VIDEO DISPLAY CORP - Quarter Report: 2014 November (Form 10-Q)

VIDEO DISPLAY CORP - Quarter Report: 2014 November (Form 10-Q)

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10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

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

For the Quarterly Period Ended November 30, 2014.

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

For the Transition Period From to

Commission File Number 0-13394

VIDEO DISPLAY CORPORATION

(Exact name of registrant as specified on its charter)

GEORGIA

58-1217564

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

1868 TUCKER INDUSTRIAL ROAD, TUCKER, GEORGIA 30084

(Address of principal executive offices)

770-938-2080

(Registrant’s telephone number including area code)

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

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

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

As of November 30, 2014, the registrant had 6,393,873 shares of Common Stock outstanding.

Video Display Corporation and Subsidiaries

Index


			Page
PART I. FINANCIAL INFORMATION

	Item 1.	Financial Statements.

		Interim Condensed Consolidated Balance Sheets – November 30, 2014 (unaudited) and February 28, 2014		3

		Interim Condensed Consolidated Statement of Operations- Nine months ended November 30, 2014 and 2013 (unaudited)		5

		Interim Condensed Consolidated Statement of Shareholders’ Equity - Nine months ended November 30, 2014 (unaudited)		6

		Interim Condensed Consolidated Statements of Cash Flows – Nine months ended November 30, 2014 and 2013 (unaudited)		7

		Notes to Interim Condensed Consolidated Financial Statements - November 30, 2014 (unaudited)		8

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.		16

	Item 3.	Quantitative and Qualitative Disclosure About Market Risk.		21

	Item 4.	Controls and Procedures.		22

PART II. OTHER INFORMATION

	Item 1.	Legal Proceedings.		23

	Item 1A.	Risk Factors.		23

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.		23

	Item 3.	Defaults upon Senior Securities.		23

	Item 4.	Submission of Matters to a Vote of Security Holders.		23

	Item 5.	Other Information.		23

	Item 6.	Exhibits.		23

	SIGNATURES			25
	31.1	Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
	31.2	Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
	32	Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

ITEM 1 – FINANCIAL STATEMENTS

Video Display Corporation and Subsidiaries

Interim Condensed Consolidated Balance Sheets (Unaudited)

(in thousands)


	November 30, 2014			February 28, 2014
	(unaudited)
Assets
Current assets
Cash and cash equivalents	$	—		$	2,299
Restricted cash		—			1,200
Trading investments, at fair value		3,217			4,914
Accounts receivable, less allowance for doubtful accounts of $29 and $40		1,885			1,876
Notes receivable		—			1,000
Inventories, net		8,135			9,915
Deferred income taxes		329			242
Income taxes refundable		1,176			1,120
Prepaid expenses and other		28			182
Assets of discontinued operations		2,537			—

Total current assets		17,307			22,748

Property, plant, and equipment
Land		154			154
Buildings		2,593			2,589
Machinery and equipment		7,270			7,249

		10,017			9,992
Accumulated depreciation and amortization		(8,602	)		(8,431	)

Net property, plant, and equipment		1,415			1,561

Notes receivable		1,078			1,698
Intangible assets, net		589			684
Deferred income taxes		732			760
Other assets		29			29
Assets of discontinued operations		77			—

Total assets	$	21,227		$	27,480

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

Video Display Corporation and Subsidiaries

Interim Condensed Consolidated Balance Sheets (Unaudited) (continued)

(in thousands)


	November 30, 2014			February 28, 2014
	(unaudited)
Liabilities and Shareholders’ Equity
Current liabilities
Accounts payable	$	687		$	946
Accrued liabilities		479			925
Current maturities of long-term debt		50			48
Liabilities of discontinued operations		1,120			—

Total current liabilities		2,336			1,919

Long-term debt, less current maturities		195			233
Deferred rent		450			540
Unrecognized gain on sale of assets		—			554

Total liabilities		2,981			3,246

Shareholders’ Equity
Preferred stock, no par value – 10,000 shares authorized; none issued and outstanding		—			—
Common stock, no par value – 50,000 shares authorized; 9,732 issued and 5,993 outstanding at November 30, 2014 and 9,732 issued and 7,020 outstanding at February 28, 2014		7,293			7,293
Additional paid-in capital		167			160
Retained earnings		26,861			29,392
Treasury stock, shares at cost; 3,740 at November 30, 2014 and 2,712 at February 28, 2014		(16,075	)		(12,611	)

Total shareholders’ equity		18,246			24,234

Total liabilities and shareholders’ equity	$	21,227		$	27,480

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

Video Display Corporation and Subsidiaries

Condensed Consolidated Statement of Operations (Unaudited)

(in thousands, except per share data)


	Three Months Ended November 30,						Nine Months Ended November 30,
	2014			2013			2014			2013
Net sales	$	3,557		$	3,721		$	9,844		$	10,507
Cost of goods sold		2,883			3,494			8,179			9,879

Gross profit		674			227			1,665			628

Operating expenses
Selling and delivery		294			371			837			1,225
General and administrative		1,123			742			2,706			1,979

		1,417			1,113			3,543			3,204

Operating (loss)		(743	)		(886	)		(1,878	)		(2,576	)

Other income (expense)
Interest income (expense)		(3	)		(24	)		16			(710	)
Investment loss		(2,423	)		—			(1,467	)		—
Other, net		290			25			701			480

Loss from continuing operations before income taxes		(2,879	)		(885	)		(2,628	)		(2,806	)

Income tax (benefit)		(43	)		(234	)		(80	)		(900	)

Net loss from continuing operations	$	(2,836	)	$	(651	)	$	(2,548	)	$	(1,906	)
Income (loss) from discontinued operations, net of income tax expense		17			35			17			2,554

Net income (loss)	$	(2,819	)		(616	)		(2,531	)		648

Net income (loss) per share:
From continuing operations-basic	$	(.45	)	$	(.08	)	$	(.39	)	$	(.25	)

From continuing operations-diluted		(.45	)		(.08	)		(.39	)		(.25	)

From discontinued operations-basic	$	.00		$	.00		$	.00			.34

From discontinued operations-diluted		.00			.00			.00			.34

Basic weighted average shares outstanding		6,257			7,593			6,517			7,589

Diluted weighted average shares outstanding		6,262			7,609			6,529			7,617

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

Video Display Corporation and Subsidiaries

Interim Condensed Consolidated Statement of Shareholders’ Equity

Nine Months Ended November 30, 2014 (unaudited)

(in thousands)


	Common Shares			Share Amount		Additional Paid-in Capital		Retained Earnings			Treasury Stock
Balance, February 28, 2014		7,020		$	7,293	$	160	$	29,392		$	(12,611	)
Net loss		—			—		—		(2,531	)		—
Repurchase of treasury stock		(1,027	)		—		—		—			(3,464	)
Share based compensation		—			—		7		—			—

Balance, November 30, 2014		5,993		$	7,293	$	167	$	26,861		$	(16,075	)

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

Video Display Corporation and Subsidiaries

Interim Condensed Consolidated Statements of Cash Flows (unaudited)

(in thousands)


	Nine Months Ended November 30,
	2014			2013
Operating Activities
Net income (loss)		(2,531	)		648
Adjustments to reconcile net income (loss) to net cash provided by (used) in operating activities:
Gain on sale of subsidiary, net of tax		—			(1,929	)
Income from discontinued operations, net of tax		(17	)		(625	)
Depreciation and amortization		291			296
Provision of doubtful accounts		1			30
Provision for inventory reserve		265			495
Non-cash charge for share based compensation		7			6
Deferred income taxes		(58	)		587
Gain on disposal of assets		(364	)		(400	)
Realized/unrealized loss on investments		1,476			23
Other		(10	)		(29	)
Changes in working capital items:
Accounts receivable		(483	)		1,206
Notes receivables		35			—
Inventories		1,515			932
Prepaid expenses and other assets		149			(955	)
Accounts payable and accrued liabilities		(705	)		(2,420	)
Deferred revenue		(90	)		570
Cost, estimated earnings and billings on uncompleted contracts		—			67
Income taxes refundable/payable		(65	)		(219	)

Net cash used in operating activities		(584	)		(1,717	)

Investing Activities
Purchases of property, plant and equipment		(51	)		(74	)
Proceeds from sale of property, plant and equipment		500			499
Proceeds from the sale of subsidiary		—			15,000
Purchases of investments		(68,271	)		—
Sales of investments		61,644			—
Cash advance to LEXEL		(95	)		—

Net cash provided by (used in) investing activities		(6,273	)		15,425

Financing Activities
Proceeds from long-term debt, lines of credit		—			14,054
Repayments of long-term debt, lines of credit		(36	)		(27,229	)
Purchase of treasury stock		(3,464	)		—
Re-issuance of treasury stock		—			166
Proceeds from marginal account borrowings		6,858			—
Proceeds from notes payable to officers and directors		—			250
Repayments of notes payable to officers and directors		—			(750	)

Net cash provided by (used in) financing activities		3,358			(13,509	)

Discontinued Operations
Operating activities		13			2,214
Investing activities		—			(53	)
Financing activities		95			—

Net cash provided by discontinued operations		108			2,161

Net change in cash and cash equivalents		(3,391	)		2,360
Cash and cash equivalents, beginning of year		3,499			379

Cash and cash equivalents, end of period		108			2,739
Cash and cash equivalents, discontinued operations		108			—

Cash and cash equivalents, continuing operations		0			2,739

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

Video Display Corporation and Subsidiaries

November 30, 2014

(unaudited)

Note 1. – Summary of Significant Accounting Policies

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

As contemplated by the Securities and Exchange Commission (the “SEC” or “Commission”) instructions to Form 10-Q, the following footnotes have been condensed and, therefore, do not contain all disclosures required in connection with annual consolidated financial statements. Reference should be made to the Company’s year-end consolidated financial statements and notes thereto, including a description of the accounting policies followed by the Company, contained in its Annual Report on Form 10-K as of and for the fiscal year ended February 28, 2014, as filed with the Commission. There are no material changes in accounting policy during the nine months ended November 30, 2014.

The financial information included in this report has been prepared by the Company, without audit. In the opinion of management, the condensed consolidated 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, 2014 consolidated balance sheet data was derived from the audited consolidated financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America (U.S. GAAP).

Note 2. – Banking & Liquidity

In fiscal 2014, with the sale of the Company’s Aydin Displays, Inc and Z-Axis, Inc. subsidiaries, the Company repaid the majority of debt it owed, the line of credit and two term loans. Currently, the only remaining debt of the Company is $0.3 million owed on a building owned by its subsidiary, Teltron Technologies, Inc. in Birdsboro, PA.

The Company is currently operating using cash from operations and investing activities. The Company has a $15.0 million working capital balance at November 30, 2014, including $3.2 million in liquid assets and $20.8 million working capital balance at February 28, 2014, including $8.4 million in liquid assets.

The Company believes it can continue to operate the Company with existing cash flows for the current level of business. The Company has selected a new banking partner, Fifth Third Bank.

Note 3. – Recent Accounting Pronouncements

In May, 2014, the FASB issued ASU 2014-09 “Revenue with Contracts from Customers”. ASU 2014-09 clarifies the principles for recognizing revenue and develops a common revenue standard for U.S. GAAP and IFRS. The new guidance (i) removes inconsistencies, and weaknesses in revenue requirements, (ii) provides a more robust framework for addressing revenue issues, (iii) improves comparability of revenue recognition practices across entities, industries, jurisdictions, and capital markets, (iv) provides more useful information to users of financial statements through improved disclosure requirements, and (v) simplifies the preparation of financial statements by reducing the number of requirements to which an entity must refer.

The guidance is effective for annual reporting periods beginning after December 15, 2016 including interim periods within that reporting period. The Company does not expect the adoption of this update to have a significant effect on the Company’s consolidated financial position or results of operations.

Video Display Corporation and Subsidiaries

November 30, 2014

(unaudited)

In April 2014, the FASB issued ASU 2014-08, “Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity”. ASU 2014-08 changes the criteria for determining which disposals can be presented as discontinued operations and modified related disclosure requirements. Under the new guidance, a discontinued operation is defined as: (i) a disposal of a component or group of components that is disposed of or is classified as held for sale that represents a strategic shift that has or will have a major effect on an entity’s operations and financial results or (ii) an acquired business or nonprofit activity that is classified as held for sale on the date of acquisition. The standard states that a strategic shift could include a disposal of (i) a major geographical area of operations, (ii) a major line of business, (iii) a major equity method investment, or (iv) other major parts of an entity. Under current U.S. GAAP, an entity is prohibited from reporting a discontinued operation if it has certain continuing cash flows or involvement component after the disposal. The new guidance eliminates these criteria.

The standard expands the disclosures for discontinued operations and requires new disclosures related to individually material disposals that do not meet the definition of a discontinued operation, an entity’s continuing involvement with a discontinued operation following the disposal date and retained equity method investments in a discontinued operation. The guidance is effective for annual periods beginning on or after December 15, 2014 and interim periods within that year. The Company does not expect the adoption of this update to have a significant effect on the Company’s consolidated financial position or results of operations.

Note 4. - Inventories

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


	November 30, 2014			February 28, 2014
Raw materials	$	6,405		$	7,906
Work-in-process		206			242
Finished goods		1,900			1,878

		8,511			10,026
Reserves for obsolescence		(376	)		(111	)

	$	8,135		$	9,915

Video Display Corporation and Subsidiaries

November 30, 2014

(unaudited)

Note 5. – Intangible Assets

Intangible assets consist primarily of the unamortized value of purchased patents, customer lists, non-compete agreements and other intangible assets. Intangible assets are amortized over the period of their expected lives, generally ranging from 5 to 15 years. Amortization expense related to intangible assets was approximately $94 thousand for the nine months ended November 30, 2014 and 2013, respectively.

The cost and accumulated amortization of intangible assets was as follows (in thousands).


	November 30, 2014				February 28, 2014
	Cost		Accumulated Amortization		Cost		Accumulated Amortization
Customer lists	$	2,863	$	2,275	$	2,863	$	2,187
Non-compete agreements		1,000		1,000		1,000		1,000
Patents		233		232		233		225
Other intangibles		6		6		6		6

	$	4,102	$	3,513	$	4,102	$	3,418

Note 6. – Long-Term Debt and Other Obligations

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


	November 30,			February 28,
	2014			2014
Mortgage payable to bank; interest rate at Community Bank’s Base rate plus 0.5% (3.75% as of November 30, 2014); monthly principal and interest payments of $5 thousand payable through October 2021; collateralized by land and building of Teltron Technologies, Inc.		245			281

		245			281
Less current maturities		(50	)		(48	)

	$	195		$	233

The Company had outstanding margin account borrowing of $6.7 million as of November 30, 2014. The Company had no margin account borrowing as of February 28, 2014. The margin account borrowings are used to purchase marketable equity securities and are netted against the investments in the balance sheet to show net trading investments. The gross investments as of November 30, 2014 were $9.9 million leaving net investments of $3.2 million after the margin account borrowings of $6.7 million. The margin interest rate is 2%.

Video Display Corporation and Subsidiaries

November 30, 2014

(unaudited)

Note 7. – Supplemental Cash Flow Information

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


	Nine Months Ended November 30,
	2014		2013
Cash paid for:
Interest	$	54	$	796

Income taxes, net of refunds		40	$	48

Non-cash activity:
Stock grant related to the acquisition of StingRay56	$	—	$	166

Lexel Imaging Reacquisition - Accounts receivable		473		—

Lexel Imaging Reacquisition – Note receivable		900		—

Video Display Corporation and Subsidiaries

November 30, 2014

(unaudited)

Note 8. – Shareholder’s Equity

Earnings (Loss) Per Share

Basic earnings (loss) per share is computed by dividing income or loss 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 (loss) per share is calculated in a manner consistent with that of basic earnings (loss) per share while giving effect to all potentially dilutive common shares that were outstanding during the period.

The following table sets forth the computation of basic and diluted earnings (loss) per share for the three and nine month periods ended November 30, 2014 and 2013 (in thousands, except per share data):


	Net Income (Loss)			Weighted Average Common Shares Outstanding		Earnings (Loss) Per Share
Nine months ended November 30, 2014
Basic-continuing operations	$	(2,548	)		6,517	$	(0.39	)
Basic-discontinued operations		17					0.00
Effect of dilution:
Diluted-continuing operations
Diluted-discontinued operations		—			12		—

Diluted	$	(2,531	)		6,529	$	(0.39	)
Nine months ended November 30, 2013
Basic-continuing operations	$	(1,906	)		7,589	$	(.25	)
Basic-discontinued operations		2,554					.34
Effect of dilution:
Diluted-continuing operations		—			—		—
Diluted-discontinued operations		—			28		—

Diluted	$	648			7,617	$	.09

Three months ended November 30, 2014
Basic-continuing operations	$	(2,836	)		6,257	$	(0.45	)
Basic-discontinued operations		17					0.00
Effect of dilution:
Diluted-continuing operations
Diluted-discontinued operations		—			5		—

Diluted	$	(2,819	)		6,262	$	(0.45	)
Three months ended November 30, 2013
Basic-continuing operations	$	(651	)		7,593	$	(.08	)
Basic-discontinued operations		35					0.00
Effect of dilution:
Diluted-continuing operations		—			—		—
Diluted-discontinued operations		—			16		—

Diluted	$	(616	)		7,609	$	(0.08	)

Video Display Corporation and Subsidiaries

November 30, 2014

(unaudited)

Stock-Based Compensation Plans

For the nine-month period ended November 30, 2014 and 2013, the Company recognized general and administrative expenses of $6.3 thousand and $5.9 thousand, respectively, related to share-based compensation. The liability for the share-based compensation recognized is presented in the consolidated balance sheet as part of additional paid in capital. As of November 30, 2014, total unrecognized compensation costs related to stock options granted was $8.5 thousand. The unrecognized stock option compensation cost is expected to be recognized over a period of approximately 1 year.

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

The Company granted 10,000 and 19,000 options during the nine month periods ended November 30, 2014 and 2013, respectively.

Stock Repurchase Program

The Company has a stock repurchase program, pursuant to which it had been authorized to repurchase up to 2,632,500 shares of the Company’s common stock in the open market. On January 20, 2014, the Board of Directors of the Company approved a one time continuation of the stock repurchase program, and authorized the Company to repurchase up to 1,500,000 additional shares of the Company’s common stock in the open market. There is no minimum number of shares required to be repurchased under the program. During the nine month period ended November 30, 2014, the Company did purchase 1,027,936 shares at an average price of $3.37 per share and during the fiscal year ended February 28, 2014 the Company purchased 572,597 shares at an average price of $3.78 per share. Under this program, an additional 604,573 shares remain authorized to be repurchased by the Company at November 30, 2014.

Note 9. – Income Taxes

The effective tax rate for the nine months ended November 30, 2013 and 2014 was (31.9)% and (3.0) %, respectively. These rates differ from the Federal statutory rate primarily due to the effect of the change in the valuation allowance on the net operating loss carry-forward, state taxes, the permanent non-deductibility of certain expenses for tax purposes, and research and experimentation credits. The disparity of the effective rate from November 30, 2013 compared to 2014 is due largely to the Company not qualifying for the Domestic Production Activities deduction, a reduction in state income taxes due to having a loss in earnings and of the change in the valuation allowance on the net operating loss carry-forward.

Note 10. – Discontinued Operations

On August 30, 2013, the Company completed the sale of the assets and the transfer of specified liabilities of the Company’s wholly-owned subsidiary, Aydin Displays Inc. (“Aydin”). Aydin’s assets were sold to a newly formed acquisition affiliate of Sparton Corp. for a combination of cash totaling $15 million, plus an additional earn-out potential

Video Display Corporation and Subsidiaries

November 30, 2014

(unaudited)

that could be in excess of $6 million dollars based upon the achievement of reaching certain projected levels of EBITDA generated by the “new” Aydin in the subsequent 12-month period to the August 30, 2013 closing. The sale provisions included a holdback of $1.2 million on the proceeds which was put into an escrow account until August 30, 2014. The Company recognized a gain on the sale of the Aydin assets of $2.9 million pre-tax. The Company did not earn an earn-out as Aydin did not reach the necessary target. Along with the sale, the Company signed a lease agreement with the buyer, whereby the Company rented a building owned by another subsidiary of the Company to the buyer with no rent for a five year period. The Company deferred $0.6 million of the gain, and will recognize it as rental income over the five-year period. Aydin had net sales of $8.3 million and pre-tax net income of $0.5 million for the six months ending August 30, 2013 before the sale.

On January 16, 2014, the Company sold their wholly-owned subsidiary, Z-Axis, Inc. The sale includes Z-Axis as well as its BEAR Power Supplies and Boundless Technologies business units. Z-Axis, Inc. was sold to one of the subsidiary’s original founders for approximately $9 million in cash and a $1 million dollar note. The Company recognized a gain on the sale of $5.4 million pre-tax. Z-Axis, Inc. had $7.8 million in net sales and pre-tax net profit of $0.6 million for the ten and a half months of fiscal 2014 before the sale.

On March 26, 2014 with an effective date of February 28, 2014, the Company completed the sale of the Company’s wholly-owned subsidiary, Lexel Imaging, Inc. to Citadal Partners, LLC for approximately $3.9 million, consisting of $1.0 million cash payable over 180 days and included in current assets as a note and a guarantee to purchase $2.9 million in inventory over a five year period. The inventory was adjusted to its net realizable value as part of the sale. The Company recognized a loss on the sale of $4.4 million pre-tax. Lexel Imaging, Inc. had net sales of $ 7.6 million and a pre-tax net loss of $0.8 million for the twelve months ending February 28, 2014.

On November 16, 2014 the Company exercised the Company’s rights under the Security Agreement as Citadal was in default of the Promissory Note with the Company and the Company repossessed Lexel Imaging, Inc. Lexel Imaging, Inc. summarized financial information is included below for an accurate comparison of the business.

All of these companies’ net sales, expenses and net profits are being shown as discontinued operations per ASC 205-20-45 “Reporting Discontinued Operations”. The operating income and cash flows from these businesses are reflected as discontinued operations in the consolidated financial statements for all periods presented. The Company has reclassified results that were previously included in continuing operations as discontinued operations for these businesses.

Video Display Corporation and Subsidiaries

November 30, 2014

(unaudited)

The summarized financial information for discontinued operations for the three and nine months ended November 30, 2013 and November 30, 2014, is as follows:


	Three months ended November 30, 2013			Nine months ended November 30, 2013			Three months ended November 30, 2014		Nine months ended November 30, 2014
Net sales		4,439			21,648			336		336
Cost of goods sold		3,669			16,163			286		286

Gross profit		770			5,485			50		50
Operating expenses
Selling and delivery		72			1,572			—		—
General and administrative		745			3,140			24		24

Total operating expenses		817			4,712			24		24
Operating profit (loss) from discontinued operations		(47	)		773			26		26
Other income		100			3,103			—		—
Interest expense		—			(6	)		—		—
Other, net		100			3,097			—		—

Income (loss) from discontinued operations before income taxes		53			3,870			26		26
Income tax expense (benefit)		18			1,316			9		9

Income (loss) from discontinued operations		35			2,554			17		17

Video Display Corporation and Subsidiaries

November 30, 2014

(unaudited)

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

The following discussion should be read in conjunction with the attached interim condensed consolidated financial statements and with the Company’s 2014 Annual Report to Shareholders, which included audited condensed consolidated financial statements and notes thereto as of and for the fiscal year ended February 28, 2014, as well as Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Overview

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

•

Simulation and Training Products – offers a complete range of projection display systems for use in training and simulation, military, medical, entertainment and industrial applications.

•

Data Display CRTs – offers a wide range of cathode ray tubes (CRTs) for use in data display screens, including computer terminal monitors and medical monitoring equipment.

•

Broadcast and Control Center Products – offers high-end visual display products for use in video walls and command and control centers.

•

Cyber Secure Products – offers advanced TEMPEST technology, also known as Emanation Security EMSEC, products and custom engineering solutions to include extreme environmental performance and survivability technologies.

During fiscal 2015, management of the Company is focusing key resources on strategic efforts to grow its business through internal sales or through niche acquisitions that enhance the profitability and sales of the Company’s more profitable product lines. Challenges facing the Company during these efforts include:

Liquidity - As of November 30, 2014, the Company is operating using cash from operations and investing activities. The Company believes it can operate the Company with existing cash flows for the current level of business. Should business increase dramatically or an acquisition candidate be found, the Company may need to find more permanent sources of capital to fund the growth.

Inventory management – The Company’s business units utilize different inventory components than the divisions had in the past. The Company has a monthly reserve at each of its divisions to offset any obsolescence although most purchases are for current orders, which should reduce the amount of obsolescence in the future. The Company still has CRT inventory in stock and, although it believes the inventory will be sold in the future, will continue to reserve for any additional obsolescence. Management believes the adequacy of its inventory reserves at November 30, 2014 and February 28, 2014 to be adequate.

Video Display Corporation and Subsidiaries

November 30, 2014

(unaudited)

Results of Operations

The following table sets forth, for the nine months ended November 30, 2014 and 2013, the percentages that selected items in the Statements of Operations bear to total sales:


	Three Months Ended November 30,						Nine Months Ended November 30,
	2014			2013			2014			2013
Sales
Simulation and Training		70.2	%		41.1	%		61.2	%		47.7	%
Data Display CRT		24.9			15.4			21.5			15.7
Broadcast and Control Centers		(0.3	)		37.0			4.8			24.5
Cyber Secure Products		5.2			6.5			12.5			12.1

Total Company		100.0	%		100.0	%		100.0	%		100.0	%
Costs and expenses
Cost of goods sold		81.0	%		93.9	%		83.1	%		94.0	%
Selling and delivery		8.3			10.0			8.5			11.7
General and administrative		31.6			19.9			27.5			18.8

		120.9	%		123.8	%		119.1	%		124.5	%

Operating loss		(20.9	)%		(23.8	)%		(19.1	)%		(24.5	)%

Interest income/expense		(0.0	)%		(0.6	)%		0.2	%		(6.8	)%
Other income (loss), net		(60.0	)		0.7			(7.8	)		4.6

Loss before income taxes		(80.9	)%		(23.7	)%		(26.7	)%		(26.7	)%
Income tax benefit		(1.2	)		(6.2	)		(0.8	)		(8.6	)

Net loss from continuing operations		(79.7	)		(17.5	)		(25.9	)		(18.1	)

Income from discontinued operations, net of income tax		0.5			0.9			0.2			24.3

Net income (loss)		(79.2	)%		(16.6	)%		(25.7	)%		6.2	%

Net sales

Consolidated net sales were down 6.3% for the nine months ended November 30, 2014 compared to the nine months ended November 30, 2013. Sales for the Company’s AYON Visual Solutions division was down 81.9% for the nine months ending November 30, 2014 when compared to last year’s nine months ending November 30, 2013. This division’s business is project driven and last year they completed several large jobs, which they did not have this year. The industry this division operates in just completed a major trade show for the year and new quoting opportunities are being received for projects later this year. Recently, AYON Visual Solutions has received a couple of medium sized orders and is expecting to hear on several opportunities it has bid on. The CRT division increased their sales by 28.6% for the nine months ended November 30, 2014 over the nine months ended November 30, 2013 or $472 thousand due to overseas orders, last time buys and an increase in sales from their largest customer. The business with the largest customer is expected to continue for at least the next several years. This division’s primary business is in flight simulation. The Display Systems division showed an increase of 20.2% due to a large project with a major government contractor. AYON CyberSecurity sales’ decreased by 2.7% due to a slowdown in orders from government agencies in the third quarter. This division is expected to exceed last year’s results due to the increases in the customer base due to its improved quality.

Gross margins

Consolidated gross profits increased by 165.1% for the nine months ended November 30, 2014 compared to the nine months ended November 30, 2013. The Company had an overall gross margin of 16.9% for the nine months ended November 30, 2014 compared to a 6.0% gross margin for the nine months ended November 30, 2013.

Every division showed an improvement in their gross margin percentage. The Company’s two new divisions, AYON Visual Solutions and AYON CyberSecurity, had lower gross margins than the other more established divisions. AYON Visual Solutions is a distributor of specialized displays, so it will consistently have lower margins than the other

Video Display Corporation and Subsidiaries

November 30, 2014

(unaudited)

manufacturers in the group as distributors typically operate on smaller margins. The Company expects AYON Visual Solutions gross margins to improve as they win bids on new projects. AYON CyberSecurity improved its gross margins by 7.1%, but still came in with a negative 56.2%. The division is still working to improve its efficiencies and cut costs in the manufacturing area of its business. As its revenues increase, management hopes to improve on their efficiencies of scale and generate more gross profit dollars. The Company is looking at ways to cut costs at this division including merging it with the VDC Display division. The Data Display division gross margins increased from 6.0% for the nine months ended November 30, 2013 to 34.8% for the nine months ended November 30, 2014, due to customer and product mix. They expect to have steady margins with their flight simulator customers while continuing to move slower moving items overseas at reduced margins. We would expect to see the margins remain above last year’s levels.

Operating expenses

Operating expenses as a percentage of sales increased from 30.5% for the nine months ended November 30, 2013 to 36.0% for the nine months ended November 30, 2014. This was primarily due to a decrease in the revenue base to absorb the corporate overhead. The Company was able to control fixed costs, such as rent and other administrative costs, on flat sales volumes. Overall operating expenses increased by $339.0 thousand. The Company expects these costs to remain at these levels for the upcoming fourth quarter of the fiscal year while increasing revenues.

Other income (expense)

The Company experienced a non-operating loss of $0.7 million during the nine months ended November 30, 2014. These losses were primarily driven by unrealized losses on trading investments of $2.7 million, offset by realized gains of $1.3 million, dividend income of $0.3 million and a gain on the sale of a building of $0.4 million.

Interest expense

The Company’s interest expense has decreased dramatically, as it no longer has a line of credit or any other debt except for a mortgage on a building it owns in Pennsylvania and borrowings related to margin account trading of securities. The interest expense for the nine months ending November 30, 2014, was $54.1 thousand compared to $710.0 thousand for the nine months ending November 30, 2013. The Company also had $70.1 thousand of interest income for the nine months ended November 30, 2014. The Company did not have any interest income for the nine months ended November 30, 2013.

Income taxes

The effective tax rate for the nine months ended November 30, 2013 and 2014 was (31.9) % and (3.0) %, respectively. These rates differ from the Federal statutory rate primarily due to the effect of the change in the valuation allowance on the net operating loss carry-forward, state taxes, the permanent non-deductibility of certain expenses for tax purposes, and research and experimentation credits. The disparity of the effective rate from November 30, 2013 compared to 2014 is due largely to the Company not qualifying for the Domestic Production Activities deduction, a reduction in state income taxes due to having a loss in earnings and of the change in the valuation allowance on the net operating loss carry-forward.

Liquidity and Capital Resources

In fiscal 2014, with the sale of the Company’s Aydin Displays, Inc and Z-Axis, Inc. subsidiaries, the Company repaid all remaining bank debt in January, 2014, except for the mortgage on a building owned by the Company’s Teltron, Inc. subsidiary, which included a line of credit and two term loans. At November 30, 2013, the Company had repaid all outstanding debt with PNC Bank except for $1.2 million on a term loan, $0.5 million owed to the CEO and the mortgage on the building in Birdsboro, PA. Currently, the only remaining debt of the Company is $0.3 million it owes on a building owned by its subsidiary, Teltron Technologies, Inc. in Birdsboro, PA.

Video Display Corporation and Subsidiaries

November 30, 2014

(unaudited)

The Company is currently operating using cash from operations and investing activities. The Company has a $15.0 million working capital balance at November 30, 2014 including $3.2 million in liquid assets and $20.8 million working capital balance at February 28, 2014, including $8.4 million in liquid assets.

The Company believes it can continue to operate the Company with existing cash flows for the current level of business. The Company has selected a new banking partner, Fifth Third Bank.

The Company continually monitors its cash and financing positions in order to find ways to lower its costs and to produce positive operating cash flow. The Company examines possibilities to grow its business through internal sales 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; however, more permanent sources of capital may be required in certain circumstances.

Cash used by operations for the nine months ended November 30, 2014 was $0.6 million. The net loss from operations was $(2.5) million and adjustments to reconcile net loss to net cash were $1.6 million including unrealized loss on trading investments of $1.5, depreciation and amortization of $0.3 and inventory reserves of $0.3 less $0.4 for the gain on disposal of assets and $0.1 adjustment for deferred income taxes. Changes in working capital provided $0.3 million, primarily due to a decrease in inventories of $1.5 million offset by an increase in accounts receivable of $0.5, and an decrease in accounts payable and accrued liabilities of $0.7 million. Cash used in operations for the nine months ended November 30, 2013 was $1.7 million.

Investing activities used cash of $6.3 million for the nine months ended November 30, 2014 primarily as a result of, $6.6 million from the net purchase of investments, and $0.1 million for fixed asset acquisitions less the proceeds of the sale of the Chroma building of $0.5 million, compared to $15.4 million from the sale of the Company’s Aydin Displays subsidiary ($15.0 million), the sale of the Company’s Bossier City property ($0.5 million), and the use of $0.1 million on the purchase of equipment during the nine months ended November 30, 2013.

Financing activities provided cash of $3.4 million for the nine months ended November 30, 2014, due to the proceeds of margin account borrowings in the investment account of $6.9 million and the use of funds to repurchase treasury stock of $3.5 million, compared to cash used of $13.5 million for the nine months ended November 30, 2013, reflecting the borrowing of $14.3 million, the repayment of debt of $28.0 million.

Critical Accounting Estimates

Management’s Discussion and Analysis of Financial Condition and Results of Operations are based upon the Company’s interim condensed consolidated financial statements. These interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP).

Video Display Corporation and Subsidiaries

November 30, 2014

(unaudited)

These principles require the use of estimates and assumptions that affect amounts reported and disclosed in the interim condensed consolidated financial statements and related notes. The accounting policies that may involve a higher degree of judgments, estimates, and complexity include reserves on inventories, revenue recognition, the allowance for bad debts and warranty reserves. The Company uses the following methods and assumptions in determining its estimates:

Reserves on Inventories

Reserves on inventories result in a charge to operations when the estimated net realizable value declines below cost. Management regularly reviews the Company’s investment in inventories for declines in value and establishes reserves when it is apparent that the expected net realizable value of the inventory falls below its carrying amount. Management reviews inventory levels on a quarterly basis. Such reviews include observations of product development trends of the original equipment manufacturers, new products being marketed, and technological advances relative to the product capabilities of the Company’s existing inventories. Management believes its inventory reserves at November 30, 2014 and February 28, 2014 to be adequate.

Revenue Recognition

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

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

Allowance for Doubtful Accounts

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

Warranty Reserves

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

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.

Video Display Corporation and Subsidiaries

November 30, 2014

(unaudited)

Recent Accounting Pronouncements

In April 2014, the FASB issued ASU 2014-08, “Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity”. ASU 2014-08 changes the criteria for determining which disposals can be presented as discontinued operations and modified related disclosure requirements. Under the new guidance, a discontinued operation is defined as: (i) a disposal of a component or group of components that is disposed of or is classified as held for sale that represents a strategic shift that has or will have a major effect on an entity’s operations and financial results or (ii) an acquired business or nonprofit activity that is classified as held for sale on the date of acquisition. The standard states that a strategic shift could include a disposal of (i) a major geographical area of operations, (ii) a major line of business, (iii) a major equity method investment, or (iv) other major parts of an entity. Under the current U.S. GAAP, an entity is prohibited from reporting a discontinued operation if it has certain continuing cash flows or involvement component after the disposal. The new guidance eliminates these criteria.

Forward-Looking Information and Risk Factors

This report contains forward-looking statements and information that is based on management’s beliefs, as well as assumptions made by, and information currently available to management. When used in this document, the words “anticipate,” “believe,” “estimate,” “intends,” “will,” and “expect” and similar expressions are intended to identify forward-looking statements. Such statements involve a number of risks and uncertainties. These risks and uncertainties, which are included under Part I, Item 1A. Risk Factors in the Company’s Annual Report on Form 10-K for the year ended February 28, 2014 could cause actual results to differ materially.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

The Company’s primary market risks include changes in technology. The Company operates in an industry which is continuously changing. Failure to adapt to the changes could have a detrimental effect on the Company.

Video Display Corporation and Subsidiaries

November 30, 2014

(unaudited)

ITEM 4. CONTROLS AND PROCEDURES

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

Our chief executive officer and chief financial officer have conducted an evaluation of the effectiveness of our disclosure controls and procedures as of November 30, 2014. We perform this evaluation on a quarterly basis so that the conclusions concerning the effectiveness of our disclosure controls and procedures can be reported in our annual report on Form 10-K and quarterly reports on Form 10-Q. Based on this evaluation, our chief executive officer and chief financial officer have concluded that our disclosure controls and procedures were effective as of November 30, 2014.

Changes in Internal Controls

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

Video Display Corporation and Subsidiaries

November 30, 2014

(unaudited)

PART II


Item 1.		Legal Proceedings

		None.

Item 1A.		Risk Factors

		Information regarding risk factors appears under the caption Forward-Looking Statements and Risk Factors in Part I, Item 2 of this Form 10-Q and in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended February 28, 2014. There have been no material changes from the risk factors previously disclosed in our Annual Report on Form 10-K.

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

		None.

Item 3.		Defaults upon Senior Securities

		None.

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

		None.

Item 5.		Other information

		None.

Item 6.		Exhibits

Exhibit Number		Exhibit Description

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

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

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

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

10(d)		Purchase Agreement dated August 30, 2013 by and between the Company and Sparton, Inc. with respect to the sale of the Company’s Aydin Displays, Inc. subsidiary. (incorporated by reference to Exhibit 10(d) to the Company’s Current Report on Form 8-K dated September 5, 2013.)

10(e)		Purchase Agreement dated January 16, 2014 by and between the Company and Z-Axis, Inc. with respect to the sale of the Company’s Z-Axis, Inc. subsidiary. (incorporated by reference to Exhibit 10 (e) to the Company’s Current Report on Form 8-K dated January 22, 2014.)

10(f)		Purchase Agreement dated March 26, 2014 by and between the Company and Citidal Partners, LLC, with respect to the sale of the Company’s Lexel Imaging, Inc. subsidiary. (incorporated by reference to Exhibit 10(f) to the Company’s Current Report on Form 8-K dated April 1, 2014.)

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

Video Display Corporation and Subsidiaries

November 30, 2014

(unaudited)


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

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

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

101.INS		XBRL Instance Document

101.SCH		XBRL Taxonomy Extension Schema Document

101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF		XBRL Taxonomy Extension Definition Linkbase Document

101.LAB		XBRL Taxonomy Extension Label Linkbase Document

101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

SIGNATURES

Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


		VIDEO DISPLAY CORPORATION

January 14, 2015	By:	/s/ Ronald D. Ordway
		Ronald D. Ordway
		Chief Executive Officer

January 14, 2015	By:	/s/ Gregory L. Osborn
		Gregory L. Osborn
		Chief Financial Officer

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Non-accelerated filer

Smaller reporting company