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

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 May 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

 

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

 

Class		Number of Shares
Common Stock, No Par Value		9,688,000

 

 

Video Display Corporation and Subsidiaries

Index

 

PART I.	FINANCIAL INFORMATION
	Item 1. Financial Statements
	Consolidated Balance Sheets – May 31, 2005 (unaudited) and February 28, 2005
	Consolidated Statements of Income - Three months ended May 31, 2005 and 2004 (unaudited)
	Consolidated Statements of Shareholders’ Equity and Comprehensive Income - Three months ended May 31, 2005 (unaudited)
	Consolidated Statements of Cash Flows – Three months ended May 31, 2005 and 2004 (unaudited)
	Notes to Consolidated Financial Statements - May 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 its Senior Securities
	Item 4. Submission of Matters to a Vote of Security Holders
	Item 5. Other Information
	Item 6. Exhibits
EXHIBIT 31.1 302 CERTIFICATION OF CEO
EXHIBIT 31.2 302 CERTIFICATION OF CFO
EXHIBIT 32.1 906 CERTFICATION OF CEO
EXHIBIT 32.2 906 CERTFICATION OF CFO

 

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Video Display Corporation and Subsidiaries

Consolidated Balance Sheets

 

		May 31,			February 28,
		2005			2005
		(unaudited)
Assets
Current Assets
Cash and cash equivalents		$	2,892,000		$	1,471,000
Accounts receivable, less allowance for possible losses of $432,000 and $339,000		11,567,000			11,929,000
Inventories (Note C and D)		34,767,000			32,105,000
Deferred income taxes		2,417,000			2,555,000
Prepaid expenses and other		1,121,000			744,000
Total current assets		52,764,000			48,804,000
Property, plant and equipment:
Land		540,000			540,000
Buildings		7,191,000			7,155,000
Machinery and equipment		19,644,000			19,485,000
		27,375,000			27,180,000
Accumulated depreciation		(19,786,000		)	(19,543,000		)
Net property, plant, and equipment		7,589,000			7,637,000
Goodwill (Note C)		1,318,000			1,318,000
Other assets (Note C)		4,506,000			4,020,000
Total assets		$	66,177,000		$	61,779,000

 

The accompanying notes are an integral part of these statements.

 

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Video Display Corporation and Subsidiaries

Consolidated Balance Sheets

 

		May 31,			February 28,
		2005			2005
		(unaudited)
Liabilities and Shareholders’ Equity
Current liabilities
Accounts payable		$	4,552,000		$	5,190,000
Accrued liabilities		3,582,000			3,080,000
Lines of credit (Note F)		—			2,688,000
Notes payable to officers and directors		45,000			49,000
Current maturities of long-term debt (Note E)		85,000			577,000
Total current liabilities		8,264,000			11,584,000
Lines of credit (Note F)		26,640,000			19,296,000
Long-term debt, less current maturities (Note E)		838,000			848,000
Notes payable to officers and directors, less current maturities		136,000			146,000
Convertible notes payable, net of discount of $56,000 and $94,000		194,000			281,000
Deferred income taxes		427,000			434,000
Total liabilities		36,499,000			32,589,000
Minority Interests		123,000			123,000
Commitments		—			—
Shareholders’ Equity (Note C and H)
Preferred stock, no par value – 10,000,000 shares authorized; none issued and outstanding		—			—
Common stock, no par value – 50,000,000 shares authorized; 9,688,000 and 9,704,000 issued and outstanding		6,834,000			7,026,000
Additional paid in capital		92,000			92,000
Retained earnings		22,624,000			22,018,000
Accumulated other comprehensive loss		5,000			(69,000		)
Total shareholders’ equity		29,555,000			29,067,000
Total liabilities and shareholders’ equity		$	66,177,000		$	61,779,000

 

The accompanying notes are an integral part of these statements.

 

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Video Display Corporation and Subsidiaries

Consolidated Statements of Income (unaudited)

 

		Three Months Ended May 31,
		2005			2004
Net sales		$	20,442,000		$	19,900,000
Cost of goods sold		13,906,000			13,314,000
Gross profit		6,536,000			6,586,000
Operating expenses
Selling and delivery		1,714,000			1,748,000
General and administrative		3,568,000			2,911,000
		5,282,000			4,659,000
Operating profit		1,254,000			1,927,000
Other income (expense)
Interest expense		(337,000		)	(257,000		)
Other, net		63,000			127,000
		(274,000		)	(130,000		)
Income before income taxes		980,000			1,797,000
Income tax expense		374,000			682,000
Net income		$	606,000		$	1,115,000
Basic earnings per share of common stock (Note H)		$	0.06		$	0.12
Diluted earnings per share of common stock (Note H)		$	0.06		$	0.11
Basic weighted average shares outstanding		9,685,000			9,670,000
Diluted weighted average shares outstanding		9,928,000			9,890,000

 

The accompanying notes are an integral part of these statements.

 

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Video Display Corporation and Subsidiaries

Consolidated Statements of Shareholders’ Equity and Comprehensive Income

the Three Months Ended May 31, 2005 (unaudited)

 

													Other			Current
							Additional						Accumulated			Period
		Common		Share			Paid In			Retained			Comprehensive			Comprehensive
		Shares		Amount			Capital			Earnings			Income (Loss)			Income
Balance at February 28, 2005		9,704,000		$	7,026,000		$	92,000		$	22,018,000		$	(69,000	)
Net income for the period		—		—			—			606,000			—			$	606,000
Conversion of debt to common stock		10,000		125,000			—			—			—
Repurchase of common stock		(26,000	)	(317,000		)	—			—			—
Foreign currency translation adjustment		—		—			—			—			74,000			74,000
Total comprehensive income																$	680,000
Balance at May 31, 2005		9,688,000		$	6,834,000		$	92,000		$	22,624,000		$	5,000

 

The accompanying notes are an integral part of these statements.

 

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Video Display Corporation and Subsidiaries

Consolidated Statements of Cash Flows (unaudited)

 

		Three Months Ended May 31,
		2005			2004
Operating Activities
Net income		$	606,000		$	1,115,000
Adjustments to reconcile net income to net cash provided by (used in) operations:
Depreciation and amortization		388,000			242,000
Provision for bad debts		93,000			29,000
Provision for inventory reserve		300,000			301,000
Deferred income taxes		131,000			—
Interest on convertible note		38,000			—
Changes in working capital, net of effects from acquisitions:
Accounts receivable		269,000			482,000
Inventories		(2,189,000		)	(1,791,000		)
Prepaid expenses and other assets		(478,000		)	602,000
Accounts payable and accrued liabilities		(136,000		)	435,000
Net cash (used in) provided by operating activities		(978,000		)	1,415,000
Investing activities
Capital expenditures		(121,000		)	(47,000		)
Cash paid for acquisition		(1,377,000		)	(150,000		)
Other investing activities		—			—
Net cash used in investing activities		(1,498,000		)	(197,000		)
Financing activities
Proceeds from long-term debt and lines of credit		11,188,000			8,975,000
Repayments of long-term debt and lines of credit		(7,034,000		)	(10,470,000		)
Repayments of loans from related parties		(14,000		)	(8,000		)
Repurchase of common stock		(317,000		)	—
Proceeds from exercise of stock options		—			5,000
Net cash provided by (used in) financing activities		3,823,000			(1,498,000		)
Effect of exchange rates on cash		74,000			7,000
Net change in cash		1,421,000			(273,000		)
Cash, beginning of period		1,471,000			3,021,000
Cash, end of period		$	2,892,000		$	2,748,000

 

The accompanying notes are an integral part of these statements.

 

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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 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.

 

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

 

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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.  As part of the agreement, the IDS division will continue operations at its current location until the end of its lease, at which time it will move to new facilities and be known as Aydin North and be 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 $12 dollars 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

 

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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:

 

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

 

NOTE D - INVENTORIES

 

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

 

Inventories consisted of the following:

 

		May 31,			February 28,
		2005			2005
		(unaudited)
Raw materials		$	12,441,000		$	7,834,000
Work-in-process		3,152,000			3,800,000
Finished goods		22,531,000			23,528,000
		38,124,000			35,162,000
Reserves for obsolescence		(3,357,000		)	(3,057,000		)
		$	34,767,000		$	32,105,000

 

NOTE E - LONG-TERM DEBT

 

Long-term debt consisted of the following:

 

		May 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 May 31, 2005); monthly principal and interest payments of $5,000 payable through October 2021; collateralized by land and building of Teltron Technologies, Inc.		553,000			557,000
Other		370,000			389,000
		923,000			1,425,000
Less current maturities		(85,000		)	(577,000		)
		$	838,000		$	848,000

 

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NOTE F - LINES OF CREDIT

 

At May 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.  As of May 31, 2005, the outstanding balance of this line of credit was $23,140,000 and the available amount for borrowing was $4,360,000.  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 May 31, 2005, the Company was in compliance with all covenants.

 

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 as a floating LIBOR rated based on a ratio of debt to EBITDA, as defined.  As of May 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 tangible cash flow, asset and debt service coverage.  As of May 31, 2005, the Company was in compliance with all covenants.

 

NOTE G – SUPPLEMENTAL CASH FLOW INFORMATION

 

		Three Months Ended
		May 31,			May 31,
		2005			2004
Cash Paid for:
Interest		$	337,000		$	257,000
Income taxes, net of refunds		$	1,174,000		$	178,000
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 H – SHAREHOLDERS’ EQUITY

 

Earnings Per Share

 

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

 

		Net Income			Weighted Average Shares Outstanding		Earnings Per Share
Quarter ended May 31, 2005
Basic		$	606,000		9,685,000		$	0.06
Effect of dilution:
Convertible debt		23,000			20,000
Options		—			223,000
Diluted		$	629,000		9,928,000		$	0.06
Quarter ended May 31, 2004
Basic		$	1,115,000		9,670,000		$	0.12
Effect of dilution:
Options		—			220,000
Diluted		$	1,115,000		9,890,000		$	0.11

 

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Stock-Based Compensation Plans

 

The Company has an incentive stock option plan whereby total options to purchase 142,000 shares 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. No stock options were granted during the quarters ended May 31, 2005 and 2004, respectively, and, as such, no related compensation expense is recorded in the accompanying consolidated financial statements.

 

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 income per share would have been as follows:

 

		Three Months Ended
		May 31,			May 31,
		2005			2004
Net income, as reported		$	606,000		$	1,115,000
Stock-based employee compensation expense determined under fair value basis, net of tax		(14,000		)	(9,000		)
Pro forma net income		$	592,000		$	1,106,000
Net (loss) earnings per share:
Basic – as reported		$	0.06		$	0.12
Basic – pro forma		$	0.06		$	0.12
Diluted – as reported		$	0.06		$	0.11
Diluted – pro forma		$	0.06		$	0.11

 

Stock Repurchase Program

 

The Company has a stock repurchase program, pursuant to which it is authorized to repurchase up to 462,500 shares of

 

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the Company’s common stock in the open market. The Company repurchased 25,621 shares in May 2005.  No shares were repurchased in the first quarter of fiscal 2005.

 

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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.

 

First Quarter 2006 Highlights

 

•      Data Display revenue - the Company’s data display revenues increased $725,000 or 32.8% compared to the first quarter of fiscal 2005.  These increases reflect the Company’s sales of projection tubes from its Data Display location in Tucker, GA, which carry a higher unit price than its 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 IDS division will continue to operate out of its current facilities until the end of its lease before moving to new facilities in Massachusetts and be known as Aydin North.

 

•      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.

 

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. 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

 

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products discontinue production or exit the business, the Company may make last time buys. In the monitor portion 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.

 

The wholesale distribution segment also maintains in inventory a broad range of products (which contributes to a higher total inventory) in order to be able to promptly provide those customers who are buying products, or obtaining warranty replacements, for electronic part components.

 

Results of Operations

 

The following table sets forth, for the three months ended May 31, 2004 and 2003, the percentages which selected items in the Statements of Income bear to total sales:

 

 

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Net sales

 

Consolidated net sales increased $542,000 for the quarter ended May 31, 2005 as compared to the quarter ended May 31, 2004.  Display segment sales decreased $76,000 while wholesale consumer parts segment sales increased $618,000 for the comparative periods.

 

The net decrease in Display segment sales is attributed to declines within the monitor operations of $651,000.  This decrease is attributed in large part to weaker demand for the Company’s products from military and defense contractors for the quarter ended May 31, 2005. The data display operations showed an increase of $725,000, which is the result of the Company distributing projection tubes from its Data Display location in Tucker, GA.  These projection tubes carry a higher sales price than the Company’s normal inventory.  Offsetting declines occurred in the entertainment, and component parts operations of $91,000 and $59,000, respectively.

 

The net loss in monitor division sales includes decreases from Aydin Displays of $788,000 and XKD of $545,000.  These decreases reflect declines in revenues from contract orders received from the Boeing Co., Lockheed Martin and others.  There were offsetting increases during the first quarter of $176,000 at the Lexel operation, and $343,000 at the Display Systems operations.

 

The data display division showed an increase in sales of $725,000 compared to the first quarter of fiscal 2004.  Management attributes this primarily to its decision in late fiscal 2004 to distribute projection tube displays from its Data Display location in Tucker, GA.  These projection tubes carry a higher sales price than the Company’s normal inventory.

 

Within the entertainment division, sales of television CRTs decreased $91,000 for the quarter ended May 31, 2005 as compared to the same period a year ago.  The Company is the primary supplier of replacement television CRTs to the domestic entertainment market.  A majority 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.  Due to the fact that 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 the exposure to obsolescence.

 

The component parts division recorded declines of $59,000 for the quarter ended May 31, 2005 as compared to the same period a year ago.  Electron gun and stem sales were negatively impacted by weaker demand during the quarter, while the Company’s Wintron location was negatively impacted as it transitions to newer technologies.  Wintron is marketing two new camera technologies.  One will assist border guards with under car inspections, another will assist correctional facilities in supervision of inmates.  Electron gun sales have historically been dependent upon the demand by domestic and foreign television CRT remanufacturers.  These sales have declined as consumers move towards purchasing new technology as opposed to repairing existing sets.

 

Wholesale segment net sales increased $618,000 for the quarter ended May 31, 2005 compared to the same period a year ago.  Management attributes this increase to the opening a new call center in the second half of fiscal 2005, which generated approximately $323,000 in additional revenues.  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.

 

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Gross margins

 

Consolidated gross profit margins decreased slightly to 32.0% from 33.1% for the quarter ended May 31, 2005 as compared to May 31, 2004.  Display segment margins decreased to 26.0% from 28.4% while the wholesale consumer parts segment increased to 52.3% from 44.8% for the comparable periods.

 

Display segment margins were impacted by a variety of factors.  The Company’s monitor operations gross margins decreased to 25.0% compared to 30.4% a year ago.  This decrease is attributed to lower sales volume within the monitor operations of $651,000 for the comparable periods.  Within the Company’s component parts operations, gross margins decreased to 29.9% from 37.3% a year ago.  This decrease is attributed to weaker demand within these operations as compared to a year ago.  Additionally, the Company’s Data Display operation is distributing projection tube displays, which carry a higher profit margin than its normal inventory.

 

Gross margins for the wholesale consumer parts segment increased for the quarter ended May 31, 2005 as compared to the same quarter a year ago.  This increase is primarily due to additional revenue generated from its new call center, which was approximately $323,000 for the quarter ended May 31, 2005.  Expenses for the call center are classified as operating expenses.

 

Operating expenses

 

Operating expenses as a percentage of sales increased to 25.8% for the quarter ended May 31, 2005 as compared to 23.4% for the quarter ended May 31, 2003.  Display segment operating expenses increased $309,000 and the wholesale segment expenses decreased $314,000 from the comparative period a year ago.

 

Display expense increases included increases within the monitor operations of $175,000, reflecting the continued growth and product development costs.  There were also increases within the data display operations of $140,000, reflecting increased corporate overhead costs.

 

Wholesale segment expenses increased $314,000 compared to the first quarter of fiscal 2005, 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 $80,000 in the first quarter of fiscal 2006 as compared to the first quarter of fiscal 2005.  The Company maintains various debt agreements with different interest rates, most of which are based on the prime rate or LIBOR.  Overall debt increased during the comparative periods by $8,365,000, which was the primary reason for the increase in interest expense.

 

Income taxes

 

The effective tax rate for the quarter ended May 31, 2005 is 38.1% as compared to 38.0% 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.

 

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Liquidity and capital resources

 

As of May 31, 2005, the Company had total cash and cash equivalents of $2,892,000.  The Company’s working capital was $44,500,000 and $37,220,000 at May 31, 2005 and February 28, 2005.  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 receivables, debt service, capital expenditures, product line additions and, in fiscal 2005, 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 period ended May 31, 2005 was $978,000 as compared to cash provided by operations of $1,415,000 in the same period a year ago.  Net income for the first quarter ended May 31, 2005 adjusted for non-cash items provided cash of $1,556,000.  Working capital requirements increased $2,534,000 in the first quarter of fiscal 2005 due primarily to greater investments in inventories which used cash of $2,189,000. Decreases in accounts payable and accrued liabilities used cash of $136,000, while increases in prepaid expenses used cash of $478,000.  Inventory increased $2,189,000 in the first quarter of fiscal 2006 due primarily to purchase requirements within the monitor segment required to fill open backlog orders.  Accounts receivable decreased $269,000.  In the first quarter of fiscal 2005, working capital requirements decreased primarily from more aggressive collection efforts of receivables, which provided cash of $482,000, and decreases in prepaid expenses, which provided cash of $602,000 and increases in accounts payable and accrued expenses, which provided cash of $435,000.  Investments in inventories increased working capital requirements $1,791,000.

 

Investing activities used cash of $1,498,000 and $197,000 in the first quarter fiscal 2006 and 2005, respectively.  Capital expenditures were $121,000 in the first quarter of fiscal 2005 as compared to $47,000 for the same period a year ago. Capital expenditures in 2005 were primarily for building improvements and computer hardware.  Capital expenditures were primarily within the monitor segment to support the growth within this segment.  The Company does not anticipate any significant investments in capital assets for 2006.  Cash of $1,377,000 was used to acquire the IDS division of Three Five Systems, Inc.

 

Financing activities provided cash of $3,823,000 in the first quarter of fiscal 2006 and used cash of $1,498,000 in the first quarter of fiscal 2005.  During the first quarter of fiscal 2006, the Company used cash of $11,188,000 from lines of credit primarily to finance working capital needs.  Cash of $7,048,000 was used to repay advances from the Company’s lines of credit and for overall debt reduction.  Cash of $317,000 was used to repurchase shares of the Company’s common stock.

 

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,

 

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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 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.

 

The Company paid a cash dividend of $393,000 in the fourth quarter of fiscal 2005. The policy regarding future payments of dividends will be reviewed periodically by the Board of Directors and will be based on the earnings and financial position of the Company and other factors which the Board of Directors deems appropriate.

 

Critical Accounting Policies

 

Management’s Discussion and Analysis of Results of Operations and Financial Condition are based upon the Company’s consolidated financial statements.  These 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 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. 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 OEM’s, new products being marketed, and technological advances relative to the product capabilities of the Company’s existing inventories.  There have been no significant changes in management’s estimates in fiscal 2006 and 2005; however, the Company cannot guarantee the accuracy of future forecasts since these estimates are subject to change based on market conditions.

 

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 EITF 00-10, shipping and handling fees billed to customers are classified in net sales in the consolidated statements of operations.  Shipping and handling costs incurred are classified in selling and delivery in the consolidated statements of operations.

 

A portion of the Company’s revenue is derived from contracts to manufacture CRT’s to a buyers’ specification.  These contracts are accounted for under the provisions of the American Institute of Certified Public Accountants’ Statement of Position No. 81-1, “Accounting for Performance of Construction-Type and Certain 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

 

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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.

 

The Wholesale Parts segment has several distribution agreements that it accounts for using the gross revenue basis as prescribed by EITF 99-19.  The Company uses the gross method because the Company has general inventory risk, physical loss inventory risk and credit risk.

 

Allowance for bad debts

 

The allowance for bad debts 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 bad debts 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 historical 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 feels that historically its procedures have been adequate and does not anticipate that its assumptions are reasonably likely to change in the future.

 

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.

 

Forward-Looking Information

 

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.  Among the factors that could cause actual results to differ materially are the following:  business conditions, rapid or unexpected technological changes, product development, inventory risks due to shifts in product demand, competition, domestic and foreign government relations, fluctuations in foreign exchange rates, rising costs for components or unavailability of components, the timing of orders booked, lender relationships, and the risk factors listed from time to time in the Company’s reports filed with the Commission.

 

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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 $27,744,000 of outstanding debt at May 31, 2005 related to long-term 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 an decrease of approximately $277,000 in pre-tax net income assuming no further changes in the amount of borrowings subject to variable rate interest from amounts outstanding at May 31, 2005. The Company does not trade in derivative financial instruments.

 

The Company has a subsidiary in the U.K., which is not material, but uses the British pound as its functional currency. Due to its limited operations outside of the U.S., the Company’s exposure to changes in foreign currency exchange rates between the U.S. dollar and foreign currencies or to weakening economic conditions in foreign markets is not expected to significantly impact the Company’s financial position.

 

ITEM 4.  CONTROLS AND PROCEDURES

 

The Company’s management, under supervision of the Chief Executive Officer and Chief Financial Officer, is responsible for establishing and maintaining disclosure controls and procedures for the Company and its subsidiaries. As of the end of the period covered by this quarterly report, with the participation of the Chief Executive Officer and the Chief Financial Officer, management completed an evaluation of the Company’s disclosure controls and procedures. Based upon this evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the disclosure controls and procedures are effective to ensure that all material information relating to the Company and its subsidiaries is made known to them by others within the organization as appropriate to allow timely decisions regarding required disclosures.

 

During the quarter ended May 31, 2005, the Company made changes to its internal controls.  These changes require that Company divisional accounting personnel be required to submit all non-repetitive monthly, or other period, journal entries to Corporate management for review and approval prior to entry into divisional or Corporate records.  In addition, management has hired additional financial reporting personnel to properly ensure all non-routine transactions are identified and recorded in a timely manner.  Except for the foregoing changes, there were no changes in the Company’s internal control over financial reporting during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the internal control over financial reporting.

 

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PART II

 

Item 1.    Legal Proceedings

 

No new legal proceedings or material changes in existing litigation occurred during the quarter ended May 31, 2005.

 

Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds

 

The Company made no sales of unregistered equity securities, nor did the Company repurchase any shares of its equity securities, during the quarter ended May 31, 2005.

 

Item 3.    Defaults upon Senior Securities

 

None.

 

Item 4.    Submission of Matters to a Vote of Security Holders

 

a)	The company held a special meeting of stockholders on May 2, 2005 and solicited votes by proxy in conjunction with such meeting.
b)	The following matters were approved by the shareholders:
	(i)	To approve an amendment to the Company’s articles of incorporation that would increase the number of shares of capital stock the Company has authority to issue from 12,000,000 shares to 60,000,000 shares, consisting of 50,000,000 shares of common stock without par value (an increase from 10,000,000 shares) and 10,000,000 shares of preferred stock without par value (an increase from 2,000,000 shares).

 

For		Against		Abstain
5,380,006		714,847		0

 

(ii)

To approve an amendment to the Company’s articles of incorporation that would add a new article that would provide that the directors of the Corporation shall have no personal liability to the Company or it’s shareholders for monetary damages for breach of duty of care or other duty as a director resulting from any act or omission, other than personal liability of a director for certain enumerated acts as specified by the Georgia Business Corporation Code.

 

For		Against		Abstain		Not Voted
5,050,128		1,411		0		1,043,314

 

Item 5.    Other information

 

None

 

Item 6.    Exhibits

 

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Exhibit Number		Exhibit Description
31.1		Section 302 Certification
31.2		Section 302 Certification
32.1		Section 906 Certification
32.2		Section 906 Certification

 

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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, thereto duly authorized.

 

 

		VIDEO DISPLAY CORPORATION
July 15, 2005	By:	/s/ Ronald D. Ordway
		Ronald D. Ordway
		Chief Executive Officer
	By:	/s/ Gregory A. Kittle
		Gregory A. Kittle
		Chief Financial Officer

 

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