UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
| x | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the Quarterly Period Ended August 31,November 30, 2014.
or
| ¨ | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the Transition Period From to
Commission File Number 0-13394
VIDEO DISPLAY CORPORATION
(Exact name of registrant as specified on its charter)
| GEORGIA | 58-1217564 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
1868 TUCKER INDUSTRIAL ROAD, TUCKER, GEORGIA 30084
(Address of principal executive offices)
770-938-2080
(Registrant’s telephone number including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, and accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ¨ | Accelerated filer | ¨ | |||
| Non-accelerated filer | ¨ | Smaller reporting company | x | |||
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
As of August 31,November 30, 2014, the registrant had 6,393,873 shares of Common Stock outstanding.
Video Display Corporation and Subsidiaries
.
Video Display Corporation and Subsidiaries
Interim Condensed Consolidated Balance Sheets
(in thousands)
| August 31, 2014 | February 28, 2014 | |||||||
| (unaudited) | ||||||||
Assets | ||||||||
Current assets | ||||||||
Cash and cash equivalents | $ | 1,222 | $ | 2,299 | ||||
Restricted cash | 1,200 | 1,200 | ||||||
Trading investments, at fair value | 4,096 | 4,914 | ||||||
Accounts receivable, less allowance for doubtful accounts of $31 and $40 | 1,805 | 1,876 | ||||||
Notes receivable | 1,704 | 1,000 | ||||||
Inventories, net | 8,739 | 9,915 | ||||||
Deferred income taxes | 307 | 242 | ||||||
Income taxes refundable | 1,144 | 1,120 | ||||||
Prepaid expenses and other | 109 | 182 | ||||||
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Total current assets | 20,326 | 22,748 | ||||||
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Property, plant, and equipment | ||||||||
Land | 154 | 154 | ||||||
Buildings | 2,593 | 2,589 | ||||||
Machinery and equipment | 7,263 | 7,249 | ||||||
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| 10,010 | 9,992 | |||||||
Accumulated depreciation and amortization | (8,537 | ) | (8,431 | ) | ||||
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Net property, plant, and equipment | 1,473 | 1,561 | ||||||
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Notes receivable | 1,054 | 1,698 | ||||||
Intangible assets, net | 621 | 684 | ||||||
Deferred income taxes | 722 | 760 | ||||||
Other assets | 29 | 29 | ||||||
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Total assets | $ | 24,225 | $ | 27,480 | ||||
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The accompanying notes are an integral part of these condensed consolidated statements.
Video Display Corporation and Subsidiaries
Interim Condensed Consolidated Balance Sheets (continued)(Unaudited)
(in thousands)
| August 31, 2014 | February 28, 2014 | |||||||
| (unaudited) | ||||||||
Liabilities and Shareholders’ Equity | ||||||||
Current liabilities | ||||||||
Accounts payable | $ | 789 | $ | 946 | ||||
Accrued liabilities | 448 | 925 | ||||||
Current maturities of long-term debt | 49 | 48 | ||||||
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Total current liabilities | 1,286 | 1,919 | ||||||
Long-term debt, less current maturities | 208 | 233 | ||||||
Deferred rent | 480 | 540 | ||||||
Unrecognized gain on sale of assets | — | 554 | ||||||
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Total liabilities | 1,974 | 3,246 | ||||||
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Shareholders’ Equity | ||||||||
Preferred stock, no par value – 10,000 shares authorized; none issued and outstanding | — | — | ||||||
Common stock, no par value – 50,000 shares authorized; 9,732 issued and 6,393 outstanding at August 31, 2014 and 9,732 issued and 7,020 outstanding at February 28, 2014 | 7,293 | 7,293 | ||||||
Additional paid-in capital | 164 | 160 | ||||||
Retained earnings | 29,680 | 29,392 | ||||||
Treasury stock, shares at cost; 3,339 at August 31, 2014 and 2,712 at February 28, 2014 | (14,886 | ) | (12,611 | ) | ||||
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Total shareholders’ equity | 22,251 | 24,234 | ||||||
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Total liabilities and shareholders’ equity | $ | 24,225 | $ | 27,480 | ||||
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The accompanying notes are an integral part of these condensed consolidated statements.
Video Display Corporation and Subsidiaries
InterimCondensed Consolidated Income Statements (unaudited)
(in thousands, except per share data)
| Three Months Ended August 31, | Six Months Ended August 31, | |||||||||||||||
| 2014 | 2013 | 2014 | 2013 | |||||||||||||
Net sales | $ | 2,592 | $ | 2,585 | $ | 6,287 | $ | 6,786 | ||||||||
Cost of goods sold | 2,578 | 2,361 | 5,296 | 6,384 | ||||||||||||
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Gross profit | 14 | 224 | 991 | 402 | ||||||||||||
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Operating expenses | ||||||||||||||||
Selling and delivery | 267 | 380 | 543 | 854 | ||||||||||||
General and administrative | 773 | 699 | 1,583 | 1,237 | ||||||||||||
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| 1,040 | 1,079 | 2,126 | 2,091 | |||||||||||||
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Operating (loss) | (1,026 | ) | (855 | ) | (1,135 | ) | (1,689 | ) | ||||||||
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Other income (expense) | ||||||||||||||||
Interest income (expense) | 5 | (327 | ) | 19 | (686 | ) | ||||||||||
Investment income | 711 | — | 956 | — | ||||||||||||
Other, net | 398 | (15 | ) | 411 | 454 | |||||||||||
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Income (loss) from continuing operations before income taxes | 88 | (1,197 | ) | 251 | (1,921 | ) | ||||||||||
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Income tax (benefit) | (61 | ) | (393 | ) | (37 | ) | (666 | ) | ||||||||
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Net income (loss) from continuing operations | $ | 149 | $ | (804 | ) | $ | 288 | $ | (1,255 | ) | ||||||
Income from discontinued operations, net of income tax expense | — | 2,304 | — | 2,519 | ||||||||||||
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Net income | 149 | 1,500 | 288 | 1,264 | ||||||||||||
Net income per share: | ||||||||||||||||
From continuing operations-basic | $ | .02 | $ | (.10 | ) | $ | .04 | $ | (.16 | ) | ||||||
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From continuing operations-diluted | .02 | (.10 | ) | .04 | (.16 | ) | ||||||||||
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From discontinued operations-basic | $ | 0 | $ | .30 | $ | 0 | .33 | |||||||||
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From discontinued operations-diluted | 0 | .30 | 0 | .33 | ||||||||||||
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Basic weighted average shares outstanding | 6,372 | 7,593 | 6,611 | 7,589 | ||||||||||||
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Diluted weighted average shares outstanding | 6,447 | 7,609 | 6,626 | 7,617 | ||||||||||||
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| November 30, 2014 | February 28, 2014 | |||||||
| (unaudited) | ||||||||
Assets | ||||||||
Current assets | ||||||||
Cash and cash equivalents | $ | — | $ | 2,299 | ||||
Restricted cash | — | 1,200 | ||||||
Trading investments, at fair value | 3,217 | 4,914 | ||||||
Accounts receivable, less allowance for doubtful accounts of $29 and $40 | 1,885 | 1,876 | ||||||
Notes receivable | — | 1,000 | ||||||
Inventories, net | 8,135 | 9,915 | ||||||
Deferred income taxes | 329 | 242 | ||||||
Income taxes refundable | 1,176 | 1,120 | ||||||
Prepaid expenses and other | 28 | 182 | ||||||
Assets of discontinued operations | 2,537 | — | ||||||
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Total current assets | 17,307 | 22,748 | ||||||
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Property, plant, and equipment | ||||||||
Land | 154 | 154 | ||||||
Buildings | 2,593 | 2,589 | ||||||
Machinery and equipment | 7,270 | 7,249 | ||||||
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| 10,017 | 9,992 | |||||||
Accumulated depreciation and amortization | (8,602 | ) | (8,431 | ) | ||||
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Net property, plant, and equipment | 1,415 | 1,561 | ||||||
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Notes receivable | 1,078 | 1,698 | ||||||
Intangible assets, net | 589 | 684 | ||||||
Deferred income taxes | 732 | 760 | ||||||
Other assets | 29 | 29 | ||||||
Assets of discontinued operations | 77 | — | ||||||
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Total assets | $ | 21,227 | $ | 27,480 | ||||
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The accompanying notes are an integral part of these condensed consolidated statements.
Video Display Corporation and Subsidiaries
Interim Condensed Consolidated Statement of Shareholders’ Equity
Six Months Ended August 31, 2014 (unaudited)Balance Sheets (Unaudited) (continued)
(in thousands)
| Common Shares | Share Amount | Additional Paid-in Capital | Retained Earnings | Treasury Stock | ||||||||||||||||
Balance, February 28, 2014 | 7,020 | $ | 7,293 | $ | 160 | $ | 29,392 | $ | (12,611 | ) | ||||||||||
Net income | — | — | — | 288 | — | |||||||||||||||
Repurchase of treasury stock | (627 | ) | — | — | — | (2,275 | ) | |||||||||||||
Share based compensation | — | — | 4 | — | — | |||||||||||||||
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Balance, August 31, 2014 | 6,393 | $ | 7,293 | $ | 164 | $ | 29,680 | $ | (14,886 | ) | ||||||||||
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| November 30, 2014 | February 28, 2014 | |||||||
| (unaudited) | ||||||||
Liabilities and Shareholders’ Equity | ||||||||
Current liabilities | ||||||||
Accounts payable | $ | 687 | $ | 946 | ||||
Accrued liabilities | 479 | 925 | ||||||
Current maturities of long-term debt | 50 | 48 | ||||||
Liabilities of discontinued operations | 1,120 | — | ||||||
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Total current liabilities | 2,336 | 1,919 | ||||||
Long-term debt, less current maturities | 195 | 233 | ||||||
Deferred rent | 450 | 540 | ||||||
Unrecognized gain on sale of assets | — | 554 | ||||||
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Total liabilities | 2,981 | 3,246 | ||||||
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Shareholders’ Equity | ||||||||
Preferred stock, no par value – 10,000 shares authorized; none issued and outstanding | — | — | ||||||
Common stock, no par value – 50,000 shares authorized; 9,732 issued and 5,993 outstanding at November 30, 2014 and 9,732 issued and 7,020 outstanding at February 28, 2014 | 7,293 | 7,293 | ||||||
Additional paid-in capital | 167 | 160 | ||||||
Retained earnings | 26,861 | 29,392 | ||||||
Treasury stock, shares at cost; 3,740 at November 30, 2014 and 2,712 at February 28, 2014 | (16,075 | ) | (12,611 | ) | ||||
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Total shareholders’ equity | 18,246 | 24,234 | ||||||
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Total liabilities and shareholders’ equity | $ | 21,227 | $ | 27,480 | ||||
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The accompanying notes are an integral part of these condensed consolidated statements.
Video Display Corporation and Subsidiaries
Interim Condensed Consolidated StatementsStatement of Cash Flows (unaudited)Operations (Unaudited)
(in thousands)thousands, except per share data)
| Six Months Ended August 31, | ||||||||
| 2014 | 2013 | |||||||
Operating Activities | ||||||||
Net income | 288 | 1,264 | ||||||
Adjustments to reconcile net income to net cash used in operating activities: | ||||||||
Income from discontinued operations, net of tax | — | (2,519 | ) | |||||
Depreciation and amortization | 195 | 154 | ||||||
Provision of doubtful accounts | 1 | 21 | ||||||
Provision for inventory reserve | 173 | 330 | ||||||
Non-cash charge for share based compensation | 4 | 4 | ||||||
Deferred income taxes | (26 | ) | 671 | |||||
Gain on disposal of assets | (364 | ) | (400 | ) | ||||
Realized/unrealized gain on investments | (776 | ) | 18 | |||||
Other | (10 | ) | — | |||||
Changes in working capital items: | ||||||||
Accounts receivable | 70 | 475 | ||||||
Notes receivable | (733 | ) | — | |||||
Inventories | 1,003 | 345 | ||||||
Prepaid expenses and other assets | 55 | (573 | ) | |||||
Accounts payable and accrued liabilities | (633 | ) | (1,450 | ) | ||||
Deferred revenue | (60 | ) | 600 | |||||
Cost, estimated earnings and billings on uncompleted contracts | — | 67 | ||||||
Income taxes refundable/payable | (24 | ) | (72 | ) | ||||
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Net cash used in operating activities | (837 | ) | (1,065 | ) | ||||
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Investing Activities | ||||||||
Purchases of property, plant and equipment | (44 | ) | (13 | ) | ||||
Proceeds from sale of property, plant & equipment | 500 | 499 | ||||||
Proceeds from the sale of subsidiaries | 0 | 15,000 | ||||||
Purchases of investments | (48,904 | ) | — | |||||
Sales of investments | 46,632 | — | ||||||
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Net cash provided by (used in) investing activities | (1,816 | ) | 15,486 | |||||
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Financing Activities | ||||||||
Proceeds from long-term debt, lines of credit | — | 14,054 | ||||||
Repayments of long-term debt, lines of credit | (24 | ) | (27,385 | ) | ||||
Purchase of treasury stock | (2,275 | ) | — | |||||
Re-issuance of treasury stock | — | 166 | ||||||
Proceeds from marginal account borrowings | 3,875 | — | ||||||
Proceeds from notes payable to officers and directors | — | 250 | ||||||
Repayments of notes payable to officers and directors | — | (235 | ) | |||||
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Net cash provided by (used in) financing activities | 1,576 | (13,150 | ) | |||||
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Discontinued Operations | ||||||||
Operating activities | — | 56 | ||||||
Investing activities | — | (52 | ) | |||||
Financing activities | — | — | ||||||
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Net cash provided by discontinued operations | — | 4 | ||||||
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Net change in cash and cash equivalents | (1,077 | ) | 1,275 | |||||
Cash and cash equivalents, beginning of year | 3,499 | 381 | ||||||
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Cash and cash equivalents, end of period | 2,422 | 1,656 | ||||||
Cash and cash equivalents, discontinued operations | — | 5 | ||||||
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Cash and cash equivalents, continuing operations | 2,422 | 1,651 | ||||||
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| Three Months Ended November 30, | Nine Months Ended November 30, | |||||||||||||||
| 2014 | 2013 | 2014 | 2013 | |||||||||||||
Net sales | $ | 3,557 | $ | 3,721 | $ | 9,844 | $ | 10,507 | ||||||||
Cost of goods sold | 2,883 | 3,494 | 8,179 | 9,879 | ||||||||||||
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Gross profit | 674 | 227 | 1,665 | 628 | ||||||||||||
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Operating expenses | ||||||||||||||||
Selling and delivery | 294 | 371 | 837 | 1,225 | ||||||||||||
General and administrative | 1,123 | 742 | 2,706 | 1,979 | ||||||||||||
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| 1,417 | 1,113 | 3,543 | 3,204 | |||||||||||||
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Operating (loss) | (743 | ) | (886 | ) | (1,878 | ) | (2,576 | ) | ||||||||
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Other income (expense) | ||||||||||||||||
Interest income (expense) | (3 | ) | (24 | ) | 16 | (710 | ) | |||||||||
Investment loss | (2,423 | ) | — | (1,467 | ) | — | ||||||||||
Other, net | 290 | 25 | 701 | 480 | ||||||||||||
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Loss from continuing operations before income taxes | (2,879 | ) | (885 | ) | (2,628 | ) | (2,806 | ) | ||||||||
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Income tax (benefit) | (43 | ) | (234 | ) | (80 | ) | (900 | ) | ||||||||
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Net loss from continuing operations | $ | (2,836 | ) | $ | (651 | ) | $ | (2,548 | ) | $ | (1,906 | ) | ||||
Income (loss) from discontinued operations, net of income tax expense | 17 | 35 | 17 | 2,554 | ||||||||||||
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Net income (loss) | $ | (2,819 | ) | (616 | ) | (2,531 | ) | 648 | ||||||||
Net income (loss) per share: | ||||||||||||||||
From continuing operations-basic | $ | (.45 | ) | $ | (.08 | ) | $ | (.39 | ) | $ | (.25 | ) | ||||
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From continuing operations-diluted | (.45 | ) | (.08 | ) | (.39 | ) | (.25 | ) | ||||||||
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From discontinued operations-basic | $ | .00 | $ | .00 | $ | .00 | .34 | |||||||||
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From discontinued operations-diluted | .00 | .00 | .00 | .34 | ||||||||||||
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Basic weighted average shares outstanding | 6,257 | 7,593 | 6,517 | 7,589 | ||||||||||||
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Diluted weighted average shares outstanding | 6,262 | 7,609 | 6,529 | 7,617 | ||||||||||||
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The accompanying notes are an integral part of these condensed consolidated statements.
Video Display Corporation and Subsidiaries
August 31,Interim Condensed Consolidated Statement of Shareholders’ Equity
Nine Months Ended November 30, 2014 (unaudited)
(in thousands)
| Common Shares | Share Amount | Additional Paid-in Capital | Retained Earnings | Treasury Stock | ||||||||||||||||
Balance, February 28, 2014 | 7,020 | $ | 7,293 | $ | 160 | $ | 29,392 | $ | (12,611 | ) | ||||||||||
Net loss | — | — | — | (2,531 | ) | — | ||||||||||||||
Repurchase of treasury stock | (1,027 | ) | — | — | — | (3,464 | ) | |||||||||||||
Share based compensation | — | — | 7 | — | — | |||||||||||||||
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Balance, November 30, 2014 | 5,993 | $ | 7,293 | $ | 167 | $ | 26,861 | $ | (16,075 | ) | ||||||||||
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The accompanying notes are an integral part of these condensed consolidated statements.
Video Display Corporation and Subsidiaries
Interim Condensed Consolidated Statements of Cash Flows (unaudited)
(in thousands)
| Nine Months Ended November 30, | ||||||||
| 2014 | 2013 | |||||||
Operating Activities | ||||||||
Net income (loss) | (2,531 | ) | 648 | |||||
Adjustments to reconcile net income (loss) to net cash provided by (used) in operating activities: | ||||||||
Gain on sale of subsidiary, net of tax | — | (1,929 | ) | |||||
Income from discontinued operations, net of tax | (17 | ) | (625 | ) | ||||
Depreciation and amortization | 291 | 296 | ||||||
Provision of doubtful accounts | 1 | 30 | ||||||
Provision for inventory reserve | 265 | 495 | ||||||
Non-cash charge for share based compensation | 7 | 6 | ||||||
Deferred income taxes | (58 | ) | 587 | |||||
Gain on disposal of assets | (364 | ) | (400 | ) | ||||
Realized/unrealized loss on investments | 1,476 | 23 | ||||||
Other | (10 | ) | (29 | ) | ||||
Changes in working capital items: | ||||||||
Accounts receivable | (483 | ) | 1,206 | |||||
Notes receivables | 35 | — | ||||||
Inventories | 1,515 | 932 | ||||||
Prepaid expenses and other assets | 149 | (955 | ) | |||||
Accounts payable and accrued liabilities | (705 | ) | (2,420 | ) | ||||
Deferred revenue | (90 | ) | 570 | |||||
Cost, estimated earnings and billings on uncompleted contracts | — | 67 | ||||||
Income taxes refundable/payable | (65 | ) | (219 | ) | ||||
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Net cash used in operating activities | (584 | ) | (1,717 | ) | ||||
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Investing Activities | ||||||||
Purchases of property, plant and equipment | (51 | ) | (74 | ) | ||||
Proceeds from sale of property, plant and equipment | 500 | 499 | ||||||
Proceeds from the sale of subsidiary | — | 15,000 | ||||||
Purchases of investments | (68,271 | ) | — | |||||
Sales of investments | 61,644 | — | ||||||
Cash advance to LEXEL | (95 | ) | — | |||||
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Net cash provided by (used in) investing activities | (6,273 | ) | 15,425 | |||||
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Financing Activities | ||||||||
Proceeds from long-term debt, lines of credit | — | 14,054 | ||||||
Repayments of long-term debt, lines of credit | (36 | ) | (27,229 | ) | ||||
Purchase of treasury stock | (3,464 | ) | — | |||||
Re-issuance of treasury stock | — | 166 | ||||||
Proceeds from marginal account borrowings | 6,858 | — | ||||||
Proceeds from notes payable to officers and directors | — | 250 | ||||||
Repayments of notes payable to officers and directors | — | (750 | ) | |||||
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Net cash provided by (used in) financing activities | 3,358 | (13,509 | ) | |||||
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Discontinued Operations | ||||||||
Operating activities | 13 | 2,214 | ||||||
Investing activities | — | (53 | ) | |||||
Financing activities | 95 | — | ||||||
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Net cash provided by discontinued operations | 108 | 2,161 | ||||||
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Net change in cash and cash equivalents | (3,391 | ) | 2,360 | |||||
Cash and cash equivalents, beginning of year | 3,499 | 379 | ||||||
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Cash and cash equivalents, end of period | 108 | 2,739 | ||||||
Cash and cash equivalents, discontinued operations | 108 | — | ||||||
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Cash and cash equivalents, continuing operations | 0 | 2,739 | ||||||
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The accompanying notes are an integral part of these condensed consolidated statements.
Video Display Corporation and Subsidiaries
November 30, 2014
(unaudited)
Note 1. – Summary of Significant Accounting Policies
The interim condensed consolidated financial statements include the accounts of the Company and its majority-owned subsidiaries after elimination of all significant intercompany accounts and transactions.
As contemplated by the Securities and Exchange Commission (the “SEC” or “Commission”) instructions to Form 10-Q, the following footnotes have been condensed and, therefore, do not contain all disclosures required in connection with annual consolidated financial statements. Reference should be made to the Company’s year-end consolidated financial statements and notes thereto, including a description of the accounting policies followed by the Company, contained in its Annual Report on Form 10-K as of and for the fiscal year ended February 28, 2014, as filed with the Commission. There are no material changes in accounting policy during the sixnine months ended August 31,November 30, 2014.
The financial information included in this report has been prepared by the Company, without audit. In the opinion of management, the condensed consolidated financial information included in this report contains all adjustments (all of which are normal and recurring) necessary for a fair presentation of the results for the interim periods. Nevertheless, the results shown for interim periods are not necessarily indicative of results to be expected for the full year. The February 28, 2014 consolidated balance sheet data was derived from the audited consolidated financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America (U.S. GAAP).
Note 2. – Banking & Liquidity
In fiscal 2014, with the sale of the Company’s Aydin Displays, Inc and Z-Axis, Inc. subsidiaries, the Company repaid the majority of debt it owed, the line of credit and two term loans. Currently, the only remaining debt of the Company is $0.3 million owed on a building owned by its subsidiary, Teltron Technologies, Inc. in Birdsboro, PA.
The Company is currently operating using cash from operations and investing activities. The Company has a $19.0$15.0 million working capital balance at August 31,November 30, 2014, including $8.3$3.2 million in liquid assets and $20.8 million working capital balance at February 28, 2014, including $8.4 million in liquid assets.
The Company believes it can continue to operate the Company with existing cash flows for the current level of business. The Company has selected a new banking partner, Fifth Third Bank. The Company is transitioning its banking relationship to the new bank.
Note 3. – Recent Accounting Pronouncements
In May, 2014, the FASB issued ASU 2014-09“Revenue with Contracts from Customers”.ASU 2014-09 clarifies the principles for recognizing revenue and develops a common revenue standard for U.S. GAAP and IFRS. The new guidance(i)guidance (i) removes inconsistencies, and weaknesses in revenue requirements, (ii) provides a more robust framework for addressing revenue issues, (iii) improves comparability of revenue recognition practices across entities, industries, jurisdictions, and capital markets, (iv) provides more useful information to users of financial statements through improved disclosure requirements, and (v) simplifies the preparation of financial statements by reducing the number of requirements to which an entity must refer.
The guidance is effective for annual reporting periods beginning after December 15, 2016 including interim periods within that reporting period. The Company does not expect the adoption of this update to have a significant effect on the Company’s consolidated financial position or results of operations.
Video Display Corporation and Subsidiaries
August 31,November 30, 2014
(unaudited)
In April 2014, the FASB issued ASU 2014-08,“Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity”. ASU 2014-08 changes the criteria for determining which disposals can be presented as discontinued operations and modified related disclosure requirements. Under the new guidance, a discontinued operation is defined as: (i) a disposal of a component or group of components that is disposed of or is classified as held for sale that represents a strategic shift that has or will have a major effect on an entity’s operations and financial results or (ii) an acquired business or nonprofit activity that is classified as held for sale on the date of acquisition. The standard states that a strategic shift could include a disposal of (i) a major geographical area of operations, (ii) a major line of business, (iii) a major equity method investment, or (iv) other major parts of an entity. Under current U.S. GAAP, an entity is prohibited from reporting a discontinued operation if it has certain continuing cash flows or involvement component after the disposal. The new guidance eliminates these criteria.
The standard expands the disclosures for discontinued operations and requires new disclosures related to individually material disposals that do not meet the definition of a discontinued operation, an entity’s continuing involvement with a discontinued operation following the disposal date and retained equity method investments in a discontinued operation. The guidance is effective for annual periods beginning on or after December 15, 2014 and interim periods within that year. The Company does not expect the adoption of this update to have a significant effect on the Company’s consolidated financial position or results of operations.
Note 4. - Inventories
Inventories are stated at the lower of cost (first in, first out) or market. Inventories consisted of the following (in thousands):
| August 31, 2014 | February 28, 2014 | November 30, 2014 | February 28, 2014 | |||||||||||||
Raw materials | $ | 6,658 | $ | 7,906 | $ | 6,405 | $ | 7,906 | ||||||||
Work-in-process | 111 | 242 | 206 | 242 | ||||||||||||
Finished goods | 2,254 | 1,878 | 1,900 | 1,878 | ||||||||||||
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| 9,023 | 10,026 | 8,511 | 10,026 | |||||||||||||
Reserves for obsolescence | (284 | ) | (111 | ) | (376 | ) | (111 | ) | ||||||||
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| $ | 8,739 | $ | 9,915 | $ | 8,135 | $ | 9,915 | |||||||||
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Video Display Corporation and Subsidiaries
August 31,November 30, 2014
(unaudited)
Note 5. – Intangible Assets
Intangible assets consist primarily of the unamortized value of purchased patents, customer lists, non-compete agreements and other intangible assets. Intangible assets are amortized over the period of their expected lives, generally ranging from 5 to 15 years. Amortization expense related to intangible assets was approximately $63$94 thousand for the sixnine months ended August 31,November 30, 2014 and 2013, respectively.
The cost and accumulated amortization of intangible assets was as follows (in thousands).
| August 31, 2014 | February 28, 2014 | November 30, 2014 | February 28, 2014 | |||||||||||||||||||||||||||||
| Cost | Accumulated Amortization | Cost | Accumulated Amortization | Cost | Accumulated Amortization | Cost | Accumulated Amortization | |||||||||||||||||||||||||
Customer lists | $ | 2,863 | $ | 2,246 | $ | 2,863 | $ | 2,187 | $ | 2,863 | $ | 2,275 | �� | $ | 2,863 | $ | 2,187 | |||||||||||||||
Non-compete agreements | 1,000 | 1,000 | 1,000 | 1,000 | 1,000 | 1,000 | 1,000 | 1,000 | ||||||||||||||||||||||||
Patents | 233 | 229 | 233 | 225 | 233 | 232 | 233 | 225 | ||||||||||||||||||||||||
Other intangibles | 6 | 6 | 6 | 6 | 6 | 6 | 6 | 6 | ||||||||||||||||||||||||
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| $ | 4,102 | $ | 3,481 | $ | 4,102 | $ | 3,418 | $ | 4,102 | $ | 3,513 | $ | 4,102 | $ | 3,418 | |||||||||||||||||
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Note 6. – Long-Term Debt and Other Obligations
Long-term debt consisted of the following (in thousands):
| August 31, 2014 | February 28, 2014 | November 30, | February 28, | |||||||||||||
Mortgage payable to bank; interest rate at Community Bank’s Base rate plus 0.5% (3.75% as of August 31, 2014); monthly principal and interest payments of $5 thousand payable through October 2021; collateralized by land and building of Teltron Technologies, Inc. | 257 | 281 | ||||||||||||||
| 2014 | 2014 | |||||||||||||||
Mortgage payable to bank; interest rate at Community Bank’s Base rate plus 0.5% (3.75% as of November 30, 2014); monthly principal and interest payments of $5 thousand payable through October 2021; collateralized by land and building of Teltron Technologies, Inc. | 245 | 281 | ||||||||||||||
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| 257 | 281 | 245 | 281 | |||||||||||||
Less current maturities | (49 | ) | (48 | ) | (50 | ) | (48 | ) | ||||||||
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| $ | 208 | $ | 233 | $ | 195 | $ | 233 | |||||||||
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The Company had outstanding margin account borrowing of $3.8 million and $0.0$6.7 million as of August 31, 2014 andNovember 30, 2014. The Company had no margin account borrowing as of February 28, 2014, respectively.2014. The margin account borrowings are used to purchase marketable equity securities and are netted against the investments in the balance sheet to show net trading investments. The gross investments as of August 31,November 30, 2014 were $7.8$9.9 million leaving net investments of $4.1$3.2 million after the margin account borrowings of $3.7$6.7 million. The margin interest rate is 2%.
Video Display Corporation and Subsidiaries
August 31,November 30, 2014
(unaudited)
Note 7. – Supplemental Cash Flow Information
Supplemental cash flow information is as follows (in thousands):
| Six Months Ended August 31, | Nine Months Ended November 30, | |||||||||||||||
| 2014 | 2013 | 2014 | 2013 | |||||||||||||
Cash paid for: | ||||||||||||||||
Interest | $ | 28 | $ | 774 | $ | 54 | $ | 796 | ||||||||
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Income taxes, net of refunds | $ | 13 | $ | 32 | 40 | $ | 48 | |||||||||
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Stock grant related to the acquisition of StingRay56 | $ | — | $ | 166 | ||||||||||||
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Lexel Imaging Reacquisition - Accounts receivable | 473 | — | ||||||||||||||
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Lexel Imaging Reacquisition – Note receivable | 900 | — | ||||||||||||||
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Video Display Corporation and Subsidiaries
August 31,November 30, 2014
(unaudited)
Note 8. – Shareholder’s Equity
Earnings (Loss) Per Share
Basic earnings (loss) per share is computed by dividing income or loss available to common shareholders by the weighted average number of common shares outstanding during each period. Shares issued during the period are weighted for the portion of the period that they were outstanding. Diluted earnings (loss) per share is calculated in a manner consistent with that of basic earnings (loss) per share while giving effect to all potentially dilutive common shares that were outstanding during the period.
The following table sets forth the computation of basic and diluted earnings (loss) per share for the three and sixnine month periods ended August 31,November 30, 2014 and 2013 (in thousands, except per share data):
| Net Income (Loss) | Weighted Average Common Shares Outstanding | Earnings (Loss) Share | Net Income (Loss) | Weighted Average Common Shares Outstanding | Earnings (Loss) Share | |||||||||||||||||||
Six months ended August 31, 2014 | ||||||||||||||||||||||||
Basic | $ | 288 | 6,611 | $ | 0.04 | |||||||||||||||||||
Nine months ended November 30, 2014 | ||||||||||||||||||||||||
Basic-continuing operations | $ | (2,548 | ) | 6,517 | $ | (0.39 | ) | |||||||||||||||||
Basic-discontinued operations | 17 | 0.00 | ||||||||||||||||||||||
Effect of dilution: | ||||||||||||||||||||||||
Options | — | 15 | — | |||||||||||||||||||||
Diluted-continuing operations | ||||||||||||||||||||||||
Diluted-discontinued operations | — | 12 | — | |||||||||||||||||||||
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Diluted | $ | 288 | 6,626 | $ | 0.04 | $ | (2,531 | ) | 6,529 | $ | (0.39 | ) | ||||||||||||
Six months ended August 31, 2013 | ||||||||||||||||||||||||
Nine months ended November 30, 2013 | ||||||||||||||||||||||||
Basic-continuing operations | $ | (1,255 | ) | 7,589 | $ | (0.16 | ) | $ | (1,906 | ) | 7,589 | $ | (.25 | ) | ||||||||||
Basic-discontinued operations | 2,519 | 0.33 | 2,554 | .34 | ||||||||||||||||||||
Effect of dilution: | ||||||||||||||||||||||||
Diluted-continuing operations | — | — | — | — | — | — | ||||||||||||||||||
Diluted-discontinued operations | — | 28 | — | — | 28 | — | ||||||||||||||||||
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Diluted | $ | 1,264 | 7,617 | $ | .17 | $ | 648 | 7,617 | $ | .09 | ||||||||||||||
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Three months ended August 31, 2014 | ||||||||||||||||||||||||
Basic | $ | 149 | 6,372 | $ | 0.02 | |||||||||||||||||||
Three months ended November 30, 2014 | ||||||||||||||||||||||||
Basic-continuing operations | $ | (2,836 | ) | 6,257 | $ | (0.45 | ) | |||||||||||||||||
Basic-discontinued operations | 17 | 0.00 | ||||||||||||||||||||||
Effect of dilution: | ||||||||||||||||||||||||
Options | — | 75 | — | |||||||||||||||||||||
Diluted-continuing operations | ||||||||||||||||||||||||
Diluted-discontinued operations | — | 5 | — | |||||||||||||||||||||
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Diluted | $ | 149 | 6,447 | $ | 0.02 | $ | (2,819 | ) | 6,262 | $ | (0.45 | ) | ||||||||||||
Three months ended August 31, 2013 | ||||||||||||||||||||||||
Three months ended November 30, 2013 | ||||||||||||||||||||||||
Basic-continuing operations | $ | (804 | ) | 7,593 | $ | (0.10 | ) | $ | (651 | ) | 7,593 | $ | (.08 | ) | ||||||||||
Basic-discontinued operations | 2,304 | 0.30 | 35 | 0.00 | ||||||||||||||||||||
Effect of dilution: | ||||||||||||||||||||||||
Diluted-continuing operations | — | — | — | — | — | — | ||||||||||||||||||
Diluted-discontinued operations | — | 16 | — | — | 16 | — | ||||||||||||||||||
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Diluted | $ | 1,500 | 7,609 | $ | .20 | $ | (616 | ) | 7,609 | $ | (0.08 | ) | ||||||||||||
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Video Display Corporation and Subsidiaries
August 31,November 30, 2014
(unaudited)
Stock-Based Compensation Plans
For the six-monthnine-month period ended August 31,November 30, 2014 and 2013, the Company recognized general and administrative expenses of $4.5$6.3 thousand and $3.7$5.9 thousand, respectively, related to share-based compensation. The liability for the share-based compensation recognized is presented in the consolidated balance sheet as part of additional paid in capital. As of August 31,November 30, 2014, total unrecognized compensation costs related to stock options granted was $10.4$8.5 thousand. The unrecognized stock option compensation cost is expected to be recognized over a period of approximately 1 year.
The Company estimates the fair value of stock options granted using the Black-Scholes option-pricing model, which requires the Company to estimate the expected term of the stock option grants and expected future stock price volatility over the term. The term represents the expected period of time the Company believes the options will remain outstanding based on historical information. Estimates of expected future stock price volatility are based on the historic volatility of the Company’s common stock, which represents the standard deviation of the differences in the weekly stock closing price, adjusted for dividends and stock splits.
Ten thousandThe Company granted 10,000 and nineteen thousand19,000 options were granted during the sixnine month periods ended August 31,November 30, 2014 and 2013, respectively.
Stock Repurchase Program
The Company has a stock repurchase program, pursuant to which it had been authorized to repurchase up to 2,632,500 shares of the Company’s common stock in the open market. On January 20, 2014, the Board of Directors of the Company approved a one time continuation of the stock repurchase program, and authorized the Company to repurchase up to 1,500,000 additional shares of the Company’s common stock in the open market. There is no minimum number of shares required to be repurchased under the program. During the sixnine month period ended August 31,November 30, 2014, the Company purchased 626,740did purchase 1,027,936 shares at an average price of $3.63$3.37 per share and during the fiscal year ended February 28, 2014 the Company purchased 572,597 shares at an average price of $3.78 per share. Under this program, an additional 1,005,769604,573 shares remain authorized to be repurchased by the Company at August 31,November 30, 2014.
Note 9. – Income Taxes
The effective tax rate for the sixnine months ended August 31,November 30, 2013 and 2014 was 34.8%(31.9)% and (14.7)(3.0) %, respectively. These rates differ from the Federal statutory rate primarily due to the effect of the change in the valuation allowance on the net operating loss carry-forward, state taxes, the permanent non-deductibility of certain expenses for tax purposes, and research and experimentation credits. The disparity of the effective rate from August 31,November 30, 2013 compared to 2014 is due largely to the Company not qualifying for the Domestic Production Activities deduction, a reduction in state income taxes due to having a loss in earnings and of the change in the valuation allowance on the net operating loss carry- forward.carry-forward.
Note 10. – Discontinued Operations
On August 30, 2013, the Company completed the sale of the assets and the transfer of specified liabilities of the Company’s wholly-owned subsidiary, Aydin Displays Inc. (“Aydin”). Aydin’s assets were sold to a newly formed acquisition affiliate of Sparton Corp. for a combination of cash totaling $15 million, plus an additional earn-out potential
Video Display Corporation and Subsidiaries
November 30, 2014
(unaudited)
that could be in excess of $6 million dollars based upon the achievement of reaching certain projected levels of EBITDA generated by the “new” Aydin in the subsequent 12-month period to the August 30, 2013 closing. The sale provisions included a holdback of $1.2 million on the proceeds which was put into an escrow account until August 30, 2014. The Company received the funds in September. The Company recognized a gain on the sale of the Aydin assets of $2.9 million pre-tax. The potentialCompany did not earn an earn-out isas Aydin did not included inreach the gain recognized.necessary target. Along with the sale, the Company signed a lease agreement with the buyer, whereby the Company rented a building owned by another subsidiary of the Company to the buyer with no rent for a five year period. The Company deferred $0.6 million of the gain, and will recognize it as rental income over the five-year period. Aydin had net sales of $8.3 million and pre-tax net income of $0.5 million for the six months ending August 30, 2013 before the sale.
Video Display Corporation and Subsidiaries
August 31, 2014
(unaudited)
On January 16, 2014, the Company sold their wholly-owned subsidiary, Z-Axis, Inc. The sale includes Z-Axis as well as its BEAR Power Supplies and Boundless Technologies business units. Z-Axis, Inc. was sold to one of the subsidiary’s original founders for approximately $9 million in cash and a $1 million dollar note. The Company recognized a gain on the sale of $5.4 million pre-tax. Z-Axis, Inc. had $7.8 million in net sales and pre-tax net profit of $0.6 million for the ten and a half months of fiscal 2014 before the sale.
On March 26, 2014 with an effective date of February 28, 2014, the Company completed the sale of the Company’s wholly-owned subsidiary, Lexel Imaging, Inc. to Citadal Partners, LLC for approximately $3.9 million, consisting of $1.0 million cash payable over 180 days and included in current assets as a note and a guarantee to purchase $2.9 million in inventory over a five year period. Citadal Partners has not paid the balance of the $1.0 million. The Company and Citadal are considering arbitration to resolve the matter. The inventory was adjusted to its net realizable value as part of the sale. The Company recognized a loss on the sale of $4.4 million pre-tax. Lexel Imaging, Inc. had net sales of $ 7.6 million and a pre-tax net loss of $0.8 million for the twelve months ending February 28, 2014.
On November 16, 2014 the Company exercised the Company’s rights under the Security Agreement as Citadal was in default of the Promissory Note with the Company and the Company repossessed Lexel Imaging, Inc. Lexel Imaging, Inc. summarized financial information is included below for an accurate comparison of the business.
All of these companies’ net sales, expenses and net profits are being shown as discontinued operations per ASC 205-20-45“Reporting Discontinued Operations”. The operating income and cash flows from these businesses are reflected as discontinued operations in the consolidated financial statements for all periods presented. The Company has reclassified results that were previously included in continuing operations as discontinued operations for these businesses.
Video Display Corporation and Subsidiaries
November 30, 2014
(unaudited)
The summarized financial information for discontinued operations for the three and sixnine months ended August 31,November 30, 2013 and November 30, 2014, is as follows:
| Three months ending August 30, 2013 | Six months ending August 30, 2013 | Three months ended November 30, 2013 | Nine months ended November 30, 2013 | Three months ended November 30, 2014 | Nine months ended November 30, 2014 | |||||||||||||||||||
Net sales | 8,810 | 17,209 | 4,439 | 21,648 | 336 | 336 | ||||||||||||||||||
Cost of goods sold | 6,267 | 12,494 | 3,669 | 16,163 | 286 | 286 | ||||||||||||||||||
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Gross profit | 2,543 | 4,715 | 770 | 5,485 | 50 | 50 | ||||||||||||||||||
Operating expenses | ||||||||||||||||||||||||
Selling and delivery | 717 | 1,500 | 72 | 1,572 | — | — | ||||||||||||||||||
General and administrative | 1,256 | 2,395 | 745 | 3,140 | 24 | 24 | ||||||||||||||||||
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Total operating expenses | 1,973 | 3,895 | 817 | 4,712 | 24 | 24 | ||||||||||||||||||
Operating profit from discontinued operations | 570 | 820 | ||||||||||||||||||||||
Other income (expense) | 2,923 | 3,003 | ||||||||||||||||||||||
Operating profit (loss) from discontinued operations | (47 | ) | 773 | 26 | 26 | |||||||||||||||||||
Other income | 100 | 3,103 | — | — | ||||||||||||||||||||
Interest expense | (2 | ) | (6 | ) | — | (6 | ) | — | — | |||||||||||||||
Other, net | 2,921 | 2,997 | 100 | 3,097 | — | — | ||||||||||||||||||
Income from discontinued operations before income taxes | 3,491 | 3,817 | ||||||||||||||||||||||
Income tax expense | 1,187 | 1,298 | ||||||||||||||||||||||
Income from discontinued operations | 2,304 | 2,519 | ||||||||||||||||||||||
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Income (loss) from discontinued operations before income taxes | 53 | 3,870 | 26 | 26 | ||||||||||||||||||||
Income tax expense (benefit) | 18 | 1,316 | 9 | 9 | ||||||||||||||||||||
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Income (loss) from discontinued operations | 35 | 2,554 | 17 | 17 | ||||||||||||||||||||
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Video Display Corporation and Subsidiaries
November 30, 2014
(unaudited)
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the attached interim condensed consolidated financial statements and with the Company’s 2014 Annual Report to Shareholders, which included audited condensed consolidated financial statements and notes thereto as of and for the fiscal year ended February 28, 2014, as well as Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Video Display Corporation and Subsidiaries
August 31, 2014
(unaudited)
Overview
The Company is a worldwide leader in the manufacturing and distribution of a wide range of display devices, encompassing, among others, industrial, military, medical, and simulation display solutions. The Company is comprised of one segment - the manufacturing and distribution of displays and display components. The Company is organized into four interrelated operations aggregated into one reportable segment pursuant to the aggregation criteria of Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 280“Segment Reporting”:
During fiscal 2015, management of the Company is focusing key resources on strategic efforts to grow its business through internal sales or through niche acquisitions that enhance the profitability and sales of the Company’s more profitable product lines. Challenges facing the Company during these efforts include:
Liquidity - As of August 31,November 30, 2014, the Company is operating using cash from operations and investing activities. The Company believes it can operate the Company with existing cash flows for the current level of business. Should business increase dramatically or an acquisition candidate be found, the Company may need to find more permanent sources of capital to fund the growth.
Inventory management – The Company’s business units utilize different inventory components than the divisions had in the past. The Company has a monthly reserve at each of its divisions to offset any obsolescence although most purchases are for current orders, which should reduce the amount of obsolescence in the future. The Company still has CRT inventory in stock and, although it believes the inventory will be sold in the future, will continue to reserve for any additional obsolescence. Management believes the adequacy of its inventory reserves at August 31,November 30, 2014 and February 28, 2014 to be adequate.
Video Display Corporation and Subsidiaries
August 31,November 30, 2014
(unaudited)
Results of Operations
The following table sets forth, for the three and sixnine months ended August 31,November 30, 2014 and 2013, the percentages that selected items in the Statements of Operations bear to total sales:
| Three Months | Six Months | |||||||||||||||||||||||||||||||
| Ended August 31, | Ended August 31, | Three Months Ended November 30, | Nine Months Ended November 30, | |||||||||||||||||||||||||||||
| 2014 | 2013 | 2014 | 2013 | 2014 | 2013 | 2014 | 2013 | |||||||||||||||||||||||||
Sales | ||||||||||||||||||||||||||||||||
Simulation and Training | 57.6 | % | 65.4 | % | 56.1 | % | 51.3 | % | 70.2 | % | 41.1 | % | 61.2 | % | 47.7 | % | ||||||||||||||||
Data Display CRT | 23.4 | 16.7 | 19.6 | 15.8 | 24.9 | 15.4 | 21.5 | 15.7 | ||||||||||||||||||||||||
Broadcast and Control Centers | 3.0 | 1.3 | 7.6 | 17.7 | (0.3 | ) | 37.0 | 4.8 | 24.5 | |||||||||||||||||||||||
Cyber Secure Products | 16.0 | 16.6 | 16.7 | 15.2 | 5.2 | 6.5 | 12.5 | 12.1 | ||||||||||||||||||||||||
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Total Company | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||||||||||
Costs and expenses | ||||||||||||||||||||||||||||||||
Cost of goods sold | 99.5 | % | 91.4 | % | 84.2 | % | 94.1 | % | 81.0 | % | 93.9 | % | 83.1 | % | 94.0 | % | ||||||||||||||||
Selling and delivery | 10.3 | 14.7 | 8.6 | 12.6 | 8.3 | 10.0 | 8.5 | 11.7 | ||||||||||||||||||||||||
General and administrative | 29.8 | 27.0 | 25.2 | 18.2 | 31.6 | 19.9 | 27.5 | 18.8 | ||||||||||||||||||||||||
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| 139.6 | % | 133.1 | % | 118.0 | % | 124.9 | % | 120.9 | % | 123.8 | % | 119.1 | % | 124.5 | % | |||||||||||||||||
Operating loss | (39.6 | )% | (33.1 | )% | (18.0 | )% | (24.9 | )% | (20.9 | )% | (23.8 | )% | (19.1 | )% | (24.5 | )% | ||||||||||||||||
Interest income/expense | 0.2 | % | (12.6 | )% | 0.3 | % | (10.1 | )% | (0.0 | )% | (0.6 | )% | 0.2 | % | (6.8 | )% | ||||||||||||||||
Other income, net | 42.8 | (0.6 | ) | 21.7 | 6.7 | |||||||||||||||||||||||||||
Other income (loss), net | (60.0 | ) | 0.7 | (7.8 | ) | 4.6 | ||||||||||||||||||||||||||
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Income/(loss) before income taxes | 3.4 | % | (46.3 | )% | 4.0 | % | (28.3 | )% | ||||||||||||||||||||||||
Loss before income taxes | (80.9 | )% | (23.7 | )% | (26.7 | )% | (26.7 | )% | ||||||||||||||||||||||||
Income tax benefit | (2.4 | ) | (15.2 | ) | (0.6 | ) | (9.8 | ) | (1.2 | ) | (6.2 | ) | (0.8 | ) | (8.6 | ) | ||||||||||||||||
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Net income/ (loss) from continuing operations | 5.8 | (31.1 | ) | 4.6 | (18.5 | ) | ||||||||||||||||||||||||||
Net loss from continuing operations | (79.7 | ) | (17.5 | ) | (25.9 | ) | (18.1 | ) | ||||||||||||||||||||||||
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Income from discontinued operations, net of income tax | — | 89.1 | — | 37.1 | 0.5 | 0.9 | 0.2 | 24.3 | ||||||||||||||||||||||||
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Net income | 5.8 | % | 58.0 | % | 4.6 | % | 18.6 | % | ||||||||||||||||||||||||
Net income (loss) | (79.2 | )% | (16.6 | )% | (25.7 | )% | 6.2 | % | ||||||||||||||||||||||||
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Net sales
Consolidated net sales were down 7.4%6.3% for the sixnine months ended August 31,November 30, 2014 compared to the sixnine months ended August 31,November 30, 2013. Sales for the Company’s AYON Visual Solutions division werewas down 60.1%81.9% for the sixnine months ending August 31,November 30, 2014 when compared to last year’s sixnine months ending August 31,November 30, 2013. This division’s business is project driven and last year in the first quarter they completed aseveral large job for a cable news network,jobs, which they did not have this year. The industry this division operates in just completed a major trade show for the year and new quoting opportunities are being received for projects later this year. We expect this divisionRecently, AYON Visual Solutions has received a couple of medium sized orders and is expecting to improve over last year’s results by the end of the fiscal year.hear on several opportunities it has bid on. The CRT division increased their sales by 14.9%28.6% for the sixnine months ended August 31,November 30, 2014 over the sixnine months ended August 31,November 30, 2013 or $159$472 thousand due to overseas orders, last time buys and an increase within sales from their largest customer. The business with the largest customer is expected to continue for at least the next several years. This division’s primary business is in flight simulation. The Display Systems division showed a decreasean increase of 4.4% due to technical issues with a large project. These issues are expected to be resolved soon and this division is expected to have a profitable second half of the fiscal year. AYON CyberSecurity sales’ increased by 2.0%20.2% due to a large orderproject with a major government contractor. AYON CyberSecurity sales’ decreased by 2.7% due to a slowdown in orders from a government agency that shippedagencies in late May.the third quarter. This division is expected to exceed last year’s results due to the increases in the customer base.base due to its improved quality.
Gross margins
Consolidated gross profits increased by 146.6%165.1% for the sixnine months ended August 31,November 30, 2014 compared to the sixnine months ended August 31,November 30, 2013. The Company had an overall gross margin of 15.8%16.9% for the sixnine months ended August 31,November 30, 2014 compared to a 5.9%6.0% gross margin for the sixnine months ended August 31,November 30, 2013.
Video Display Corporation and Subsidiaries
August 31, 2014
(unaudited)
Every division showed an improvement in their gross margin percentage. The Company’s two new divisions, AYON Visual Solutions and AYON CyberSecurity, had lower gross margins than the other more established divisions. AYON Visual Solutions is a distributor of specialized displays, so it will consistently have lower margins than the other
Video Display Corporation and Subsidiaries
November 30, 2014
(unaudited)
manufacturers in the group as distributors typically operate on smaller margins. The Company expects AYON Visual Solutions gross margins to improve as they win bids on new projects. AYON CyberSecurity improved its gross margins by 16.0%7.1%, but still came in with a negative 35.4%56.2%. The division is still working to improve its efficiencies and cut costs in the manufacturing area of its business. As its revenues increase, management hopes to improve on their efficiencies of scale and generate more gross profit dollars. The Company is looking at ways to cut costs at this division including merging it with the VDC Display division. The Data Display division gross margins increased from 7.8%6.0% for the sixnine months ended August 31,November 30, 2013 to 21.5%34.8% for the sixnine months ended August 31,November 30, 2014, due to customer and product mix. They expect to have steady margins with their flight simulator customers while continuing to move slower moving items overseas at reduced margins. We would expect to see the margins remain above last year’s levels.
Operating expenses
Operating expenses as a percentage of sales increased from 30.8%30.5% for the sixnine months ended August 31,November 30, 2013 to 33.8%36.0% for the sixnine months ended August 31,November 30, 2014. This was primarily due to a decrease in the revenue base to absorb the corporate overhead. The Company was able to control fixed costs, such as rent and other administrative costs, on flat sales volumes. Overall operating expenses increased by $35.0$339.0 thousand. The Company expects to continue to contain these costs to remain at these levels for the upcoming fourth quarter of the fiscal year while increasing revenues.
Other income (expense)
The Company experienced a non-operating loss of $0.7 million during the nine months ended November 30, 2014. These losses were primarily driven by unrealized losses on trading investments of $2.7 million, offset by realized gains of $1.3 million, dividend income of $0.3 million and a gain on the sale of a building of $0.4 million.
Interest expense
The Company’s interest expense has decreased dramatically, as it no longer has a line of credit or any other debt except for a mortgage on a building it owns in Pennsylvania and borrowings related to margin account trading of securities. The interest expense for the sixnine months ending August 31,November 30, 2014, was $27.9$54.1 thousand compared to $686.4$710.0 thousand for the sixnine months ending August 31,November 30, 2013. The Company also had $70.1 thousand of interest income for the nine months ended November 30, 2014. The Company did not have any interest income for the nine months ended November 30, 2013.
Income taxes
The effective tax rate for the sixnine months ended August 31,November 30, 2013 and 2014 was 34.8%(31.9) % and (14.7)(3.0) %, respectively. These rates differ from the Federal statutory rate primarily due to the effect of the change in the valuation allowance on the net operating loss carry-forward, state taxes, the permanent non-deductibility of certain expenses for tax purposes, and research and experimentation credits. The disparity of the effective rate from August 31,November 30, 2013 compared to 2014 is due largely to the Company not qualifying for the Domestic Production Activities deduction, a reduction in state income taxes due to having a loss in earnings and of the change in the valuation allowance on the net operating loss carry- forward.carry-forward.
Liquidity and Capital Resources
In fiscal 2014, with the sale of the Company’s Aydin Displays, Inc and Z-Axis, Inc. subsidiaries, the Company repaid all remaining bank debt in January, 2014, except for the mortgage on a building owned by the Company’s Teltron, Inc. subsidiary, which included a line of credit and two term loans. At August 31,November 30, 2013, the Company had repaid all outstanding debt with PNC Bank except for $1.2 million on a term loan, $0.5 million owed to the CEO and the mortgage on the building in Birdsboro, PA. Currently, the only remaining debt of the Company is $0.3 million it owes on a building owned by its subsidiary, Teltron Technologies, Inc. in Birdsboro, PA.
Video Display Corporation and Subsidiaries
August 31,November 30, 2014
(unaudited)
The Company is currently operating using cash from operations and investing activities. The Company has a $19.0$15.0 million working capital balance at August 31,November 30, 2014 including $8.3$3.2 million in liquid assets and $20.8 million working capital balance at February 28, 2014, including $8.4 million in liquid assets.
The Company believes it can continue to operate the Company with existing cash flows for the current level of business. The Company has selected a new banking partner, Fifth Third Bank. The Company is transitioning its banking relationship to the new bank.
The Company continually monitors its cash and financing positions in order to find ways to lower its costs and to produce positive operating cash flow. The Company examines possibilities to grow its business through internal sales or niche acquisitions. There could be an impact on working capital requirements to fund this growth. As in the past, the intent is to finance such projects with operating cash flows; however, more permanent sources of capital may be required in certain circumstances.
Cash used by operations for the sixnine months ended August 31,November 30, 2014 was $0.8$0.6 million. The net incomeloss from operations was $0.3$(2.5) million and adjustments to reconcile net incomeloss to net cash were $1.1$1.6 million including unrealized loss on trading investments of $1.5, depreciation and reserves.amortization of $0.3 and inventory reserves of $0.3 less $0.4 for the gain on disposal of assets and $0.1 adjustment for deferred income taxes. Changes in working capital provided $0.3 million, primarily due to a decrease in inventories of $1.0$1.5 million a decrease in payables of $0.6 million andoffset by an increase in notesaccounts receivable of $0.5, and an decrease in accounts payable and accrued liabilities of $0.7 million. Cash used in operations for the sixnine months ended August 31,November 30, 2013 was $1.0$1.7 million.
Investing activities used cash of $1.8$6.3 million for the sixnine months ended August 31,November 30, 2014 primarily as a result of, $2.2$6.6 million from the net purchase of investments, offset byand $0.1 million for fixed asset acquisitions less the proceeds of $0.5 million from the sale of the former Chroma property,building of $0.5 million, compared to $15.5$15.4 million from the sale of the Company’s Aydin Displays subsidiary ($15.0 million) and, the sale of the Company’s Bossier City property ($0.5 million), and the use of $0.1 million on the purchase of equipment during the sixnine months ended August 31,November 30, 2013.
Financing activities provided cash of $1.6$3.4 million for the sixnine months ended August 31,November 30, 2014, due to the proceeds of margin account borrowings in the investment account of $3.9$6.9 million and the use of funds to repurchase treasury stock of $2.3$3.5 million, compared to cash used of $13.1$13.5 million for the sixnine months ended August 31,November 30, 2013, reflecting the borrowing of $14.3 million, the repayment of debt of $13.3 million and the reissuance of treasury stock of $0.2$28.0 million.
The Company has a stock repurchase program, pursuant to which it had been authorized to repurchase up to 2,632,500 shares of the Company’s common stock in the open market. On January 20, 2014, the Board of Directors of the Company approved a one time continuation of the stock repurchase program, and authorized the Company to repurchase up to 1,500,000 additional shares of the Company’s common stock in the open market. There is no minimum number of shares required to be repurchased under the program. During the sixnine month period ended August 31,November 30, 2014, the Company purchased 626,740did purchase 1,027,936 shares at an average price of $3.63$3.37 per share and during the fiscal year ended February 28, 2014 the Company purchased 572,597 shares at an average price of $3.78 per share. Under this program, an additional 1,005,769604,573 shares remain authorized to be repurchased by the Company at August 31,November 30, 2014.
Critical Accounting Estimates
Management’s Discussion and Analysis of Financial Condition and Results of Operations are based upon the Company’s interim condensed consolidated financial statements. These interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP).
Video Display Corporation and Subsidiaries
November 30, 2014
(unaudited)
These principles require the use of estimates and assumptions that affect amounts reported and disclosed in the interim
Video Display Corporation and Subsidiaries
August 31, 2014
(unaudited)
condensed consolidated financial statements and related notes. The accounting policies that may involve a higher degree of judgments, estimates, and complexity include reserves on inventories, revenue recognition, the allowance for bad debts and warranty reserves. The Company uses the following methods and assumptions in determining its estimates:
Reserves on Inventories
Reserves on inventories result in a charge to operations when the estimated net realizable value declines below cost. Management regularly reviews the Company’s investment in inventories for declines in value and establishes reserves when it is apparent that the expected net realizable value of the inventory falls below its carrying amount. Management reviews inventory levels on a quarterly basis. Such reviews include observations of product development trends of the original equipment manufacturers, new products being marketed, and technological advances relative to the product capabilities of the Company’s existing inventories. Management believes its inventory reserves at August 31,November 30, 2014 and February 28, 2014 to be adequate.
Revenue Recognition
Revenue is recognized on the sale of products when the products are shipped, all significant contractual obligations have been satisfied, and the collection of the resulting receivable is reasonably assured. The Company’s delivery term typically is F.O.B. shipping point.
In accordance with FASB ASC Topic 605-45 “Revenue Recognition: Principal Agent Considerations”, shipping and handling fees billed to customers are classified in net sales in the consolidated income statements. Shipping and handling costs incurred are classified in selling and delivery in the consolidated income statements.
Allowance for Doubtful Accounts
The allowance for doubtful accounts is determined by reviewing all accounts receivable and applying credit loss experience to the current receivable portfolio with consideration given to the current condition of the economy, assessment of the financial position of the creditors as well as payment history and overall trends in past due accounts compared to established thresholds. The Company monitors credit exposure and assesses the adequacy of the allowance for doubtful accounts on a regular basis. Historically, the Company’s allowance has been sufficient for any customer write-offs. Although the Company cannot guarantee future results, management believes its policies and procedures relating to customer exposure are adequate.
Warranty Reserves
The warranty reserve is determined by recording a specific reserve for known warranty issues and a general reserve based on claims experience. The Company considers actual warranty claims compared to net sales, then adjusts its reserve liability accordingly. Actual claims incurred could differ from the original estimates, requiring adjustments to the reserve. Management believes that its procedures historically have been adequate and does not anticipate that its assumptions are reasonably likely to change in the future.
Other Accounting Policies
Other loss contingencies are recorded as liabilities when it is probable that a liability has been incurred and the amount of the loss is reasonably estimable. Disclosure is required when there is a reasonable possibility that the ultimate loss will exceed the recorded provision. Contingent liabilities are often resolved over long time periods. Estimating probable losses requires analysis of multiple factors that often depend on judgments about potential actions by third parties.
Video Display Corporation and Subsidiaries
August 31,November 30, 2014
(unaudited)
Recent Accounting Pronouncements
In May, 2014, the FASB issued ASU 2014-09“Revenue with Contracts from Customers”.ASU 2014-09 clarifies the principles for recognizing revenue and develops a common revenue standard for U.S. GAAP and IFRS. The new guidance (i) removes inconsistencies, and weaknesses in revenue requirements, (ii) provides a more robust framework for addressing revenue issues, (iii) improves comparability of revenue recognition practices across entities, industries, jurisdictions, and capital markets, (iv) provides more useful information to users of financial statements through improved disclosure requirements, and (v) simplifies the preparation of financial statements by reducing the number of requirements to which an entity must refer.
The guidance is effective for annual reporting periods beginning after December 15, 2016 including interim periods within that reporting period. The Company does not expect the adoption of this update to have a significant effect on the Company’s consolidated financial position or results of operations.
In April 2014, the FASB issued ASU 2014-08,“Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity”. ASU 2014-08 changes the criteria for determining which disposals can be presented as discontinued operations and modified related disclosure requirements. Under the new guidance, a discontinued operation is defined as: (i) a disposal of a component or group of components that is disposed of or is classified as held for sale that represents a strategic shift that has or will have a major effect on an entity’s operations and financial results or (ii) an acquired business or nonprofit activity that is classified as held for sale on the date of acquisition. The standard states that a strategic shift could include a disposal of (i) a major geographical area of operations, (ii) a major line of business, (iii) a major equity method investment, or (iv) other major parts of an entity. Under the current U.S. GAAP, an entity is prohibited from reporting a discontinued operation if it has certain continuing cash flows or involvement component after the disposal. The new guidance eliminates these criteria.
The standard expands the disclosures for discontinued operations and requires new disclosures related to individually material disposals that do not meet the definition of a discontinued operation, an entity’s continuing involvement with a discontinued operation following the disposal date and retained equity method investments in a discontinued operation. The guidance is effective for annual periods beginning on or after December 15, 2014 and interim periods within that year. The Company does not expect the adoption of this update to have a significant effect on the Company’s consolidated financial position or results of operations.
Forward-Looking Information and Risk Factors
This report contains forward-looking statements and information that is based on management’s beliefs, as well as assumptions made by, and information currently available to management. When used in this document, the words “anticipate,” “believe,” “estimate,” “intends,” “will,” and “expect” and similar expressions are intended to identify forward-looking statements. Such statements involve a number of risks and uncertainties. These risks and uncertainties, which are included under Part I, Item 1A. Risk Factors in the Company’s Annual Report on Form 10-K for the year ended February 28, 2014 could cause actual results to differ materially.
Video Display Corporation and Subsidiaries
August 31, 2014
(unaudited)
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company’s primary market risks include changes in technology. The Company operates in an industry which is continuously changing. Failure to adapt to the changes could have a detrimental effect on the Company.
Video Display Corporation and Subsidiaries
November 30, 2014
(unaudited)
ITEM 4. CONTROLS AND PROCEDURES
Our disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) are designed to provide reasonable assurance that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act of 1934, such as this quarterly report on Form 10-Q, is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms. Our disclosure controls and procedures are also designed to ensure that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, to allow timely decisions regarding required disclosure.
Our chief executive officer and chief financial officer have conducted an evaluation of the effectiveness of our disclosure controls and procedures as of August 31,November 30, 2014. We perform this evaluation on a quarterly basis so that the conclusions concerning the effectiveness of our disclosure controls and procedures can be reported in our annual report on Form 10-K and quarterly reports on Form 10-Q. Based on this evaluation, our chief executive officer and chief financial officer have concluded that our disclosure controls and procedures were effective as of August 31,November 30, 2014.
Changes in Internal Controls
There have not been any changes in our internal controls over financial reporting (as such term is defined inRules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
Video Display Corporation and Subsidiaries
August 31,November 30, 2014
(unaudited)
Exhibit Number | Exhibit Description | ||
| 3(a) | Articles of Incorporation of the Company (incorporated by reference to Exhibit 3A to the Company’s Registration Statement on Form S-18 filed January 15, 1985). | ||
| 3(b) | By-Laws of the Company (incorporated by reference to Exhibit 3B to the Company’s Registration Statement on Form S-18 filed January 15, 1985). | ||
| 10(b) | Lease dated June 1, 2008 by and between Registrant (Lessee) and Ronald D. Ordway (Lessor) with respect to premises located at 4601 Lewis Road, Stone Mountain, Georgia. (incorporated by reference to Exhibit 10(b) to the Company’s 2009 Annual Report on Form 10-K) | ||
| 10(c) | Lease dated November 1, 2008 by and between Registrant (Lessee) and Ronald D. Ordway (Lessor) with respect to premises located at 1868 Tucker Industrial Road, Tucker, Georgia. (incorporated by reference to Exhibit 10(c) to the Company’s 2009 Annual Report on Form 10-K) | ||
| 10(d) | Purchase Agreement dated August 30, 2013 by and between the Company and Sparton, Inc. with respect to the sale of the Company’s Aydin Displays, Inc. subsidiary. (incorporated by reference to Exhibit 10(d) to the Company’s Current Report onForm 8-K dated September 5, 2013.) | ||
| 10(e) | Purchase Agreement dated January 16, 2014 by and between the Company and Z-Axis, Inc. with respect to the sale of the Company’s Z-Axis, Inc. subsidiary. (incorporated by reference to Exhibit Form 8-K dated January 22, 2014.) | ||
| 10(f) | Purchase Agreement dated March 26, 2014 by and between the Company and Citidal Partners, LLC, with respect to the sale of the Company’s Lexel Imaging, Inc. subsidiary. (incorporated by reference to Exhibit 10(f) to the Company’s Current Report onForm 8-K dated April 1, 2014.) | ||
Video Display Corporation and Subsidiaries
August 31, 2014
(unaudited)
| 10(j) | Video Display Corporation 2006 Stock Incentive Plan. (incorporated by reference to Appendix A to the Company’s 2006 Proxy Statement on Schedule 14A) | |
Video Display Corporation and Subsidiaries
November 30, 2014
(unaudited)
| 31.1 | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
31.2 | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
32.0 | Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
101.INS | XBRL Instance Document | |
101.SCH | XBRL Taxonomy Extension Schema Document | |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | |
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | |
101.LAB | XBRL Taxonomy Extension Label Linkbase Document | |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document | |
Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| VIDEO DISPLAY CORPORATION | ||||||
| By: | /s/ Ronald D. Ordway | |||||
| Ronald D. Ordway | ||||||
| Chief Executive Officer | ||||||
| By: | /s/ Gregory L. Osborn | |||||
| Gregory L. Osborn | ||||||
| Chief Financial Officer | ||||||
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