Item 1A. Risk Factors.
Forward looking statements and risk factors
All statements other than statements of historical facts included in this report, including, without limitation, those statements contained in Item 1, are statements that constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 as amended and Section 21E of the Securities Exchange Act of 1934. The words “expect”, “estimate”, “anticipate”, “predict”, “believe” and similar expressions and variations thereof are intended to identify forward-looking statements. Such statements appear in a number of places in this report and include statements regarding the intent, belief or current expectations of the Company, its directors or its officers with respect to, among other things: (i) trends affecting the Company’s financial condition or results of operations; (ii) the Company’s financing plans; (iii) the Company’s business and growth strategies, including potential acquisitions; and (iv) other plans and objectives for future operations. Investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties and that actual results may differ materially from those predicted in the forward-looking statements or which may be anticipated from historical results or trends.
Our Company operates in technology based markets that involve a number of risks, some of which are beyond our control. The following discussion highlights some risks and uncertainties that investors should consider, in conjunction with all other information in this Annual Report on Form 10-K. Additional risks and uncertainties not presently known to the Company may also impair the Company’s business and operations. If any of the following risks actually occur, the Company’s business, financial condition, cash flows or results of operations could be materially affected.
Our industry is highly competitive and competitive conditions may adversely affect our business.
Our success depends on our ability to compete in markets that are highly competitive, with rapid technological advances and products that require constant improvement in both price and performance. In most of our markets we are experiencing increased competition, and we expect this trend to continue. This environment may result in changes in relationships with customers or vendors, the ability to develop new relationships or the business failure of customers or vendors, which may negatively impact our business. If our competitors are more successful than we are in developing new technology and products, our business may be adversely affected.
Competitive pressures may increase or change through industry consolidation, entry of new competitors, marketing changes or otherwise. There can be no assurance that the Company will be able to continue to compete effectively with existing or potential competitors.
Competitors or third parties may infringe on our intellectual property.
The Company holds patents with respect to certain products and services. The Company also sells products under various trademarks and tradenames. Should competitors or third parties infringe on these
rights, costly legal processes may be required to defend our intellectual property rights, which could adversely affect our business.
Migration to flat panel and other technology may negatively impact our CRT business.
The Company acquires CRT inventory when the replacement market appears to demonstrate adequate future demand and the purchase price allows a reasonable profit for the risk. Due to the extended time frame for the replacement market to develop (five to seven years), these purchased inventories may not sell as quickly as other inventories. If the Company is unable to manage CRT inventory levels in coordination with reduced future CRT demand due to the growth of flat panel technology, the marketability of inventory on hand may be affected and the Company may incur significant costs in the disposal of excess inventory.
The Company anticipates that flat panel and other technology products, due to their lower space and power requirements, will eventually become the display of choice in many display applications. In anticipation of long-term trends toward flat panel display usage, the Company has focused its efforts and its acquisition strategy toward flat panel technologies. If the Company is unable to successfully replace any future declines in CRT sales with products based on other technologies, our business may be adversely affected.
Future acquisitions may not provide benefits to the Company.
The Company’s growth strategy includes expansion through acquisitions. There can be no assurance that the Company will be able to successfully complete further acquisitions or that past or future acquisitions will not have an adverse impact on the Company’s operations.
Changes in government priorities may impact military spending, and our financial condition and results of operations could suffer if their purchases decline.
We currently derive a significant portion of our net sales (30% in fiscal 2008) from direct and indirect sales to the U.S. government. If we are unable to replace expiring contracts, which are typically less then twelve months in duration, with contracts for new business, our sales could decline, which would have a material adverse effect on our business, financial condition and results of operations. We expect that direct and indirect sales to the U.S. government will continue to account for a substantial portion of our sales in the foreseeable future. We have no assurance that these government-related sales will continue to reach or exceed historical levels in future periods.
If we are unable to retain certain key personnel and hire new highly skilled personnel, we may not be able to execute our business plan.
Our future success depends on the skills, experience and efforts of our senior managers. The loss of services of any of these individuals, or our inability to attract and retain qualified individuals for key management positions, could negatively impact our business.
Our business operations could be disrupted if our information technology systems fail to perform adequately.
We depend upon our information technology systems in the conduct of our operations and financial reporting. If our major information systems fail to perform as anticipated, we could experience difficulties in maintaining normal business operations. Such systems related problems could adversely affect product development, sales and profitability.
Changes to accounting rules or regulations may adversely affect our results of operations.
New accounting rules or regulations and varying interpretations of existing accounting rules or regulations have occurred and may occur in the future. Future changes to accounting rules or regulations or the questioning of current accounting practices, may adversely affect our results of operations.
The Company’s stock price may be negatively affected by a variety of factors.
In addition to any impact the Company’s operating performance, potential future Company sales of common stock, the Company’s dividend policies or possible anti-takeover measures available to the Company may have, changes in securities markets caused by general foreign or domestic economic, consumer or business trends, the impact of interest rate policies by the federal reserve board, and other factors outside the Company’s control may negatively affect our stock price.
Changes to estimates related to long term assets, or operating results that are lower than our current estimates, may cause us to incur impairment charges.
We make certain estimates and projections in connection with impairment analyses for goodwill and other long term assets in accordance with Financial Accounting Standards Board (FASB) Statements No. 142 “Goodwill and Other Intangible Assets” and No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets.” These calculations require us to make a number of estimates and projections of long term future results. If these estimates or projections change or prove incorrect, we may be required to record impairment charges. If these impairment charges are significant, our results of operations would be adversely affected.
International factors could negatively affect our business.
A significant portion of our net sales (13% in fiscal 2008) are made to foreign customers. We are subject to the risks inherent in conducting our business across national boundaries, many of which are outside of our control. These risks include the following:
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Economic downturns;
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Currency exchange rate and interest rate fluctuations;
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Changes in governmental policy, including, among others, those relating to taxation;
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International military, political, diplomatic and terrorist incidents;
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Government instability;
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Nationalization of foreign assets; and
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Tariffs and governmental trade policies.
We cannot ensure that one or more of these factors will not negatively affect our international customers and, as a result, our business and financial performance.
Our level of indebtedness could adversely affect the future operation of our business.
Our level of indebtedness could have important consequences, including:
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making it more difficult for us to make payments on the debt, as our business may not be able to generate sufficient cash flows from operating activities to meet our debt service obligations;
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increasing our vulnerability to general economic and industry conditions;
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requiring a substantial portion of cash flow from operating activities to be dedicated to the payment of our outstanding lines of credit and long-term debt, and as a result reducing our ability to use our cash flow to fund our operations and capital expenditures, capitalize on future business opportunities and expand our business and execute our strategy;
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exposing us to the risk of increased interest rates since much of our borrowings are at variable rates of interest;
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causing us to make non-strategic divestitures;
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limiting our ability to obtain additional financing for working capital, capital expenditures, debt service requirements and other general corporate purposes; and
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limiting our ability to adjust to changing market conditions and to react to competitive pressure and placing us at a competitive disadvantage compared to our competitors who may have lower debt leverage.
Our debt agreements contain covenants that limit our flexibility in operating our business.
The agreements governing our indebtedness contain various covenants that limit our ability to engage in specified types of transactions, and which may adversely affect our ability to operate our business. Among other things, these covenants limit our ability to:
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incur additional indebtedness;
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make certain investments, loans or advances;
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transfer and sell certain assets;
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create or permit liens on assets;
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consolidate, merge, sell or otherwise dispose of all or substantially all of our assets;
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engage in any business activity substantially different from our current businesses;
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pay dividends; and
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cause, permit or suffer a change in capital ownership.
A breach of any of these covenants could result in default under our debt agreements, which could prompt the lenders to declare all amounts outstanding under the debt agreements to be immediately due and payable and terminate all commitments to extend further credit. If we were unable to repay those amounts, the lenders could proceed against the collateral granted to them to secure that indebtedness. If the lenders under the debt agreements accelerate the repayment of borrowings, we cannot assure you that we will have sufficient assets and funds to repay the borrowings under our debt agreements. See related comments under the caption “Management’s Discussion of Liquidity and Capital Resources” in Part II, Item 7. in this Annual Report of Form 10-K.
Item 1B.
Item 1B. Unresolved Staff Comments.
None.
Item 2.
Item 2. Properties.
The Company leases its corporate headquarters at 1868 Tucker Industrial Road in Tucker, Georgia (within the Atlanta metropolitan area). Its headquarters occupy approximately 10,000 square feet of the total 59,000 square feet at this location. The remainder is utilized as warehouse and assembly facilities. This location, as well as one other, is leased from a related party at current market rates. See Part II, Item 13. Certain Relationships and Related Transactions in this Annual Report on Form 10-K. Management believes the facilities to be adequate for its needs. The following table details manufacturing, warehouse, and administrative facilities:
The Company is involved in various legal proceedings relating to claims arising in the ordinary course of business.
In May 2008, the Company was named in a lawsuit captioned Barco Federal Systems, LLC and Barco N.V., a Belgian corporation v. Aydin Displays, Inc. a Pennsylvania corporation , a subsidiary of Video Display Corporation, U.S. District Court, Northern District of Georgia, 1: 08-cv-01252-JEC. The complaint filed alleges that Aydin Displays, Inc. has infringed two patents held by Barco NV of Kortrijk, Belgium and licensed to Barco Federal Systems LLC, a U.S. subsidiary devised by Barco NV presumed to qualify Barco NV as a U.S. entity for solicitation of U.S. Government defense contracts.
Aydin Displays, Inc. denies any infringement of the two Barco patents. In response to the lawsuit, Aydin Displays, Inc. has filed several counterclaims against Barco, asserting not only that Aydin Displays, Inc. has not infringed the patents, but also that Barco’s patents are invalid and unenforceable. Aydin Displays, Inc. is also investigating additional claims against Barco.
Item 4.
Item 4.
Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this Annual Report.
PART II
Item 5.
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
The Company’s common stock is traded on the National Association of Securities Dealers Automated Quotation System (“NASDAQ”) national market system under the symbol VIDE.
The following table shows the range of prices for the Company’s common stock as reported (and as adjusted for the stock dividend discussed below) by NASDAQ for each quarterly period beginning on March 1, 2006. The prices reflect inter-dealer prices, without mark-up, mark-down, or commission, and may not necessarily represent actual transactions.
There were approximately 697 holders of record of the Company’s common stock as of May 15, 2008.
Payment of cash dividends in the future will be dependent upon the earnings and financial condition of the Company and other factors which the Board of Directors may deem appropriate. The Company is restricted by certain loan agreements regarding the payout of cash dividends.
Securities Authorized for Issuance Under Equity Compensation Plans
The following table provides information as of February 29, 2008 regarding compensation plans (including individual compensation arrangements) under which Common Stock of the Company is authorized for issuance.
Recent Sales of Unregistered Securities
In August 2006, the Company acquired certain assets of Hobson Bros. Inc. of Chicago, which the Company has included in the Display Segment, in exchange for 26,830 shares of the Company’s common stock held as treasury shares. The market value of shares issued was $9.32 on the date of closing for a total acquisition cost of $250,000.
Issuer Purchases of Equity Securities
The Company has a stock repurchase program, pursuant to which it was originally authorized to repurchase up to 462,500 shares of the Company’s common stock in the open market. On January 11, 2006, the Board of Directors of the Company approved a continuation of the stock repurchase program, and authorized the Company to repurchase up to 600,000 additional shares of the Company’s common stock, depending on the market price of the shares over an indefinite and unspecified time period. There is no minimum number of shares required to be repurchased under the program. During the fiscal year ended February 29, 2008, the Company repurchased 176,251 shares at an average price of $7.47 per share, which have been added to treasury shares in the consolidated balance sheet. Under this program, an additional 375,332 shares remain authorized to be repurchased by the Company at February 29, 2008. As discussed in Note 7 to the Consolidated Financial Statements, the Loan and Security Agreement executed by the Company on June, 29, 2006 included restrictions on investments which restricted further repurchases of stock under this program. The participating banks granted an exception to these restrictions, allowing the Company to purchase unlimited shares providing the company meets the covenants in the loan agreement.
The following table summarizes repurchases of our stock in the fourth quarter ended February 29, 2008 (in thousands):
N/A
Item 7.
Item 7.
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 displays and display components (“Display Segment”) and (2) the wholesale distribution of consumer electronic parts from foreign and domestic manufacturers (“Wholesale Distribution Segment”). The Display Segment is organized into four interrelated operations aggregated into one reportable segment pursuant to the aggregation criteria of Financial Accounting Standards Board Statement (SFAS) No. 131, Disclosures about Segments of an Enterprise and Related Information.
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Monitor - offers a wide range of CRT, flat panel and projection display systems for use in training and simulation, military, medical and industrial applications.
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Data Display CRTs - offers a wide range of CRTs for use in data display screens, including computer terminal monitors and medical monitoring equipment.
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Entertainment CRTs - offers a wide range of CRTs and projection tubes for television and home theater equipment.
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Component Parts - provides replacement electron guns and other components for CRTs primarily for servicing the Company’s internal needs.
During fiscal 2008, management of the Company focused key resources on strategic efforts to improve the profitability of operations while seeking acquisition opportunities that enhance the profitability and sales growth of the Company’s more profitable product lines. In addition, the Company continues to seek new products through acquisitions and internal development that complement existing profitable product lines. Challenges facing the Company during these efforts include:
Inventory management - The Company continually monitors historical sales trends as well as projected needs to ensure adequate on hand supplies of inventory and to ensure against overstocking of slower moving, obsolete items.
Certain of the Company’s divisions maintain significant inventories of CRTs and component parts in an effort to ensure its customers a reliable source of supply. The Company’s inventory turnover averages over 175 days, although in many cases the Company would anticipate holding 90 to 100 days of inventory in the normal course of operations. This level of inventory is higher than some of the Company’s competitors due to the fact that it sells a number of products representing older, or trailing edge, technology that may not be available from other sources. The market for these trailing edge technology products is declining and, as manufacturers for these products discontinue production or exit the business, the Company may make “last time” buys. In the monitor operations of the Company’s business, the market for its products is characterized by fairly rapid change as a result of the development of new technologies, particularly in the flat panel display area. If the Company fails to anticipate the changing needs of its customers or 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 Company’s management monitors the adequacy of its inventory reserves regularly, and at February 29, 2008, believes its reserves to be adequate.
Interest rate exposure - The Company had outstanding debt of approximately $21 million as of February 29, 2008 which is subject to interest rate fluctuations by the Company’s lenders. Variable interest rates on the company’s loans and the potential for rate hikes could negatively impact the Company’s future earnings. It is the intent of the Company to continually monitor interest rates and consider converting portions of the Company’s debt from floating rates to fixed rates should conditions be favorable for such interest rate swaps or hedges.
Operations
The following table sets forth, for the fiscal years indicated, the percentages which selected items in the Company’s consolidated statements of operations bear to total revenues (amounts in thousands):
(See Item 1. Business - Description of Principal Business and Principal Products for discussion about the Company’s Products and Divisions. See also Note 13. Segment Information to the Consolidated Financial Statements.)
Fiscal 2008 Compared to Fiscal 2007
Net Sales
Consolidated net sales increased $6.3 million or 7.6% to $88.2 million for fiscal 2008, compared to $81.9 million for fiscal 2007. Display Segment sales increased 0.7% or $0.4 million to $58.3 million for fiscal 2008, compared to $57.9 million for fiscal 2007. Wholesale Distribution Segment sales increased 24.4% or $5.8 million from $24.1 million for fiscal 2007 to $29.9 million for fiscal 2008.
The net increase in Display Segment sales for fiscal 2008 is primarily attributed to the addition of the Clinton facility to the Data Display CRTs which offset declines in Monitors, other Data Display CRT facilities, and the Entertainment CRT sales , as compared to fiscal 2007. The Monitor revenues declined $0.7 million primarily due to the reduced demand for new flight training systems for commercial and military flight training. Data Display CRTs sales in fiscal 2008 benefited from the addition of the Clinton division which offset declines in the Data and UK divisions. Entertainment CRT net sales declined $0.4 million in fiscal 2008 compared to fiscal 2007. A significant portion of the entertainment division’s sales 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, fewer extended warranties were sold by retailers, a trend consistent with recent prior fiscal years. The Company remains the primary supplier of product to meet manufacturers’ standard warranties. Future sales trends in this division will be negatively impacted by the decreasing number of extended warranties sold for larger, more expensive sets. Because the Company is in the replacement market, it has the ability to track retail sales trends and, accordingly, can attempt to adjust quantities of certain size CRTs carried in stock and reduce exposure to obsolescence.
Components Parts sales increased $0.1 million from fiscal 2007 to fiscal 2008. Component Parts sales have generally declined in recent years due to weaker demand for electron gun and stem sales. Component Parts sales have historically been dependent upon the demand by domestic and foreign television CRT remanufacturers. These sales have declined over the past few years as consumers move towards purchasing new technology as opposed to repairing existing sets.
Wholesale Distribution Segment net sales growth is attributed to an expansion of the call center in fiscal 2006, which acts as a consumer and dealer support center for 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.
Gross Margins
Consolidated gross margins decreased to 32.3% for fiscal 2008 from 33.7% for fiscal 2007.
Display Segment margins increased from 28.6% for fiscal 2007 to 28.9% for fiscal 2008. Gross margins within the Monitor operation decreased to 28.2% for fiscal 2008 compared to 30.1% for fiscal 2007. This decrease is primarily attributable to delays and increased costs on several contracts in fiscal 2008 at the Aydin division. Data Display CRT gross margins increased to 28.1% for fiscal 2008 compared to 22.1% for fiscal 2007. This improvement in margins is primarily attributed to improved selling prices of certain CRT products with limited availability and reduced costs through transition to internal manufacturing of certain high resolution projection tubes. Gross margins in Entertainment CRTs increased from 30.3% for fiscal 2007 to 41.7% for fiscal 2008 due to the impact of the increased volume of high margin products at the company’s Louisiana facility. Gross margins from Component Parts increased to 50.4% for fiscal 2008 from 2.8% for fiscal 2007, primarily reflecting the disposal of the unprofitable Wintron facility in May 2006.
The Wholesale Distribution Segment gross margins decreased from 45.9% for fiscal 2007 to 38.9% for fiscal 2008, primarily due to the impact of increased sales volume of lower margin call center “service sales” during fiscal 2008. Expenses for the call center are classified as operating expenses.
Operating Expenses
Operating expenses as a percentage of sales decreased from 27.8% for fiscal 2007 to 26.4% for fiscal 2008 primarily reflecting the impact of increased sales without increasing expenses during fiscal 2008.
Display Segment operating expenses decreased $0.2 million or 1.2% to $11.5 million for fiscal 2008 compared to $11.7 million in fiscal 2007. This reduction is primarily due to cost savings derived from management’s efforts to consolidate facilities, reduce overhead personnel and disposal of unprofitable operations.
Wholesale Distribution Segment operating expenses increased $0.7 million or 6.3% to $11.8 million for fiscal 2008 compared to $11.1 million in fiscal 2007, primarily due to additional expenses associated with the call center which was expanded late in fiscal 2006. These expenses (primarily payroll) are classified in general and administrative expense in the consolidated financial statements.
Interest Expense
Interest expense decreased $0.3 million or 15.2% to $1.8 million for fiscal 2008 compared to $2.1 million in fiscal 2007. The Company maintains various debt agreements with different interest rates, most of which are based on the prime rate or LIBOR. These decreases in interest expense primarily reflect a reduced balance on the debt and lower market interest rates in effect during fiscal 2008 compared to fiscal 2007.
Income Taxes
The effective tax rate for fiscal 2008 was 29.6% compared to 41.7% for fiscal 2007. The lower effective rate in 2008 was primarily due to the impact of a state tax refund received of approximately $0.2 million (net of federal taxes), which related to amendments to apportionment factors in previously filed state of Kentucky income tax returns, and $0.2 million due to domestic production activities.
Foreign Currency Translation
Gains or losses resulting from the transactions with the Company’s 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.
Fiscal 2007 Compared to Fiscal 2006
Net Sales
Consolidated net sales decreased $1.9 million or 2.4% to $81.9 million for fiscal 2007, compared to $83.9 million for fiscal 2006. Display Segment sales decreased 11.1% or $7.2 million to $57.9 million for fiscal 2007, compared to $65.1 million for fiscal 2006. Wholesale Distribution Segment sales increased 27.9% or $5.3 million from $18.8 million for fiscal 2006 to $24.1 million for fiscal 2007.
The net decrease in Display Segment sales for fiscal 2007 is primarily attributed to declines in Monitor, Data Display CRT, Entertainment CRT and Component Parts sales, as compared to fiscal 2006. The Monitor revenues declined $4.8 million primarily due to the fulfillment of a military contract for replacement CRTs early in fiscal 2006, which has not been renewed and reduced demand for new flight training systems for commercial and military flight training. Data Display sales in fiscal 2006 benefited from a concentration of new orders for certain projection tubes as production transferred to the Company’s facilities from the original equipment manufacturer. After this initial spike, sales of these projection tubes leveled off at lower, but steady levels, resulting in a $0.9 reduction in sales for fiscal 2007. Entertainment CRT net sales declined $1.1 million in fiscal 2007 compared to fiscal 2006. A significant portion of the entertainment division’s sales 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, fewer extended warranties were sold by retailers, a trend consistent with recent prior fiscal years. The Company remains the primary supplier of product to meet manufacturers’ standard warranties. Future sales trends in this division will be negatively impacted by the decreasing number of extended warranties sold for larger, more expensive sets. Because the Company is in the replacement market, it has the ability to track retail sales trends and, accordingly, can attempt to adjust quantities of certain size CRTs carried in stock and reduce exposure to obsolescence.
Components Parts sales declined $0.3 million from fiscal 2006 to fiscal 2007. Component Parts sales have generally declined in recent years due to weaker demand for electron gun and stem sales. Component Parts sales have historically been dependent upon the demand by domestic and foreign television CRT remanufacturers. These sales have declined over the past few years as consumers move towards purchasing new technology as opposed to repairing existing sets.
Wholesale Distribution Segment net sales growth is attributed to an expansion of the call center in fiscal 2006, which acts as a consumer and dealer support center for 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.
Gross Margins
Consolidated gross margins increased to 33.7% for fiscal 2007 from 29.2% for fiscal 2006.
Display Segment margins increased from 22.7% for fiscal 2006 to 28.6% for fiscal 2007. Gross margins within the Monitor operation increased to 30.1% for fiscal 2007 compared to 25.4% for fiscal 2006. This increase is primarily attributable to continued streamlining of operational facilities and cost reduction efforts as well as the one time impact of certain relocation and integration costs incurred in fiscal 2006. Data Display CRT gross margins increased to 22.1% for fiscal 2007 compared to 8.2% for fiscal 2006. This improvement in margins is primarily attributed to improved selling prices of certain CRT products with limited availability and reduced costs through transition to internal manufacturing of certain high resolution projection tubes. Gross margins in Entertainment CRTs decreased from 34.8% for fiscal 2006 to 30.3% for fiscal 2007 due to the impact of the reduced sales volume. Gross margins from Component Parts increased to 2.8% for fiscal 2007 from a negative margin of (8.3%) for fiscal 2006, primarily reflecting the disposal of the unprofitable Wintron facility in May 2006.
The Wholesale Distribution Segment gross margins decreased from 51.9% for fiscal 2006 to 45.9% for fiscal 2007, primarily due to the impact of increased sales volume of lower margin call center “service sales” during fiscal 2007. Expenses for the call center are classified as operating expenses.
Operating Expenses
Operating expenses as a percentage of sales increased from 26.7% for fiscal 2006 to 27.8% for fiscal 2007 primarily reflecting the impact of reduced sales during fiscal 2007.
Display Segment operating expenses decreased $1.2 million or 9.3% to $11.7 million for fiscal 2007 compared to $12.9 million in fiscal 2006. This reduction is primarily due to cost savings derived from management’s efforts to consolidate facilities, reduce overhead personnel and disposal of unprofitable operations, and decreases in corporate legal and professional fees.
Wholesale Distribution Segment operating expenses increased $1.6 million or 16.8% to $11.1 million for fiscal 2007 compared to $9.5 million in fiscal 2006, primarily due to additional expenses associated with the call center which was expanded late in fiscal 2006. These expenses (primarily payroll) are classified in general and administrative expense in the consolidated financial statements.
Interest Expense
Interest expense increased $0.6 million or 40.0% to $2.1 million for fiscal 2007 compared to $1.5 million in fiscal 2006. The Company maintains various debt agreements with different interest rates, most of which are based on the prime rate or LIBOR. These increases in interest expense primarily reflect a higher proportion of subordinated debt, which has a higher effective interest rate, and higher market interest rates in effect during fiscal 2007 compared to fiscal 2006.
Income Taxes
The effective tax rate for fiscal 2007 was 41.7% compared to 40.7% for fiscal 2006, reflecting the impact of an increase in permanent differences in taxable income and foreign taxes.
Foreign Currency Translation
Gains or losses resulting from the transactions with the Company’s 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.
Management’s Discussion of Liquidity and Capital Resources
At February 29, 2008 and February 28, 2007, the Company had total cash of $1.6 million and $1.2 million, respectively. The Company’s working capital was $39.0 million at February 29, 2008 and February 28, 2007. At February 29, 2008 the Company’s $15.2 million in outstanding lines of credit were classified as long-term debt as the bank agreement was extended during fiscal 2008 to June 2009, as discussed later in this section. In recent years, the Company has financed its growth and cash needs primarily through income from operations, borrowings under revolving credit facilities, borrowings from its CEO and long-term debt.
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 continually monitors its cash and financing positions in order to find ways to lower its interest costs and to produce positive operating cash flow. The Company examines possibilities to
grow its business through internal sales growth or niche acquisitions. There could be an impact on working capital requirements to fund this growth. As in the past, the intent is to finance such projects with operating cash flows or existing bank lines; however, more permanent sources of capital may be required in certain circumstances.
Cash provided by operations was $5.7 million in fiscal 2008 and $4.2 million in fiscal 2007. During fiscal 2008, net working capital items increased by $0.6 million due to an increase in accounts payable of $1.0 million and a $0.7 million decrease in cost, estimated earnings and billings , net, on uncompleted contracts offset by a $3.1 million increase in gross inventories and $0.7 million increase in refundable income taxes. During fiscal 2007, net working capital, excluding acquisitions, increased $22.7 million due to a $1.0 million increase in accounts receivable, a $2.1 million decrease in inventory, a $2.9 million increase in cost, estimated earnings and billings, net, on uncompleted contacts, a decrease of $1.2 million in refundable income taxes and a decrease in short term lines of credit, mainly due to the refinancing of those lines, of $17.6 million. The increase in accounts receivable resulted from the timing of sales near the end of the fiscal year. The overall aging of accounts receivable improved slightly at February 28, 2007 compared to the prior fiscal year end. The reduction in inventory is primarily due to a reduction in bulk purchases of last time buys of CRTs as the Company anticipates a trend of reduced demand for these products in the replacement market. After refinancing during fiscal 2007, the lines of credit are now classified as long term liabilities.
Investing activities used cash of $0.8 million and $0.8 million in fiscal 2008 and fiscal 2007 respectively. In fiscal 2007, the Company acquired the business and assets of EDL Displays, inc. in exchange for $0.6 million in cash plus the assumption of a $0.7 bank loan. Capital expenditures exclusive of acquisitions were $0.8 million and $0.4 million in fiscal 2008 and fiscal 2007 respectively. Capital expenditures in fiscal 2008 of $0.8 million and 2007 of $0.4 million were for general maintenance requirements and computer hardware. The Company does not anticipate significant investments in capital assets for fiscal 2009 beyond normal maintenance requirements.
During 2007, the Company acquired the Cathode Ray Tube Manufacturing and Distribution Business and certain assets of Clinton Electronics Corp., including inventory, fixed assets and various other assets of $2,550,000 in a non-cash transaction. Consideration for the assets acquired include a $1.0 million face value Convertible Note Payable, convertible into 120,000 shares of the Company’s common stock, an agreement to deliver, on the first anniversary of the closing date, a certificate for $1,125,000 in market value of the Company’s common stock as of that date, and on the second anniversary of the closing date, a certificate for $500,000 in market value of the Company’s common stock as of that date. The agreement to subsequently deliver shares of common stock includes terms which limit the maximum number of shares which may be issued and provide an option for the seller to receive cash in lieu of stock, if the Company’s common stock is selling for less than $7.00 per share on the applicable anniversary dates of the agreement.
Also during 2007, the Company acquired certain assets of Hobson Bros. Inc., including inventory, fixed assets and various other assets of $250,000 in exchange for $250,000 in market value of the Company’s common stock.
Financing activities used cash of $4.5 million and $4.0 million in fiscal 2008 and fiscal 2007 respectively. During fiscal 2008, the Company used cash for the net repayment of loans to related parties of $3.0 million and for the repurchase of common stock of $1.3 million. During fiscal 2007, the Company used cash for net repayment of long term debt, lines of credit and financing lease obligations of $2.4 million, for net repayment of loans from related parties of $0.9 million and for the repurchase of common stock of $0.8 million.
On June 29, 2006, the Company executed a Loan and Security Agreement with a syndicate including RBC Centura Bank and Regions Bank to provide a $17 million line of credit to the Company and a $3.5 million line of credit to the Company’s subsidiary Fox International, Ltd. As of February 29,
2008, the outstanding balances of these lines of credit were $11.7 million and $3.5 million, respectively. The available amounts for borrowing were $5.3 million and $0.0 million, respectively. These loans are secured by all assets and personal property of the Company. The agreement contains covenants, including requirements related to tangible cash flow, ratio of debt to cash flow and assets coverage. The agreement also includes restrictions on the incurrence of additional debt or liens, investments (including Company stock), divestitures and certain other changes in the business. The agreement was extended to June 2009, and accordingly is classified under long term liabilities on the Company’s balance sheet. The interest rate on these loans is a floating LIBOR rate based on a fixed charge coverage ratio, as defined in the loan documents. In conjunction with Loan and Security Agreement, the syndicate also executed a $3.0 million term note with the Company repayable in 60 monthly increments of $50,000 each through July 1, 2011, and the Chief Executive Officer (“CEO”) of the Company personally provided a $6.0 million subordinated term note to the Company. See related information in Notes 7 and 8 to the Consolidated Financial Statements. These new lines of credit replaced two lines of credit outstanding with Bank of America, which were terminated in conjunction with this agreement. At the date of termination, the Company was not in compliance with the consolidated Fixed Charge Coverage Ratio and the consolidated Senior Funded Debt to EBITDA ratio covenants as defined by the Bank of America credit line agreements.
The Company has a stock repurchase program, pursuant to which it was originally authorized to repurchase up to 462,500 shares of the Company’s common stock in the open market. On January 11, 2006, the Board of Directors of the Company approved a continuation of the stock repurchase program, and authorized the Company to repurchase up to 600,000 additional shares of the Company’s common stock, depending on the market price of the shares. There is no minimum number of shares required to be repurchased under the program. During the fiscal year ended February 29, 2008, the Company repurchased 176,251 shares at an average price of $7.47 per share, which have been added to treasury shares on the consolidated balance sheet. Under this program, an additional 375,332 shares remain authorized to be repurchased by the Company at February 29, 2008. As discussed in Note 7, the Loan and Security Agreement executed by Company on June, 29, 2006 included restrictions on investments which restricted further repurchases of stock under this program. The participating banks granted an exception to these restrictions, allowing the Company to purchase unlimited shares providing the company meets the covenants in the loan agreement.
Transactions with Related Parties, Contractual Obligations and Commitments
In conjunction with an agreement involving re-financing of the Company’s lines of credit and Loan and Security Agreement, on June 29, 2006 the Company’s CEO provided a $6.0 million subordinated term note to the Company with monthly principal payments of $33,333 plus interest through July 2021. The interest rate on this note is equal to the prime rate plus one percent. The note is secured by a general lien on all assets of the Company, subordinate to the lien held by the syndicate of RBC Centura and Regions Bank. The balance outstanding under this loan agreement was approximately $2.8 million at February 29, 2008.
The Company has a demand note outstanding from another officer, bearing interest at 8 percent. Principal payments of $44,000 and $71,000 were made on this note in fiscal 2008 and 2007, respectively, while additional advances of $0 and $220,000 were borrowed on this note during fiscal 2008 and 2007, respectively. The balance outstanding on this note is $252,000 at February 29, 2008.
Contractual Obligations
Future maturities of long-term debt and future contractual obligations due under operating leases at February 29, 2008 are as follows (in thousands):
Off-Balance Sheet Arrangements
Except for operating leases, the Company historically has not relied upon off-balance sheet arrangements, transactions or relationships that would materially affect liquidity or the availability of, or requirements for, capital resources.
Critical Accounting Policies
Management’s Discussion and Analysis of Financial Condition and Results of Operations are based upon the Company’s consolidated financial statements. These consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. These principles require the use of estimates and assumptions that affect amounts reported and disclosed in the consolidated financial statements and related notes. The accounting policies that may involve a higher degree of judgments, estimates, and complexity include reserves on inventories, the allowance for bad debts, contract revenue recognition as well as profitability or loss recognition estimates 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 attempts to determine by historical usage analysis and interchangeability of CRT types along with repair contracts currently maintained by its customers, as well as numerous other market factors, 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 2008 and 2007; however, the Company cannot guarantee the accuracy of future forecasts since these estimates are subject to change based on market conditions.
During fiscal 2008 and fiscal 2007, the Company deducted inventory against the reserve for obsolescence in the amount of $1.7 million and $0.8 million respectively. The reserve for inventory obsolescence was approximately $5.5 million and $5.4 million at February 29, 2008 and February 28, 2007, respectively.
Revenue and profit or loss recognition
Revenues are recognized when there is persuasive evidence of an arrangement, delivery has occurred, the price has been fixed or is determinable and collectibility can be reasonably assured. The Company’s delivery term typically is F.O.B. shipping point.
In accordance with Emerging Issues Task Force (“EITF”) Issue 00-10 “Accounting for Shipping and Handling Fees and Costs” shipping and handling fees billed to customers are classified in net sales in the consolidated statements of operations. Shipping and handling costs incurred for the delivery of product to customers 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 CRTs to a buyer’s 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 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 Distribution Segment has several distribution agreements that it accounts for using the gross revenue basis as prescribed by EITF Issue 99-19 “Reporting Revenue Gross as a Principal versus Net as an Agent”. The Company uses the gross method because the Company has general inventory risk, physical loss inventory risk and credit risk. The call center service revenue is recognized based on written pricing agreements with each manufacturer, on a per-call, per-email or per-standard mail basis.
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 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 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 feels that historically its procedures have been adequate and does not anticipate that its assumptions are reasonably likely to change in the future.
Other loss contingencies
Other loss contingencies are recorded as liabilities when it is probable that a liability has been incurred and the amount of the loss can reasonably be estimated. Disclosure is required when there is a reasonable possibility that the ultimate loss will exceed the recorded provision. Contingent liabilities are often resolved over long time periods. Estimating probable losses requires analysis of multiple factors that often depend on judgments about potential actions by third parties.
Recent Accounting Pronouncements
In June 2006, the Financial Accounting Standards Board (“FASB”) ratified the consensus reached by the Emerging Issues Task Force in Issue No. 06-3 (“EITF 06-3”), How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That is, Gross versus Net Presentation). The scope of EITF 06-3 includes any tax assessed by a governmental authority that is directly imposed on a revenue-producing activity between a seller and a customer, and may include, but is not limited to, sales, use, value added, and some excise taxes. EITF 06-3 concluded that the presentation of taxes within its scope on either a gross (included in revenue and cost) or net (excluded from revenues) basis is an accounting policy decision subject to appropriate disclosure. EITF 06-3 is effective for fiscal years beginning after December 15, 2006. The Company currently presents these taxes on a net basis and therefore the adoption of EITF 06-3 did not have a material effect on the Company’s consolidated financial statements.
On March 1, 2007, the Company adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“Interpretation No. 48”), which clarifies the accounting for uncertainty in income taxes recognized in the Companies’ consolidated financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. Interpretation No. 48 requires the use of a two-step approach for recognizing and measuring tax benefits taken or expected to be taken in a tax return and disclosures regarding uncertainties in income tax positions. In addition, it provides guidance on the measurement, derecognition, classification and disclosure of tax positions, as well as the accounting for related interest and penalties. The adoption of Interpretation No. 48 in fiscal 2008 did not have a material impact on the Company’s consolidated financial statements.
In September 2006, the FASB issued Statement of Financial Accounting Standards (“Statement No.”) 157, Fair Value Measurements. Statement No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. The statement does not require new fair value measurements, but is applied to the extent that other accounting pronouncements require or permit fair value measurements. The statement emphasizes that fair value is a market-based measurement that should be determined based on the assumptions that market participants would use in pricing an asset or liability. Companies will be required to disclose the extent to which fair value is used to measure assets and liabilities, the inputs used to develop the measurements, and the effect of certain of the measurements on earnings (or changes in net assets) for the period. Management is in the process of assessing the impact of Statement No. 157, but does not anticipate that the adoption will have a material impact on the Company’s consolidated financial statements.
In September 2006, the FASB issued Statement No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans-an amendment of FASB Statements No. 87, 88, 106, and 132(R), which requires an employer to recognize the over-funded or under-funded status of a defined benefit postretirement plan (other than a multiemployer plan) as an asset or liability in its statement of
financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income of a business entity or changes in unrestricted net assets of a not-for-profit organization. Statement No. 158 also requires an employer to measure the funded status of a plan as of the date of its year-end statement of financial position, with limited exceptions. This statement is effective for fiscal years ending after December 15, 2006. The Company does not currently provide defined benefit pension or other postretirement plans; therefore the adoption of this statement did not have an impact on the Company’s consolidated financial statements.
In September 2006, the staff of the Securities and Exchange Commission issued Staff Accounting Bulletin 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements (SAB 108). SAB 108 requires that public companies utilize a dual balance-sheet and income-statement approach to assessing the quantitative effects of financial misstatements. SAB 108 also addresses the mechanics of correcting misstatements that include the effects from prior years, and provides for error correction through a one-time cumulative effect adjustment to beginning-of-year retained earnings upon initial adoption. The guidance in SAB 108 must be applied to annual financial statements for fiscal years ending after November 15, 2006. The adoption of SAB 108 did not have a material effect on the Company’s consolidated financial statements
In February 2007, the FASB issued Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. Statement No. 159 allows companies to elect to apply fair value accounting for certain financial assets and liabilities. Statement No. 159 is applicable only to certain financial instruments and is effective for fiscal years beginning after November 15, 2007. Statement No. 159 will be effective for the Company during the fiscal year ended February 28, 2009. The Company is currently evaluating the effect, if any; Statement No. 159 may have on its consolidated financial statements.
In December 2007, the FASB issued SFAS 141 (R), Business Combinations. This statement replaces SFAS 141, “Business Combinations.” This statement retains the fundamental requirements in Statement 141 that the acquisition method of accounting (which Statement 141 called the purchase method) be used for all business combinations and for an acquirer to be identified for each business combination. This statement also establishes principles and requirements for how the acquirer: a) recognizes and measures in it’s financial statements the identifiable assets acquired, the liabilities assumed, and any non controlling interest in the acquiree; b) recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase and c) determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS 141 (R) will apply prospectively to business combinations for which the acquisition date is on or after the Company’s fiscal year beginning March 1, 2009. While the Company has not yet evaluated this statement for the impact, if any, that SFAS 141 (R) will have on its consolidated financial statements, the Company will be required to expense costs related to any acquisitions after February 28, 2010.
In December 2007, the FASB issued SFAS 160, Noncontrolling Interest in Consolidated Financial Statements. This Statement amends Accounting Research Bulletin 51 to establish accounting and reporting standards for the noncontrolling (minority) interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. The Company has not yet determined the impact, if any, that SFAS 160 will have on its consolidated financial statements. SFAS 160 is effective for the Company’s fiscal year beginning March 1, 2009.
Impact of Inflation
Inflation has not had a material effect on the Company’s results of operations to date.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures 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 $20.4 million of outstanding debt at February 29, 2008 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 a decrease of approximately $204,000 in pre-tax income assuming no further changes in the amount of borrowings subject to variable rate interest from amounts outstanding at February 29, 2008. The Company does not trade in derivative financial instruments.
The Company has a subsidiary in the UK, 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 affect the Company’s financial position.
Item 8.
Item 8.
Financial Statements and Supplementary Data.
Video Display Corporation and Subsidiaries
Index to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of February 29, 2008 and February 28, 2007
Consolidated Statements of Operations for the years ended February 29, 2008 and February 28, 2007
Consolidated Statements of Shareholders’ Equity and Comprehensive Income for the years ended February 29, 2008 and February 28, 2007
Consolidated Statements of Cash Flows for the years ended February 29, 2008 and February 28, 2007
Notes to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
To the Board of Directors
Video Display Corporation
We have audited the accompanying consolidated balance sheets of Video Display Corporation and subsidiaries (the “Company”) as of February 29, 2008 and February 28, 2007, and the related consolidated statements of operations, shareholders’ equity and comprehensive income, and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Video Display Corporation and subsidiaries as of February 29, 2008 and February 28, 2007, and the results of their operations and their cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, for the year ended February 28, 2007, the Company changed its method of accounting for share-based compensation.
/s/ Carr, Riggs & Ingram, LLC
Atlanta, Georgia
June 13, 2008
Video Display Corporation and Subsidiaries
Consolidated Balance Sheets
(in thousands)
The accompanying notes are an integral part of these statements.
Video Display Corporation and Subsidiaries
Consolidated Balance Sheets
(in thousands)
The accompanying notes are an integral part of these statements.
Video Display Corporation and Subsidiaries
Consolidated Statement of Operations
(in thousands, except per share data)
The accompanying notes are an integral part of these statements.
Video Display Corporation and Subsidiaries
Consolidated Statements of Shareholders’ Equity and Comprehensive Income
(in thousands)
The accompanying notes are an integral part of these statements.
Video Display Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
The accompanying notes are an integral part of these statements.
See Note 17 for supplemental cash flow information.
Note 1. Summary of Significant Accounting Policies
Fiscal Year
All references herein to “2008” and “2007” mean the fiscal years ended February 29, 2008 and February 28, 2007 respectively.
Nature of Business
Video Display Corporation and subsidiaries (the “Company”) principally manufactures and distributes cathode ray tubes (“CRTs”) in the worldwide replacement market for use in television sets and data display screens for medical, military and industrial monitoring systems as well as manufacturing and distributing electron optic parts, which are significant components in new and recycled CRTs and monitors. The Company also manufactures low and high-end monochrome and color CRT and active matrix liquid crystal monitor displays for use in specialty high performance and ruggedized applications. The Company also acts as a wholesale distributor of electronic parts and CRTs purchased from domestic and foreign manufacturers. In addition, the Company operates a call center which acts as a consumer and dealer support center for 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. The Company’s operations are principally located in the U.S.; however, the Company does have a subsidiary operation located in the United Kingdom.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its subsidiaries after elimination of all intercompany accounts and transactions.
Reclassifications
Certain amounts in the prior years’ financial statements have been reclassified to conform to the current year presentation.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Examples include provisions for returns, bad debts, inventory reserves, valuations on deferred income tax assets, goodwill and other intangible assets, accounting for percentage of completion contracts and the length of product life cycles and fixed asset lives. Actual results could vary from these estimates.
Revenue Recognition
Revenues are recognized when there is persuasive evidence of an arrangement, delivery has occurred, the price has been fixed or is determinable and collectibility can be reasonably assured. The Company’s delivery term typically is F.O.B. shipping point. The Company offers one-year and two-year limited warranties on certain products. The Company records a liability for estimated warranty obligations at the date products are sold. Adjustments are made as new information becomes available. The provisions of Financial Standards Accounting Board (FASB) Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness
to Others”, require disclosures about the guarantees that an entity has issued, including a reconciliation of changes in the entity’s product warranty liabilities.
In accordance with Emerging Issues Task Force Issue (“EITF”) 00-10 “Accounting for Shipping and Handling Fees and Costs”, 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. Shipping costs of $2.2 million and $2.3 million were included in the fiscal years ended 2008 and 2007 respectively.
A portion of the Company’s revenue is derived from contracts to manufacture CRTs to a buyer’s specification. These contracts are accounted for under the provisions of the American Institute of Certified Public Accountants’ Statement of Position No. (“SOP”) 81-1, “Accounting for Performance of Construction-Type and Certain Production-Type Contracts”. The Company utilizes the percentage of completion method as contemplated by this SOP to recognize revenue on all contracts to design, develop, manufacture, or modify complex electronic equipment to a buyer’s specification. Percentage of completion is measured using the ratio of costs incurred to estimated total costs at completion. Any losses identified on contracts are recognized immediately.
The Wholesale Distribution Segment has several distribution agreements that it accounts for using the gross revenue basis as prescribed by EITF 99-19 “Reporting Revenue Gross as a Principal versus Net as an Agent”. The Company uses the gross method because the Company has general inventory risk, physical loss inventory risk and credit risk. The call center service revenue is recognized based on written pricing agreements with each manufacturer, on a per-call, per-email or per-standard-mail basis.
Research and Development
The Company includes research and development expenditures in the consolidated financial statements as a part of general and administrative expenses. Research and development costs were approximately $0.8 million and $1.2 million in the fiscal years ended 2008 and 2007 respectively.
Financial Instruments
Fair values of cash, accounts receivable, short-term liabilities and debt approximate cost due to the short period of time to maturity. Recorded amounts of long-term debt and convertible debentures are considered to approximate fair value due to either rates which fluctuate with the market or are otherwise commensurate with the current market.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable are customer obligations due under normal trade terms. The Company sells its products primarily to manufacturers, consumers of CRTs and consumers of electronic products. Management performs continuing credit evaluations of its customers’ financial condition and although the Company generally does not require collateral, letters of credit may be required from its customers in certain circumstances, such as foreign sales. The allowance for doubtful accounts is determined by reviewing all accounts receivable and applying historical credit loss experience to the current receivable portfolio with consideration given to the current condition of the economy, assessment of the financial position of the creditors as well as 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. Management believes accounts receivable are stated at amounts expected to be collected.
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 believes that historically its procedures have been adequate and does not anticipate that its assumptions are reasonably likely to change in the future.
Inventories
Inventories consist primarily of CRTs, electron guns, monitors and electronic parts. Inventories are stated at the lower of cost (primarily first-in, first-out) or market.
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 OEMs, 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 2008 and 2007; however, the Company cannot guarantee the accuracy of future forecasts since these estimates are subject to change based on market conditions.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation is computed principally by the straight-line method for financial reporting purposes over the following estimated useful lives: Buildings - ten to twenty-five years; Machinery and Equipment - five to ten years. Depreciation expense totaled approximately $1.4 million and $1.4 million for the fiscal years ended 2008 and 2007 respectively. Substantial betterments to property, plant and equipment are capitalized and routine repairs and maintenance are expensed as incurred.
Management reviews and assesses long-lived assets, which includes property, plant and equipment for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In performing the review for recoverability, management estimates the future cash flows expected to result from the use of the asset. If the sum of the undiscounted expected cash flows is less than the carrying amount of the asset, an impairment loss is recognized based upon the estimated fair value of the asset.
Goodwill and Other Intangibles
Goodwill and nonamortizable intangible assets are tested for impairment annually unless events or circumstances exist that would require an assessment in the interim. The Company uses a multiple of EBITDA (earnings before interest, tax, depreciation and amortization expenses) in evaluating the fair value of the monitor operations. As a result of such testing in February 2008 and 2007, the Company determined there was no impairment of goodwill.
Intangible assets consist primarily of customer lists and non-competition agreements related to acquisitions. Intangible assets are amortized using the straight-line method over their estimated period of
benefit. The Company identifies and records impairment losses on intangible assets when events and circumstances indicate that such assets might be impaired. The Company considers factors such as significant changes in the regulatory or business climate and projected future cash flows from the respective asset. No impairment of intangible assets has been identified during any of the periods presented.
Stock-Based Compensation Plans
On March 1, 2006, the Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 123 (Revised 2004), “Share-Based Payment” (“SFAS No. 123(R)”), which requires employee share-based compensation to be accounted for under the fair value method and requires the use of an option pricing model for estimating the fair value of stock options at the date of grant. Previously, the Company accounted for stock options under the intrinsic value method prescribed by Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations, and provided the required pro forma disclosures prescribed by SFAS No. 123, “Accounting for Stock-Based Compensation,” (“Statement No. 123”), as amended. Since the exercise price of options equaled the market price of the stock on the date of grant, the stock options had no intrinsic value and, therefore, no expense was recognized for stock options by the Company prior to the beginning of fiscal 2007.
The Company elected to adopt Statement No. 123(R) using the modified prospective method, which requires compensation expense to be recorded for all unvested share-based awards beginning in the first quarter of adoption.
For the fiscal year ended February 29, 2008 and February 28, 2007, the Company recognized general and administrative expense of ($44,000) and $86,000 related to share-based compensation. After the adoption of SFAS No. 123(R), the liability for the share-based compensation recognized is presented in the consolidated balance sheet as part of additional paid in capital. As of February 29, 2008, total unrecognized compensation costs related to stock options and shares of restricted stock granted was $103,686. The unrecognized share based compensation cost is expected to be recognized ratably over a period of approximately 3 years.
Comprehensive Income
SFAS No. 130 “Reporting Comprehensive Income” establishes standards for reporting and presentation of non-owner changes in shareholders’ equity. For the Company, total non-owner changes in shareholders’ equity include net income and the change in the cumulative foreign exchange translation adjustment component of shareholders’ equity. Total comprehensive income was approximately $2.8 million and $1.9 million in the fiscal years ended 2008 and 2007 respectively.
Stock Repurchase Program
The Company has a stock repurchase program, pursuant to which it was originally authorized to repurchase up to 462,500 shares of the Company’s common stock in the open market. On January 11, 2006, the Board of Directors of the Company approved a non-time limited continuation of the stock repurchase program, and authorized the Company to repurchase up to 600,000 additional shares of the Company’s common stock, depending on the market price of the shares. There is no minimum number of shares required to be repurchased under the program. During the fiscal year ended February 29, 2008, the Company repurchased 176,251 shares at an average price of $7.47 per share, which have been added to treasury shares on the consolidated balance sheet. Under this program, an additional 375,332 shares remain authorized to be repurchased by the Company at February 29, 2008. As discussed in Note 7, the Loan and Security Agreement executed by the Company on June 29, 2006 included restrictions on investments which restricted further repurchases of stock under this program. The participating banks granted a limited exception to these restrictions, allowing the Company to purchase unlimited shares providing the company meets the covenants in the loan agreement.
Taxes on Income
The Company accounts for income taxes under the asset and liability method prescribed in FASB Statement No. 109, Accounting for Income Taxes, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company’s financial statements or tax returns. In estimating future tax consequences, the Company generally considers all expected future events other than possible enactments of changes in the tax laws or rates. The effect on deferred tax assets and liabilities of a change in tax rates are recognized as income or expense in the period that includes the enactment date.
Effective March 1, 2007, the Company adopted Interpretation No. 48, Accounting for Uncertainty in Income Taxes, which clarifies the accounting for uncertainty in income taxes recognized in the Companies’ consolidated financial statements. Interpretation No. 48 requires that a position taken or expected to be taken in a tax return be recognized in the financial statements when it is more likely than not (i.e., a likelihood of more than fifty percent) that the position would be sustained upon examination by tax authorities. A recognized tax position is then measured at the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. Upon adoption, the Company did not have any material unrecognized tax benefits. As of February 29, 2008, the Company does not have any material unrecognized tax benefits.
The Company recognizes accrued interest and penalties related to unrecognized tax benefits as components of interest expense and other expense, respectively, in arriving at pretax income. The Company did not have any interest and penalties accrued upon the adoption of Interpretation No. 48, and, as of February 29, 2008, the Company does not have any interest and penalties accrued related to unrecognized tax benefits.
According to federal statute, the Company’s tax returns for the years ended February 28, 2005, 2006 and 2007 remain open to examination by the Internal Revenue Service (“IRS”). Most state taxing authorities follow the federal statute of three years. The IRS commenced a routine examination of the Company’s U.S. federal income tax return for the year ended February 28, 2006 during the first quarter of fiscal 2009 that is anticipated to be concluded in the third quarter of 2009.
Foreign Currency Translations
Assets and liabilities of foreign subsidiaries are translated using the exchange rate in effect at the end of the year. Revenues and expenses are translated using the average of the exchange rates in effect during the year. Translation adjustments and transaction gains and losses related to long-term inter-company transactions are accumulated as a separate component of shareholders’ equity. The Company has a subsidiary in the United Kingdom, which is not material, and uses the British pound as its functional currency.
Earnings Per Share
Basic earnings per share is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding during each year. Shares issued or repurchased during the year are weighted for the portion of the year 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 potentially dilutive common shares that were outstanding during the period.
The following is a reconciliation of basic earnings per share to diluted earnings per share for 2008 and 2007, (in thousands, except for per share data)
Stock options, debentures and other liabilities convertible into 304,000 and 468,000 shares respectively of the Company’s common stock were anti-dilutive and were excluded from the fiscal 2008 and 2007 diluted earnings per share calculation.
Segment Reporting
The Company applies Statement No. 131, Disclosures about Segments of an Enterprise and Related Information to report information about operating segments in annual and interim financial reports. An operating segment is defined as a component that engages in business activities, whose operating results are reviewed by the chief operating decision maker in order to make decisions about allocating resources, and for which discrete financial information is available (see Note 13. Segment Reporting).
Recent Accounting Pronouncements
In June 2006, the FASB ratified EITF 06-3, How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That is, Gross versus Net Presentation). The scope of EITF 06-3 includes any tax assessed by a governmental authority that is directly imposed on a revenue-producing activity between a seller and a customer, and may include, but is not limited to, sales, use, value added, and some excise taxes. EITF 06-3 concluded that the presentation of taxes within its scope on either a gross (included in revenue and cost) or net (excluded from revenues) basis is an accounting policy decision subject to appropriate disclosure. EITF 06-3 is effective for fiscal years beginning after December 15, 2006. The Company presents these taxes on a net basis and the adoption of EITF 06-3 did not have a material effect on the Company’s consolidated financial statements.
In September 2006, the FASB issued Statement No. 157, Fair Values Measurements. This statement is effective for financial statements issued for fiscal years beginning after November 15, 2007 and for any interim periods within those fiscal years. Statement No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures
about fair value measurements. The statement does not require new fair value measurements, but is applied to the extent that other accounting pronouncements require or permit fair value measurements. The statement emphasizes that fair value is a market-based measurement that should be determined based on the assumptions that market participants would use in pricing an asset or liability. Companies are required to disclose the extent to which fair value is used to measure assets and liabilities, the inputs used to develop the measurements, and the effect of certain of the measurements on earnings (or changes in net assets) for the period. Management does not expect that the implementation of Statement No. 157 will have a material impact on the Management’s consolidated financial statements.
In September 2006, the FASB issued Statement No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans-an amendment of FASB Statements No. 87, 88, 106, and 132(R), which requires an employer to recognize the over-funded or under-funded status of a defined benefit postretirement plan (other than a multiemployer plan) as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income of a business entity or changes in unrestricted net assets of a not-for-profit organization. Statement No. 158 also requires an employer to measure the funded status of a plan as of the date of its year-end statement of financial position, with limited exceptions. This statement is effective for fiscal years ending after December 15, 2006. The Company does not currently provide defined benefit pension or other postretirement plans; therefore the adoption of this interpretation did not have an impact on the Company’s consolidated financial statements.
In September 2006, the staff of the Securities and Exchange Commission issued Staff Accounting Bulletin 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements (SAB 108). SAB 108 requires that public companies utilize a dual balance-sheet and income-statement approach to assessing the quantitative effects of financial misstatements. SAB 108 also addresses the mechanics of correcting misstatements that include the effects from prior years, and provides for error correction through a one-time cumulative effect adjustment to beginning-of-year retained earnings upon initial adoption. The guidance in SAB 108 must be applied to annual financial statements for fiscal years ending after November 15, 2006. The adoption of SAB 108 did not have a material effect on the Company’s consolidated financial statements
In February 2007, the FASB issued Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. Statement No. 159 allows companies to elect to apply fair value accounting for certain financial assets and liabilities. Statement No. 159 is applicable only to certain financial instruments and is effective for fiscal years beginning after November 15, 2007. Statement No. 159 will be effective for the Company during the fiscal year ended February 28, 2009. The Company is currently evaluating the effect, if any; Statement No. 159 may have on its consolidated financial statements.
In December 2007, the FASB issued Statement No. 141 (R), Business Combinations. This statement replaces SFAS 141, “Business Combinations.” This statement retains the fundamental requirements in Statement 141 that the acquisition method of accounting (which Statement No. 141 called the purchase method) be used for all business combinations and for an acquirer to be identified for each business combination. This statement also establishes principles and requirements for how the acquirer: a) recognizes and measures in it’s financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree; b) recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase and c) determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. Statement No. 141 (R) will apply prospectively to business combinations for which the acquisition date is on or after the Company’s fiscal year beginning March 1, 2009. While the Company has not yet evaluated this statement for the impact, if any, that Statement No. 141 (R) will have on its consolidated financial statements, the Company will be required to expense costs related to any acquisitions after February 28, 2010.
In December 2007, the FASB issued Statement No. 160, Noncontrolling Interest in Consolidated Financial Statements. This Statement amends Accounting Research Bulletin 51 to establish accounting and reporting standards for the noncontrolling (minority) interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. The Company has not yet determined the impact, if any, that Statement No. 160 will have on its consolidated financial statements. Statement No. 160 is effective for the Company’s fiscal year beginning March 1, 2009.
Note 2. Costs and Estimated Earnings Related to Billings on Uncompleted Contracts
Information relative to contracts in progress consisted of the following (in thousands):
Costs and estimated earnings in excess of billings are the results of contracts in progress (jobs) in completing orders to customers’ specifications on contracts accounted for under SOP 81-1. Costs included are material, labor and overhead. These jobs require design and engineering effort for a specific customer purchasing a unique product. The Company records revenue on these fixed-price and cost-plus contracts on the percentage of completion basis using the ratio of costs incurred to estimated total costs at completion as the measurement basis for progress toward completion and revenue recognition. Any losses identified on contracts are recognized immediately. Contract accounting requires significant judgment relative to assessing risks, estimating contract costs and making related assumptions for schedule and technical issues. With respect to contract change orders, claims or similar items, judgment must be used in estimating related amounts and assessing the potential for realization. These amounts are only included in contract value when they can be reliably estimated and realization is probable. Billings are generated based on specific contract terms, which might be a progress payment schedule, specific shipments, etc. None of the above contracts in progress contain post-shipment obligations.
Changes in job performance, manufacturing efficiency, final contract settlements and other factors affecting estimated profitability may result in revisions to costs and income and are recognized in the period in which the revisions are determined. The effect of changes in the estimated profitability of contracts for fiscal 2008 was to decrease net earnings by approximately $1.0 million pre-tax and $0.6 million after tax, below the amounts which would have been reported had the preceding year contract profitability estimates been used. This decrease in profitability was primarily the result of mechanical changes and the re-design of printed circuit card assemblies to correct reliability for one major customer.
As of February 29, 2008 and February 28, 2007, there were no production costs which exceeded the aggregate estimated cost of all in process and delivered units relating to long-term contracts. Additionally, there were no claims outstanding that would affect the ultimate realization of full contract values. As of February 29, 2008 and February 28, 2007, there were no progress payments that had been netted against inventory.
Note 3. Intangible Assets
Intangible assets consist primarily of the unamortized value of purchased patents/designs, customer lists, non-compete agreements and miscellaneous 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 $940,000 and $815,00 for fiscal 2008 and 2007 respectively. As of February 29, 2008 and February 28, 2007, the cost and accumulated amortization of intangible assets was as follows (in thousands):
Expected amortization expense for the next five years and thereafter is as follows (in thousands):
Note 4. Business Acquisitions
Effective December 31, 2006, the Company acquired the Cathode Ray Tube Manufacturing and Distribution Business and certain assets of Clinton Electronics Corp. located in Loves Park, Illinois. The Cathode Ray Tube Manufacturing and Distribution Business has been an industry leader in the supply of monochrome CRTs used in video display products since 1964. The assets acquired in this transaction have been recorded based on their fair value at the date of acquisition and include inventories of $2,125,000, equipment of $100,000 and certain intellectual property and customer lists of $325,000. Consideration for the assets acquired included a $1.0 million face value Convertible Note Payable, convertible into 120,000 shares of the Company’s common stock, delivered on the closing date, January 9, 2007,
an agreement to deliver, on the first anniversary of the closing date, a certificate for $1,125,000 in market value of the Company’s common stock as of that date, and on the second anniversary of the closing date, a certificate for $500,000 in market value of the Company’s common stock as of that date. The agreement to subsequently deliver shares of common stock includes terms which limit the maximum number of shares which may be issued and provide an option for the seller to receive cash in lieu of stock, if the Company’s common stock is selling for less than $7.00 per share on the applicable anniversary dates of the agreement. The Company recorded the convertible notes payable net of an implied discount of $75,000. The purchase agreement provides for an adjustment to this base purchase price on the second anniversary of the closing date, to be paid in shares of the Company’s common stock, based on the remaining fair value of the initial inventories on hand as of that date. The purchase agreement also included a $300,000 cash payment on the closing date for a 12 month lease of facilities located in Loves Park. The product development designs and drawings are being amortized over a five year period, while the customer list is being amortized over a three year period, which the Company estimates to be the useful life of these assets.
In August 2006, the Company acquired certain assets of Hobson Bros. Inc. of Chicago for the production of various molded plastic and rubber parts, wire assemblies and stamped metal parts used primarily in the display industry. The fair value of these assets, including inventories of $30,000, equipment of $168,000 and product development designs and drawings of $50,000, were acquired in exchange for 26,830 shares of the Company’s common stock held as treasury shares. The market value of shares issued was $9.32 at the date of close for a total acquisition cost of $250,000. The product development designs and drawings are being amortized over a five year period. These assets will be integrated into the Company’s Tucker, Georgia facilities.
On June 22, 2006, the Company acquired the business and assets of EDL Displays, Inc. (“EDL”) located in Dayton Ohio. EDL is noted for its specialized, large-size, ruggedized, high-resolution displays with application in air traffic control, shipboard navigation, simulation, homeland security, and command and control. The assets acquired in this transaction have been recorded based on their fair value at the date of acquisition and include accounts receivable of $120,000, inventories of $400,000, equipment of $50,000 and certain intellectual property and customer lists of $658,000. Total consideration for the assets acquired included a cash payment of $550,000 and the assumption of a $678,000 bank loan. The purchase agreement provided for an adjustment to the purchase price based on final collection of accounts receivable and evaluation of the market value of purchased inventories at the end of a 12 month period of operation. No adjustment was necessary. The intellectual property, including product development designs and drawings are being amortized over a five year period, while the customer list is being amortized over a three year period, which the Company estimates to be the useful life of these assets. The EDL business was relocated and merged into the Company’s Pennsylvania based Aydin Displays operation effective December 31, 2006.
Note 5. Inventories
Inventories consisted of the following (in thousands):
Note 6. Long-Term Debt
Long-term debt consisted of the following (in thousands):
Future maturities of long-term debt and capitalized lease obligations are as follows (in thousands):
Note 7. Lines of Credit
On June 29, 2006, the Company executed a Loan and Security Agreement with a syndicate including RBC Centura Bank and Regions Bank to provide a $17 million line of credit to the Company and a $3.5 million line of credit to the Company’s subsidiary Fox International, Ltd. As of February 29, 2008, the outstanding balances of these lines of credit were $11.7 million and $3.5 million, respectively. The available amounts for borrowing were $5.3 million and $0.0 million, respectively. These loans are secured by all assets and personal property of the Company. The agreement contains covenants, including requirements related to tangible cash flow, ratio of debt to cash flow and assets coverage. The agreement also includes restrictions on the incurrence of additional debt or liens, investments (including the purchase of Company stock), divestitures and certain other changes in the business. The agreement was extended to June 2009, and accordingly is classified under long term liabilities on the Company’s balance sheet. The
interest rate on these loans is a floating LIBOR rate based on a fixed charge coverage ratio, as defined in the loan documents. In conjunction with Loan and Security Agreement, the syndicate also executed a $3.0 million term note with the Company, and the CEO of the Company provided a $6.0 million subordinated term note to the Company. See related information in Note 8 below.
Note 8. Notes Payable to Officers and Directors
In conjunction with an agreement involving re-financing of the Company’s lines of credit and Loan and Security Agreement, on June 29, 2006 the Company’s CEO provided a $6.0 million subordinated term note to the Company with monthly principal payments of $33,333 plus interest through July 2021. The interest rate on this note is equal to the prime rate plus one percent. Interest payments of $260,000 and $446,000 were paid on this note in fiscal 2008 and fiscal 2007 respectively. The note is secured by a general lien on all assets of the Company, subordinate to the lien held by the syndicate of RBC Centura and Regions Bank. The balance outstanding under this loan agreement was approximately $2.8 million at February 29, 2008.
The Company has a demand note outstanding from another officer, bearing interest at 8%. Principal payments of $44,000 and $71,000 were made on these notes in fiscal 2008 and 2007, respectively, while additional advances of $0 and $220,000 were borrowed on these notes during fiscal 2008 and 2007, respectively. Interest payments of $22,000 and $34,000 were paid on this note in fiscal 2008 and fiscal 2007 respectively. The balance outstanding on this note is $252,000 at February 29, 2008.
Note 9. Convertible Notes Payable
In connection with the purchase of the Cathode Ray Tube Manufacturing and Distribution Business and certain assets of Clinton Electronics Corp. discussed in Note 4, the Company issued a $1.0 million face value non-interest bearing Convertible Note Payable with a maturity date of January 8, 2008. The note is convertible into 120,000 shares of the Company’s common stock at any time prior to maturity. The Company recognized a $75,000 discount on the debt to reflect the inherent interest in the notes, which will accrete as interest expense over the one year life of the note. Total interest expense accreted on this note during fiscal 2008 and 2007 was $62,000 and $13,000 respectively. The convertible note was paid in January 2008.
During fiscal 2004, the Company issued four non-interest bearing notes payable due August 2007, valued at $125,000 each, and convertible at any time into common shares of the Company’s stock at a rate of $12.50 per share. The Company recognized a $150,000 discount on the debt to reflect the inherent interest in the notes. This discount on debt is accreted as interest expense over the three year life of the notes. The discount fully accretes upon conversion of the debt to equity. During the fourth quarter of fiscal 2005, one of the notes was converted into 10,000 shares of the Company’s common stock. During the first quarter of fiscal 2006, another of the notes was converted into 10,000 shares of the Company’s common stock. The remaining two notes were paid during the second quarter of fiscal 2008. Total interest expense accreted on these notes during fiscal 2008 and Fiscal 2007 was $12,500 and $25,000, respectively.
Note 10. Accrued Expenses and Warranty Obligations
The following provides a reconciliation of changes in the Company’s warranty reserve for fiscal years 2008 and 2007. The Company provides no other guarantees.
Accrued liabilities consisted of the following (in thousands):
Note 11. Stock Options
Upon recommendation of the Board of Directors of the Company, on August 25, 2006, the shareholders of the Company approved the Video Display Corporation 2006 Stock Incentive Plan (“Plan”), whereby options to purchase up to 500,000 shares of the Company’s common stock may be granted and up to 100,000 restricted common stock shares may be awarded. Options may not be granted at a price less than the fair market value, determined on the day the options are granted. Options granted to a participant who is the owner of ten percent or more of the common stock of the Company may not be granted at a price less than 110% of the fair market value, determined on the day the options are granted. The exercise price of each option granted is fixed and may not be re-priced. The life of each option granted is determined by the plan administrator, but may not exceed the lesser of five years from the date the participant has the vested right to exercise the option, or seven years from the date of the grant. The life of an option granted to a participant who is the owner of ten percent or more of the common stock of the Company may not exceed five years from the date of grant. All full-time or part-time employees, and Directors of the Company, are eligible for participation in the Plan. In addition, any consultant or advisor who renders bona fide services to the Company, other than in connection with the offer or sale of securities in a capital-raising transaction, is eligible for participation in the Plan. The plan administrator is appointed by the Board of Directors of the Company, and must include two or more outside, independent Directors of the Company. The Plan may be terminated by action of the Board of Directors, but in any event will terminate on the tenth anniversary of its effective date.
Prior to expiration on May 1, 2006 the Company maintained an incentive stock option plan whereby options to purchase up to 1.2 million shares could be granted to directors and key employees at a price not less than fair market value at the time the options were granted. Upon vesting, options granted are exercisable for a period not to exceed ten years. No further options may be granted pursuant to the plan after the expiration date; provided however, those options outstanding at that date will remain exercisable in accordance with their respective terms.
Information regarding the stock option plans is as follows:
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 be outstanding based on historical information. Estimates of expected future stock price volatility are based on the historic volatility of the Company’s common stock. The Company calculates the historic volatility based on the weekly stock closing price, adjusted for dividends and stock splits. The fair value of the stock options is based on the stock price at the time the option is granted, the annualized volatility of the stock and the discount rate at the grant date.
On September 1, 2006, the Company granted 10,000 restricted common stock shares to certain management employees at fair value on the date of grant, $8.12 per share. Total compensation cost associated with the grant, $81,000 will be recognized over the twenty-one month vesting period, at which time the restrictions on the shares will terminate. No forfeitures are expected in relation to this grant due to the limited term of vesting. 35,000 options were granted to the new Chief Financial Officer during the fiscal year ended February 29, 2008.
Note 12. Taxes on Income
Provision for (benefit from) income taxes in the consolidated statements of operations consisted of the following components (in thousands):
Income before provision for taxes consisted of the following (in thousands):
The following table shows the reconciliation of federal income taxes at the statutory rate on income before income taxes to the reported provision for income tax (in thousands):
The effective tax rate for fiscal 2008 was 29.6% compared to 41.7% for fiscal 2007. The lower effective rate in 2008 was primarily due to the impact of a state tax refund received of approximately $0.2 million (net of federal taxes), which related to amendments to apportionment factors in previously filed state of Kentucky income tax returns and , and $0.3 million due to domestic production activities.
Deferred income taxes as of February 29, 2008 and February 28, 2007 reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes and certain tax loss carryforwards.
The sources of the temporary differences and carryforwards, and their effect on the net deferred tax asset consisted of the following (in thousands):
Investment loss carryforwards consist primarily of investment losses, which may be utilized to offset any future taxable gains on the sale of investments. Investment loss carryforwards in the amount of $108,000 expire in 2009. The Company has provided a valuation allowance on these loss carryforwards, as full realization of these assets is not considered likely.
Undistributed earnings of the Company’s foreign subsidiary have been considered to be indefinitely reinvested and, accordingly, no provision for U.S. federal and state income taxes has been provided thereon. Upon distribution of those earnings in the form of dividends or otherwise, the Company would be subject to both U.S. income taxes (subject to an adjustment for foreign tax credits) and withholding taxes payable to the foreign country. The Company has decided to close the foreign subsidiary and has determined the tax liability to be immaterial.
Note 13. Segment Information
In accordance with Statement No. 131, Disclosures about segments of an Enterprise and Related Information, the Company has determined that it has two reportable segments. The two reportable segments are as follows: (1) the manufacture and distribution of displays and display components (“Display Segment”) and (2) the wholesale distribution of consumer electronic parts from foreign and domestic manufacturers (“Wholesale Distribution Segment”). The operations within the Display Segment consist of monitors, data display CRTs, entertainment (television and projection) CRTs, projectors and other monitors and component parts. These operations have similar economic criteria, and are appropriately aggregated consistent with the criteria of paragraph 17 of Statement No. 131. The Company’s call center is an integral part of the distribution of electronic consumer parts, consumer and dealer support and technical support functions, with call activity for all of these functions being routed to call employees cross-trained to provide appropriate service. Accordingly the call center is included within the Wholesale Distribution segment.
Sales to foreign customers were 13% and 13% of consolidated net sales for fiscal 2008 and 2007 respectively. Foreign operations are included in the Display Segment.
The accounting policies of the operating segments are the same as those described in Note 1, Summary of Significant Accounting Policies. Segment amounts disclosed reflect elimination entries made in consolidation. The chief operating decision maker evaluates performance of the segments based on operating income. Costs excluded from this profit measure primarily consist of interest expense and income taxes.
The following table sets forth net sales, income before income taxes, depreciation and amortization, capital expenditures, and identifiable assets for each reportable segment and applicable operations:
**
Includes non-cash additions and additions to fixed assets through business acquisitions.
Note 14. Benefit Plan
The Company maintains defined contribution plans that are available to all U.S. employees. The Company accrued $91,000 and $100,000 in fiscal years ended 2008 and 2007 respectively for 401(k) matching contributions.
Note 15. Commitments and Contingencies
Operating Leases
The Company leases various manufacturing facilities and transportation equipment under leases classified as operating leases, expiring at various dates through 2012. These leases provide that the Company pays taxes, insurance and other expenses on the leased property and equipment. Rent expense for all leases was approximately $2.0 million and $1.8 million in fiscal 2008 and 2007 respectively.
Future minimum rental payments due under these leases are as follows (in thousands):
Related Party Leases
Included above are leases for manufacturing and warehouse facilities leased from the Company’s Chief Executive Officer under operating leases expiring at various dates through 2009. Rent expense under these leases totaled approximately $314,000 in fiscal 2008 and 2007.
Future minimum rental payments due under these leases with related parties are as follows (in thousands):
The Company is involved in various legal proceedings relating to claims arising in the ordinary course of business.
Legal Proceedings
In May 2008, the Company was named in a lawsuit captioned Barco Federal Systems, LLC and Barco N.V., a Belgian corporation v. Aydin Displays, Inc. a Pennsylvania corporation , a subsidiary of Video Display Corporation, U.S. District Court, Northern District of Georgia, 1: 08-cv-01252-JEC. The complaint filed alleges that Aydin Displays, Inc. has infringed two patents held by Barco NV of Kortrijk, Belgium and licensed to Barco Federal Systems LLC, a U.S. subsidiary devised by Barco NV presumed to qualify Barco NV as a U.S. entity for solicitation of U.S. Government defense contracts.
Aydin Displays, Inc. denies any infringement of the two Barco patents. In response to the lawsuit, Aydin Displays, Inc. has filed several counterclaims against Barco, asserting not only that Aydin Displays, Inc. has not infringed the patents, but also that Barco’s patents are invalid and unenforceable. Aydin Displays, Inc. is also investigating additional claims against Barco.
Note 16. Concentrations of Risk and Major Customers
Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash and accounts receivable. At times, such cash in banks are in excess of the FDIC insurance limit.
The Company sells to a variety of domestic and international customers on an open-unsecured account basis, in certain cases requiring letters of credit. These customers principally operate in the medical, military, television and avionics industries. The Company’s Display Segment had direct and indirect net sales to the U.S. government, primarily the Department of Defense for training and simulation programs, which comprised approximately 46% and 45% of Display Segment net sales and 30% and 34% of consolidated net sales in fiscal 2008 and 2007 respectively. Sales to foreign customers were 13% and 13% of consolidated net sales in fiscal 2008 and 2007 respectively. The Company’s Wholesale
Distribution Segment, Fox International, had net sales to one customer that comprised approximately 17% and 19% of that subsidiary’s net sales in fiscal 2008 and 2007 respectively. The Company attempts to minimize credit risk by reviewing all customers’ credit history before extending credit, by monitoring customers’ credit exposure on a daily basis and requiring letters of credit for certain sales. The Company establishes an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends and other information.
Note 17. Supplemental Cash Flow Information
Non-cash investing and financing activities:
During 2008, the Company acquired certain computer and telephone equipment in the amount of $216,000 under a financing lease obligation.
During 2007, the Company acquired the Cathode Ray Tube Manufacturing and Distribution Business and certain assets of Clinton Electronics Corp., including inventory, fixed assets and various other assets of $2,550,000. Consideration for the assets acquired include a $1.0 million face value Convertible Note Payable convertible into 120,000 shares of the Company’s common stock, an agreement to deliver, on the first anniversary of the closing date, a certificate for $1,125,000 in market value of the Company’s common stock as of that date, and on the second anniversary of the closing date, a certificate for $500,000 in market value of the Company’s common stock as of that date. The agreement to subsequently deliver shares of common stock includes terms which limit the maximum number of shares which may be issued and provide an option for the seller to receive cash in lieu of stock, if the Company’s common stock is selling for less than $7.00 per share on the applicable anniversary dates of the agreement.
Also during 2007, the Company acquired certain assets of Hobson Bros. Inc., including inventory, fixed assets and various other assets of $250,000 in exchange for $250,000 of the Company’s common stock.
Note 18. Selected Quarterly Financial Data (unaudited)
The following table sets forth selected quarterly consolidated financial data for the fiscal years ended February 29, 2008 and February 28, 2007, respectively. The summation of quarterly net income (loss) per share may not agree with annual net income (loss) per share.
Note 19. Subsequent Events
On May 27, 2008 the Company’s Board of Directors unanimously voted to give tentative approval for the Company to distribute a minimum of 80% of the shares of its wholly owned subsidiary, Fox International Ltd., to the existing Video Display Corporation shareholders. The final decision on the distribution is dependent upon receiving certain legal opinions, tax considerations and other regulatory approvals. Because there are still unknown factors that require resolution, no dates have been determined for the distribution or if the distribution shall actually occur.
Item 9.
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A(T).
Item 9A(T).
Controls and Procedures.
Evaluation of disclosure controls and procedures.
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, conducted an evaluation of our disclosure controls and procedures, as such term is defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended, as of the end of the period covered by this report (February 29,2008). Our disclosure controls and procedures are intended to ensure that the information we are required to disclose in the reports that we file or submit under the Securities Exchange Act of 1934 is (i) recorded, processed, summarized and reported within the time periods specified in the Securities and
Exchange Commission’s rules and forms and (ii) accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, as the principal executive and financial officers, respectively, to allow final decisions regarding required disclosures. Because of the material weaknesses described in Management’s Report on Internal Control Over Financial Reporting, our management has concluded that, as of February 29, 2008, our disclosure controls and procedures were not effective. Notwithstanding the material weaknesses discussed below, our management has concluded that the financial statements included in this Form 10-K present fairly, in all material respects our financial position, results of operations and cash flows for the periods presented in conformity with generally accepted accounting principles.
The required certifications of our Chief Executive Officer and our acting Chief Financial Officer are included as exhibits to this Annual Report on Form 10-K. The disclosures set forth in this Item 9A contain information concerning the evaluation of our disclosure controls and procedures, internal control over financial reporting and changes to internal control referred to in those certifications. Those certifications should be read in conjunction with this Item 9A for a more complete understanding of the matters covered by the certifications.
This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.
Changes in Internal Controls
There have not been any other 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 year to which this report relates that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended. A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and disposition of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. It should be noted that any system of controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system will be met. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an assessment of the effectiveness of the Company’s internal control over financial reporting as of February 29, 2008. In making this assessment, management used the criteria set forth in the framework established by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) entitled “Internal Control- Integrated Framework.” Based on such assessment, our management concluded that as of February 29, 2008 our internal control over financial reporting was not effective.
A material weakness is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. Our management has identified the following material weakness as of February 29, 2008:
The Company did not maintain effective controls over the valuation and accuracy of certain inventory and related costs of goods sold. Specifically, the Company failed to maintain effective controls over the core inventory accounting at its Fox International, Ltd. subsidiary to ensure that inventory valuation and the related cost of goods sold were in accordance with generally accepted accounting principles. This control deficiency could potentially result in a misstatement of our inventory and related costs of goods accounts, and could therefore result in a material misstatement in the Company’s annual or interim consolidated financial statements that would not be prevented or detected. Accordingly, our management has determined that this control deficiency constitutes a material weakness.
Plan for Remediation of Material Weakness
To remedy the material weaknesses identified above, the Company intends to take the following actions:
1)
A more robust, proactive tracking of cores being returned to the supplier.
2)
Information systems improvements for identifying cores received and returned.
3)
Reviews by the appropriate accounting management of the data collected and used in recording the entries for the core accounting.
Management believes these changes will allow them to improve internal controls over financial reporting and enable them to evaluate such controls. Management will continue to assess the actions necessary to maintain effective controls over the core inventory accounting at its Fox International, Ltd. subsidiary.
Limitations on the effectiveness of controls.
Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that internal control over financial reporting and our disclosure controls and procedures will prevent all errors and potential fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within Video Display Corporation have been detected. These inherent limitations include
the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple errors or mistakes. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
Item 9B.
Item 9B. Other Information.
None.
PART III
Item 10.
Item 10.
Directors, Executive Officers and Corporate Governance.
The information contained in Video Display Corporation’s Proxy Statement to be filed within 120 days of the Company’s 2008 fiscal year end (the “2008 Proxy Statement”), with respect to directors and executive officers of the Company under the headings “Election of Directors” and “Executive Officers”, is incorporated herein by reference in response to this item; provided, however, that the information contained in the 2008 Proxy Statement under the heading “Compensation and Stock Option Committee Report” or under the heading “Performance Graph” shall not be incorporated herein by reference.
The information contained in the 2008 Proxy Statement under the heading, “Executive Compensation and Other Benefits”, with respect to executive compensation, is incorporated herein by reference in response to this item.
Item 12.
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The information contained in the 2008 Proxy Statement under the headings “Common Stock Ownership” and “Executive Compensation and Other Benefits”, is incorporated herein by reference in response to this item.
Item 13.
Item 13.
Certain Relationships and Related Transactions, and Director Independence.
The information contained in the 2008 Proxy Statement under the heading, “Transactions with Affiliates”, is incorporated herein by reference in response to this item.
Item 14.
Item 14.
Principal Accounting Fees and Services.
The information contained in the 2008 Proxy Statement under the heading, “Audit Fees and All Other Fees” is incorporated herein by reference in response to this item.
PART IV
Item 15.
Item 15.
Exhibits, Financial Statement Schedules.
(a) The following documents are filed as part of this Report:
1.
Financial Statements:
The following consolidated financial statements of the Company and its consolidated subsidiaries and the Reports of the Independent Registered Public Accounting Firms are included in Part II, Item 8.
2.
Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts (with auditor’s report)
(b) Exhibits
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
POWER OF ATTORNEY
Know all men by these presents, that each person whose signature appears below constitutes and appoints Ronald D. Ordway as attorney-in-fact, with power of substitution, for him in any and all capacity, to sign any amendments to this Report on Form 10-K, and to file the same, with exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that said attorney-in-fact may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Report of Independent Registered Public Accounting Firm
To the Board of Directors
Video Display Corporation
Our audits of the consolidated financial statements referred to in our report dated June 13, 2008 included elsewhere in this Annual Report on Form 10-K also included the financial statement schedule of Video Display Corporation, listed in Item 15(a) of this Form 10-K. This schedule is the responsibility of Video Display Corporation’s management. Our responsibility is to express an opinion based on our audits of the consolidated financial statements.
In our opinion, the financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
/s/ Carr, Riggs & Ingram, LLC
Atlanta, Georgia
June 13, 2008
VIDEO DISPLAY CORPORATION AND SUBSIDIARIES
SCHEDULE II -VALUATION AND QUALIFYING ACCOUNTS
(in thousands)