SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13
OF THE SECURITIES EXCHANGE ACT OF 1934
| For Quarter Ended November 30, 2003 | 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 by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes o No ý
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 January 14, 2004 |
|
|---|---|---|
| Common Stock, No Par Value | 4,751,000 |
Video Display Corporation and Subsidiaries
Index
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Page |
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| PART I. FINANCIAL INFORMATION | ||||
Item 1. |
Financial Statements |
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Consolidated balance sheets— November 30, 2003 (unaudited) and February 28, 2003 (audited) |
3 |
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Consolidated statements of operations— Three and nine months ended November 30, 2003 and 2002 (unaudited) |
4 |
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Consolidated statements of shareholders' equity and comprehensive income— Twelve months ended February 28, 2003 (audited) and the nine months ended November 30, 2003 (unaudited) |
5 |
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Consolidated statements of cash flows— Nine months ended November 30, 2003 and 2002 (unaudited) |
6 |
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Notes to consolidated financial statements— November 30, 2003 (unaudited) |
7-12 |
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Item 2. |
Management's Discussion and Analysis of Financial Condition and Results of Operations |
13-18 |
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Item 3. |
Quantitative and Qualitative Disclosure About Market Risk |
18 |
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Item 4. |
Controls and Procedures |
18 |
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PART II. OTHER INFORMATION |
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Item 1. |
Legal Proceedings |
19 |
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| Item 2. | Changes in Securities and Use of Proceeds | 19 | ||
| Item 3. | Defaults upon 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 |
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EXHIBIT 31—CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 |
21-22 |
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EXHIBIT 32—CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 |
23 |
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2
Video Display Corporation and Subsidiaries
Consolidated Balance Sheets
| |
November 30, 2003 (unaudited) |
February 28, 2003 (Note A) |
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|---|---|---|---|---|---|---|---|---|
| Assets | ||||||||
| Current Assets | ||||||||
| Cash and cash equivalents | $ | 1,453,000 | $ | 2,392,000 | ||||
| Accounts receivable, less allowance for possible losses of $319,000 and $502,000 | 9,896,000 | 11,120,000 | ||||||
| Inventories (Note C) | 27,215,000 | 28,821,000 | ||||||
| Prepaid expenses and other | 4,600,000 | 4,289,000 | ||||||
| Total current assets | 43,164,000 | 46,622,000 | ||||||
| Property, plant and equipment: | ||||||||
| Land | 540,000 | 540,000 | ||||||
| Buildings | 7,012,000 | 6,858,000 | ||||||
| Machinery and equipment | 18,384,000 | 17,949,000 | ||||||
| 25,936,000 | 25,347,000 | |||||||
| Accumulated depreciation and amortization | (18,078,000 | ) | (17,186,000 | ) | ||||
| Net property, plant, and equipment | 7,858,000 | 8,161,000 | ||||||
| Other assets | 2,399,000 | 2,552,000 | ||||||
| Total assets | $ | 53,421,000 | $ | 57,335,000 | ||||
Liabilities and Shareholders' Equity |
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| Current liabilities | ||||||||
| Accounts payable | $ | 3,623,000 | $ | 3,809,000 | ||||
| Accrued liabilities | 4,468,000 | 4,077,000 | ||||||
| Line of credit (Note E) | 2,420,000 | 9,229,000 | ||||||
| Notes payable to shareholders | 19,000 | 60,000 | ||||||
| Current maturities of long-term debt (Note D) | 1,995,000 | 2,708,000 | ||||||
| Total current liabilities | 12,525,000 | 19,883,000 | ||||||
Convertible subordinated debentures |
— |
1,000,000 |
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| Long-term debt, less current maturities (Note D) | 2,352,000 | 5,155,000 | ||||||
| Line of credit (Note E) | 5,567,000 | — | ||||||
| Notes payable to shareholders, less current maturities | 8,274,000 | 8,311,000 | ||||||
| Deferred income taxes | 554,000 | 554,000 | ||||||
| Other | 122,000 | 176,000 | ||||||
| Total liabilities | 29,394,000 | 35,079,000 | ||||||
| Redeemable common stock; 15,000 shares issued and outstanding at February 28, 2003 (Note F) | — | 100,000 | ||||||
Commitments |
— |
— |
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Shareholders' Equity (Note G) |
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| Preferred stock, no par value—2,000,000 shares authorized; none issued and outstanding | — | — | ||||||
| Common stock, no par value—10,000,000 shares authorized; 4,751,000 and 4,700,000 issued and outstanding | 6,132,000 | 5,293,000 | ||||||
| Additional paid in capital | 92,000 | 92,000 | ||||||
| Retained earnings | 17,924,000 | 17,004,000 | ||||||
| Accumulated other comprehensive loss | (121,000 | ) | (233,000 | ) | ||||
| Total shareholders' equity | 24,027,000 | 22,156,000 | ||||||
| Total liabilities and shareholders' equity | $ | 53,421,000 | $ | 57,335,000 | ||||
The accompanying notes are an integral part of these statements.
3
Video Display Corporation and Subsidiaries
Consolidated Statements of Operations (unaudited)
| |
Three Months Ended November 30, |
Nine Months Ended November 30, |
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|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
2003 |
2002 |
2003 |
2002 |
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| Net sales | $ | 18,065,000 | $ | 18,240,000 | $ | 56,193,000 | $ | 56,666,000 | ||||||
| Cost of goods sold | 12,689,000 | 17,281,000 | 37,956,000 | 43,924,000 | ||||||||||
| Gross profit | 5,376,000 | 959,000 | 18,237,000 | 12,742,000 | ||||||||||
| Operating expenses | ||||||||||||||
| Selling and delivery | 1,642,000 | 1,926,000 | 5,105,000 | 5,867,000 | ||||||||||
| General and administrative | 2,755,000 | 3,714,000 | 8,754,000 | 9,818,000 | ||||||||||
| Recognized foreign currency translation loss | — | 1,296,000 | — | 1,296,000 | ||||||||||
| 4,397,000 | 6,936,000 | 13,859,000 | 16,981,000 | |||||||||||
| Operating profit | 979,000 | (5,977,000 | ) | 4,378,000 | (4,239,000 | ) | ||||||||
| Other income (expense) | ||||||||||||||
| Interest expense | (290,000 | ) | (447,000 | ) | (931,000 | ) | (1,153,000 | ) | ||||||
| Other, net | (90,000 | ) | 48,000 | 29,000 | 128,000 | |||||||||
| (380,000 | ) | (399,000 | ) | (902,000 | ) | (1,025,000 | ) | |||||||
| Income (loss) before income taxes | 599,000 | (6,376,000 | ) | 3,476,000 | (5,264,000 | ) | ||||||||
| Income tax expense (benefit) | 227,000 | (1,452,000 | ) | 1,320,000 | (1,036,000 | ) | ||||||||
| Net income | $ | 372,000 | $ | (4,924,000 | ) | 2,156,000 | $ | (4,228,000 | ) | |||||
| Basic earnings per share of common stock (Note G) | $ | 0.08 | $ | (1.03 | ) | $ | 0.46 | $ | (0.89 | ) | ||||
| Diluted earnings per share of common stock (Note G) | $ | 0.08 | $ | (1.03 | ) | $ | 0.45 | $ | (0.89 | ) | ||||
| Basic weighted average shares outstanding | 4,700,000 | 4,761,000 | 4,640,000 | 4,761,000 | ||||||||||
| Diluted weighted average shares outstanding | 4,807,000 | 4,761,000 | 4,884,000 | 4,761,000 | ||||||||||
The accompanying notes are an integral part of these statements.
4
Video Display Corporation and Subsidiaries
Consolidated Statements of Shareholders' Equity and Comprehensive Income
for the Twelve Months Ended February 28, 2003 (audited) and
the Nine Months Ended November 30, 2003 (unaudited)
| |
Common Stock |
Additional Paid In Capital |
Accumulated Other Comprehensive Income |
Retained Earnings |
Current Period Comprehensive Income |
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|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Balance at February 28, 2002 | $ | 5,325,000 | $ | 92,000 | $ | (1,393,000 | ) | $ | 20,635,000 | |||||||||
| Net loss for the year | — | — | — | (3,286,000 | ) | $ | (3,286,000 | ) | ||||||||||
| Unrealized loss on marketable equity securities | — | — | (4,000 | ) | — | (4,000 | ) | |||||||||||
| Foreign currency translation adjustment | — | — | (132,000 | ) | — | (132,000 | ) | |||||||||||
| Foreign currency translation adjustment recognized in operations resulting from liquidation of foreign subsidiary | — | — | 1,296,000 | — | 1,296,000 | |||||||||||||
| Total comprehensive loss | $ | (2,126,000 | ) | |||||||||||||||
| Issuance of common stock under stock option plan | 37,000 | — | — | — | ||||||||||||||
| Repurchase of common stock | (69,000 | ) | — | — | (345,000 | ) | ||||||||||||
| Balance at February 28, 2003 | 5,293,000 | 92,000 | (233,000 | ) | 17,004,000 | |||||||||||||
| Net income for the period | — | — | — | 2,156,000 | $ | 2,156,000 | ||||||||||||
| Unrealized gain on marketable equity securities | — | — | 25,000 | — | 25,000 | |||||||||||||
| Realized loss recognized on sale of marketable equity securities | — | — | 126,000 | — | 126,000 | |||||||||||||
| Foreign currency translation adjustment | — | — | (39,000 | ) | — | (39,000 | ) | |||||||||||
| Total comprehensive income | $ | 2,268,000 | ||||||||||||||||
| Conversion of convertible debentures into 240,000 shares | 1,000,000 | — | — | — | ||||||||||||||
| Issuance of common stock under stock option plan | 125,000 | — | — | — | ||||||||||||||
| Issuance of common stock | 51,000 | — | — | — | ||||||||||||||
| Repurchase of common stock | (337,000 | ) | — | — | (1,236,000 | ) | ||||||||||||
| Balance at November 30, 2003 | $ | 6,132,000 | $ | 92,000 | $ | (121,000 | ) | $ | 17,924,000 | |||||||||
The accompanying notes are an integral part of these statements.
5
Video Display Corporation and Subsidiaries
Consolidated Statements of Cash Flows (unaudited)
| |
Nine Months Ended November 30, |
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|---|---|---|---|---|---|---|---|
| |
2003 |
2002 |
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| Operating Activities | |||||||
| Net income | $ | 2,156,000 | $ | (4,228,000 | ) | ||
| Adjustments to reconcile net income (loss) to net cash provided by operations: | |||||||
| Depreciation and amortization | 892,000 | 1,152,000 | |||||
| Provision for inventory reserves and write-downs | 780,000 | 4,397,000 | |||||
| Provision for bad debts | 145,000 | 542,000 | |||||
| Loss on disposal of fixed assets | — | 725,000 | |||||
| Loss on sale of marketable equity securities | 126,000 | — | |||||
| Deferred income taxes | — | (55,000 | ) | ||||
| Recognized foreign currency translation loss | — | 1,296,000 | |||||
| Changes in working capital: | |||||||
| Accounts receivable | 1,079,000 | (439,000 | ) | ||||
| Inventories | 826,000 | (2,355,000 | ) | ||||
| Prepaid expenses and other assets | (158,000 | ) | (872,000 | ) | |||
| Accounts payable and accrued liabilities | 152,000 | 1,680,000 | |||||
| Net cash provided by operating activities | 5,998,000 | 1,873,000 | |||||
| Investing activities | |||||||
| Capital expenditures | (588,000 | ) | (1,123,000 | ) | |||
| Proceeds from sale of marketable equity securities | 30,000 | — | |||||
| Other investing activities | — | 158,000 | |||||
| Net cash used in provided by investing activities | (558,000 | ) | (965,000 | ) | |||
| Financing activities | |||||||
| Proceeds from long-term debt and lines of credit | 13,903,000 | 11,456,000 | |||||
| Payments on long-term debt and lines of credit | (18,739,000 | ) | (12,096,000 | ) | |||
| Proceeds from exercise of stock options | 125,000 | 11,000 | |||||
| Purchase of common stock under repurchase program | (1,573,000 | ) | (46,000 | ) | |||
| Redemption of redeemable common stock | (100,000 | ) | — | ||||
| Proceeds from issuance of common stock | 51,000 | — | |||||
| Net cash used in financing activities | (6,333,000 | ) | (675,000 | ) | |||
| Effect of exchange rate changes on cash | (46,000 | ) | 46,000 | ||||
| Net change in cash | (939,000 | ) | 279,000 | ||||
| Cash, beginning of period | 2,392,000 | 1,615,000 | |||||
| Cash, end of period | $ | 1,453,000 | $ | 1,894,000 | |||
The accompanying notes are an integral part of these statements.
6
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 28, 2003 included in the Company's Annual Report on Form 10-K.
The consolidated financial statements include 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.
Assets and liabilities of foreign subsidiaries 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. The Company has a subsidiary in the U.K., which is not material, and uses the British pound as its functional currency.
The Company reported its Mexican subsidiary on the basis of the functional currency being the U.S. dollar, effective January 1, 1997, as over 90% of the subsidiary's sales and purchases were with the parent with accounts receivable and accounts payable settled in U.S. dollars. The Mexican operations were substantially shut down in the third quarter of the fiscal year ended 2003 and the cumulative translation losses were recognized as a charge against income in that fiscal year.
NOTE B—ADOPTION OF RECENT ACCOUNTING PRONOUNCEMENTS
In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest Entities". In general, a variable interest entity is a corporation, partnership, trust, or any other legal structure used for business purposes that either (a) does not have equity investors with voting rights or (b) has equity investors that do not provide sufficient financial resources for the entity to support its activities. FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. The consolidation requirements of FIN 46 apply immediately to variable interest entities created or obtained after January 31, 2003. FIN 46 applies in the first fiscal year, or interim period, beginning after December 15, 2003 to variable interests entities in which an enterprise holds a variable interest that it acquired before February 1, 2003. Since the Company currently has identified no variable interest entities, management expects that the adoption of the provisions of FIN 46 will not have a material impact on the Company's consolidated results of operations or financial position.
In May 2003, the FASB issued Statement No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity". SFAS No. 150 requires three types of freestanding financial instruments to be classified as liabilities in statements of financial position. One type is mandatorily redeemable shares, which the issuing company is obligated to buy back in exchange for cash or other assets. A second type, which includes put options and forward purchase contracts,
7
involves instruments that do or may require the issuer to buy back some of its shares in exchange for cash or other assets. The third type of instruments are obligations that can be settled with shares, the monetary value of which is fixed, tied solely or predominately to a variable such as a market index, or varies inversely with the value of the issuer's shares. The majority of the guidance in SFAS No. 150 is effective for all financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. In accordance with SFAS No. 150, the Company adopted this standard on September 1, 2003, which did not have a material impact on the Company's consolidated financial position and results of operations. During fiscal 2003, the Company issued $100,000 of redeemable common stock in exchange for inventory. During the first quarter ended May 31, 2003, the stock was redeemed at the option of the holder for $100,000 cash.
There were no other recently issued accounting pronouncements with delayed effective dates that would currently have a material impact on the Company's consolidated financial position and results of operations.
NOTE C—INVENTORIES
Inventories are stated at the lower of cost (first in, first out) or market.
Inventories consisted of the following:
| |
November 30, 2003 |
February 28, 2003 |
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|---|---|---|---|---|---|---|---|
| Raw materials and work-in-process | $ | 16,407,000 | $ | 14,947,000 | |||
| Finished goods | 14,094,000 | 16,213,000 | |||||
| 30,501,000 | 31,160,000 | ||||||
| Reserves for obsolescence | (3,286,000 | ) | (2,339,000 | ) | |||
| $ | 27,215,000 | $ | 28,821,000 | ||||
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NOTE D—LONG-TERM DEBT
Long-term debt consisted of the following:
| |
November 30, 2003 |
February 28, 2003 |
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|---|---|---|---|---|---|---|---|
| Term loan facility, floating interest rate based on an adjusted LIBOR rate (4.00% as of November 30, 2003), quarterly principal payments commenced November 1999 and maturing November 2005; collateralized by assets of Aydin Display, Inc. | $ | 2,188,000 | $ | 3,125,000 | |||
| Term loan facility, interest rate of prime (4.00% as of November 30, 2003) plus 1%; collateralized by inventories and receivables of Fox International, Inc.; converted to a short-term revolving note due July 31, 2004. | — | 2,410,000 | |||||
| Note payable to bank; interest rate of prime plus 1.5%; monthly principal payments of $9,000 payable through May 2010; collateralized by assets of XKD Corporation. | 542,000 | 593,000 | |||||
| Mortgage payable to bank; interest not to exceed 7.5% and maturing December 2003; collateralized by land and building of Fox International, Inc. | 556,000 | 589,000 | |||||
| Mortgage payable to bank; interest rate of prime plus 0.5%; monthly principal and interest payments of $5,000 payable through October 2021; collateralized by land and building of Teltron Technologies, Inc. | 577,000 | 588,000 | |||||
| Other | 484,000 | 558,000 | |||||
| 4,347,000 | 7,863,000 | ||||||
| Less current portion | (1,995,000 | ) | (2,708,000 | ) | |||
| $ | 2,352,000 | $ | 5,155,000 | ||||
NOTE E—LINES OF CREDIT
On November 21, 2003, the Company signed an amendment to its existing line with its primary lender expanding the maximum availability from $9,500,000 to $12,000,000 for two years. In addition to the $12,000,000 line of credit, the lender also agreed to advance up to $3,500,000 of short term (180 day) bridge financing to allow the Company to consider methods of acquisition of real estate currently under lease by the Company.
The interest rate on the amended line of credit is a variable rate based upon the Company's earning performance. At November 30, 2003, the floating rate was 3.62% based on a ratio of debt to EBITDA, as defined. The weighted average interest rate during the nine months ended November 30, 2003 and the year ended February 28, 2003 was 3.70% and 3.4%. The average amount and maximum amount outstanding were $6,966,000 and $8,801,000, respectively, during the nine month periods ended November 30, 2003 and $9,248,000 and $9,524,000, respectively, during fiscal year 2003. Borrowings under the line of credit are limited to eligible accounts receivable, inventory and real estate, as defined, and includes a commitment fee of 0.25% for the unused portion. As of November 30, 2003, the outstanding balance on the line of credit was $5,567,000 and the available amount for borrowing was $6,433,000.
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
9
expenditures and acquisitions have certain restrictions. Substantially all of the Company's retained earnings are restricted based upon these covenants. Subsequent to November 30, 2003, the Company received bank approval to issue a $0.05 per common share cash dividend to all shareholders of record as of December 30, 2003.
Additionally, the Company converted a $2,750,000 term loan facility