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

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC  20549

 

FORM 10-Q

 

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

 

For Quarterly Period Ended August 31, 2005

 

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		(I.R.S.Employer
incorporation or organization)		Identification No.)

 

1868 TUCKER INDUSTRIAL DRIVE, TUCKER, GEORGIA  30084

(Address of principal executive offices and zip code)

 

770-938-2080

(Registrant’s telephone number including area code)

 

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

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Yes o  No ý

 

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

 

Shares outstanding of each of the registrant’s classes of common stock at August 31, 2005:

 

Class		Number of Shares
Common Stock, No Par Value		9,694,000

 

 

Video Display Corporation and Subsidiaries

Index

 

PART I.	FINANCIAL INFORMATION
	Item 1. Financial Statements
	Consolidated Balance Sheets – August 31, 2005 (unaudited) and February 28, 2005
	Consolidated Statements of Income - Three and six months ended August 31, 2005 and 2004 (unaudited)
	Consolidated Statements of Shareholders’ Equity - Six months ended August 31, 2005 (unaudited)
	Consolidated Statements of Cash Flows – Six months ended August 31, 2005 and 2004 (unaudited)
	Notes to Consolidated Financial Statements - August 31, 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
EXHIBIT 31.1 302 CERTIFICATION OF CEO
EXHIBIT 31.2 302 CERTIFICATION OF CFO
EXHIBIT 32.1 906 CERTIFICATIONS

 

2

 

Video Display Corporation and Subsidiaries

Consolidated Balance Sheets

 

		August 31,			February 28,
		2005			2005
		(unaudited)
Assets
Current assets
Cash and cash equivalents		$	2,185,000		$	1,471,000
Accounts receivable, less allowance for possible losses of $451,000 and $339,000		14,641,000			11,929,000
Inventories		34,565,000			32,105,000
Deferred income taxes		2,821,000			2,555,000
Prepaid expenses and other		905,000			744,000
Total current assets		55,117,000			48,804,000
Property, plant and equipment:
Land		540,000			540,000
Buildings		7,338,000			7,155,000
Machinery and equipment		19,972,000			19,485,000
		27,850,000			27,180,000
Accumulated depreciation		(20,077,000		)	(19,543,000		)
Net property, plant, and equipment		7,773,000			7,637,000
Goodwill		1,318,000			1,318,000
Other assets		3,966,000			4,020,000
Total assets		$	68,174,000		$	61,779,000

 

The accompanying notes are an integral part of these statements.

 

3

 

		August 31,			February 28,
		2005			2005
		(unaudited)
Liabilities and Shareholders’ Equity
Current liabilities
Accounts payable		$	5,335,000		$	5,190,000
Accrued liabilities		3,935,000			3,080,000
Line of credit		—			2,688,000
Notes payable to officers and directors		1,043,000			49,000
Current maturities of long-term debt		148,000			577,000
Total current liabilities		10,461,000			11,584,000
Lines of credit		25,178,000			19,296,000
Long-term debt, less current maturities		829,000			848,000
Notes payable to officers and directors, less current maturities		128,000			146,000
Convertible notes payable, net of discount of $50,000 and $94,000		200,000			281,000
Deferred income taxes		464,000			434,000
Total liabilities		37,260,000			32,589,000
Minority Interests		123,000			123,000
Commitments		—			—
Shareholders’ Equity
Preferred stock, no par value – 10,000,000 shares authorized; none issued and outstanding		—			—
Common stock, no par value – 50,000,000 shares authorized; 9,694,000 and 9,704,000 issued and outstanding		6,856,000			7,026,000
Additional paid-in capital		92,000			92,000
Retained earnings		23,740,000			22,018,000
Accumulated other comprehensive income (loss)		103,000			(69,000		)
Total shareholders’ equity		30,791,000			29,067,000
Total liabilities and shareholders’ equity		$	68,174,000		$	61,779,000

 

The accompanying notes are an integral part of these statements.

 

4

 

Video Display Corporation and Subsidiaries

Consolidated Statements of Income (unaudited)

 

		Three Months Ended August 31,						Six Months Ended August 31,
		2005			2004			2005			2004
Net sales		$	23,332,000		$	20,667,000		$	43,774,000		$	40,567,000
Cost of goods sold		15,728,000			13,832,000			29,634,000			27,146,000
Gross profit		7,604,000			6,835,000			14,140,000			13,421,000
Operating expenses
Selling and delivery		1,883,000			1,761,000			3,597,000			3,508,000
General and administrative		3,603,000			3,017,000			7,172,000			5,929,000
		5,486,000			4,778,000			10,769,000			9,437,000
Operating profit		2,118,000			2,057,000			3,371,000			3,984,000
Other income (expense)
Interest expense		(338,000		)	(232,000		)	(675,000		)	(489,000		)
Other, net		16,000			35,000			80,000			162,000
		(322,000		)	(197,000		)	(595,000		)	(327,000		)
Income before income taxes		1,796,000			1,860,000			2,776,000			3,657,000
Income tax expense		680,000			708,000			1,054,000			1,390,000
Net income		$	1,116,000		$	1,152,000		$	1,722,000		$	2,267,000
Basic earnings per share of common stock		$	0.12		$	0.12		$	0.18		$	0.24
Diluted earnings per share of common stock		$	0.11		$	0.12		$	0.17		$	0.23
Basic weighted average shares outstanding		9,690,000			9,656,000			9,696,000			9,644,000
Diluted weighted average shares outstanding		9,925,000			9,892,000			9,914,000			9,864,000

 

The accompanying notes are an integral part of these statements.

 

5

 

Video Display Corporation and Subsidiaries

Consolidated Statement of Shareholders’ Equity

For the Six Months Ended August 31, 2005 (unaudited)

 

													Accumulated
							Additional						Other
		Common		Share			Paid In			Retained			Comprehensive
		Shares		Amount			Capital			Earnings			Income (Loss)
Balance at February 28, 2005		9,704,000		$	7,026,000		$	92,000		$	22,018,000		$	(69,000	)
Net income for the period		—		—			—			1,722,000			—
Foreign currency translation adjustment		—		—			—			—			172,000
Repurchase of common stock		(26,000	)	(317,000		)	—			—			—
Exercise of stock options		6,000		22,000			—			—			—
Conversion of debt to common stock		10,000		125,000			—			—			—
Balance at August 31, 2005		9,694,000		$	6,856,000		$	92,000		$	23,740,000		$	103,000

 

The accompanying notes are an integral part of these statements.

 

6

 

Video Display Corporation and Subsidiaries

Consolidated Statements of Cash Flows (unaudited)

 

		Six Months Ended August 31,
		2005			2004
Operating Activities
Net income		$	1,722,000		$	2,267,000
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Depreciation and amortization		840,000			600,000
Provision for bad debts		111,000			61,000
Provision for inventory reserve		694,000			526,000
Deferred income taxes		(237,000		)	(323,000		)
Changes in working capital, net of effects from acquisitions:
Accounts receivable		(2,823,000		)	1,836,000
Inventories		(2,381,000		)	(2,878,000		)
Prepaid expenses and other assets		161,000			(2,000		)
Accounts payable and accrued liabilities		1,000,000			389,000
Net cash (used in) provided by operating activities		(913,000		)	2,476,000
Investing Activities
Capital expenditures		(595,000		)	(314,000		)
Cash paid for acquisition		(1,377,000		)	(150,000		)
Net cash used in investing activities		(1,972,000		)	(464,000		)
Financing Activities
Proceeds from long-term debt and lines of credit		17,190,000			16,221,000
Repayments of long-term debt and lines of credit		(14,444,000		)	(16,655,000		)
Proceeds from loans from related parties		1,000,000			—
Repayments of loans from related parties		(24,000		)	(678,000		)
Repurchase of common stock		(317,000		)	—
Proceeds from exercise of stock options		22,000			47,000
Net cash provided by (used in) financing activities		3,427,000			(1,065,000		)
Effect of exchange rates on cash		172,000			(26,000		)
Net increase in cash		714,000			921,000
Cash, beginning of period		1,471,000			3,021,000
Cash, end of period		$	2,185,000		$	3,942,000

 

The accompanying notes are an integral part of these statements.

 

7

 

Video Display Corporation and Subsidiaries

Notes to Consolidated Financial Statements (unaudited)

 

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

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 included the accounts of the Company and its majority owned subsidiaries after elimination of all significant intercompany accounts and transactions.   Certain prior period balances have been reclassified to conform to the current period presentation.

 

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

 

NOTE B – RECENT 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 Principles 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 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 will 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.

 

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

 

8

 

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:

 

Inventories		$	773,000
Machinery & equipment		74,000
Product designs, customer lists and other assets		530,000
		$	1,377,000

 

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:

 

Cash		$	150,000
Value of Video Display common stock issued		400,000
Total Purchase Price Consideration		$	550,000

 

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

 

Finished goods		$	279,000
Machinery & equipment		80,000
Goodwill		91,000
Other assets		100,000
		$		550,000

 

NOTE C – INVENTORIES

 

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

 

Inventories consisted of the following:

 

9

 

		August 31,			February 28,
		2005			2005
		(unaudited)
Raw materials		$	12,145,000		$	7,834,000
Work-in-process		3,166,000			3,800,000
Finished goods		23,005,000			23,528,000
		38,316,000			35,162,000
Reserves for obsolescence		(3,751,000		)	(3,057,000		)
		$	34,565,000		$	32,105,000

 

NOTE D – LONG-TERM DEBT

 

Long-term debt consisted of the following:

 

		August 31,			February 28,
		2005			2005
		(unaudited)
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.		$	—		$	479,000
Mortgage payable to bank; interest rate at FHLB plus 1.95% (7.35% as of August 31, 2005); monthly principal and interest payments of $5,000 payable through October 2021; collateralized by land and building of Teltron Technologies, Inc.		548,000			557,000
Other		429,000			389,000
		977,000			1,425,000
Less current maturities		148,000			577,000
		$	829,000		$	848,000

 

NOTE E - LINES OF CREDIT

 

At August 31, 2005, the Company had a $27,500,000 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 August 31, 2005, the outstanding balance of this line of credit was $21,678,000 and the available amount for borrowing was $5,822,000.  The line of credit agreement contains covenants, including requirements related to tangible cash flow, asset and debt service coverage.  Additionally, the bank requires that any contemplated acquisitions be accretive.  As of August 31, 2005, the Company was in compliance with all covenants.  This line of credit agreement expires in November 2006, and accordingly, is classified under long-term liabilities on the Company’s balance sheet.

 

Additionally, in April 2005, the Company converted a $2,750,000 line of credit (collateralized by assets of Fox International, Inc.) with another bank to a $3,500,000 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 August 31, 2005, the outstanding balance of this line of credit was $3,500,000 and the available amount for borrowing was $0.  The line of credit agreement contains covenants, including requirements related to

 

10

 

tangible cash flow, asset and debt service coverage.  As of August 31, 2005, the Company was in compliance with all covenants.  This line of credit agreement expires in November 2006, and accordingly, is classified under long-term liabilities on the Company’s balance sheet.

 

NOTE F – SUPPLEMENTAL CASH FLOW INFORMATION

 

		Six Months Ended
		August 31,			August 31,
		2005			2004
Cash Paid for:
Interest		$	631,000		$	489,000
Income taxes, net of refunds		$	1,152,000		$	857,000
Non-cash Transactions:
Conversion of note payable to common stock		$	125,000		$	—
Issuance of common stock for monitor division of Data Ray, Inc.		$	—		$	400,000

 

NOTE G – SHAREHOLDERS’ EQUITY

 

Earnings Per Share

 

Basic earnings per share is computed by dividing income available to common shareholders by the weighted average number of 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 is a reconciliation from basic earnings per share to diluted earnings per share for each of the periods presented:

 

					Weighted Average
					Common Shares		Earnings Per
		Net Income			Outstanding		Share
Quarter ended August 31, 2005
Basic		$	1,116,000		9,690,000		$	0.12
Effect of dilution:
Stock options		—			235,000
Diluted		$	1,116,000		9,925,000		$	0.11
Quarter ended August 31, 2004
Basic		$	1,152,000		9,656,000		$	0.12
Effect of dilution:
Stock options		—			236,000
Diluted		$	1,152,000		9,892,000		$	0.12

 

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Six months ended August 31, 2005
Basic		$	1,722,000		9,696,000		$	0.18
Effect of dilution:
Stock options		—			218,000
Diluted		$	1,722,000		9,914,000		$	0.17
Six months ended August 31, 2004
Basic		$	2,267,000		9,644,000		$	0.24
Effect of dilution:
Stock options		—			220,000
Diluted		$	2,267,000		9,864,000		$	0.23

 

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.

 

Stock-Based Compensation Plans

 

The Company has an incentive stock option plan whereby options may be granted to key employees at a price not less than fair market value at the time the options are granted and are exercisable beginning on the first anniversary of the grant date for a period not to exceed ten years.  Statement of Financial Accounting Standards No. 123 encourages, but does not require, companies to record compensation cost for stock-based employee compensation plans at fair value.  The Company has chosen to continue to account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees”, and related Interpretations. Accordingly, compensation cost for stock options is measured as the excess, if any, of the quoted market price of the Company’s stock at the date of the grant over the amount an employee must pay to acquire the stock.  The option price of all the Company’s stock options is equal to the market value of the stock at the grant date.  The Company granted 9,000 stock options during each of the quarters ended August 31, 2005 and 2004.

 

Had compensation cost been determined based upon the fair value at the grant date for awards under the stock option plan consistent with the methodology prescribed under SFAS No. 123, the effect on the Company’s pro forma net income and net earnings per share would have been as follows:

 

		Three Months Ended						Six Months Ended
		August 31,			August 31,			August 31,			August 31,
		2005			2004			2005			2004
Net income, as reported		$	1,116,000		$	1,152,000		$	1,722,000		$	2,267,000
Stock-based employee compensation expense, as reported		—			—			—			—
Stock-based employee compensation expense determined under fair value basis, net of tax		(8,000		)	(12,000		)	(15,000		)	(21,000		)
Pro forma net income		$	1,108,000		$	1,140,000		$	1,707,000		$	2,246,000
Net earnings per share:
Basic – as reported		$	0.12		$	0.12		$	0.18		$	0.24
Basic – pro forma		$	0.12		$	0.12		$	0.18		$	0.23
Diluted – as reported		$	0.11		$	0.12		$	0.17		$	0.23
Diluted – pro forma		$	0.11		$	0.12		$	0.17		$	0.23

 

12

 

Stock Repurchase Program

 

The Company has a stock repurchase program, pursuant to which it is authorized to repurchase up to 462,500 shares of the Company’s common stock in the open market. The Company repurchased 25,621 shares in May 2005.  No shares were repurchased in fiscal 2005.  Under this program, an additional 170,500 shares remain authorized to be repurchased by the Company.

 

NOTE H – COMPREHENSIVE INCOME

 

Statement of Financial Accounting Standards No. 130 “Reporting Comprehensive Income” establishes standards for reporting and display of nonowner changes in shareholders’ equity.  For the Company, total nonowner changes in shareholders’ equity include net income and the change in the cumulative foreign exchange translation adjustment component of shareholders’ equity.  During the three months ended August 31, 2005 and 2004, total comprehensive income was $1,214,000 and $1,211,000, respectively.   During the six months ended August 31, 2005 and 2004, total comprehensive income was $1,894,000 and $2,333,000, respectively.

 

NOTE I – RELATED PARTY TRANSACTIONS

 

In August 2005, the Company’s chief executive officer advanced the Company $1,000,000.  This loan was repaid subsequent to quarter end in September 2005.

 

13

 

Video Display Corporation and Subsidiaries

 

ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion should be read in conjunction with the attached interim consolidated financial statements and with the Company’s 2005 Annual Report to Stockholders, which included audited financial statements and notes thereto for the fiscal year ended February 28, 2005, as well as Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

Overview

 

The Company is a worldwide leader in the manufacture and distribution of a wide range of display devices, encompassing, among others, entertainment, military, medical and simulation display solutions.  The Company is comprised of two segments - (1) the manufacture and distribution of monitors, projection systems and CRT displays and (2) the wholesale distribution of consumer electronic parts. The display segment is organized into four interrelated operations aggregated into one operating segment pursuant to the aggregation criteria of SFAS 131:

 

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

 

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

 

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

 

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

 

Second Quarter and Year to Date 2006 Highlights

 

•                  Monitor division revenue - the Company’s monitor division continued a strong growth trend.  The Company continues to strengthen its ability to compete in various niche markets within the defense, medical and projection display industries.  Net sales within this segment increased in the second quarter of fiscal 2006 by $1,497,000 or 11.4% compared to the second quarter of fiscal 2005.  For the six months ended August 31, 2005, net revenue increased $846,000 or 3.3% compared to the same period a year ago.  This increase reflects the Company’s acquisition of the Evans & Sutherland product line in November 2004, which was consolidated with the Company’s Display Systems operations in Cape Canaveral, FL.

 

•                  Data Display division revenue – the Company’s data display division sales increased $813,000 and $1,538,000 for the three and six month periods ended August 31, 2005 as compared to the same periods a year ago.  These increases reflect the Company’s decision to distribute projection tubes from its Data Display location in Tucker, GA.  These projection units carry a higher sales price per unit than the company’s normal inventory.

 

•                  Acquisition – during the first quarter of fiscal 2006, the Company acquired the IDS division of Three Five Systems, Inc., consisting of inventory and certain assets.  The newly acquired operation has acquired leased facilities in Marlboro, MA and has now completed its relocation to the new facility and will operate as a division of the Company’s Aydin Display Systems operations.

 

•                  New credit facility – in April 2005, the Company finalized a new line of credit to replace a prior facility.  Under the terms of this new facility, the Company paid off the existing line of credit as well as a mortgage securing the land and building of Fox International, Ltd.  The maximum amount available for borrowings under this new line is $3,500,000 compared to $2,750,000 under the prior facility.  Proceeds from this line are available for working capital needs of the Company.

 

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  Fiscal 2006 Challenges

 

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

 

Certain of the Company’s divisions maintain significant inventories of CRTs and component parts in an effort to ensure its customers a reliable source of supply.  The Company’s inventory turnover averages 175 days, although in many cases the Company would anticipate holding 90 to 100 days of inventory in the normal course of operations.  This level of inventory is higher than some of the Company’s competitors due to the fact that it sells a number of products representing older, or trailing edge, technology that may not be available from other sources. The market for these trailing edge 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, particularly in the flat panel display area. If the Company fails to anticipate the changing needs of its customers and accurately forecast their requirements, it may accumulate inventories of products which its customers no longer need and which the Company will be unable to sell or return to its vendors.  Because of this, the Company’s management monitors the adequacy of its inventory reserves regularly, and at August 31, 2005, believes its reserves to be adequate.

 

Interest rate exposure – The Company had outstanding bank debt in excess of $25,000,000 as of August 31, 2005, all of which is subject to interest rate fluctuations by the Company’s lenders.  Higher rates applied by the Federal Reserve Board over the past four fiscal quarters and anticipated continued rate hikes have had and will continue to negatively impact 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.

 

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Results of Operations

 

The following table sets forth, for the three and six months ended August 31, 2005 and 2004, the percentages which selected items in the Statements of Income bear to total sales:

 

		Three Months				Six Months
		Ended August 31,				Ended August 31,
		2005		2004		2005		2004
Sales
Display Segment
Monitors		62.7	%	63.5	%	59.9	%	62.6	%
Data Display CRTs		10.7		8.2	%	12.4		9.6
Entertainment CRTs		4.0		5.3		4.6		5.6
Electron Guns and Components		1.1		0.9		0.9		1.0
Total Display Segment		78.5	%	77.9	%	77.9	%	78.8	%
Wholesale Consumer Parts Segment		21.5		22.1		22.1		21.2
		100.0%		100.0	%	100.0	%	100.0	%
Costs and expenses
Cost of goods sold		67.4	%	66.9	%	67.7	%	66.9	%
Selling and delivery		8.1		8.5		8.2		8.6
General and administrative		15.4		14.6		16.4		14.6
		90.9%		90.0	%	92.3	%	90.1	%
Income from Operations		9.1	%	10.0	%	7.7	%	9.8	%
Interest expense		1.4	%	1.1	%	1.5	%	1.2	%
Other income		0.1		0.2		0.2		0.4
Income before income taxes		7.8	%	9.1	%	6.4	%	9.0	%
Provision for income taxes		2.9		3.4		2.4		3.4
Net Income		4.9	%	5.6	%	4.0	%	5.6	%

 

Net sales

 

Consolidated net sales increased $2,666,000 and $3,207,000 for the three and six months ended August 31, 2005 as compared to the same periods ended August 31, 2004.  Display segment sales increased $2,213,000 and $2,136,000 for the three and six-month comparative periods ended August 31, 2005.  Sales within the Wholesale Consumer Parts segment increased $453,000 for the three-month comparative period and $1,071,000 for the six-month comparative periods.

 

The net increases in Display Segment sales is attributed to growth within the monitor operations of $1,497,000 for the three months ended August 31, 2005 and $846,000 for the six months ended August 31, 2005 as compared to the same periods a year ago.  These increases are due in large part to stronger demand from military and defense contractors, and also reflect increases resulting from the Company’s acquisition of Evans and Sutherland in the third quarter of fiscal 2005.  The data display sales showed an increase of $813,000 for the three month period and $1,538,000 for the six month periods ended August 31, 2005 as compared to the comparative period of a year ago.  These increases are the result of the Company distributing projection tubes from its Data Display location in Tucker, GA.  These projection tubes carry a higher selling price than Data Display’s normal inventory.  The components division showed an increase in sales for the three month period ended August 31, 2005 of $58,000 while sales for the six month comparative period remained flat.

 

Within the entertainment division, sales declined $156,000 and $247,000 for the three and six month comparative periods.  The Company is the primary supplier of replacement television CRTs to the domestic entertainment market.  A

 

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large portion of the entertainment segment’s sales (37%) are to major television retailers as replacements for products sold under manufacturer and extended warranties.  Due to continued lower retail sales prices for mid-size television sets (25” to 30”), fewer extended warranties were sold by retailers, a trend consistent with the past two fiscal years.  The Company remains the primary supplier of product to meet manufacturers’ standard warranties.  Growth in this division will be impacted by the timing and number of extended warranties sold for the larger, more expensive sets.  Because the Company is in the replacement market, it has the ability to track retail sales trends and, accordingly, can attempt to adjust quantities of certain size CRTs carried in stock and reduce exposure to obsolescence.

 

Sales within the component parts division were relatively flat for the comparative periods.  Sales in this division have declined over the past two fiscal years due to weaker demand for electron gun and stem sales.  Electron gun sales have historically been dependent upon the demand by domestic and foreign television CRT remanufacturers.  These sales have declined over the past few years as consumers move towards purchasing new technology as opposed to repairing existing sets.  The Company’s Wintron location is in the process of transitioning to two newer camera technologies.  One such technology will assist border guards with under car inspections and another will assist correctional facilities with the supervision of inmates.  If successful, the Company feels these new technologies will have a positive impact on the component division sales.

 

Wholesale consumer parts segment net sales increased $453,000 and $1,071,000 for the three and six month periods ended August 31, 2005 compared to the same periods a year ago.  Management attributes these increases to the opening a new call center in the second half of fiscal 2005.  This call center acts as a consumer and dealer support center for both in-warranty and out-of-warranty household products, appliances, parts and accessories for Black & Decker, Delonghi, Norelco, Coby and various other manufacturers.  This call center also acts as a technical support center for these same manufacturers.  Other increases within this segment reflect increased volume of sales to Best Buy and Applica for the comparative periods.

 

Gross margins

 

 Consolidated gross margins decreased slightly from 33.1% to 32.6% for the quarter and from 33.1% to 32.3% for the six months ended August 31, 2005 as compared to the same period ended August 31, 2004.  Display segment margins decreased from 31.2% to 27.1% and from 30.7% to 26.6% for the comparative three and six month periods.  The wholesale consumer parts segment margins increased from 39.7% to 52.7% and from 42.1% to 52.5% for the three and six month comparative periods.

 

Gross margins within the Company’s monitor operations decreased to 25.8% for the six months ended August 31, 2005 compared to 30.9% for the same period a year ago and from 31.2% to 28.9% for the three months ended August 31, 2005.  These decreases are primarily attributable to decreased sales volume at the Company’s Teltron, Z-Axis and Lexel locations as well as management’s decision to close the XKD location at the end of fiscal 2005.

 

Gross margins for the wholesale consumer parts segment increased to 52.7% for the quarter ended August 31, 2005 as compared to 39.7% for the same quarter a year ago.  Gross margins increased from 42.1% to 52.5% for the six month comparative periods.  This increase is primarily due to additional revenue generated from its new call center.  Expenses for the call center are classified as operating expenses.

 

Operating expenses

 

Operating expenses as a percentage of sales were relatively flat for the quarter ended August 31, 2005 as compared to August 31, 2004 and increased slightly from 23.3% to 24.6% for the six month comparative periods.  

 

Display segment expenses were flat for the three month comparative periods and increased $313,000 for the six month comparative periods ended August 31.  Management attributes the majority of this increase to corporate expenses, such as increased professional fees.

 

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Wholesale consumer parts segment expenses increased $704,000 and $1,019,000 compared to the three and six month periods a year ago, primarily due to additional expenses associated with the new call center opened in late fiscal 2005.  These expenses (primarily payroll and telephone) are classified in general and administrative expense in the consolidated financial statements.

 

Interest expense

 

Interest expense increased $106,000 and $186,000 for the three and six months ended August 31, 2005 as compared to the same periods a year ago.  The Company maintains various debt agreements with different interest rates, most of which are based on the prime rate or LIBOR.   Overall debt increased $7,362,000 during the comparable periods, which was the primary reason for the increase in interest expense.

 

Income taxes

 

The effective tax rate for the six months ended August 31, 2005 is 38.0%, unchanged from a year ago.  These rates are greater than the Federal statutory rate primarily due to the effect of state taxes and the permanent non-deductibility of certain expenses for tax purposes.

 

Foreign currency translation

 

Gains or losses resulting from the transactions with its UK subsidiary are reported in current operations while currency translation adjustments are recognized in a separate component of shareholders’ equity.  There were no significant gains or losses recognized in either period related to the UK subsidiary.

 

Liquidity and capital resources

 

As of August 31, 2005, the Company had total cash and cash equivalents of $2,185,000.  The Company’s working capital was $44,656,000 and $37,220,000 at August 31, 2005 and February 28, 2005, respectively.  In recent years, the Company has financed its growth and cash needs primarily through income from operations, borrowings under revolving credit facilities 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, product line additions and dividends.

 

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, but typically has larger investments in inventories than those of its competitors.

 

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.  In May 2005, the Company acquired the IDS division of Three Five Systems, Inc.  The acquisition consisted of cash to the seller of $1,377,000 total consideration.

 

Cash used by operations for the six months ended August 31, 2005 was $913,000 as compared to cash provided of $2,476,000 for the same period a year ago.   This decrease is attributable to slower collections of receivables as compared to the same period a year ago, offset by increases in accounts payable and accrued liabilities.

 

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