SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended November 30, 2002 Commission File Number 0-13394
VIDEO DISPLAY CORPORATION
(Exact name of registrant as specified on its charter)
| Georgia (State or other jurisdiction of incorporation or organization) |
58-1217564 (I.R.S.Employer Identification No.) |
1868 Tucker Industrial Drive, Tucker, Georgia 30084
(Address of principal executive offices)
Registrant's telephone number including area code: 770-938-2080
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days.
Yes ý No o
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practical date:
| Class |
Outstanding at November 30, 2002 |
|
|---|---|---|
| Common Stock, No Par Value | 4,761,833 |
Video Display Corporation and Subsidiaries
| |
|
|
Page |
|||
|---|---|---|---|---|---|---|
| PART I. FINANCIAL INFORMATION | ||||||
Item 1. Financial Statements |
||||||
Consolidated balance sheets— November 30, 2002 (unaudited) and February 28, 2002 (audited) |
3-4 |
|||||
Consolidated statements of operations— Three and nine months ended November 30, 2002 and 2001 (unaudited) |
5 |
|||||
Consolidated statements of shareholders' equity and comprehensive income (loss)— Twelve months ended February 28, 2002 (audited) and the nine months ended November 30, 2002 (unaudited) |
6 |
|||||
Consolidated statements of cash flows— Nine months ended November 30, 2002 and 2001 (unaudited) |
7 |
|||||
Notes to consolidated financial statements— November 30, 2002 (unaudited) |
8-12 |
|||||
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations |
13-17 |
|||||
Item 3. Quantitative and Qualitative Disclosure About Market Risk |
18 |
|||||
Item 4. Controls and Procedures |
18 |
|||||
PART II. OTHER INFORMATION |
||||||
Item 1. Legal Proceedings |
19 |
|||||
Item 2. Changes in Securities and Use of Proceeds |
19 |
|||||
Item 3. Defaults upon its Senior Securities |
19 |
|||||
Item 4. Submission of Matters to a Vote of Security Holders |
19 |
|||||
Item 5. Other Information |
19 |
|||||
Item 6. Exhibits and Reports on Form 8-K |
19 |
|||||
SIGNATURES |
20 |
|||||
2
Video Display Corporation and Subsidiaries
Consolidated Balance Sheets
| |
November 30, 2002 (unaudited) |
February 28, 2002 (Note A) |
||||||
|---|---|---|---|---|---|---|---|---|
| Assets | ||||||||
| Current assets | ||||||||
| Cash and cash equivalents | $ | 1,894,000 | $ | 1,615,000 | ||||
| Accounts receivable, less allowance for possible losses of $515,000 and $343,000 | 12,696,000 | 12,712,000 | ||||||
| Inventories (Note D) | 29,978,000 | 31,920,000 | ||||||
| Prepaid expenses | 4,072,000 | 3,276,000 | ||||||
| Total current assets | 48,640,000 | 49,523,000 | ||||||
Property, plant and equipment: |
||||||||
| Land | 600,000 | 600,000 | ||||||
| Buildings | 7,050,000 | 6,814,000 | ||||||
| Machinery and equipment | 18,323,000 | 18,845,000 | ||||||
| 25,973,000 | 26,259,000 | |||||||
| Accumulated depreciation and amortization | (17,222,000 | ) | (16,891,000 | ) | ||||
| Net property, plant, and equipment | 8,751,000 | 9,368,000 | ||||||
Other assets |
2,567,000 |
2,950,000 |
||||||
| Total assets | $ | 59,958,000 | $ | 61,841,000 | ||||
The accompanying notes are an integral part of these statements.
3
Video Display Corporation and Subsidiaries
Consolidated Balance Sheets
| |
November 30, 2002 (unaudited) |
February 28, 2002 (Note A) |
||||||
|---|---|---|---|---|---|---|---|---|
| Liabilities and Shareholders' Equity | ||||||||
| Current liabilities | ||||||||
| Accounts payable | $ | 6,860,000 | $ | 4,808,000 | ||||
| Accrued liabilities | 4,147,000 | 4,800,000 | ||||||
| Lines of credit (Note F) | 9,191,000 | 3,779,000 | ||||||
| Notes payable to shareholders | 7,617,000 | 7,124,000 | ||||||
| Current maturities of long-term debt (Note E) | 2,739,000 | 1,443,000 | ||||||
| Total current liabilities | 30,554,000 | 21,954,000 | ||||||
Convertible subordinated debentures |
1,000,000 |
1,000,000 |
||||||
| Lines of credit (Note F) | — | 8,785,000 | ||||||
| Long-term debt, less current maturities (Note E) | 5,965,000 | 4,955,000 | ||||||
| Notes payable to shareholders, less current maturities | 151,000 | 217,000 | ||||||
| Deferred income taxes | 113,000 | 113,000 | ||||||
| Total liabilities | 37,783,000 | 37,024,000 | ||||||
Minority interests |
188,000 |
158,000 |
||||||
| Redeemable common stock | 100,000 | — | ||||||
Commitments |
— |
— |
||||||
Shareholders' Equity |
||||||||
| Preferred stock, no par value—2,000,000 shares authorized; none issued and outstanding | — | — | ||||||
| Common stock, no par value—10,000,000 shares authorized; 4,762,000 and 4,749,000 issued and outstanding | 3,791,000 | 3,826,000 | ||||||
| Additional paid in capital | 92,000 | 92,000 | ||||||
| Retained earnings | 19,338,000 | 22,134,000 | ||||||
| Accumulated other comprehensive loss | (1,334,000 | ) | (1,393,000 | ) | ||||
| Total shareholders' equity | 21,887,000 | 24,659,000 | ||||||
| Total liabilities and shareholders' equity | $ | 59,958,000 | $ | 61,841,000 | ||||
The accompanying notes are an integral part of these statements.
4
Video Display Corporation and Subsidiaries
Consolidated Statements of Operations (unaudited)
| |
Three Months Ended November 30, |
Nine Months Ended November 30, |
||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
2002 |
2001 |
2002 |
2001 |
||||||||||
| Net sales | $ | 18,240,000 | $ | 17,034,000 | $ | 56,666,000 | $ | 53,334,000 | ||||||
| Cost of goods sold | 17,079,000 | 11,248,000 | 43,722,000 | 36,338,000 | ||||||||||
| Gross profit | 1,161,000 | 5,786,000 | 12,944,000 | 16,996,000 | ||||||||||
| Operating expenses | ||||||||||||||
| Selling and delivery | 1,926,000 | 1,601,000 | 5,867,000 | 4,780,000 | ||||||||||
| General and administrative | 3,714,000 | 3,091,000 | 9,818,000 | 9,292,000 | ||||||||||
| 5,640,000 | 4,692,000 | 15,685,000 | 14,072,000 | |||||||||||
| Operating profit (loss) | (4,479,000 | ) | 1,094,000 | (2,741,000 | ) | 2,924,000 | ||||||||
| Other income (expense) | ||||||||||||||
| Interest expense | (382,000 | ) | (324,000 | ) | (1,088,000 | ) | (1,252,000 | ) | ||||||
| Other, net | 66,000 | (24,000 | ) | 158,000 | 24,000 | |||||||||
| (316,000 | ) | (348,000 | ) | (930,000 | ) | (1,228,000 | ) | |||||||
| Income (loss) before minority interest | (4,795,000 | ) | 746,000 | (3,671,000 | ) | 1,696,000 | ||||||||
| Minority interest expense | 18,000 | 2,000 | 30,000 | 6,000 | ||||||||||
| Income (loss) before income taxes | (4,813,000 | ) | 744,000 | (3,701,000 | ) | 1,690,000 | ||||||||
| Income tax expense (benefit) | (1,321,000 | ) | 291,000 | (905,000 | ) | 652,000 | ||||||||
| Net income (loss) | $ | (3,492,000 | ) | $ | 453,000 | $ | (2,796,000 | ) | $ | 1,038,000 | ||||
| Basic earnings per share of common stock | $ | (0.73 | ) | $ | 0.10 | $ | (0.59 | ) | $ | 0.22 | ||||
| Diluted earnings per share of common stock | $ | (0.73 | ) | $ | 0.10 | $ | (0.59 | ) | $ | 0.22 | ||||
| Basic weighted average shares outstanding | 4,761,000 | 4,749,000 | 4,761,000 | 4,685,000 | ||||||||||
| Diluted weighted average shares outstanding | 4,761,000 | 5,024,000 | 4,761,000 | 5,010,000 | ||||||||||
The accompanying notes are an integral part of these statements.
5
Video Display Corporation and Subsidiaries
Consolidated Statements of Shareholders' Equity and Comprehensive Income (Loss)
for the Twelve Months Ended February 28, 2002 (audited) and
the Nine Months Ended November 30, 2002 (unaudited)
| |
Common Stock |
Additional Paid In Capital |
Accumulated Other Comprehensive Loss |
Retained Earnings |
Current Period Comprehensive Income (Loss) |
|||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Balance at February 28, 2001 | $ | 3,034,000 | $ | 92,000 | $ | (1,479,000 | ) | $ | 20,952,000 | |||||||||
Net income for the year |
— |
— |
— |
1,182,000 |
$ |
1,182,000 |
||||||||||||
| Unrealized loss on marketable equity securities | — | — | (2,000 | ) | — | (2,000 | ) | |||||||||||
| Foreign currency translation adjustment | — | — | 88,000 | — | 88,000 | |||||||||||||
| Total comprehensive income | $ | 1,268,000 | ||||||||||||||||
| Issuance of common stock under stock option plan | 17,000 | — | — | — | ||||||||||||||
| Conversion of subordinated debentures to common stock | 775,000 | — | — | — | ||||||||||||||
| Balance at February 28, 2002 | 3,826,000 | 92,000 | (1,393,000 | ) | 22,134,000 | |||||||||||||
Net loss for the period |
— |
— |
— |
(2,796,000 |
) |
$ |
(2,796,000 |
) |
||||||||||
| Unrealized loss on marketable equity securities | — | — | (4,000 | ) | — | (4,000 | ) | |||||||||||
| Foreign currency translation adjustment | — | — | 63,000 | — | 63,000 | |||||||||||||
| Total comprehensive loss | $ | (2,737,000 | ) | |||||||||||||||
| Issuance of common stock under stock option plan | 11,000 | — | — | — | ||||||||||||||
| Repurchase of common stock | (46,000 | ) | — | — | — | |||||||||||||
| Balance at November 30, 2002 | $ | 3,791,000 | $ | 92,000 | $ | (1,334,000 | ) | $ | 19,338,000 | |||||||||
The accompanying notes are an integral part of these statements.
6
Video Display Corporation and Subsidiaries
Consolidated Statements of Cash Flows (unaudited)
| |
Nine Months Ended November 30, |
||||||
|---|---|---|---|---|---|---|---|
| |
2002 |
2001 |
|||||
| Reconciliation of Net Income to Net Cash Provided by (Used in) Operating Activities | |||||||
| Net (loss) income | $ | (2,796,000 | ) | $ | 1,038,000 | ||
| Adjustments to reconcile net income (loss) to net cash used in operations: | |||||||
| Depreciation and amortization | 1,015,000 | 1,239,000 | |||||
| Provision for inventory reserves and write-downs | 4,397,000 | 430,000 | |||||
| Provision for bad debts | 542,000 | (41,000 | ) | ||||
| Loss on disposal of fixed assets | 725,000 | — | |||||
| Deferred income taxes | (55,000 | ) | — | ||||
| Net income allocated to minority interests | 30,000 | 6,000 | |||||
| Changes in working capital, net of effects from acquisitions: | |||||||
| Accounts receivable | (526,000 | ) | (1,461,000 | ) | |||
| Inventories | (2,356,000 | ) | (663,000 | ) | |||
| Prepaid expenses and other assets | (741,000 | ) | (472,000 | ) | |||
| Accounts payable and accrued liabilities | 1,399,000 | (338,000 | ) | ||||
| Net cash provided by (used in) operating activities | 1,634,000 | (262,000 | ) | ||||
| Investing activities | |||||||
| Capital expenditures | (1,123,000 | ) | (1,503,000 | ) | |||
| Purchase of assets of Christie, Inc. | — | (2,700,000 | ) | ||||
| Other investing activities | 380,000 | (387,000 | ) | ||||
| Net cash used in investing activities | (743,000 | ) | (4,590,000 | ) | |||
| Financing activities | |||||||
| Proceeds from long-term debt and lines of credit | 11,456,000 | 23,127,000 | |||||
| Repayments of long-term debt and lines of credit | (12,096,000 | ) | (19,750,000 | ) | |||
| Proceeds from exercise of stock options | 11,000 | 16,000 | |||||
| Repurchase of shares of common stock | (46,000 | ) | — | ||||
| Net cash (used in) provided by financing activities | (675,000 | ) | 3,393,000 | ||||
| Effect of exchange rates on cash | 63,000 | 28,000 | |||||
| Net change in cash and cash equivalents | 279,000 | (1,431,000 | ) | ||||
| Cash and cash equivalents, beginning of period | 1,615,000 | 4,137,000 | |||||
| Cash and cash equivalents, end of period | 1,894,000 | 2,706,000 | |||||
The accompanying notes are an integral part of these statements.
7
Video Display Corporation and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
NOTE A—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principals for interim financial information and in accordance with instructions for Form 10-Q as found in Article 10 of Regulation S-X. Accordingly, such consolidated financial statements do not include all of the information and disclosures required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments necessary for a fair presentation of the results of operations for the periods covered have been reflected in the statements. The accompanying consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto for the year ended February 28, 2002 included in the Company's Annual Report on Form 10-K.
The consolidated financial statements included the accounts of the Company and its majority owned subsidiaries after elimination of all significant intercompany accounts and transactions.
NOTE B—ADOPTION OF RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board (the "FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations", and SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS No. 141 requires the use of the purchase method of accounting and prohibits the use of the pooling-of-interests method of accounting for business combinations initiated after June 30, 2001. This statement also requires that the Company recognize acquired intangible assets apart from goodwill if the acquired intangible assets meet certain criteria. SFAS No. 142 requires, among other things, that companies no longer amortize goodwill, but instead test goodwill for impairment at least annually.
In addition, SFAS No. 142 requires that the Company identify reporting units for purposes of assessing potential future impairments of goodwill, reassess the useful lives of other existing recognized finite-lived intangible assets, and cease amortization of intangible assets with an indefinite useful life. An intangible asset with an indefinite useful life should be tested for impairment in accordance with the guidance in SFAS No. 142. This statement is required to be applied in fiscal years beginning after December 15, 2001, to all goodwill and other intangible assets recognized at that date, regardless of when those assets were initially recognized. SFAS No. 142 requires the Company to complete a transitional goodwill impairment test within six months from the date of adoption and reassess the useful lives of other intangible assets within the first interim quarter after adoption.
The Company adopted SFAS Nos. 141 and 142 on March 1, 2002, and accordingly, ceased amortization of goodwill at that time. Goodwill amortization expense of $81,000 and $243,000 was included in the consolidated financial statements for the three and nine months ended November 30, 2001, respectively. Had goodwill amortization expense not been recognized in 2001, basic earnings per share would have increased from $0.10 per share to $0.11 per share for the three months ended November 30, 2001, and from $0.22 per share to $0.27 per share for the nine months ended November 30, 2001.
As of November 30, 2002, the Company completed the first phase of transitional testing for the potential impairment of goodwill relating to its Monitor division. The Company used a mulitple of EBITDA (earnings before interest, taxes, depreciation and amortization expense) in evaluating the fair value of the Monitor division. As a result of such testing, the Company determined there was no impairment of goodwill that should be included in the accompanying financial statements. At November 30, 2002, the net book value recorded for goodwill was $1,142,000.
8
NOTE C—ACCOUNTING STANDARDS NOT YET ADOPTED
In June 2001, the FASB approved the issuance of SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS 143 establishes accounting standards for the recognition and measurement of legal obligations associated with the retirement of tangible long-lived assets and requires recognition of a liability for an asset retirement obligation in the period in which it is incurred. The provisions of this statement are effective for financial statements issued for fiscal years beginning after June 15, 2002. The Company currently anticipates that adoption of this statement will not have a material impact on its consolidated financial statements.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS 144 addresses financial accounting for the impairment or disposal of long-lived assets. The provisions of this statement are effective for financial statements issued for fiscal years beginning after December 15, 2001. The Company currently anticipates that adoption of this statement will not have a material impact on its consolidatedfinancial statements.
In April 2002, the FASB issued SFAS No. 145, "Rescission of SFAS No. 4, 44, 64, Amendment of SFAS No. 13, and Technical Corrections." SFAS 4, which was amended by SFAS 64, required all gains and losses from the extinguishment of debt to be aggregated and, if material, classified as an extraordinary item, net of related income tax effect. As a result, the criteria in Opinion 30 will now be used to classify those gains and losses. SFAS 13 was amended to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. The adoption of SFAS 145 will not have a current impact on the Company's consolidated financial statements.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." Generally, SFAS 146 provides that defined exit costs (including restructuring and employee termination costs) are to be recorded on an incurred basis rather than on a commitment basis as is presently required. SFAS 146 is effective for exit or disposal activities initiated after December 31, 2002. The Company currently anticipates that adoption of this statement will not have a material impact on its consolidated financial statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation—Transition and Disclosure." SFAS 148 amends the transition and disclosure requirements of SFAS No. 123, "Accounting for Stock-Based Compensation." Certain of the disclosure requirements are required for all companies, regardless if the fair value method or intrinsic value method is used to account for stock-based employee compensation arrangements. The Company continues to account for its incentive stock option plan under the intrinsic value method in accordance with the recognition and measurement principles of APB Opinion No. 25, "Accounting for Stock Issued to Employees." The amendments to SFAS 123 will be effective for financial statements for fiscal years ended after December 15, 2002 and for interim periods beginning after December 15, 2002. The Company anticipates that the adoption of SFAS 148 will not have an impact on the Company's consolidated financial statements.
9
NOTE D—INVENTORIES
Inventories are stated at the lower of cost (first in, first out) or market.
Inventories consist of:
| |
November 30, 2002 |
February 28, 2002 |
|||||
|---|---|---|---|---|---|---|---|
| Raw materials and work-in-process | $ | 7,501,000 | $ | 14,478,000 | |||
| Finished goods | 24,547,000 | 19,082,000 | |||||
| 32,048,000 | 33,560,000 | ||||||
| Reserves for obsolescence | (2,070,000 | ) | (1,640,000 | ) | |||
| $ | 29,978,000 | $ | 31,920,000 | ||||
NOTE E—LONG-TERM DEBT
Long-term debt consisted of the following:
| |
November 30, 2002 |
February 28, 2002 |
||||
|---|---|---|---|---|---|---|
| Term loan facility; floating interest rate based on an adjusted LIBOR rate (4.25% as of November 30, 2002), quarterly principal payments of $313,000 through November 2005; collateralized by assets of Aydin Display, Inc. | $ | 3,750,000 | $ | 4,375,000 | ||
Term loan facility (converted from line of credit on August 1, 2002); interest rate of prime (4.25% as of November 30, 2002) plus 1.75%, monthly principal payments of $57,000 payable through July 31, 2004; collateralized by the receivables and inventory of Fox International, Ltd., Inc. |
2,582,000 |
— |
||||
Note payable to bank; interest rate of prime (4.25% as of November 30, 2002) plus 1.5% monthly, principal payments of $9,000 payable through May 2010; collateralized by assets of XKD Corporation. |
608,000 |
656,000 |
||||
Mortgage note payable to bank; interest not to exceed 7.5% and maturing December 2003; collateralized by land and building of Fox International, Ltd., Inc. |
600,000 |
627,000 |
||||
Mortgage note payable to bank; interest rate of prime plus 0.5%; monthly principal and interest payments of $5,000 commenced in May 2002 and payable through October 2021; collateralized by land and building of Teltron Technologies, Inc. |
591,000 |
509,000 |
||||
Other |
573,000 |
231,000 |
||||
8,704,000 |
6,398,000 |
|||||
Less current maturities |
2,739,000 |
1,443,000 |
||||
$ |
5,965,000 |
$ |
4,955,000 |
|||
NOTE F—LINE OF CREDIT
In May 2001, the Company and its primary bank agreed to consolidate an existing line of credit and term note payable into a $10,000,000 credit facility. The interest rate on the line of credit is based on a floating LIBOR rate (3.9% at November 30, 2002), based on a ratio of debt to EBITDA, as defined. The note matures on July 1, 2003, and accordingly has been classified as current on the
10
November 30, 2002 balance sheet. The amount of credit available for advance was reduced by $500,000 on July 1, 2001. A second scheduled reduction of $500,000 scheduled for July 1, 2002 was extended indefinitely while the company currently negotiates changes to the line of credit. Advance rates remain the same as under the previous line, including a commitment fee of 0.25% for the unused portion. The agreement contains affirmative and negative covenants, including requirements related to tangible net worth and debt service coverage. Additionally, dividend payments, capital expenditures and acquisitions have certain restrictions. Substantially all of the Company's retained earnings are restricted based upon these covenants. As of November 30, 2002, the Company was not in compliance with certain covenants due to the third quarter adjustment and write-off of inventories, equipment, and other assets as a result of the internal reorganization and closure of three facilities. Subsequent to November 30, 2002, the bank has waived those covenant violations with respect to the fiscal quarter ended November 30, 2002. As of November 30, 2002, the outstanding balance on the line of credit was $9,191,000.
NOTE G—SUPPLEMENTAL CASH FLOW INFORMATION
| |
Nine Months Ended |
|||||
|---|---|---|---|---|---|---|
| |
||||||