption of this standard did not have a material impact on the Company’s financial position or results of operations.

 

In March 2004, the FASB issued an Exposure Draft for a proposed Statement of Financial Accounting Standards Statement to address the accounting for stock-based employee plans.  The proposed statement, in its current form, would eliminate the ability to account for share-based compensation transactions using APB 25 and instead require that such transactions be accounted for using a fair-value-based method of accounting.  The adoption of this statement, in its current form, would result in income statement effects similar to what is currently disclosed using a proforma basis (see the discussion under the caption “Stock-Based Compensation Plans” below) as allowed under Statement No. 123.  The adoption of this proposed statement in its current form is not expected to have a material impact on the Company’s financial statements.

 

8

 

NOTE C - INVENTORIES

 

Inventories are stated at the lower of cost (first in, first out) or market.

 

Inventories consisted of the following:

 

		August 31, 2004			February 29, 2004
Raw materials and work-in-process		$	15,372,000		$	11,937,000
Finished goods		16,264,000			16,844,000
		31,636,000			28,781,000
Reserves for obsolescence		(2,730,000		)	(2,506,000		)
		$	28,906,000		$	26,275,000

 

NOTE D - LONG-TERM DEBT

 

Long-term debt consisted of the following:

 

		August 31, 2004			February 29, 2004
Term loan facility, floating interest rate based on an adjusted LIBOR rate (4.50% as of August 31, 2004), quarterly principal payments of $313,000 through November 2005; collateralized by assets of Aydin Display, Inc.		$	1,250,000		$	1,875,000
Note payable to bank; interest rate of prime (4.5% as of August 31, 2004) plus 1.5%; collateralized by assets of XKD Corporation, paid in full.		—			542,000
Mortgage payable to bank; variable interest rate (5.5% as of August 31, 2004); monthly principal and interest payments of $6,000 payable until December 2008 with a final principal payment of $350,000 in December 2008, collateralized by land and building of Fox International, Inc.		501,000			526,000
Mortgage payable to bank; interest rate at FHLB plus 1.95% (7.35% as of August 31, 2004); monthly principal and interest payments of $5,000 payable through October 2021; collateralized by land and building of Teltron Technologies, Inc.		565,000			573,000
Other		421,000			461,000
		2,737,000			3,977,000
Less current portion		(1,859,000		)	(1,959,000		)
		$	878,000		$	2,018,000

 

9

 

NOTE E - LINES OF CREDIT

 

The Company has a $12,000,000 credit facility with a bank.  The interest rate on the line of credit is a floating LIBOR rate (3.98% at August 31, 2004) based on a ratio of debt to EBITDA, as defined.  The weighted average interest rate during the six months ended August 31, 2004 and the year ended February 29, 2004 was 3.71% and 3.70%. The average amount and maximum amount outstanding were $8,301,000 and $9,596,000, respectively, during the six months ended August 31, 2004, and $6,754,000 and $8,801,000, respectively, during fiscal year 2004.  Borrowings under the line of credit are limited by eligible accounts receivable, inventory and real estate, as defined, and includes a commitment fee of 0.25% for the unused portion.  As of August 31, 2004, the outstanding balance on the line of credit was $9,596,000 and the available amount for borrowing was $2,404,000.

 

The line of credit 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 August 31, 2004, the Company is in compliance with its loan covenants.

 

Additionally, the Company has a $2,750,000 secondary line of credit (collateralized by assets of Fox International, Inc.) with another bank.  Interest on this line is at the rate of prime plus 1%.  The line is limited by eligible accounts receivable and inventory.  The outstanding balance at August 31, 2004 was $2,610,000 and the available amount for borrowing was $140,000.  This line is due to expire on July 31, 2005 and, accordingly, is classified within current liabilities in the consolidated financial statements.

 

NOTE F – SUPPLEMENTAL CASH FLOW INFORMATION

 

		Six Months Ended
		August 31, 2004			August 31, 2003
Cash Paid for:
Interest		$	489,000		$	641,000
Income taxes, net of refunds		$	857,000		$	382,000
Non-cash Transactions:
Issuance of common stock for monitor division of Data Ray, Inc.		$	400,000		$	—

 

10

 

NOTE G – SHAREHOLDERS’ EQUITY

 

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 period.  Shares issued during the period are weighted for the portion of the period that they were outstanding.  Diluted earnings per share is calculated in a manner consistent with that of basic earnings per share while giving effect to all dilutive potential common shares that were outstanding during the period.

 

The following table sets forth the computation of basic and diluted earnings per share for the three and six-month periods ended August 31, 2004 and 2003:

 

		Net Income			Weighted Average Shares Outstanding		Earnings Per Share
Quarter ended August 31, 2004
Basic		$	1,152,000		4,828,000		$	0.24
Effect of dilution:
Stock options		—			118,000
Diluted		$	1,152,000		4,946,000		$	0.23
Quarter ended August 31, 2003
Basic		$	1,002,000		4,579,000		$	0.22
Effect of dilution:
Stock options		—			97,000
Convertible debt		13,000			246,000
Diluted		$	1,015,000		4,922,000		$	0.21
Six months ended August 31, 2004
Basic		$	2,267,000		4,822,000		$	0.47
Effect of dilution:
Stock options		—			110,000
Diluted		$	2,267,000		4,932,000		$	0.46
Six months ended August 31, 2003
Basic		$	1,783,000		4,609,000		$	0.39
Effect of dilution:
Stock options		—			91,000
Convertible debt		27,000			246,000
Diluted		$	1,810,000		4,946,000		$	0.37

 

Stock-Based Compensation Plans

 

The Company has an incentive stock option plan whereby total options to purchase 150,000 shares may be granted to key employees at a price not less than fair market value at the time the options are granted and are exercisable beginning on the first anniversary of the grant date for a period not to exceed ten years.  Statement of Financial Accounting Standards No. 123 encourages, but does not require companies to record compensation cost for stock-based employee compensation plans at fair value.  The Company has chosen to continue to account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees”, and related Interpretations. Accordingly, compensation cost for stock options is

 

11

 

measured as the excess, if any, of the quoted market price of the Company’s stock at the date of the grant over the amount an employee must pay to acquire the stock.  The option price of all the Company’s stock options is equal to the market value of the stock at the grant date.  The Company granted 9,000 and 6,000 stock options during the quarters ended August 31, 2004 and 2003, respectively.

 

Based on the additional disclosure requirements of SEAS 148, "Accounting for Stock Based Compensation — Transition and Disclosure — an Amendment to SFAS 123", the following illustrates the assumptions and the effect on net income and net income per share if the Company had applied the fair value recognition provisions of SFAS 123.

 

		Three Months Ended						Six Months Ended
		August 31,			August 31,			August 31,			August 31,
		2004			2003			2004			2003
Net income, as reported		$	1,152,000		$	1,002,000		$	2,267,000		$	1,783,000
Stock-based employee compensation expense, as reported		—			—			—			—
Stock-based employee compensation expense determined under fair value basis, net of tax		(12,000		)	(15,000		)	(21,000		)	(27,000		)
Pro forma net income		$	1,140,000		$	987,000		$	2,246,000		$	1,756,000
Net earnings per share:
Basic – as reported		$	0.24		$	0.22		$	0.47		$	0.39
Basic – pro forma		$	0.24		$	0.22		$	0.46		$	0.38
Diluted – as reported		$	0.23		$	0.21		$	0.46		$	0.37
Diluted – pro forma		$	0.23		$	0.20		$	0.45		$	0.36

 

Stock Repurchase Program

 

The Company has a stock repurchase program, pursuant to which it is authorized to repurchase up to 462,500 shares of the Company’s common stock in the open market. Through August 31, 2004, the Company has repurchased 292,000 shares under this program.  No shares were repurchased during the first six months of the current fiscal year. 

 

NOTE H – BUSINESS ACQUISITION

 

In March 2004, the Company acquired the monitor operations of Colorado based Data Ray, Inc.  The Company acquired inventory, fixed assets and various other assets of $459,000 in exchange for cash of $150,000 and $400,000 of the Company’s common stock, resulting in goodwill of approximately $91,000.  These operations were consolidated into the Company’s Z-Axis, Inc. operations located in Phelps, NY, since the date of acquisition.  The $400,000 of common stock was issued at $12 dollars per share, the market value of the stock at the date of purchase.  The common stock has a put feature whereby Data Ray can redeem the stock for $11 per share if the price of the stock is below $12 after the one year anniversary date of the purchase agreement.

 

12

 

NOTE I – SUBSEQUENT EVENTS

 

Acquisition

 

On October 14, 2004, the Company announced it had finalized and completed its Asset Purchase Agreement with Evans & Sutherland.  Under this agreement, the Company will pay $5,250,000 for Evans & Sutherland’s ESCP® and Targetview CRT projector product lines.  This acquisition will be financed by a loan from an officer of the Company.  Under the terms of the final agreement, the Company will consolidate all CRT projector manufacturing, sales and support with its established Marquee™ projector operations in Cape Canaveral, Florida.  The Company expects this consolidation will be completed by the end of the year.

 

Stock Split

 

On September 8, 2004, the Company announced a two for one stock split of its common stock, payable as a stock dividend on November 1, 2004, to shareholders of record at the close of business on September 23, 2004.  Shareholders will receive one share of common stock for every one share of the Company stock held on the record date.  Immediately prior to the distribution there will be approximately 4,834,000 shares of common stock outstanding and immediately after the distribution there will be approximately 9,668,000 shares of common stock outstanding.  The following table presents proforma information for common shares outstanding and earnings per share if the dividend had been paid in the second quarter:

 

		Three Months Ended						Six Months Ended
		August 31,			August 31,			August 31,			August 31,
		2004			2003			2004			2003
Net income, as reported		$	1,152,000		$	1,002,000		$	2,267,000		$	1,783,000
Basic weighted average shares outstanding, as reported		4,828,000			4,579,000			4,822,000			4,609,000
Basic weighted average shares outstanding, based on stock split		9,656,000			9,158,000			9,644,000			9,218,000
Diluted weighted average shares outstanding, as report		4,946,000			4,922,000			4,932,000			4,946,000
Diluted weighted average shares outstanding, based on stock split		9,892,000			9,844,000			9,864,000			9,892,000
Net earnings per share:
Basic – as reported		$	0.24		$	0.22		$	0.47		$	0.39
Basic – pro forma		$	0.12		$	0.11		$	0.24		$	0.20
Diluted – as reported		$	0.23		$	0.21		$	0.46		$	0.37
Diluted – pro forma		$	0.12		$	0.11		$	0.23		$	0.19

 

13

 

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 2004 Annual Report to Stockholders, which included audited financial statements and notes thereto for the fiscal year ended February 29, 2004, as well as Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

Overview

 

The Company is a worldwide leader in the manufacture and distribution of a wide range of display devices, encompassing, among others, entertainment, military, medical and simulation display solutions.  The Company is comprised of two distinct segments - (1) the manufacture and distribution of monitors, projection systems and CRTs and (2) the wholesale distribution of consumer electronic parts. The monitor and CRT segment is organized into four distinct subsegments or divisions:

 

•      Monitors – offers a complete range of CRTs, flat panel displays and projection systems for use in training and simulation, military, medical and industrial applications.

•      Data Display – offers a complete range of CRTs for use in data display screen, including computer terminal monitors and medical monitoring equipment.

•      Home Entertainment – offers a complete range of CRTs and projection tubes for television and home theater equipment.

•      Components – provides replacement electron guns for CRTs for independent customers as well as servicing the Company’s internal needs.

 

Second Quarter and Year to Date 2005 Highlights

 

•      Monitor division revenue - the Company’s monitor division continued a strong growth trend.  The Company now has the ability to compete in various niche markets within the defense, medical and projection display industries.  Net sales within this segment increased in the second quarter of fiscal 2005 by $1,314,000 or 11.1% compared to the second quarter of fiscal 2004.  For the six months ended August 31, 2004, net revenue increased $2,455,000 or 10.7% compared to the same period a year ago.  This increase reflects new military contracts started in fiscal 2004.

•      Monitor division gross profit – the Company’s monitor division sales increased 10.7%, while cost of sales increased 6.3%.  The Company did more high volume contract work during the first half of fiscal 2005 as compared to the first half of fiscal 2004, while it was able to contain costs on orders of higher volume.

•      Reduction of debt – for the six months ended August 31, 2004, the Company’s total debt was reduced by $1,813,000 compared to the same period a year ago, which contributed to a $152,000 decrease in interest expense for the first half of fiscal 2005.

 

Fiscal 2005 Challenges

 

Inventory management - the Company continually monitors historical sales trends as well as projected future needs to ensure adequate on hand supplies of inventory and to ensure against overstocking of slower moving, obsolete items.

 

Certain of the Company’s divisions maintain significant inventories of CRT’s and component parts in an effort to ensure its customers a reliable source of supply.  The Company’s inventory turnover averages 175 days, although in many cases the Company would anticipate holding 90 to 100 days of inventory in the normal course of operations.  This level of inventory is higher than some of the Company’s competitors due to the fact that it sells a number of products representing older, or trailing edge, technology that may not be available from other sources. The market for these trailing edge

 

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technology products is declining and, as manufacturers for these products discontinue production or exit the business, the Company may make last time buys. In the monitor segment of the Company’s business, the market for its products is characterized by fairly rapid change as a result of the development of new technologies, particularly in the flat panel display area. If the Company fails to anticipate the changing needs of its customers and accurately forecast their requirements, it may accumulate inventories of products which its customers no longer need and which the Company will be unable to sell or return to its vendors.  Because of this, the Company’s management monitors the adequacy of its inventory reserves regularly, and at August 31, 2004, believes its reserves to be adequate.

 

Results of Operations

 

The following table sets forth, for the three and six months ended August 31, 2004 and 2003, the percentages which selected items in the Statements of Income bear to total sales:

 

		Three Months Ended August 31,				Six Months Ended August 31,
		2004		2003		2004		2003
Sales
CRT Segment
Monitors		63.5	%	61.8	%	62.6	%	60.2	%
Data Display CRT’s		8.2		9.5	%	9.6		9.7
Entertainment CRT’s		5.3		7.0		5.6		7.5
Electron Guns and Components		0.9		0.7		1.0		1.4
Total CRT Segment		77.9	%	79.0	%	78.8	%	78.8	%
Wholesale Consumer Parts Segment		22.1		21.0		21.2		21.2
		100.0	%	100.0	%	100.0	%	100.0	%
Costs and expenses
Cost of goods sold		66.9	%	65.3	%	66.9	%	66.3	%
Selling and delivery		8.5		8.8		8.6		9.1
General and administrative		14.6		16.1		14.6		15.6
		90.0	%	90.2	%	90.1	%	91.0	%
Income from Operations		10.0	%	9.8	%	9.8	%	9.0	%
Interest expense		1.1	%	1.7	%	1.2	%	1.7	%
Other income		0.2		0.4		0.4		0.3
Income before income taxes		9.1	%	8.5	%	9.0	%	7.5	%
Provision for income taxes		3.4		3.2		3.4		2.8
Net Income		5.6	%	5.3	%	5.6	%	4.7	%

 

Net sales

 

Consolidated net sales increased $1,552,000 and $2,439,000 for the three and six months ended August 31, 2004 as compared to the same period ended August 31, 2003.  CRT division sales increased $1,002,000 and $1,946,000 for the three and six-month comparative periods ended August 31, 2004.  The wholesale division sales increased $550,000 for the three-month comparative period and $493,000 for the six-month comparative periods ended August 31, 2004.

 

The net increase in CRT segment sales is attributed to growth within the monitor segment of $1,314,000 for the three months ended August 31, 2004 and $2,455,000 for the six months ended August 31, 2004.  This increase is due in large

 

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