VIDEO DISPLAY CORP - Quarter Report: 2005 November (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

 

Commission File Number 0-13394

 

VIDEO DISPLAY CORPORATION

(Exact name of registrant as specified on its charter)

 

 

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

 

As of January 23, 2006, the registrant had 9,689,000 shares of Common Stock outstanding.

 

 

Video Display Corporation and Subsidiaries
Index

 

PART I.	FINANCIAL INFORMATION
	Item 1	Financial Statements
		Consolidated Balance Sheets –
		November 30, 2005 (unaudited) and February 28, 2005
		Consolidated Statements of Income -
		Three and nine months ended November 30, 2005 and 2004 (unaudited)
		Consolidated Statement of Shareholders’ Equity -
		For the nine months ended November 30, 2005 (unaudited)
		Consolidated Statements of Cash Flows –
		Nine months ended November 30, 2005 and 2004 (unaudited)
		Notes to consolidated financial statements -
		November 30, 2005 (unaudited)
	Item 2.	Management’s Discussion and Analysis of Financial
		Condition and Results of Operations
	Item 3.	Quantitative and Qualitative Disclosure About Market Risk
	Item 4	Controls and Procedures
PART II.	OTHER INFORMATION
	Item 1.	Legal Proceedings
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds
	Item 3.	Defaults upon Senior Securities
	Item 4.	Submission of Matters to a Vote of Security Holders
	Item 5.	Other Information
	Item 6.	Exhibits
	SIGNATURES

 

2

 

ITEM 1. FINANCIAL STATEMENTS

 

Video Display Corporation and Subsidiaries

Consolidated Balance Sheets
(in thousands)

 

		November 30, 2005			February 28, 2005
		(unaudited)			(restated, Note K)
Assets
Current Assets
Cash		$	1,819		$	1,471
Accounts receivable, less allowance for possible losses of $323 and $339		10,408			11,929
Inventories, net		35,928			32,105
Cost and estimated earnings in excess of billings on uncompleted contracts		1,064			738
Deferred income taxes		3,145			2,855
Prepaid expenses and other		1,180			460
Total current assets		53,544			49,558
Property, plant and equipment:
Land		540			540
Buildings		7,498			7,155
Machinery and equipment		20,996			19,485
		29,034			27,180
Accumulated depreciation and amortization		(20,355		)	(19,543		)
Net property, plant, and equipment		8,679			7,637
Goodwill		1,318			1,318
Other assets		3,832			3,671
Total assets		$	67,373		$	62,184

 

The accompanying notes are an integral part of these statements.

 

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		November 30, 2005			February 28, 2005
		(unaudited)			(restated, Note K)
Liabilities and Shareholders’ Equity
Current liabilities
Accounts payable		$	5,638		$	5,190
Accrued liabilities		3,146			3,425
Billings in excess of cost and estimated earnings on uncompleted contracts		1,740			454
Line of credit		—			2,688
Notes payable to officers and directors		42			49
Current maturities of long-term debt and financing lease obligations		139			577
Total current liabilities		10,705			12,383
Lines of credit		24,084			19,296
Long-term debt, less current maturities		818			848
Financing lease obligations, less current maturities		353			—
Notes payable to officers and directors, less current maturities		125			146
Convertible notes payable, net of discount of of $44 and $94		206			281
Deferred income taxes		465			434
Total liabilities		36,756			33,388
Minority Interests		123			123
Commitments and Contingencies		—			—
Shareholders’ Equity
Preferred stock, no par value – 10,000 shares authorized; none issued and outstanding		—			—
Common stock, no par value – 50,000 shares authorized; 9,694 and 9,704 issued and outstanding		6,856			7,026
Additional paid-in capital		92			92
Retained earnings		23,601			21,624
Accumulated other comprehensive loss		(55		)	(69		)
Total shareholders’ equity		30,494			28,673
Total liabilities and shareholders’ equity		$	67,373		$	62,184

 

The accompanying notes are an integral part of these statements.

 

4

 

Video Display Corporation and Subsidiaries

Consolidated Statements of Income (unaudited)
(in thousands, except per share data)

 

		Three Months Ended November 30,								Nine Months Ended November 30,
		2005			2004				2005				2004
					(restated, Note K)								(restated, Note K)
Net sales		$	19,676		$	21,434			$		63,450		$	62,001
Cost of goods sold		13,231			14,214				42,865				41,360
Gross profit		6,445			7,220				20,585				20,641
Operating expenses
Selling and delivery		1,929			1,729				5,526				5,237
General and administrative		3,733			3,561				10,905				9,552
		5,662			5,290				16,431				14,789
Operating profit		783			1,930				4,154				5,852
Other income (expense)
Interest expense		(353		)	(244		)		(1,028			)	(732		)
Other, net		6			26				86				188
		(347		)	(218		)		(942			)	(544		)
Income before income taxes		436			1,712				3,212				5,308
Income tax expense		181			657				1,235				2,030
Net income		$	255		$	1,055			$		1,977		$	3,278
Basic earnings per share of common stock		$	.03		$	.11			$		.20		$	.34
Diluted earnings per share of common stock		$	.03		$	.11			$		.20		$	.33
Basic weighted average shares outstanding		9,687			9,686				9,699				9,665
Diluted weighted average shares outstanding		9,967			9,923				9,977				9,893

 

The accompanying notes are an integral part of these statements.

 

5

 

Video Display Corporation and Subsidiaries

Consolidated Statements of Shareholders’ Equity

For the Nine Months Ended November 30, 2005 (unaudited)
(in thousands)

 

		Common Shares		Share Amount			Additional Paid In Capital			(restated, Note K) Retained Earnings			Accumulated Other Comprehensive Income (Loss)
Balance at February 28, 2005		9,704		$	7,026		$	92		$	21,624		$	(69	)
Net income for the period		—		—			—			1,977			—
Foreign currency translation adjustment		—		—			—			—			14
Repurchase of common stock		(26	)	(317		)	—			—			—
Exercise of stock options		6		22			—			—			—
Conversion of debt to common stock		10		125			—			—			—
Balance at November 30, 2005		9,694		$	6,856		$	92		$	23,601		$	(55	)

 

The accompanying notes are an integral part of these statements.

 

6

 

Video Display Corporation and Subsidiaries

Consolidated Statements of Cash Flows (unaudited)
(in thousands)

 

		Nine Months Ended November 30,
		2005			2004
					(restated, Note K)
Operating Activities
Net income		$	1,977		$	3,278
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		1,304			894
Provision for bad debts		(16		)	91
Provision for inventory reserve		720			375
Deferred income taxes		(260		)	(416		)
Changes in working capital, net of effects from acquisitions:
Accounts receivable		1,537			(120		)
Inventories		(3,769		)	(3,117		)
Prepaid expenses and other assets		246			(679		)
Accounts payable and accrued liabilities		169			1,461
Net cash provided by operating activities		1,908			1,767
Investing Activities
Capital expenditures		(1,427		)	(530		)
Cash paid for acquisition		(1,377		)	(150		)
Cash paid for product acquisition and other assets		—			(5,250		)
Net cash used in investing activities		(2,804		)	(5,930		)
Financing Activities
Proceeds from long-term debt, lines of credit and financing lease obligations		23,999			43,107
Payments on long-term debt, lines of credit and financing lease obligations		(22,447		)	(29,740		)
Proceeds from loans from related parties		1,000			3,000
Repayments of loans from related parties		(1,028		)	(11,282		)
Repurchase of common stock		(317		)	—
Proceeds from exercise of stock options		22			157
Net cash provided by financing activities		1,229			5,242
Effect of exchange rate changes on cash		15			20
Net increase in cash		348			1,099
Cash, beginning of period		1,471			3,021
Cash, end of period		$	1,819		$	4,120

 

The accompanying notes are an integral part of these statements.

 

7

 

Video Display Corporation and Subsidiaries

Notes to Consolidated Financial Statements (unaudited)

November 30, 2005

 

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

As contemplated by the Securities and Exchange Commission (the “Commission”) instructions to Form 10-Q, the following footnotes have been condensed and, therefore, do not contain all disclosures required in connection with annual financial statements.  Reference should be made to the Company’s year-end financial statements and notes thereto contained in its Annual Report on Form 10-K for the fiscal year ended February 28, 2005, as filed with the Commission.

 

The 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 28, 2005 consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States.

 

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.

 

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

 

NOTE B - NEW ACCOUNTING PRONOUNCEMENTS

 

In December 2004, the Financial Accounting Standards Board (FASB) issued Statement No. 123 (R) (revised 2004) Share-Based payment, which is a revision of FASB Statement No. 123, Accounting for Stock-Based Compensation.  Statement 123 (R) supersedes Accounting Principal Board Opinion (APB) No. 25, Accounting for Stock Issued to Employees, and amends FASB No. 95, Statement of Cash Flows.  Generally, the approach to accounting in Statement 123 (R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements as based on their fair values.  Currently the Company accounts for these payments under the intrinsic value provisions of APB No. 25 with no expense recognition in the financial statements.  Statement 123 (R) is effective for the Company beginning March 1, 2006.  The Statement offers several alternatives for implementation.  At this time, management has not made a decision as to the alternative it may select.

 

In November 2004, the FASB issued Statement of Financial Accounting Standards No. 151 (“SFAS No. 151”), Inventory Costs, an amendment of APB No. 43, Chapter 4.  The amendments made by SFAS No. 151 will improve financial reporting by requiring that abnormal amounts of idle facility expense, freight, handling costs, and wasted materials (spoilage) be recognized as current-period charges and by requiring the allocation of fixed production overheads to inventory based on the normal capacity of production facilities.  SFAS No. 151 is effective for inventory costs incurred during fiscal years beginning after June 15, 2005.  Earlier application is permitted for inventory costs incurred during fiscal years beginning after November 24, 2004.  The Company is currently evaluating the impact that adoption of SFAS No. 151 will have on its financial position and results of operations.

 

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In December 2004, the FASB issued SFAS 153, “Exchanges of Nonmonetary Assets”.  This statement explains that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged.  This statement is effective for fiscal years beginning after June 15, 2005.  The Company does not anticipate this pronouncement to have a material impact on the consolidated financial statements.

 

In June 2005, the FASB issued SFAS 154, “Accounting Changes and Error Corrections”.  This statement revises the reporting requirements related to changes in accounting principles or adoption of new accounting pronouncements.  This statement is effective for fiscal years beginning after December 15, 2005.  The Company does not anticipate this pronouncement to have a material impact on the consolidated financial statements.

 

NOTE C - BUSINESS ACQUISITION

 

In May 2005, the Company acquired the IDS division of Three Five Systems, Inc.  Three Five Systems specializes in flat panel, touch screen and rack mount systems with custom military, industrial and commercial requirements.  As part of this transaction, the Company acquired fixed assets of $74,000, inventories of $773,000, and various other assets of $530,000 in exchange for cash of $1,377,000.  The other assets include product development designs and drawings and a customer list, as well as a non-compete agreement.  The product development designs and drawings will be amortized over a five year period, while the customer list will be amortized over a three year period, which the Company estimates to be the useful life of these assets.  The IDS division has moved to new facilities and is known as Aydin North and is a part of the Company’s Pennsylvania based Aydin operations.  The IDS operations of Three Five Systems, Inc. are not significant to the Company.

 

The aggregate purchase price has been allocated based on fair values as of the date of the completion of the acquisition as follows (in thousands):

 

 

In March 2004, the Company acquired the monitor operations of Colorado based Data Ray, Inc.  The Company acquired inventory, fixed assets and various other assets of $459,000 in exchange for cash of $150,000 and $400,000 of the Company’s common stock, resulting in goodwill of approximately $91,000.  These operations were consolidated into the Company’s Z-Axis, Inc. operations located in Phelps, NY, since the date of acquisition.  The $400,000 of common stock was issued at $6 per share, the market value of the stock at the date of purchase.  The common stock had a put feature whereby Data Ray could redeem the stock for $5.50 per share if the price per share of the Company’s stock was below $6.00 after the one year anniversary date of the purchase agreement.  The price of the stock was in excess of $6.00 at the one year anniversary date of the agreement.  The monitor operations of Data Ray are not significant to the Company.

 

The following table presents the total purchase price of the acquisition (in thousands):

 

 

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The aggregate purchase price has been allocated based on fair values as of the date of the completion of the acquisition as follows (in thousands):

 

 

NOTE D - PURCHASE OF ASSETS

 

In October 2004, the Company entered into an agreement with Evans & Sutherland, Inc. to purchase certain assets.  Under this agreement, the Company paid a total of $5,250,000 for the following assets related to Evans & Sutherland’s ESCP® and Targetview CRT projector product lines:  inventory valued at $2,244,000, fixed assets valued at $248,000 and intangible assets valued at $2,758,000.  The intangible assets consist of a non-compete agreement valued at $1,000,000 and amortizable over 5 years, and a customer list valued at $1,758,000 amortizable over a 15 year period.  The purchase was financed initially by a loan from the Chief Executive Officer, which subsequently was refinanced under the Company’s new line of credit.  Following this acquisition, the Company began the process of consolidating all CRT projector manufacturing, sales and support with its established Marquee™ projector operations in Cape Canaveral, Florida.  This consolidation process was substantially completed by the end of December 2004.  The Company has a presence in the military flight training and simulation market, and with this acquisition will be able to expand into the commercial flight training and simulation market.

 

NOTE E - INVENTORIES

 

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

 

Inventories consisted of the following (in thousands):

 

 

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NOTE F – COSTS AND ESTIMATED EARNINGS RELATED TO BILLINGS ON UNCOMPLETED CONTRACTS

 

Information relative to contracts in progress consisted of the following:

 

 

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 SOP 81-1 “Accounting for Performance of Construction-Type and Certain 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 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.

 

As of November 30, 2005 and February 28, 2005, there were no production costs which 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, 2005 and February 28, 2005, there were no progress payments that had been netted against inventory.

 

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NOTE G - LONG-TERM DEBT AND FINANCING LEASE OBLIGATIONS

 

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

 

		November 30, 2005			February 28, 2005
Mortgage payable to bank; variable interest rate; monthly principal and interest payments of $6,000 payable until December 2008 with a final principal payment of $350,000 in December 2008, collateralized by land and building of Fox International, Inc.; paid in full in April 2005.		$	—		$	479
Mortgage payable to bank; interest rate at Federal Home Loan Bank Board Index rate plus 1.95% (7.35% as of November 30, 2005); monthly principal and interest payments of $5,000 payable through October 2021; collateralized by land and building of Teltron Technologies, Inc.		544			557
Other		333			389
		877			1,425
Financing lease obligations		433			—
		1,310			1,425
Less current maturities		(139		)	(577		)
		$	1,171		$	848

 

NOTE H - LINES OF CREDIT

 

At November 30, 2005, the Company had a $27.5 million credit facility with a bank, collateralized by equipment, inventories and accounts receivable of the Company.  The interest rate on this line is a floating LIBOR rate based on a ratio of debt to EBITDA, as defined in the loan documents.  As of November 30, 2005, the outstanding balance of this line of credit was $20.6 million and the available amount for borrowing was $6.9 million.  The line of credit agreement contains covenants, including requirements related to tangible cash flow, ratio of debt to cash flow and asset coverage.  Additionally, the bank requires that any contemplated acquisitions be accretive.  The Company was not in compliance with the consolidated Senior Funded Debt to EBITDA ratio covenant at November 30, 2005. On January 17, 2006, the Company obtained a waiver of this default from the lender. The Company expects to be in compliance with the financial covenants over the next twelve months based on current financial projections and the availability of subordinated advances from the Company’s Chief Executive Officer, if required. This line of credit agreement, as amended on January 6, 2006, expires in March 2007, and accordingly, is classified under long-term liabilities on the Company’s balance sheet.

 

Additionally, in April 2005, the Company converted a $2.8 million line of credit (collateralized by assets of Fox International, Inc.) with another bank to a $3.5 million line of credit with a bank.  As part of the new financing, the lender paid off the balance of the previous line as well as a mortgage secured by the land and building of Fox International, Inc.  The interest rate on this line is a floating LIBOR rated based on a ratio of debt to EBITDA, as defined in the loan documents.  As of November 30, 2005, the outstanding balance of this line of credit was $3.5 million with no remaining borrowing availability.  The line of credit agreement contains covenants, including requirements related to tangible cash

 

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flow, ratio of debt to cash flow and asset coverage.  The Company was not in compliance with the consolidated Senior Funded Debt to EBITDA ratio covenant at November 30, 2005. On January 17, 2006, the Company obtained a waiver from the lender of this default. The Company expects to be in compliance with the financial covenants over the next twelve months based on current financial projections and the availability of subordinated advances from the Company’s Chief Executive Officer, if required.  This line of credit agreement, as amended on January 6, 2006, expires in March 2007, and accordingly, is classified under long-term liabilities on the Company’s balance sheet.

 

NOTE I – SEGMENT INFORMATION

 

Condensed segment information is as follows (in thousands):

 

		Three Months Ended November 30,									Nine Months Ended November 30,
		2005						2004			2005			2004
								(restated, Note K)						(restated, Note K)
Net Sales
Display Segment		$				15,010		$	16,738		$	49,111		$	48,703
Wholesale Distribution Segment		4,666						4,696			14,339			13,298
		$			19,676			$	21,434		$	63,450		$	62,001
Operating profit
Display Segment		$		586				$	1,852		$	3,448		$	5,703
Wholesale Distribution Segment		197						78			706			149
Income from Operations		783						1,930			4,154			5,852
Interest expense		(353					)	(244		)	(1,028		)	(732		)
Other income, net		6						26			86			188
Income before income taxes		$	436					$	1,712		$	3,212		$	5,308

 

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NOTE J — SUPPLEMENTAL CASH FLOW INFORMATION

 

		Nine Months Ended (in thousands)
		November 30, 2005			November 30, 2004
Cash Paid for:
Interest		$	978		$	723
Income taxes, net of refunds		$	3,250		$	1,253
Non-cash Transactions:
Leased capital equipment		$	433		$	—
Conversion of note payable to common stock		$	125		$	—
Issuance of common stock for monitor division of Data Ray, Inc.		$	—		$	400

 

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NOTE K — PRIOR PERIOD RESTATEMENT

 

Certain prior year amounts have been restated to correct errors discovered by the Company during preparation of the 3^rd quarter Fiscal 2006 financial statements. See related comments under the caption “Prior Period Restatement” in Part I, Item 2. in this quarterly report on Form 10-Q. The Company discovered errors in its accounting for the treatment of foreign subsidiary losses for income tax purposes in fiscal 2005 and in certain non-income tax-based franchise taxes in fiscal 2005 and prior fiscal years. These errors resulted primarily from clerical mathematical error, as well as the improper recording of non-income based franchise taxes against an accrual rather than as an expense on the consolidated statements of income.

 

The following tables summarize the impact of the restatements on the affected items as originally reported on the consolidated balance sheet at February 28, 2005 and as originally reported on the consolidated statements of income for the three and nine month periods ended November 30, 2004 (in thousands except per share data).

 

		November 30, 2004
		Three Months Ended								Nine Months Ended
		As Previously Reported					As Restated			As Previously Reported			As Restated
Selected Consolidated Statements of Operations items
General and administrative expenses		$			3,529		$	3,561		$	9,457		$	9,552
Operating profit		1,962					1,930			5,947			5,852
Income before income taxes		1,744					1,712			5,403			5,308
Provision for income taxes		667					657			2,060			2,030
Net income		1,077					1,055			3,343			3,278
Basic earnings per share of common stock		$		.11			$	.11		$	.35		$	.34
Diluted earnings per share of common stock		$	.11				$	.11		$	.34		$	.33

 

		February 28, 2005
		As Previously Reported			As Restated
Selected Consolidated Balance Sheet items
Deferred income taxes		$	2,555		$	2,855
Other assets		4,020			3,671
Accrued liabilities		3,080			3,425
Retained earnings		22,018			21,624
Total shareholders equity		29,067			28,673

 

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NOTE L – SHAREHOLDERS’ 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, 2005 and 2004 (in thousands, except per share data):

 

		Net Income			Weighted Average Common Shares Outstanding		Earnings Per Share
Quarter ended November 30, 2005
Basic		$	255		9,687		$	0.03
Effect of dilution:
Options		—			280
Diluted		$	255		9,967		$	0.03
Quarter ended November 30, 2004
Basic		$	1,055		9,686		$	0.11
Effect of dilution:
Options		—			237
Diluted		$	1,055		9,923		$	0.11
Nine months ended November 30, 2005
Basic		$	1,977		9,699		$	0.20
Effect of dilution:
Options		—			278
Diluted		$	1,977		9,977		$	0.20
Nine months ended November 30, 2004
Basic		$	3,378		9,665		$	0.34
Effect of dilution:
Options		—			228
Diluted		$	3,278		9,893		$	0.33

 

Prior year earnings per share data have been adjusted to include the effect of a 2 for 1 stock split effected in the form of a 100% stock dividend in November 2004.

 

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