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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

 

FORM 10-Q

 

 

 

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

For the Quarterly Period Ended November 30, 2012.

or

 

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

For the Transition Period From                      to                     

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

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

1868 TUCKER INDUSTRIAL ROAD, TUCKER, GEORGIA 30084

(Address of principal executive offices)

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  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, and accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   ¨    Smaller reporting company   x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

As of November 30, 2012, the registrant had 7,566,610 shares of Common Stock outstanding.

 

 

 


Video Display Corporation and Subsidiaries

Index

 

             Page  
PART I.   FINANCIAL INFORMATION   
  Item 1.   Financial Statements   
   

Condensed Consolidated Balance Sheets –
November 30, 2012 (unaudited) and February 28, 2012

     3   
   

Condensed Consolidated Income Statements -
Three months and nine months ended November 30, 2012 and 2011
(unaudited)

     5   
   

Condensed Consolidated Statement of Shareholders’ Equity -
Nine months ended November 30, 2012 (unaudited)

     6   
   

Condensed Consolidated Statements of Cash Flows –
Nine months ended November 30, 2012 and 2011 (unaudited)

     7   
   

Notes to Condensed Consolidated Financial Statements -
November 30, 2012 (unaudited)

     8   
  Item 2.  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     18   
  Item 3.   Quantitative and Qualitative Disclosure About Market Risk      25   
  Item 4.   Controls and Procedures      26   
PART II.   OTHER INFORMATION   
  Item 1.   Legal Proceedings      27   
  Item 1A.   Risk Factors      27   
  Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds      27   
  Item 3.   Defaults upon Senior Securities      27   
  Item 4.   Submission of Matters to a Vote of Security Holders      27   
  Item 5.   Other Information      27   
  Item 6.   Exhibits      28   
  SIGNATURES      29   
 

31.1  

  Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002   
 

31.2  

  Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002   
 

   32  

  Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002   

.

 

 

2


ITEM 1 – FINANCIAL STATEMENTS

Video Display Corporation and Subsidiaries

Condensed Consolidated Balance Sheets

(in thousands)

 

     November 30,     February 29,  
     2012     2012  
     (unaudited)        

Assets

    

Current assets

    

Cash

   $ —        $ 148   

Accounts receivable, less allowance for doubtful accounts of $84 and $176

     5,963        7,193   

Inventories, net

     31,584        29,736   

Cost and estimated earnings in excess of billings on uncompleted contracts

     3,244        3,236   

Deferred income taxes

     2,280        1,936   

Income taxes refundable

     77        680   

Prepaid expenses and other

     760        842   
  

 

 

   

 

 

 

Total current assets

     43,908        43,771   
  

 

 

   

 

 

 

Property, plant, and equipment

    

Land

     281        336   

Buildings

     5,625        6,659   

Machinery and equipment

     15,606        17,884   
  

 

 

   

 

 

 
     21,512        24,879   

Accumulated depreciation and amortization

     (17,211     (20,463
  

 

 

   

 

 

 

Net property, plant, and equipment

     4,301        4,416   
  

 

 

   

 

 

 

Note receivable

     622        250   

Goodwill

     1,291        1,291   

Intangible assets, net

     1,043        1,221   

Deferred income taxes

     726        648   

Other assets

     30        6   
  

 

 

   

 

 

 

Total assets

   $ 51,921      $ 51,603   
  

 

 

   

 

 

 

 

The accompanying notes are an integral part of these consolidated statements.

 

3


Video Display Corporation and Subsidiaries

Condensed Consolidated Balance Sheets (continued)

(in thousands)

 

     November 30,     February 29,  
     2012     2012  
     (unaudited)        

Liabilities and Shareholders’ Equity

    

Current liabilities

    

Accounts payable

   $ 3,368      $ 3,237   

Accrued liabilities

     2,007        1,945   

Billings in excess of cost and estimated earnings on uncompleted contracts

     196        342   

Lines of credit

     11,085        —     

Current maturities of long-term debt

     4,821        945   
  

 

 

   

 

 

 

Total current liabilities

     21,477        6,469   

Lines of credit

     —          11,057   

Long-term debt, less current maturities

     293        4,878   

Unrecognized gain

     554        —     

Other long term liabilities

     249        246   
  

 

 

   

 

 

 

Total liabilities

     22,573        22,650   
  

 

 

   

 

 

 

Shareholders’ Equity

    

Preferred stock, no par value – 10,000 shares authorized; none issued and outstanding

     —          —     

Common stock, no par value – 50,000 shares authorized;

    

9,732 issued and 7,566 outstanding at November 30, 2012 and 9,732 issued and 7,581 outstanding at February 29, 2012

     7,293        7,293   

Additional paid-in capital

     114        114   

Retained earnings

     32,515        32,065   

Treasury stock, shares at cost: 2,166 at November 30, 2012 and 2,151 at February 29, 2012

     (10,574     (10,519
  

 

 

   

 

 

 

Total shareholders’ equity

     29,348        28,953   
  

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 51,921      $ 51,603   
  

 

 

   

 

 

 

The accompanying notes are an integral part of these consolidated statements.

 

4


Video Display Corporation and Subsidiaries

Condensed Consolidated Income Statements (unaudited)

(in thousands, except per share data)

 

     Three Months Ended
November 30,
    Nine Months Ended
November 30,
 
     2012     2011     2012     2011  

Net sales

   $ 12,613      $ 16,036      $ 37,552      $ 49,602   

Cost of goods sold

     9,331        10,667        27,158        33,689   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     3,282        5,369        10,394        15,913   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses

        

Selling and delivery

     1,307        1,413        4,122        3,994   

General and administrative

     1,748        2,040        5,584        6,370   
  

 

 

   

 

 

   

 

 

   

 

 

 
     3,055        3,453        9,706        10,364   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating profit

     227        1,916        688        5,549   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other income (expense)

        

Interest expense

     (166     (185     (528     (624

Other, net

     92        67        352        137   
  

 

 

   

 

 

   

 

 

   

 

 

 
     (74     (118     (176     (487
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations before income taxes

     153        1,798        512        5,062   

Income tax expense

     5        540        62        1,565   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 148      $ 1,258      $ 450      $ 3,497   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income per share:

        

Basic earnings per share of common stock

   $ .02      $ .17      $ .06      $ .46   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted earnings per share of common stock

   $ .02      $ .17      $ .06      $ .45   
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic weighted average shares outstanding

     7,566        7,628        7,571        7,619   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted weighted average shares outstanding

     7,615        7,683        7,624        7,855   
  

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these consolidated statements.

 

5


Video Display Corporation and Subsidiaries

Condensed Consolidated Statement of Shareholders’ Equity (unaudited)

(in thousands)

 

     Common
Shares
    Share
Amount
     Additional
Paid-in
Capital
    Retained
Earnings
     Treasury
Stock
 

Balance, February 29, 2012

     7,581      $ 7,293       $ 114      $ 32,065       $ (10,519

Net income

     —          —           —          450         —     

Purchase of treasury stock

     (22     —           —          —           (90

Options exercised

     7        —           (8     —           35   

Share based compensation

     —          —           8        —           —     
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Balance, November 30, 2012

     7,566      $ 7,293       $ 114      $ 32,515       $ (10,574
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

The accompanying notes are an integral part of these consolidated statements.

 

6


Video Display Corporation and Subsidiaries

Condensed Consolidated Statements of Cash Flows (unaudited)

(in thousands)

 

     Nine Months Ended
November 30,
 
     2012     2011  

Operating Activities

    

Net income

   $ 450      $ 3,497   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Depreciation and amortization

     782        831   

Provision for doubtful accounts

     (84     161   

Provision for inventory reserve

     983        1,203   

Non-cash charge for share based compensation

     8        169   

Deferred income taxes

     (422     501   

Gain on disposal of equipment

     (47     —     

Other

     (7     15   

Changes in working capital:

    

Accounts receivable

     1,314        709   

Inventories

     (2,831     (749

Note receivable for StingRay56

     250        —     

Prepaid expenses and other current assets

     133        —     

Accounts payable and accrued liabilities

     196        (2,506

Cost, estimated earnings and billings, net, on uncompleted contracts

     (154     (2,080

Income taxes refundable/payable

     603        451   
  

 

 

   

 

 

 

Net cash provided by operating activities

     1,174        2,202   
  

 

 

   

 

 

 

Investing Activities

    

Capital expenditures

     (629     (474

Proceeds from sale of Chroma property

     52        —     

Proceeds from sale of Fox International, Ltd.

     —          51   

Proceeds from sale of equipment

     —          3   

Use of letter of credit/CD

     —          1,388   
  

 

 

   

 

 

 

Net cash provided by (used in) investing activities

     (577     968   
  

 

 

   

 

 

 

Financing Activities

    

Proceeds from long-term debt, lines of credit

     17,490        10,508   

Payments on long-term debt, lines of credit

     (18,172     (13,241

Purchase of treasury stock

     (90     (225

Re-issue of treasury stock for options exercised

     27        8   

Proceeds from notes payable to officers and directors

     —          10   

Repayments of notes payable to officers and directors

     —          (1,581
  

 

 

   

 

 

 

Net cash (used in) financing activities

     (745     (4,521
  

 

 

   

 

 

 

Net change in cash

     (148     (1,351

Cash, beginning of year

     148        1,399   
  

 

 

   

 

 

 

Cash, end of period

   $ —        $ 48   
  

 

 

   

 

 

 

The accompanying notes are an integral part of these consolidated statements.

 

7


Video Display Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited)

November 30, 2012

Note 1. – Summary of Significant Accounting Policies

The accompanying condensed consolidated financial statements include the accounts of the Company and its majority-owned subsidiaries after elimination of all significant intercompany accounts and transactions.

As contemplated by the Securities and Exchange Commission (the “SEC” or “Commission”) instructions to Form 10-Q, the following footnotes have been condensed and, therefore, do not contain all disclosures required in connection with annual consolidated financial statements. Reference should be made to the Company’s year-end consolidated financial statements and notes thereto, including a description of the accounting policies followed by the Company, contained in its Annual Report on Form 10-K for the fiscal year ended February 29, 2012, as filed with the Commission. There are no material changes in accounting policy during the nine months ended November 30, 2012.

The consolidated financial information included in this report has been prepared by the Company, without audit. In the opinion of management, the financial information included in this report contains all adjustments (all of which are normal and recurring) necessary for a fair presentation of the results for the interim periods. Nevertheless, the results shown for interim periods are not necessarily indicative of results to be expected for the full year. The February 29, 2012 consolidated balance sheet data was derived from the audited consolidated financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America.

Note 2. – Liquidity

On December 23, 2010, the Company and its subsidiaries executed a new Credit Agreement with RBC Bank and Community & Southern Bank (collectively, the “Banks”) to provide new financing to the Company to replace the existing credit agreement with RBC Bank that terminated in conjunction with this Agreement. The new Agreement provided for a line of credit of up to $17.5 million and two term loans of $3.5 million and $3.0 million.

 

   

1st Amendment: On May 26, 2011, the Banks amended the Credit Agreement to reduce the revolver commitment to $15.0 million, restate the covenants to pertain to only continuing operations of the Company and to adjust the targets for the senior funded debt to EBITDA covenant for the Company’s quarters ending May 31, 2011 and August 31, 2011.

 

   

2nd Amendment: On July 26, 2011, the Banks again amended the Credit Agreement to include a swing-line promissory note of $1.0 million that is included in the revised $15.0 million revolver commitment.

 

   

3rd Amendment: On September 1, 2011, the Banks amended the Credit Agreement to allow the Company to repurchase a limited amount of the Company’s common stock, equal to ten percent of the Company’s net earnings after taxes, subject to meeting certain share repurchase conditions and revised the definition of the fixed charge coverage ratio and total liabilities to tangible net worth to exclude such repurchases.

 

   

4th Amendment: On January 17, 2012, the Banks amended the Credit Agreement to allow the Company to purchase a promissory note, dated July 23, 2010, held by Hetra Secure Solutions Corporation on StingRay56.

 

   

5th Amendment: On March 5, 2012, the Banks amended the Credit Agreement to allow the Company to acquire StingRay56, Inc.

The outstanding balance of the line of credit at November 30, 2012 was $11.1 million and the outstanding balances of the term loans were $2.2 million and $2.6 million, respectively. The outstanding balance of the line of credit at February 29, 2012 was $11.1 million and the outstanding balances of the term loans were $2.7 million and $2.8 million, respectively. These loans are secured by all assets and personal property of the Company and a limited guarantee of the Chief Executive Officer of $3.0 million. The $3.0 million term loan is secured by real estate property of the Company and a building owned by Southeastern Metro Savings, LLC, a company in which the Company’s Chief Executive Officer is a minority owner. The building will continue to be in the collateral pool until such time as the note is sufficiently paid down or it is replaced by other collateral.

 

8


Video Display Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited)

November 30, 2012

 

The Agreement contains three covenants: a fixed charge coverage ratio, ratio of senior funded debt to earnings before interest, taxes, depreciation and amortization (EBITDA), and total liabilities to tangible net worth. The Agreement also includes restrictions on the incurrence of additional debt or liens, investments (including Company stock), divestitures and certain other changes in the business. The Agreement expires on December 1, 2013. The interest rate on these loans is a floating LIBOR rate based on a fixed charge coverage ratio, minimum 4.0%, as defined in the loan documents.

As of November 30, 2012, the Company was not in compliance with the senior funded debt to EBITDA ratio and permitted share repurchases covenants as defined by the Banks credit line agreements. A breach of these covenants could result in default under our debt agreement, which could prompt the lender to declare all amounts outstanding under the debt agreement to be immediately due and payable and terminate all commitments to extend further credit. If the Company were unable to repay those amounts, the lender could proceed against the collateral granted to secure that indebtedness. If the lender under the debt agreement accelerates the repayment of the borrowings, there can be no assurance that the Company will have sufficient assets and funds to repay the borrowings under its debt agreements. The Company has been in talks with other banks about refinancing the current debt under an agreement with less restrictive covenants and borrowing base calculations. Management believes that a new debt agreement can be obtained by the end of the fourth quarter, however, there can be no assurance that an agreement can be reached that is reasonable to the Company or at all. Additionally, due to the activity generated by the chairman’s remarks at the annual shareholder meeting concerning any potential mergers, spinoffs, sale of the Company as a whole or any other method (see 8-K), the Company put negotiations on hold with the banks amendment of the facility or potential refinance until the uncertainty and any potential outcomes could be realized. Upon any definite agreement being reached, the Company will resume the negotiations on its debt facility. As a result of these violations and the Company’s likelihood of not meeting them at the next reporting period, the debt has been classified as current at November 30, 2012. The senior funded debt to EBITDA covenant was deemed to be the most restrictive by the Company and the Banks.

Note 3. – Recent Accounting Pronouncements

In September 2011, the FASB issued revised guidance FASB ASU 2011-08, “Intangibles – Goodwill and Other (Topic 350) - Testing Goodwill for Impairment” to allow entities to use a qualitative approach to test goodwill for impairment. The amendment permits an entity to first perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. If it is concluded that this is the case, it is necessary to perform the currently prescribed two-step goodwill impairment test. Otherwise, the two-step goodwill impairment test is not required. The amendments are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted and the Company has chosen early adoption. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.

In July 2012, the FASB issued revised guidance FASB ASU 2012-02, “Testing Indefinite Lived Assets for Impairment” to allow entities to consider qualitative values in determining whether or not indefinite lived assets should be tested for impairment. If it is more likely than not that impairment exists, testing for impairment should be performed. The update is effective for fiscal years beginning after September 15, 2012 but early adoption is permitted. Management believes that the adoption of this guidance will not have a material impact on the Company’s consolidated financial statements.

 

9


Video Display Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited)

November 30, 2012

 

Note 4. – Inventories

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

Inventories consisted of the following (in thousands):

 

     November 30,     February 29,  
     2012     2012  

Raw materials

   $ 21,295      $ 19,106   

Work-in-process

     6,687        6,853   

Finished goods

     7,560        7,027   
  

 

 

   

 

 

 
     35,542        32,986   

Reserves for obsolescence

     (3,958     (3,250
  

 

 

   

 

 

 
   $ 31,584      $ 29,736   
  

 

 

   

 

 

 

Note 5. – Costs and Estimated Earnings Related to Billings on Uncompleted Contracts

Information relative to contracts in progress consisted of the following:

 

     November 30,     February 29,  
     2012     2012  

Costs incurred to date on uncompleted contracts

   $ 5,088      $ 7,499   

Estimated earnings recognized to date on these contracts

     2,795        4,373   
  

 

 

   

 

 

 
     7,883        11,872   

Billings to date

     (4,835     (8,978
  

 

 

   

 

 

 

Costs and estimated earnings in excess of billings, net

   $ 3,048      $ 2,894   
  

 

 

   

 

 

 

Costs and estimated earnings in excess of billings

   $ 3,244      $ 3,236   

Billings in excess of costs and estimated earnings

     (196     (342
  

 

 

   

 

 

 
   $ 3,048      $ 2,894   
  

 

 

   

 

 

 

Costs and estimated earnings in excess of billings are the results of contracts in progress (jobs) in completing orders to customers’ specifications on contracts accounted for under FASB ASC 605-35, “Revenue Recognition: Construction-Type and Production-Type Contracts.” Costs included are material, labor, and overhead. These jobs require design and engineering effort for a specific customer purchasing a unique product. The Company records revenue on these fixed-price and cost-plus contracts on the percentage of completion basis using the ratio of costs incurred to estimated total costs at completion as the measurement basis for progress toward completion and revenue recognition. Any losses identified on contracts are recognized immediately. Contract accounting requires significant judgment relative to assessing risks, estimating contract costs and making related assumptions for schedule and technical issues. With respect to contract change orders, claims, or similar items, judgment must be used in estimating related amounts and assessing the potential for realization. These amounts are only included in contract value when they can be reliably

 

10


Video Display Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited)

November 30, 2012

 

estimated and realization is probable. Billings are generated based on specific contract terms, which might be a progress payment schedule, specific shipments, etc. None of the above contracts in progress contain post-shipment obligations.

Changes in job performance, manufacturing efficiency, final contract settlements, and other factors affecting estimated profitability may result in revisions to costs and income and are recognized in the period in which the revisions are determined.

As of November 30, 2012 and February 29, 2012, there were no production costs that exceeded the aggregate estimated cost of all in-process and delivered units relating to long-term contracts. Additionally, there were no claims outstanding that would affect the ultimate realization of full contract values. As of November 30, 2012 and February 29, 2012, there were no progress payments that had been netted against inventory.

Note 6. – Intangible Assets

Intangible assets consist primarily of the unamortized value of purchased patents, customer lists, non-compete agreements and other intangible assets. Intangible assets are amortized over the period of their expected lives, generally ranging from 5 to 15 years. Amortization expense related to intangible assets was approximately $179 thousand and $222 thousand for the nine months ended November 30, 2012 and 2011, respectively.

The cost and accumulated amortization of intangible assets were as follows (in thousands):

 

     November 30, 2012      February 29, 2012  
     Cost      Accumulated
Amortization
     Cost      Accumulated
Amortization
 

Customer lists

   $ 3,611       $ 2,788       $ 3,611       $ 2,701   

Non-compete agreements

     1,245         1,245         1,245         1,245   

Patents

     777         708         777         692   

Other intangibles

     649         498         649         423   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 6,282       $ 5,239       $ 6,282       $ 5,061   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

11


Video Display Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited)

November 30, 2012

 

Note 7. – Long-term Debt

Long-term debt consisted of the following (in thousands):

 

     November 30,
2012
    February 29,
2012
 

Note payable to RBC Bank and Community & Southern Bank; interest rate at LIBOR plus applicable margin as defined per the loan agreement, minimum 4.00% (2.51% combined rate as of November 30, 2012); monthly principal payments of $58 plus accrued interest, payable through December 2013 with an extension to December 2015 with a renewal of the credit agreement in December 2013; collateralized by all assets of the Company.

   $ 2,158      $ 2,683   

Note payable to RBC Bank and Community & Southern Bank; interest rate at LIBOR plus applicable margin as defined per the loan agreement, minimum 4.00% (2.51% combined rate as of November 30, 2012); monthly principal payments of $17 plus accrued interest, payable through December 2013 with an extension to December 2025 with a renewal of the credit agreement in December 2013; collateralized by three properties of the Company and one property owned by the Chief Executive Officer.

     2,617        2,767   

Mortgage payable to bank; interest rate at Community Banks Base Rate plus 0.5% (3.75% as of November 30, 2012); monthly principal and interest payments of $5 payable through October 2021; collateralized by land and building of Aydin Display Systems, Inc.

     339        373   
  

 

 

   

 

 

 
     5,114        5,823   

Less current maturities

     (4,821     (945
  

 

 

   

 

 

 
   $ 293      $ 4,878   
  

 

 

   

 

 

 

Note 8. – Lines of Credit

On December 23, 2010, the Company and its subsidiaries executed a new Credit Agreement with RBC Bank and Community & Southern Bank (collectively, the “Banks”) to provide new financing to the Company to replace the existing credit agreement with RBC Bank that terminated in conjunction with this Agreement. The new Agreement provided for a line of credit of up to $17.5 million and two term loans of $3.5 million and $3.0 million.

 

   

1st Amendment: On May 26, 2011, the Banks amended the Credit Agreement to reduce the revolver commitment to $15.0 million, restate the covenants to pertain to only continuing operations of the Company and to adjust the targets for the senior funded debt to EBITDA covenant for the Company’s quarters ending May 31, 2011 and August 31, 2011.

 

12


Video Display Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited)

November 30, 2012

 

   

2nd Amendment: On July 26, 2011, the Banks again amended the Credit Agreement to include a swing-line promissory note of $1.0 million that is included in the revised $15.0 million revolver commitment.

 

   

3rd Amendment: On September 1, 2011, the Banks amended the Credit Agreement to allow the Company to repurchase a limited amount of the Company’s common stock, equal to ten percent of the Company’s net earnings after taxes, subject to meeting certain share repurchase conditions and revised the definition of the fixed charge coverage ratio and total liabilities to tangible net worth to exclude such repurchases.

 

   

4th Amendment: On January 17, 2012, the Banks amended the Credit Agreement to allow the Company to purchase a promissory note, dated July 23, 2010, held by Hetra Secure Solutions Corporation on StingRay56.

 

   

5th Amendment: On March 5, 2012, the Banks amended the Credit Agreement to allow the Company to acquire StingRay56, Inc.

The outstanding balance of the line of credit at November 30, 2012 was $11.1 million and the balances of the term loans were $2.2 million and $2.6 million, respectively. The outstanding balance of the line of credit at February 29, 2012 was $11.1 million and the balances of the term loans were $2.7 million and $2.8 million, respectively. These loans are secured by all assets and personal property of the Company and a limited guarantee of the Chief Executive Officer of $3.0 million. The $3.0 million term loan is secured by real estate property of the Company and a building owned by Southeastern Metro Savings, LLC, a company in which the Company’s Chief Executive Officer is a minority officer. The building will continue to be in the collateral pool until such time as the note is sufficiently paid down or it is replaced by other collateral.

The Agreement contains three covenants: a fixed charge coverage ratio, ratio of senior funded debt to earnings before interest, taxes, depreciation and amortization (EBITDA), and total liabilities to tangible net worth. The Agreement also includes restrictions on the incurrence of additional debt or liens, investments (including Company stock), divestitures and certain other changes in the business. Substantially all of the Company’s retained earnings are restricted based upon these covenants. The Agreement expires on December 1, 2013. The interest rate on these loans is a floating LIBOR rate based on a fixed charge coverage ratio, minimum 4.0%, as defined in the loan documents.

As of November 30, 2012, the Company was not in compliance with the senior funded debt to EBITDA ratio and permitted share repurchases covenants as defined by the Banks credit line agreements. A breach of these covenants could result in default under our debt agreement, which could prompt the lender to declare all amounts outstanding under the debt agreement to be immediately due and payable and terminate all commitments to extend further credit. If the Company were unable to repay those amounts, the lender could proceed against the collateral granted to secure that indebtedness. If the lender under the debt agreement accelerates the repayment of the borrowings, there can be no assurance that the Company will have sufficient assets and funds to repay the borrowings under its debt agreements. The Company has been in talks with other banks about refinancing the current debt under an agreement with less restrictive covenants and borrowing base calculations. Management believes that a new debt agreement can be obtained by the end of the fourth quarter, however, there can be no assurance that an agreement can be reached that is reasonable to the Company or at all. Additionally, due to the activity generated by the chairman’s remarks at the annual shareholder meeting concerning any potential mergers, spinoffs, sale of the Company as a whole or any other method (see 8-K), the Company put negotiations on hold with the banks amendment of the facility or potential refinance until the uncertainty and any potential outcomes could be realized. Upon any definite agreement being reached, the Company will resume the negotiations on its debt facility. As a result of these violations and the Company’s likelihood of not meeting them at the next reporting period, the debt has been classified as current at November 30, 2012. The senior funded debt to EBITDA covenant was deemed to be the most restrictive by the Company and the Banks.

 

13


Video Display Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited)

November 30, 2012

 

Note 9. – Gain on Sale of Property, Plant and Equipment

On July 5, 2012 the Company sold its property at 8-18 Riverside Drive in White Mills, PA for $750 thousand. The Company received a $60 thousand down payment and financed the remaining $690 thousand on a ten-year note at an 8% interest rate. The Company is accounting for the sale on the installment method. The total gain on the sale is approximately $602 thousand. The Company recognized approximately $48 thousand of the gain at the time of the sale and the remaining gain of approximately $554 thousand will be recognized as payments are received.

Note 10. – Supplemental Cash Flow Information

Supplemental cash flow information is as follows (in thousands):

 

     Nine Months  
     Ended November 30,  
     2012     2011  

Cash paid for:

    

Interest

   $ 528      $ 644   
  

 

 

   

 

 

 

Income taxes, net of refunds

   $ (119   $ 613   
  

 

 

   

 

 

 

Non-cash activity:

    

Reduction of note receivable for acquisition of StingRay56

   $ 250      $ —     
  

 

 

   

 

 

 

Receipt of note receivable in conjunction with the sale of the Chroma property

   $ 690      $ —     
  

 

 

   

 

 

 

Receipt of treasury stock in conjunction with the sale of Fox International, Ltd.

   $ —        $ 3,272   
  

 

 

   

 

 

 

Reduction of notes payable to officers and directors in conjunction with the sale of Fox International, Ltd.

   $ —        $ 199   
  

 

 

   

 

 

 

 

14


Video Display Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited)

November 30, 2012

 

Note 11. – Shareholder’s Equity

Earnings Per Share

Basic earnings per share is computed by dividing income available to common shareholders by the weighted average number of common 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 nine month periods ended November 30, 2012 and 2011 (in thousands, except per share data):

 

     Net
Income
     Weighted
Average
Common Shares
Outstanding
     Earnings
Per
Share
 

Three months ended November 30, 2012

        

Basic

   $ 148         7,566       $ 0.02   

Effect of dilution:

        

Options

     —           49         —     
  

 

 

    

 

 

    

 

 

 

Diluted

   $ 148         7,615       $ 0.02   
  

 

 

    

 

 

    

 

 

 

Three months ended November 30, 2011

        

Basic

   $ 1,258         7,628       $ 0.17   

Effect of dilution:

        

Options

     —           55         —     
  

 

 

    

 

 

    

 

 

 

Diluted

   $ 1,258         7,683       $ 0.17   
  

 

 

    

 

 

    

 

 

 

Nine months ended November 30, 2012

        

Basic

   $ 450         7,571       $ 0.06   

Effect of dilution:

        

Options

     —           53         —     
  

 

 

    

 

 

    

 

 

 

Diluted

   $ 450         7,624       $ 0.06   
  

 

 

    

 

 

    

 

 

 

Nine months ended November 30, 2011

        

Basic

   $ 3,497         7,619       $ 0.46   

Effect of dilution:

        

Options

     —           236         (0.01
  

 

 

    

 

 

    

 

 

 

Diluted

   $ 3,497         7,855       $ 0.45   
  

 

 

    

 

 

    

 

 

 

 

15


Video Display Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited)

November 30, 2012

 

Stock-Based Compensation Plans

For the nine-month period ended November 30, 2012 and 2011, the Company recognized general and administrative expenses of $7.7 thousand and $2.0 thousand, respectively, related to share-based compensation. The liability for the share-based compensation recognized is presented in the consolidated balance sheets as part of additional paid in capital. As of November 30, 2012, total unrecognized compensation costs related to stock options granted was $5.6 thousand. The unrecognized stock option compensation cost is expected to be recognized over a period of approximately 1 year.

The Company estimates the fair value of stock options granted using the Black-Scholes option-pricing model, which requires the Company to estimate the expected term of the stock option grants and expected future stock price volatility over the term. The term represents the expected period of time the Company believes the options will remain outstanding based on historical information. Estimates of expected future stock price volatility are based on the historic volatility of the Company’s common stock, which represents the standard deviation of the differences in the weekly stock closing price, adjusted for dividends and stock splits.

Three members of the board of directors were each granted 3,000 stock options during the nine-month period ended November 30, 2012.

Stock Repurchase Program

The Company has a stock repurchase program, pursuant to which it was originally authorized to repurchase up to 1,632,500 shares of the Company’s common stock in the open market. On July 8, 2009, the Board of Directors of the Company approved a one time continuation of the stock repurchase program, and authorized the Company to repurchase up to 1,000,000 additional shares of the Company’s common stock, depending on the market price of the shares. There is no minimum number of shares required to be repurchased under the program. For the nine months ended November 30, 2012, the Company repurchased 22,031 shares at an average price of $4.10 per share. The Company repurchased 57,087 shares in the nine months ended November 30, 2011. Under the Company’s stock repurchase program, an additional 705,106 shares remain authorized to be repurchased by the Company at November 30, 2012. The Credit Agreement executed by the Company on December 23, 2010 included restrictions on investments that restricted further repurchases of stock under this program. On September 1, 2011, the Agreement was amended to allow the Company to repurchase a limited amount of the Company’s common stock, equal to ten percent of the Company’s net earnings after taxes subject to meeting certain share repurchase conditions.

Note 12. – Income Taxes

The effective tax rate for the nine months ended November 30, 2012 and 2011 was 12.1% and 30.9%, respectively. These rates differ from the Federal statutory rate primarily due to the effect of state taxes, the permanent non-deductibility of certain expenses for tax purposes, and research and experimentation credits.

Note 13. – Related Party Transactions

In conjunction with an agreement involving re-financing of the Company’s lines of credit and Loan and Security Agreement, on June 29, 2006 the Company’s CEO provided a $6.0 million subordinated term note to the Company with monthly principal payments of $33.3 thousand plus interest through July 2021. The interest rate on the note was equal to the prime rate plus one percent. The note was secured by a general lien on all assets of the Company, subordinate to the lien held by RBC Bank and Community & Southern Bank. During fiscal 2012, the Company repaid the remaining balance under this loan agreement on November 28, 2011 with consent from RBC Bank and Community & Southern Bank. The payoff was approximately $1.0 million. Interest paid on the loan in the nine months ending November 30, 2011 was $86.4 thousand.

 

16


Video Display Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited)

November 30, 2012

 

The Company’s CEO provides a portion of the collateral for the term loans with the consortium of RBC Bank and Community & Southern Bank. (See Note 8 – Lines of Credit)

Note 14. – Legal Proceedings

During 2007, the Company acquired the Cathode Ray Tube Manufacturing and Distribution Business and certain other assets of Clinton Electronics Corp. (“Clinton”), including inventory and fixed assets, for a total purchase price of $2,550,000, pursuant to an Asset Purchase Agreement between the parties (the “APA”). The form of consideration for the assets acquired included: (i) a $1.0 million face value Convertible Note; (ii) an agreement to deliver a stock certificate representing Company Common Shares having a $1,125,000 in market value of the Company’s common stock in January of 2008; and (iii) an agreement to deliver a stock certificate representing Company Common Shares having a $500,000 in market value of the Company’s common stock in January of 2009. The Company had paid the $1.0 million Note Payable in January 2008. The Company disputed certain representations made by Clinton in the APA including, but not limited to, representations concerning revenue, expenses, and inventory. As a result of this dispute, the Company did not issue the stock certificates scheduled for delivery January of 2008 and January of 2009. As such, the Company had accrued a potential liability of $1,625,000 and this accrued liability was reflected in the Company's Balance Sheet until the settlement was reached.

On August 24, 2011, the Company and the Clinton Electronics Corporation signed a settlement agreement ending the dispute involving the purchase of certain assets by the Company, pursuant to an Asset Purchase Agreement between the two companies. Prior to the negotiated settlement, the companies had agreed to arbitrate the dispute.

The terms of the settlement were not disclosed. There was no effect to the income statement due to the settlement. The previously accrued liability covered the settlement and the write off of inventory from the original agreement. The settlement did not have a material adverse effect on the Company’s business, consolidated financial condition, results of operation or cash flows.

 

17


Video Display Corporation and Subsidiaries

November 30, 2012

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 condensed consolidated financial statements and with the Company's 2012 Annual Report to Shareholders, which included audited consolidated financial statements and notes thereto for the fiscal year ended February 29, 2012, as well as Management's Discussion and Analysis of Financial Condition and Results of Operations.

Overview

The Company is a worldwide leader in the manufacturing and distribution of a wide range of display devices, encompassing, among others, industrial, military, medical, and simulation display solutions. The Company is comprised of one segment - the manufacturing and distribution of displays and display components. The Company is organized into four interrelated operations aggregated into one reportable segment pursuant to the aggregation criteria of FASB ASC Topic 280 “Segment Reporting”:

 

   

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

 

   

Data Display CRT offers a wide range of CRTs for use in data display screens, including computer terminal monitors and medical monitoring equipment.

 

   

Entertainment CRT – offers a wide range of CRTs and projection tubes for television and home theater equipment.

 

   

Component Parts – provides replacement electron guns and other components for CRTs primarily for servicing the Company’s internal needs.

During fiscal 2013, management of the Company is focusing key resources on strategic efforts to dispose of unprofitable operations and seek acquisition opportunities that enhance the profitability and sales growth of the Company’s more profitable product lines. The Company continues to seek new products through acquisitions and internal development that complement existing profitable product lines. Challenges facing the Company during these efforts include:

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 mitigate the risk of overstocking slower moving, obsolete items. The Company’s inventories increased particularly in the monitor division due to new product lines it is carrying, due to requirements to fulfill contracts and last-time buys. The Company has two new divisions, Aydin Visual Solutions and Aydin Cyber Security which between the two have added $1.7 million in inventory since February 29, 2012. The Aydin Displays subsidiary has increased inventories by $0.8 million since February 29, 2012 to secure products that would no longer be available and are needed for an active contract and the Lexel subsidiary increased inventory by $1.3 million due to last time buys of glass and other items needed for current orders. The other divisions decreased their inventories.

Certain of the Company’s divisions maintain significant inventories of CRTs and component parts in an effort to ensure its customers a reliable source of supply. The Company’s inventory turnover averages over approximately 310 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 because 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 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 operations 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,

 

18


Video Display Corporation and Subsidiaries

November 30, 2012

 

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 November 30, 2012 and February 29, 2012, believes its reserves to be adequate.

Interest rate exposure – The Company had outstanding debt of $16.2 million as of November 30, 2012, all of which is subject to interest rate fluctuations by the Company’s lenders. Higher rates applied by the Federal Reserve Board could have a negative effect on the Company’s earnings. It is the intent of the Company to continually monitor interest rates and consider converting portions of the Company’s debt from floating rates to fixed rates should conditions be favorable for such interest rate swaps or hedges.

Results of Operations

The following table sets forth, for the three and nine months ended November 30, 2012 and 2011, the percentages that selected items in the Condensed Consolidated Statements of Income bear to total sales:

 

     Three Months     Nine Months  
     Ended November 30,     Ended November 30,  
     2012     2011     2012     2011  

Sales

        

Monitors

     96.6     92.3     95.3     91.6

Data display CRTs

     3.1        7.4        4.2        7.9   

Entertainment CRTs

     0.1        0.1        0.1        0.2   

Components parts

     0.2        0.2        0.4        0.3   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Company

     100.0     100.0     100.0     100.0

Costs and expenses

        

Cost of goods sold

     74.0     66.5     72.3     67.9

Selling and delivery

     10.3        8.8        11.0        8.1   

General and administrative

     13.9        12.7        14.9        12.8   
  

 

 

   

 

 

   

 

 

   

 

 

 
     98.2     88.0     98.2     88.8

Operating profit

     1.8     12.0     1.8     11.2

Interest expense

     (1.3 )%      (1.2 )%      (1.4 )%      (1.3 )% 

Other income, net

     0.7        0.4        1.0        0.3   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     1.2     11.2     1.4     10.2

Income tax expense

     0.0        3.4        0.2        3.2   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     1.2     7.8     1.2     7.0
  

 

 

   

 

 

   

 

 

   

 

 

 

This year’s results have been negatively impacted by two new divisions, Aydin Visual Solutions and Aydin Cyber Security. The two divisions have net losses of $565 thousand and $1.1 million, respectively through the nine months ended November 30, 2012. These two entities are still in the start up stages, causing the losses noted and decreasing consolidated net income of the company.

Net sales

Consolidated net sales decreased $3.4 million for the three months ended November 30, 2012 and $12.0 million for the nine months ended November 30, 2012 as compared to the three and nine months ended November 30, 2011. The Component Parts division had a slight increase in sales during both time periods ending November 30, 2012, but the other divisions all had decreases. The Data Display and Entertainment divisions both generated less than half the sales of the comparable periods ending November 30, 2011.

The decrease in the Monitor division was lead by the Company’s Display Systems division, with sales decreasing for the nine-month period ending November 30, 2012, compared to the nine months ending November 30, 2011, from

 

19


Video Display Corporation and Subsidiaries

November 30, 2012

 

$10.2 million to $5.4 million or 46.7%. The sales decrease is a result of a transition from selling “CRT products” to developing and selling digital display solutions. The typical sales cycle of a new product solution is 12 to 18 months. Management believes Display Systems is at the cusp of seeing the results of this transition. The Company’s Aydin subsidiary’s sales decreased by 29.0% for the nine-month comparable period ending November 30, 2012, from $20.8 million to $14.8 million. The decrease was primarily due to approximately $5.0 million of shipments on long-term military contracts which have been delayed and approximately $1.0 million of projects not renewed due to lack of funding. The Z-Axis subsidiary was down 25.8% due to fewer shipments to their two major customers. Last year one of Z-Axis’s major customers used Z-Axis’s products to correct problems with their products already in the market place which created abnormally high demand. The second customer’s demand has slowed due to decreases in orders from their military customers caused by the slowdown in overseas conflicts. Overall, the Company expects results to improve over the first nine months of the fiscal year; however, the revenues are not expected to reach last year’s 12 - month results. The Data Display division decrease was due to the shutdown of the division’s Clinton facility in the fourth quarter of fiscal 2012 and the Tucker facility’s decrease was primarily to its top customer in flight simulation and decreases among most of its customer base.

Gross margins

Consolidated gross margins decreased by 38.9% for the three months ended November 30, 2012 over the three months ended November 30, 2011 and as a percent to sales decreased from 33.5% to 26.0%. The consolidated gross margin decreased by 34.7% for the nine months ended November 30, 2012 over the nine months ended November 30, 2011 and as a percent to sales decreased from 32.1% to 27.7% due to the decreased sales noted above while absorbing fixed costs.

Gross margins within the Monitor division decreased by 33.7% for the three month period ended November 30, 2012 over the comparable three month period ended November 30, 2011 and decreased by 32.0% for the nine month period ended November 30, 2012 over the comparative nine month period ended November 30, 2011 due to decreased sales volume. The actual gross margin percentages increased at Aydin Displays for the nine month period ending November 30, 2012 despite lower sales due to product mix. The gross margin percentage at Display Systems decreased by 61.5% due to a lack of sales volume. The Data Display division gross margins decreased by 136.0% for the three-month comparable period ended November 30, 2012, and decreased by 82.2% for the nine months ended November 30, 2012 compared to the nine months ended November 30, 2011, due to the impact of the decreased revenue at the Company’s display facility caused by a reduction in demand for these products due to changes in technology, i.e. CRTs being replaced by flat screens in certain applications. The gross margins in home entertainment CRTs and the Component Parts were negligible as both divisions sales continue to decline and are not material to the results of the Company. The Company expects gross margins to improve slightly compared to the first nine months of the fiscal year due to improved margins at VDCDS, Aydin Displays and Z-Axis based on the forecasted product mix at these divisions.

Operating expenses

Operating expenses as a percentage of sales increased from 21.5% to 24.2% for the comparable three months ended November 30, 2012 and increased from 20.9% to 25.9% for the nine months ended November 30, 2012. This was primarily due to a larger decrease in revenues than expenses. Actual expenses decreased by $0.4 million for the three month period and by $0.7 million for the nine month period ending November 30, 2012 which was not as significant as the decrease in sales. We expect selling expenses will continue to track at last year’s levels as the Company continues its marketing efforts to boost revenues. General and Administrative expenses are down approximately $800 thousand and we anticipate they will continue to decrease compared to last year.

 

20


Video Display Corporation and Subsidiaries

November 30, 2012

 

Interest expense

Interest expense decreased 10.0% for the three-month comparable period ended November 30, 2012, and decreased 15.3% for the comparable nine month period ended November 30, 2012 due to decreased average borrowings by the Company. The Company expects to have higher interest costs due to the higher interest rate being charged by the bank for the covenant breach; this will be somewhat offset as the outstanding debt decreases, due to increased cash flow from operations and the management of current assets. The Company maintains various debt agreements with different interest rates, most of which are based on the prime rate or LIBOR.

Income taxes

The effective tax rate for the three months ended November 30, 2012 and 2011 was 0.0% and 30.0%, respectively and for the nine months ended November 30, 2012 and 2011 was 12.1% and 30.9%, respectively. These rates differ from the Federal statutory rate primarily due to the effect of state taxes, the permanent non-deductibility of certain expenses for tax purposes, and research and experimentation credits.

Liquidity and Capital Resources

As of November 30, 2012, the Company had total cash of zero as all cash is swept on a daily basis and pays down the line of credit and availability under the line of credit was approximately $0.1 million based on the accounts receivable and inventory borrowing base calculations. The Company’s working capital was $22.4 million and $37.3 million at November 30, 2012 and February 29, 2012, respectively. The decrease in the working capital is due to $15.0 million of debt reclassified to a short-term liability due to the Company’s bank covenant violation and the likelihood of doing so in subsequent quarters. In recent years, the Company has financed its growth and cash needs primarily through income from operations, borrowings under revolving credit facilities, advances from the Company’s Chief Executive Officer and long-term debt. Liquidity provided by operating activities of the Company is reduced by working capital requirements (largely inventories and accounts receivable), debt service, capital expenditures, and product line additions.

The Company specializes in certain products representing trailing-edge technology that may not be available from other sources, and may not be currently manufactured. In many instances, the Company’s products are components of larger display systems for which immediate availability is critical for the customer. Accordingly, the Company enjoys higher gross margins on certain products, but typically has larger investments in inventories than those of its competitors.

On December 23, 2010, the Company and its subsidiaries executed a new Credit Agreement with RBC Bank and Community & Southern Bank (collectively, the “Banks”) to provide new financing to the Company to replace the existing credit agreement with RBC Bank that terminated in conjunction with this Agreement. The new Agreement provided for a line of credit of up to $17.5 million and two term loans of $3.5 million and $3.0 million.

 

   

1st Amendment: On May 26, 2011, the Banks amended the Credit Agreement to reduce the revolver commitment to $15.0 million, restate the covenants to pertain to only continuing operations of the Company and to adjust the targets for the senior funded debt to EBITDA covenant for the Company’s quarters ending May 31, 2011 and August 31, 2011.

 

   

2nd Amendment: On July 26, 2011, the Banks again amended the Credit Agreement to include a swing-line promissory note of $1.0 million that is included in the revised $15.0 million revolver commitment.

 

   

3rd Amendment: On September 1, 2011, the Banks amended the Credit Agreement to allow the Company to repurchase a limited amount of the Company’s common stock, equal to ten percent of the Company’s net earnings after taxes, subject to meeting certain share repurchase conditions and revised the definition of the fixed charge coverage ratio and total liabilities to tangible net worth to exclude such repurchases.

 

   

4th Amendment: On January 17, 2012, the Banks amended the Credit Agreement to allow the Company to purchase a promissory note, dated July 23, 2010, held by Hetra Secure Solutions Corporation on StingRay56.

 

   

5th Amendment: On March 5, 2012, the Banks amended the Credit Agreement to allow the Company to acquire StingRay56, Inc.

 

21


Video Display Corporation and Subsidiaries

November 30, 2012

 

The outstanding balance of the line of credit at November 30, 2012 was $11.1 million and the balances of the term loans were $2.2 million and $2.6 million, respectively. The outstanding balance of the line of credit at February 29, 2012 was $11.1 million and the balances of the term loans were $2.7 million and $2.8 million, respectively. These loans are secured by all assets and personal property of the Company and a limited guarantee of the Chief Executive Officer of $3.0 million. The $3.0 million term loan is secured by real estate property of the Company and a building owned by Southeastern Metro Savings, LLC, a company in which the Company’s Chief Executive Officer is a minority officer. The building will continue to be in the collateral pool until such time as the note is sufficiently paid down or it is replaced by other collateral.

The Agreement contains three covenants: a fixed charge coverage ratio, ratio of senior funded debt to earnings before interest, taxes, depreciation and amortization (EBITDA), and total liabilities to tangible net worth. The Agreement also includes restrictions on the incurrence of additional debt or liens, investments (including Company stock), divestitures and certain other changes in the business. The Agreement expires on December 1, 2013. The interest rate on these loans is a floating LIBOR rate based on a fixed charge coverage ratio, minimum 4.0%, as defined in the loan documents.

As of November 30, 2012, the Company was not in compliance with the senior funded debt to EBITDA ratio and permitted share repurchases covenants as defined by the Banks credit line agreements. A breach of these covenants could result in default under our debt agreement, which could prompt the lender to declare all amounts outstanding under the debt agreement to be immediately due and payable and terminate all commitments to extend further credit. If the Company were unable to repay those amounts, the lender could proceed against the collateral granted to secure that indebtedness. If the lender under the debt agreement accelerates the repayment of the borrowings, there can be no assurance that the Company will have sufficient assets and funds to repay the borrowings under its debt agreements. The Company has been in talks with other banks about refinancing the current debt under an agreement with less restrictive covenants and borrowing base calculations. Management believes that a new debt agreement can be obtained by the end of the fourth quarter, however, there can be no assurance that an agreement can be reached that is reasonable to the Company or at all. Additionally, due to the activity generated by the chairman’s remarks at the annual shareholder meeting concerning any potential mergers, spinoffs, sale of the Company as a whole or any other method (see 8-K), the Company put negotiations on hold with the banks amendment of the facility or potential refinance until the uncertainty and any potential outcomes could be realized. Upon any definite agreement being reached, the Company will resume the negotiations on its debt facility. As a result of these violations and the Company’s likelihood of not meeting them at the next reporting period, the debt has been classified as current at November 30, 2012. The senior funded debt to EBITDA covenant was deemed to be the most restrictive by the Company and the Banks.

The Company continues to monitor its cash and financing positions, seeking to find ways to lower its interest costs and to produce positive operating cash flow. The Company examines possibilities to grow its business as opportunities present themselves, such as new sales contracts or niche acquisitions. There could be an impact on working capital requirements to fund this growth. As in the past, the intent is to finance such projects with operating cash flows or existing bank lines; however, more permanent sources of capital may be required in certain circumstances.

Cash provided by operations for the nine months ended November 30, 2012 was $1.2 million. Net income from operations provided $0.5 million, and adjustments to reconcile net income to net cash were $1.2 million including depreciation and reserves. Changes in working capital used $0.5 million primarily due to an increase in inventory of $2.8 million and an increase in costs on uncompleted contracts of $0.2 million offset by an increase in accounts payable and accrued liabilities of $0.2 million, a decrease in accounts receivable of $1.3 million, a decrease in short-term notes receivable of $0.3 million, a decrease in prepaid expenses of $0.1 million, and a decrease in refundable taxes of $0.6 million. Cash provided by operations for the nine months ended November 30, 2011 was $2.2 million.

 

22


Video Display Corporation and Subsidiaries

November 30, 2012

 

Investing activities used cash of $0.6 million due to the purchase of equipment for $0.63 million offset by $0.05 million for the proceeds from the sale of the Chroma property during the nine months ended November 30, 2012. Cash provided by investing activities for the nine months ended November 30, 2011 was $1.0 million.

Financing activities used cash of $0.7 million for the nine months ended November 30, 2012, due to net repayments against the line of credit of $0.68 million and the purchase of treasury stock for $0.09 million. Cash used by financing activities for the nine months ended November 30, 2011 was $4.5 million.

The Company’s debt agreements with financial institutions contain affirmative and negative covenants, including requirements related to tangible net worth and debt service coverage and new loans. 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 Company has a stock repurchase program, pursuant to which it was originally authorized to repurchase up to 1,632,500 shares of the Company’s common stock in the open market. On July 8, 2009, the Board of Directors of the Company approved a one time continuation of the stock repurchase program, and authorized the Company to repurchase up to 1,000,000 additional shares of the Company’s common stock, depending on the market price of the shares. There is no minimum number of shares required to be repurchased under the program. For the nine months ended November 30, 2012, the Company repurchased 22,031 shares at an average price of $4.10 per share. The Company repurchased 57,087 shares in the nine months ended November 30, 2011. Under the Company’s stock repurchase program, an additional 705,106 shares remain authorized to be repurchased by the Company at November 30, 2012. The Credit Agreement executed by the Company on December 23, 2010 included restrictions on investments that restricted further repurchases of stock under this program. On September 1, 2011, the Agreement was amended to allow the Company to repurchase a limited amount of the Company’s common stock, equal to ten percent of the Company’s net earnings after taxes subject to meeting certain share repurchase conditions.

On March 1, 2011, the Company sold its Fox International Ltd., Inc. subsidiary to FI Acquisitions, a company majority owned by the Company’s Chief Executive Officer. The Company put its Fox International Ltd. subsidiary up for auction on January 15, 2011, and gave all interested parties a thirty-day due diligence period that was later extended until March 23, 2011, to give any potential bidders more time. FI Acquisitions was the only bidder and paid the net book value, approximately $3.5 million, for Fox International Ltd. in a stock sale, satisfied by the Company’s Chief Executive Officer exchanging 800,000 shares of the Company’s stock valued at approximately $3.3 million, approximately $50 thousand in cash and a reduction in notes payable to officers and directors of approximately $200 thousand. As the sale was at net book value, no gain or loss was recorded by the Company.

Critical Accounting Estimates

Management’s Discussion and Analysis of Financial Condition and Results of Operations are based upon the Company’s condensed consolidated financial statements. These condensed consolidated 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 condensed consolidated financial statements and related notes. The accounting policies that may involve a higher degree of judgments, estimates, and complexity include reserves on inventories, revenue recognition, the allowance for bad debts and warranty reserves. The Company uses the following methods and assumptions in determining its estimates:

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 net realizable value of the inventory falls below its carrying amount.

 

23


Video Display Corporation and Subsidiaries

November 30, 2012

 

Management considers the projected demand for CRTs in this estimate of net realizable value. 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 reviews inventory levels on a quarterly basis. Such reviews include observations of product development trends of the original equipment manufacturers, new products being marketed, and technological advances relative to the product capabilities of the Company’s existing inventories. There were no significant changes in management’s estimates in the third quarter of fiscal 2013 and 2012; however, the Company cannot guarantee the accuracy of future forecasts since these estimates are subject to change based on market conditions. The Company is currently assessing the adequacy of certain reserves in its monitor operations and anticipates that there will be additional reserves set aside during the fourth quarter.

Revenue recognition

Revenue is recognized on the sale of products when the products are shipped, all significant contractual obligations have been satisfied, and the collection of the resulting receivable is reasonably assured. The Company’s delivery term typically is F.O.B. shipping point.

In accordance with FASB ASC Topic 605-45 “Revenue Recognition: Principal Agent Considerations”, shipping and handling fees billed to customers are classified in net sales in the consolidated income statements. Shipping and handling costs incurred are classified in selling and delivery in the consolidated income statements.

A portion of the Company’s revenue is derived from contracts to manufacture flat panel and CRTs to a buyers’ specification. These contracts are accounted for under the provisions of FASB ASC Topic 605-35 “Revenue Recognition: Construction-Type and Production-Type Contracts”. These contracts are fixed-price and cost-plus contracts and are recorded on the percentage of completion basis using the ratio of costs incurred to estimated total costs at completion as the measurement basis for progress toward completion and revenue recognition. Any losses identified on contracts are recognized immediately. Contract accounting requires significant judgment relative to assessing risks, estimating contract costs and making related assumptions for schedule and technical issues. With respect to contract change orders, claims, or similar items, judgment must be used in estimating related amounts and assessing the potential for realization. These amounts are only included in contract value when they can be reliably estimated and realization is probable.

Allowance for doubtful accounts

The allowance for doubtful accounts is determined by reviewing all accounts receivable 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 as well as past payment history and overall trends in past due accounts compared to established thresholds. The Company monitors credit exposure and assesses the adequacy of the allowance for doubtful accounts on a regular basis. Historically, the Company’s allowance has been sufficient for any customer write-offs. Although the Company cannot guarantee future results, management believes its policies and procedures relating to customer exposure are adequate.

Warranty reserves

The warranty reserve is determined by recording a specific reserve for known warranty issues and a general reserve based on claims experience. The Company considers actual warranty claims compared to net sales, then adjusts its reserve liability accordingly. Actual claims incurred could differ from the original estimates, requiring adjustments to the reserve. Management believes that its procedures historically have been adequate and does not anticipate that its assumptions are reasonably likely to change in the future.

 

24


Video Display Corporation and Subsidiaries

November 30, 2012

 

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 factors that often depend on judgments about potential actions by third parties.

Recent accounting pronouncements

In September 2011, the FASB issued revised guidance FASB ASU 2011-08, “Intangibles – Goodwill and Other (Topic 350) - Testing Goodwill for Impairment” to allow entities to use a qualitative approach to test goodwill for impairment. The amendment permits an entity to first perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. If it is concluded that this is the case, it is necessary to perform the currently prescribed two-step goodwill impairment test. Otherwise, the two-step goodwill impairment test is not required. The amendments are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted and the Company has chosen early adoption. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.

In July 2012, the FASB issued revised guidance FASB ASU 2012-02, “Testing Indefinite Lived Assets for Impairment” to allow entities to consider qualitative values in determining whether or not indefinite lived assets should be tested for impairment. If it is more likely than not that impairment exists, testing for impairment should be performed. The update is effective for fiscal years beginning after September 15, 2012 but early adoption is permitted. Management believes that the adoption of this guidance will not have a material impact on the Company’s consolidated financial statements.

Forward-Looking Information and Risk Factors

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. These risks and uncertainties, which are included under Part I, Item 1A. Risk Factors in the Company’s Annual Report on Form 10-K for the year ended February 29, 2012 could cause actual results to differ materially. There appears to be a greater risk that military spending could decline and therefore our sales could decline, having a material adverse effect on our business.

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 $16.2 million of outstanding debt at November 30, 2012 related to 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 a decrease of approximately $0.2 million in pre-tax net income assuming no further changes in the amount of borrowings subject to variable rate interest from amounts outstanding at November 30, 2012. The Company does not trade in derivative financial instruments.

 

25


Video Display Corporation and Subsidiaries

November 30, 2012

 

ITEM 4. CONTROLS AND PROCEDURES

Our disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) are designed to provide reasonable assurance that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act of 1934, such as this quarterly report on Form 10-Q, is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms. Our disclosure controls and procedures are also designed to ensure that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, to allow timely decisions regarding required disclosure.

Our chief executive officer and chief financial officer have conducted an evaluation of the effectiveness of our disclosure controls and procedures as of November 30, 2012. We perform this evaluation on a quarterly basis so that the conclusions concerning the effectiveness of our disclosure controls and procedures can be reported in our annual report on Form 10-K and quarterly reports on Form 10-Q. Based on this evaluation, our chief executive officer and chief financial officer have concluded that our disclosure controls and procedures were effective as of November 30, 2012.

Changes in Internal Controls

There have not been any changes in our internal controls over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

 

26


Video Display Corporation and Subsidiaries

November 30, 2012

 

PART II

 

Item 1.

Legal Proceedings

During 2007, the Company acquired the Cathode Ray Tube Manufacturing and Distribution Business and certain other assets of Clinton Electronics Corp. (“Clinton”), including inventory and fixed assets, for a total purchase price of $2,550,000, pursuant to an Asset Purchase Agreement between the parties (the “APA”). The form of consideration for the assets acquired included: (i) a $1.0 million face value Convertible Note; (ii) an agreement to deliver a stock certificate representing Company Common Shares having a $1,125,000 in market value of the Company’s common stock in January of 2008; and (iii) an agreement to deliver a stock certificate representing Company Common Shares having a $500,000 in market value of the Company’s common stock in January of 2009. The Company had paid the $1.0 million Note Payable in January 2008. The Company disputed certain representations made by Clinton in the APA including, but not limited to, representations concerning revenue, expenses, and inventory. As a result of this dispute, the Company did not issue the stock certificates scheduled for delivery January of 2008 and January of 2009. As such, the Company had accrued a potential liability of $1,625,000 and this accrued liability was reflected in the Company's Balance Sheet until the settlement was reached.

On August 24, 2011, the Company and the Clinton Electronics Corporation signed a settlement agreement ending the dispute involving the purchase of certain assets by the Company, pursuant to an Asset Purchase Agreement between the two companies. Prior to the negotiated settlement, the companies had agreed to arbitrate the dispute.

The terms of the settlement were not disclosed. There was no effect to the income statement due to the settlement. The previously accrued liability covered the settlement and the write off of inventory from the original agreement. The settlement did not have a material adverse effect on the Company’s business, consolidated financial condition, results of operation or cash flows.

 

Item 1A.

Risk Factors

Information regarding risk factors appears under the caption Forward-Looking Statements and Risk Factors in Part I, Item 2 of this Form 10-Q and in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended February 29, 2012. There appears to be a greater risk that military spending could decline and therefore our sales could decline, having a material adverse effect on our business. Besides this, there have been no other material changes from the risk factors previously disclosed in our Annual Report on Form 10-K.

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

None.

 

Item 3.

Defaults upon Senior Securities

None.

 

Item 4.

Submission of Matters to a Vote of Security Holders

None.

 

Item 5.

Other information

None.

 

27


Video Display Corporation and Subsidiaries

November 30, 2012

 

Item 6. Exhibits

 

Exhibit
Number

 

Exhibit Description

    3(a)  

Articles of Incorporation of the Company (incorporated by reference to Exhibit 3A to the Company’s Registration Statement on Form S-18 filed January 15, 1985).

    3(b)  

By-Laws of the Company (incorporated by reference to Exhibit 3B to the Company’s Registration Statement on Form S-18 filed January 15, 1985).

  10(b)  

Lease dated June 1, 2008 by and between Registrant (Lessee) and Ronald D. Ordway (Lessor) with respect to premises located at 4601 Lewis Road, Stone Mountain, Georgia. (incorporated by reference to Exhibit 10(b) to the Company’s 2009 Annual Report on Form 10-K)

  10(c)  

Lease dated November 1, 2008 by and between Registrant (Lessee) and Ronald D. Ordway (Lessor) with respect to premises located at 1868 Tucker Industrial Road, Tucker, Georgia. (incorporated by reference to Exhibit 10(c) to the Company’s 2009 Annual Report on Form 10-K)

  10(d)  

Purchase Agreement dated March 1, 2011 by and between the Company and FI Acquisition with respect to the sale of the Company’s Fox International subsidiary. (incorporated by reference to Exhibit 10(d) to the Company’s 2011 Annual Report on Form 10-K)

  10(e)  

Amendment to Loan and Security Agreement dated May 26, 2011 (incorporated by reference to Exhibit 10(e) to the Company’s 2011 Annual Report on Form 10-K)

  10(f)  

Amendment to Loan and Security Agreement dated July 26, 2011 (incorporated by reference to Exhibit 10(f) to the Company’s Report on Form 10-Q dated January 17, 2012)

  10(g)  

Amendment to Loan and Security Agreement dated September 1, 2011 (incorporated by reference to Exhibit 10(g) to the Company’s Report on Form 10-Q dated January 17, 2012)

  10(h)  

Loan and Security Agreement and related documents, dated December 23, 2010, among Video Display Corporation and Subsidiaries and RBC Bank and Community and Southern Bank as lenders and RBC Bank as administrative agent (incorporated by reference to Exhibit 10(h) to the Company’s Report on Form 8-K dated December 30, 2010).

  10(i)  

$6,000,000 Subordinated Note, dated June 29, 2006, between Video Display Corporation and Ronald D. Ordway (holder) (incorporated by reference to Exhibit 10(i) to the Company’s Current Report on Form 8-K dated June 29, 2006).

  10(j)  

Video Display Corporation 2006 Stock Incentive Plan. (incorporated by reference to Appendix A to the Company’s 2006 Proxy Statement on Schedule 14A)

  10(k)  

Amendment to Loan and Security Agreement dated January 17, 2012 (incorporated by reference to Exhibit 10(k) to the Company’s Report on Form 10-K dated May 29, 2012)

  10(l)  

Amendment to Loan and Security Agreement dated May 22, 2012 (incorporated by reference to Exhibit 10(l) to the Company’s Report on Form 10-K dated May 29, 2012)

  31.1  

Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

  31.2  

Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

  32  

Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS  

XBRL Instance Document

101.SCH  

XBRL Taxonomy Extension Schema Document

101.CAL  

XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF  

XBRL Taxonomy Extension Definition Linkbase Document

101.LAB  

XBRL Taxonomy Extension Label Linkbase Document

101.PRE  

XBRL Taxonomy Extension Presentation Linkbase Document

 

28


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 thereunto duly authorized.

 

           VIDEO DISPLAY CORPORATION
January 14, 2013     By:  

/s/ Ronald D. Ordway

           Ronald D. Ordway
           Chief Executive Officer
January 14, 2013     By:  

/s/ Gregory L. Osborn

           Gregory L. Osborn
           Chief Financial Officer

 

29