-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PGhC3d6rqz8SAuheoVdy9fRhqydu2lJ7z48ZmFjh6OKAZ/G7gE80q8g2M+21qCOn /h6TgFi4zlw36dx6RCbLtg== 0000912057-02-027545.txt : 20020716 0000912057-02-027545.hdr.sgml : 20020716 20020716150319 ACCESSION NUMBER: 0000912057-02-027545 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20020531 FILED AS OF DATE: 20020716 FILER: COMPANY DATA: COMPANY CONFORMED NAME: VIDEO DISPLAY CORP CENTRAL INDEX KEY: 0000758743 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRONIC COMPONENTS & ACCESSORIES [3670] IRS NUMBER: 581217564 STATE OF INCORPORATION: GA FISCAL YEAR END: 0228 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-13394 FILM NUMBER: 02703863 BUSINESS ADDRESS: STREET 1: 1868 TUCKER INDUSTRIAL DR CITY: TUCKER STATE: GA ZIP: 30084 BUSINESS PHONE: 7709382080 MAIL ADDRESS: STREET 1: 1868 TUCKER INDUSTRIAL DR CITY: TUCKER STATE: GA ZIP: 30084 10-Q 1 a2084541z10-q.txt FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OF THE SECURITIES EXCHANGE ACT OF 1934 For Quarter Ended MAY 31, 2002 Commission File Number 0-13394 VIDEO DISPLAY CORPORATION (Exact name of registrant as specified on its charter) GEORGIA 58-1217564 (State or other jurisdiction of (I.R.S.Employer incorporation or organization) Identification No.) 1868 TUCKER INDUSTRIAL DRIVE, TUCKER, GEORGIA 30084 (Address of principal executive offices) Registrant's telephone number including area code: 770-938-2080 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practical date:
CLASS OUTSTANDING AT MAY 31, 2002 - -------------------------- --------------------------- Common Stock, No Par Value 4,767,133
VIDEO DISPLAY CORPORATION AND SUBSIDIARIES INDEX
PAGE PART I FINANCIAL INFORMATION Item 1. Financial Statements Consolidated balance sheets - May 31, 2002 (unaudited) and February 28, 2002 (audited) 3-4 Consolidated statements of income - Three months ended May 31, 2002 and 2001 (unaudited) 5 Consolidated statements of shareholders' equity and comprehensive income - Twelve months ended February 28, 2002 (audited) and the three months ended May 31, 2002 (unaudited) 6 Consolidated statements of cash flows - Three months ended May 31, 2002 and 2001 (unaudited) 7 Notes to consolidated financial statements - May 31, 2002 (unaudited) 8-11 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12-15 Item 3. Quantitative and Qualitative Disclosure About Market Risk 15 PART II OTHER INFORMATION Item 1. Legal Proceedings 16 Item 2. Changes in Securities and Use of Proceeds 16 Item 3. Defaults upon its Senior Securities 16 Item 4. Submission of Matters to a Vote of Security Holders 16 Item 5. Other Information 16 Item 6. Exhibits and Reports on Form 8-K 16 SIGNATURES 17
2 VIDEO DISPLAY CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
MAY 31, FEBRUARY 28, 2002 2002 (UNAUDITED) (NOTE A) ------------ ------------ ASSETS Current Assets Cash and cash equivalents $ 857,000 $ 1,615,000 Accounts receivable, less allowance for possible losses of $429,000 and $343,000 13,510,000 12,712,000 Inventories (Notes D and G) 33,111,000 31,920,000 Prepaid expenses 2,899,000 3,276,000 ------------ ------------ Total current assets 50,377,000 49,523,000 ------------ ------------ Property, plant and equipment: Land 600,000 600,000 Buildings 6,899,000 6,814,000 Machinery and equipment 19,075,000 18,845,000 ------------ ------------ 26,574,000 26,259,000 Accumulated depreciation and amortization (17,284,000) (16,891,000) ------------ ------------ Net property, plant, and equipment 9,290,000 9,368,000 ------------ ------------ Other assets 2,533,000 2,950,000 ------------ ------------ Total assets $ 62,200,000 $ 61,841,000 ============ ============
The accompanying notes are an integral part of these statements. 3 VIDEO DISPLAY CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
MAY 31, FEBRUARY 28, 2002 2002 (UNAUDITED) (NOTE A) ------------ ------------ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Accounts payable $ 5,173,000 $ 4,808,000 Accrued liabilities 4,475,000 4,800,000 Lines of credit (Note F) 3,545,000 3,779,000 Notes payable to shareholders 7,522,000 7,124,000 Current maturities of long-term debt (Note E) 2,035,000 1,443,000 ------------ ------------ Total current liabilities 22,750,000 21,954,000 Convertible subordinated debentures 1,000,000 1,000,000 Lines of credit (Note F) 8,761,000 8,785,000 Long-term debt, less current maturities (Note E) 4,094,000 4,955,000 Notes payable to shareholders, less current maturities 197,000 217,000 Deferred income taxes 113,000 113,000 ------------ ------------ Total liabilities 36,915,000 37,024,000 ------------ ------------ Minority interests 166,000 158,000 Redeemable common stock (Note G) 100,000 -- COMMITMENTS -- -- SHAREHOLDERS' EQUITY Preferred stock, no par value - 2,000,000 shares authorized; none issued and outstanding -- -- Common stock, no par value - 10,000,000 shares authorized; 4,767,000 and 4,749,000 issued and outstanding 3,832,000 3,826,000 Additional paid in capital 92,000 92,000 Retained earnings 22,473,000 22,134,000 Accumulated other comprehensive loss (1,378,000) (1,393,000) ------------ ------------ Total shareholders' equity 25,019,000 24,659,000 ------------ ------------ Total liabilities and shareholders' equity $ 62,200,000 $ 61,841,000 ============ ============
The accompanying notes are an integral part of these statements. 4 VIDEO DISPLAY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
THREE MONTHS ENDED MAY 31, ---------------------------- 2002 2001 ------------ ------------ Net sales $ 18,819,000 $ 17,479,000 Cost of goods sold 12,713,000 12,078,000 ------------ ------------ Gross profit 6,106,000 5,401,000 ------------ ------------ Operating expenses Selling and delivery 2,027,000 1,470,000 General and administrative 3,357,000 3,055,000 ------------ ------------ 5,384,000 4,525,000 ------------ ------------ Operating profit 722,000 876,000 ------------ ------------ Other income (expense) Interest expense (251,000) (478,000) Other, net 108,000 (26,000) ------------ ------------ (143,000) (504,000) ------------ ------------ Income before minority interest 579,000 372,000 Minority interest expense 6,000 3,000 ------------ ------------ Income before income taxes 573,000 369,000 Income tax expense 234,000 135,000 ------------ ------------ Net income $ 339,000 $ 234,000 ============ ============ Basic and diluted earnings per share of common stock (Note H) $ 0.07 $ 0.05 ============ ============ Basic weighted average shares outstanding 4,756,000 4,556,000 ============ ============ Diluted weighted average shares outstanding 5,107,000 5,047,000 ============ ============
The accompanying notes are an integral part of these statements. 5 VIDEO DISPLAY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME FOR THE TWELVE MONTHS ENDED FEBRUARY 28, 2002 (AUDITED) AND THE THREE MONTHS ENDED MAY 31, 2002 (UNAUDITED)
ACCUMULATED CURRENT ADDITIONAL OTHER PERIOD COMMON PAID IN COMPREHENSIVE RETAINED COMPREHENSIVE STOCK CAPITAL INCOME EARNINGS INCOME ----- ------- ------ -------- ------ Balance at February 28, 2001 $ 3,034,000 $92,000 $(1,479,000) $20,952,000 Net income for the year - - - 1,182,000 $ 1,182,000 Unrealized loss on marketable equity securities - - (2,000) - (2,000) Foreign currency translation adjustment - - 88,000 - 88,000 -------------- Total comprehensive income $ 1,268,000 ============== Issuance of common stock under stock option plan 17,000 - - - Conversion of subordinated debentures to common stock 775,000 - - - --------------- ----------- ----------- ----------- -------------- Balance at February 28, 2002 3,826,000 92,000 (1,393,000) 22,134,000 Net income for the period - - - 339,000 $ 339,000 Issuance of common stock under stock option plan 6,000 - - - - Unrealized loss on marketable equity securities - - (2,000) - (2,000) Foreign currency translation adjustment - - 17,000 - 17,000 --------------- ----------- ----------- ----------- -------------- Balance at May 31, 2002 $3,832,000 $92,000 $(1,378,000) $22,473,000 $ 354,000 =============== =========== =========== =========== ==============
The accompanying notes are an integral part of these statements. 6 VIDEO DISPLAY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
THREE MONTHS ENDED MAY 31, -------------------------- 2002 2001 ----------- ----------- RECONCILIATION OF NET INCOME TO NET CASH USED IN OPERATING ACTIVITIES Net income $ 339,000 $ 234,000 ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH USED IN OPERATIONS: Depreciation and amortization 400,000 480,000 Provision for bad debts 86,000 (16,000) CHANGES IN WORKING CAPITAL, NET OF EFFECTS FROM ACQUISITIONS: Accounts receivable (884,000) (6,000) Inventories (1,092,000) (989,000) Prepaid expenses 393,000 (853,000) Accounts payable and accrued liabilities 44,000 20,000 Minority interests 8,000 2,000 ----------- ----------- Net cash used in operating activities $ (706,000) $(1,128,000) ----------- ----------- INVESTING ACTIVITIES Capital expenditures (316,000) (49,000) Other investing activities 391,000 (628,000) ----------- ----------- Net cash provided by (used in) investing activities 75,000 (677,000) ----------- ----------- FINANCING ACTIVITIES Proceeds from long-term debt and lines of credit 4,553,000 5,723,000 Proceeds from exercise of stock option 6,000 5,000 Payments on long-term debt and lines of credit (4,703,000) (5,900,000) ----------- ----------- Net cash used in financing activities (144,000) (172,000) ----------- ----------- Effect of exchange rates on cash 17,000 69,000 ----------- ----------- Net change in cash (758,000) (1,908,000) Cash, beginning of period 1,615,000 4,137,000 ----------- ----------- Cash, end of period $ 857,000 $ 2,229,000 =========== ===========
The accompanying notes are an integral part of these statements. 7 VIDEO DISPLAY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The consolidated financial statements include the accounts of the Company and its majority owned subsidiaries after elimination of all significant intercompany accounts and transactions. The balance sheet at February 28, 2002 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, the accompanying unaudited consolidated financial statements reflect all adjustments "consisting of only normal accruals" necessary to present fairly the Company's consolidated financial position as of May 31, 2002 and the Consolidated Statement of Income for the three months ended May 31, 2002 and 2001. NOTE B - ADOPTION OF RECENT ACCOUNTING PRONOUNCEMENTS In June 2001, the Financial Accounting Standards Board (the FASB) issued SFAS No. 141, Business Combinations, and SFAS No.142, Goodwill and Other Intangible Assets. SFAS No. 141 requires the use of the purchase method of accounting and prohibits the use of the pooling-of-interests method of accounting for business combinations initiated after June 30, 2001. This statement also requires that the Company recognize acquired intangible assets apart from goodwill if the acquired intangible assets meet certain criteria. SFAS No.142 requires, among other things, that companies no longer amortize goodwill, but instead test goodwill for impairment at least annually. In addition, SFAS No. 142 requires that the Company identify reporting units for purposes of assessing potential future impairments of goodwill, reassess the useful lives of other existing recognized finite-lived intangible assets, and cease amortization of intangible assets with an indefinite useful life. An intangible asset with an indefinite useful life should be tested for impairment in accordance with the guidance in SFAS No. 142. This statement is required to be applied in fiscal years beginning after December 15, 2001, to all goodwill and other intangible assets recognized at that date, regardless of when those assets were initially recognized. SFAS No. 142 requires the Company to complete a transitional goodwill impairment test within six months from the date of adoption and reassess the useful lives of other intangible assets within the first interim quarter after adoption. The Company adopted SFAS Nos. 141 and 142 on March 1, 2002, and accordingly, ceased amortization of goodwill at that time. At present, the Company is currently assessing, but has not yet determined, the complete impact the adoption of SFAS No. 141 and SFAS No. 142 will have on its financial position and results of operations. At May 31, 2002, the net book value recorded for goodwill was $1,132,000. NOTE C - ACCOUNTING STANDARDS NOT YET ADOPTED In August 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations. SFAS No. 143 covers all legally enforceable obligations associated with the retirement of tangible long-lived assets and provides the accounting and reporting requirements for such obligations. SFAS No. 143 is effective for the Company beginning March 1, 2003. The Company has not assessed the impact of this new statement on its financial position or results of operations. 8 VIDEO DISPLAY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE D - INVENTORIES Inventories are stated at the lower of cost (first in, first out) or market. Inventories consist of:
MAY 31, FEBRUARY 28, 2002 2002 ------------ ------------ Raw materials and work-in-process $ 12,234,000 $ 14,478,000 Finished goods 22,676,000 19,082,000 ------------ ------------ 34,910,000 33,560,000 Reserves for obsolescence (1,799,000) (1,640,000) ------------ ------------ $ 33,111,000 $ 31,920,000 ============ ============
NOTE E - LONG-TERM DEBT Long-term debt consisted of the following:
MAY 31, FEBRUARY 28, 2002 2002 ---------- ---------- Term loan facility; floating interest rate based on an adjusted LIBOR rate (4.34% as of May 31, 2002), quarterly principal payments commenced November 1999 and maturing November 2005; collateralized by assets of Aydin Display, Inc. $4,063,000 $4,375,000 Note payable to bank; interest rate of prime (4.75% as of May 31, 2002) plus 1.5% monthly principal payments of $9,000 payable through May 2010; collateralized by assets of XKD Corporation 641,000 656,000 Mortgage payable to bank; interest not to exceed 7.5% and maturing December 2003; collateralized by land and building of Fox International, Inc. 616,000 627,000 Mortgage payable to bank; interest rate of prime plus 0.5%; monthly principal and interest payments of $5,000 commenced in May 2002 and payable through October 2021; collateralized by land and building of Teltron Technologies, Inc. 598,000 509,000 Other 211,000 231,000 ---------- ---------- 6,129,000 6,398,000 Less current portion 2,035,000 1,443,000 ---------- ---------- $4,094,000 $4,955,000 ========== ==========
9 VIDEO DISPLAY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE F - LINES OF CREDIT AND SHORT-TERM DEBT At February 28, 2001, the Company had a $5,500,000 primary line of credit (the "Primary Line") and a $3,500,000 secondary line of credit (the "Secondary Line") secured by substantially all of the assets of the Company. The Primary Line's interest rate was at a fixed rate of 7.25% and the Secondary Line's interest rate is at Prime (4.75% as of May 31, 2002) plus one percent. Both lines were secured by substantially all of the assets of the Company and were limited by eligible accounts receivable and inventory, as defined by the agreements. As of February 28, 2001 the outstanding balances on the Primary and Secondary lines was $5,500,000 and $3,017,000, respectively. In May 2000, the Company entered into a $3,000,000 note payable (the "Lexel note") with its primary bank to finance the acquisition of Lexel. The note bore interest at LIBOR plus 2% and was guaranteed by the CEO of the Company. In May 2001, the Company and its primary bank agreed to consolidate the existing Primary Line and the $3,000,000 Lexel note into a $10,000,000 credit facility (the "amended Primary Line. The Secondary Line was to expire on December 31, 2001. On February 28, 2002, the Company negotiated an amendment to the Secondary Line. The term was extended until July 31, 2002 with principal reductions to $3,150,000 on March 31, 2002 and additional monthly principal payments of $100,000 from April through July 2002. The interest rate is based on the prime rate plus 2%. All other terms of the agreement remain essentially the same. As of May 31, 2002, the outstanding balance on the Primary Line was $9,261,000, of which $500,000 is classified as current, and the outstanding balance on the Secondary Line (all of which is classified as current) was $3,045,000. The interest rate on the amended Primary Line is based on a floating LIBOR rate (4.34% at May 31, 2002), based on a ratio of debt to EBITDA, as defined. The note matures on July 1, 2003. The amount of credit available for advance was reduced by $500,000 on July 1, 2001 and by an additional $500,000 on July 1, 2002. Advance rates remain the same as under the previous line, including a commitment fee of 0.25% for the unused portion. The new agreement contains affirmative and negative covenants, including requirements related to tangible net worth and debt service coverage. Additionally, dividend payments, capital expenditures and acquisitions have certain restrictions. Substantially all of the Company's retained earnings are restricted based upon these covenants. NOTE G - SUPPLEMENTAL CASH FLOW INFORMATION
THREE MONTHS ENDED ------------------- MAY 31, MAY 31, 2002 2001 -------- -------- Cash Paid for: Interest $331,000 $478,000 ======== ======== Income taxes, net of refunds $499,000 $229,000 ======== ======== Non-cash Transactions: Issuance of redeemable common stock for purchase of inventory $100,000 $ -- ======== ======== Conversion of convertible debentures to common stock $ -- $775,000 ======== ========
10 VIDEO DISPLAY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE H - STOCK DIVIDEND AND EARNINGS PER SHARE In March 2001, the Company's Board of Directors declared a stock dividend of 0.20 shares of common stock for each common share outstanding. The stock dividend was issued on April 16, 2001 to all common stock shareholders of record as of March 31, 2001. In accordance with SFAS No. 128, "Earnings per Share," all per share data for all periods presented in the consolidated financial statements reflect the increase in the amount of common stock outstanding resulting from the stock dividend. Basic earnings per share is computed by dividing income available to common shareholders by the weighted average number of shares outstanding during each period. Shares issued during the period are weighted for the portion of the period that they were outstanding. Diluted earnings per share is calculated in a manner consistent with that of basic earnings per share while giving effect to all dilutive potential common shares that were outstanding during the period. The following is a reconciliation from basic earnings per share to diluted earnings per share for each of the periods presented.
WEIGHTED AVERAGE SHARES EARNINGS PER NET INCOME OUTSTANDING SHARE ---------- -------------- ------------ Quarter ended May 31, 2002 Basic $ 339,000 4,756,000 $ 0.07 Effect of dilution: Options -- 111,000 Convertible debt 12,000 240,000 --------- --------- ------ Diluted $ 351,000 5,107,000 $ 0.07 ========= ========= ====== Quarter ended May 31, 2001 Basic $ 234,000 4,556,000 $ 0.05 Effect of dilution: Options -- 48,000 Convertible debt 22,000 443,000 --------- --------- ------ Diluted $ 256,000 5,047,000 $ 0.05 ========= ========= ======
11 VIDEO DISPLAY CORPORATION AND SUBSIDIARIES PART I ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the attached interim consolidated financial statements and with the Company's 2002 Annual Report to Stockholders, which included audited financial statements and notes thereto for the fiscal year ended February 28, 2002, as well as Management's Discussion and Analysis of Financial Condition and Results of Operations. RESULTS OF OPERATIONS The following table sets forth, for the three months ended May 31, 2002 and 2001, the percentages which selected items in the Statements of Income bear to total sales:
THREE MONTHS ENDED MAY 31, 2002 2001 ------- ------- Sales CRT Segment Data Display CRT's 12.5% 18.0% Entertainment CRT's 9.3 9.4 Electron Guns and Components 1.6 2.2 Monitors 56.6 49.8 Wholesale Consumer Parts Segment 20.0 20.6 ----- ------ 100.0% 100.0% Costs and expenses Cost of goods sold 67.6% 69.1% Selling and delivery 10.7 8.4 General and administrative 17.7 17.5 ----- ------ 96.0% 95.0% Income from Operations 4.0 5.0 Interest expense (1.4) (2.7) Other income (expense) 0.4 (0.2) ----- ------ Income before income taxes 3.0 2.1 Provision for income taxes (1.2) (0.8) ----- ------ Net income 1.8% 1.3% ===== ======
NET SALES Consolidated net sales increased $1,340,000 for the quarter ended May 31, 2002 as compared to the quarter ended May 31, 2001. CRT division sales increased $1,163,000 and wholesale division sales increased $177,000 for the comparative periods. 12 VIDEO DISPLAY CORPORATION AND SUBSIDIARIES CRT segment sales included increases within the monitor and entertainment divisions of $1,920,000 and $110,000 respectively for the comparative periods. Offsetting declines were posted to the data display and component parts divisions of $777,000 and $89,000 respectively for the same comparative periods. The increase in monitor division sales includes $245,000 related to the acquisition of XKD Corporation in June 2001. Additionally, the monitor division posted sales increases at the Display Systems and Lexel Imaging locations of $865,000 and $1,322,000 respectively. These increases reflect the effects of additions of product lines, including projection simulation, through acquisitions over the past 24 months. The slight increase within the entertainment division sales is primarily attributed to increased revenues in projection tube sales. The decline in sales within the data display and component parts divisions is primarily a result of declines in the international market. The increase in sales in the wholesale parts segment of $177,000 includes an increase of approximately $879,000 posted as a result of the distribution agreement with Applica Incorporated signed in the second quarter of fiscal 2002 whereby Fox International is authorized to distribute parts and accessories for the Black & Decker, Toaster Oven, Profinish, Quick and Easy, and Spacemaker product lines. The Company has also reached an agreement with Norelco, but the revenue impact was minimal in the first quarter of fiscal year 2003. The offsetting declines of approximately $700,000 are attributed to declines with major distributors and retail consumers, which is related to the effects of the economic downturn experienced in the U.S. during the last nine months. GROSS MARGINS Consolidated gross profit margins increased slightly to 32.4% from 30.9% for the quarter ended May 31, 2002 as compared to May 31, 2001. CRT segment margins remained relatively flat at 29.5% while the wholesale consumer parts segment increased to 44.0% from 35.1% for the comparable periods. Wholesale parts segment margins increased primarily due to the Applica Incorporated distribution agreement. Those revenues include a handling charge and shipping revenue, which accounts for approximately 70% profit margin before the effects of offsetting expenses reflected in operating expenses. Excluding the effects of the Applica profits, gross margins for this segment would be 36.2% as compared to 35.1% for the comparative periods ended May 31, 2002 and 2001, respectively. OPERATING EXPENSES Operating expenses as a percentage of sales increased to 28.4% for the quarter ended May 31, 2002 as compared to 25.9% for May 31, 2001. CRT segment operating expenses increased $425,000 or 1% as compared to net sales and the wholesale segment expenses increased $434,000 or 4.4% as compared to the net sales of the comparative period a year ago. CRT expenses increased $100,000 due to the XKD Corporation acquisition and $400,000 due to increases at the Display Systems location as a result of additional costs associated with the acquired projection simulation product lines. Wholesale segment expenses include increases of $315,000 in delivery expense as well as increases to warehousing rent and labor costs resulting from the additional costs associated with the Applica distribution agreement. 13 VIDEO DISPLAY CORPORATION AND SUBSIDIARIES INTEREST EXPENSE Interest expense decreased $227,000 in the first quarter of fiscal 2003 as compared to the first quarter of fiscal 2002. The Company maintains various debt agreements with different interest rates, most of which are based on the prime rate or LIBOR. These rates are lower for the comparative periods. INCOME TAXES The effective tax rate for the quarter ended May 31, 2002 is 40.8% as compared to 36.6% a year ago. FOREIGN CURRENCY TRANSLATION The Company's Mexican subsidiary reports on the basis of the functional currency as being the US dollar. Any exchange gains or losses due to the actual exchange of pesos and US dollars are currently reflected in the Company's income statements. There were no significant gains or losses for the current period reported. LIQUIDITY AND CAPITAL RESOURCES As of May 31, 2002, the Company had total cash and cash equivalents of $857,000. The Company's working capital was $27,627,000 and $27,569,000 at May 31, 2002 and February 28, 2002. The slight increase in working capital can be attributed primarily to the purchase of inventory with long term financing resources. Cash used in operations for the period ended May 31, 2002 was $706,000 as compared to cash used in operations of $1,128,000 in the same period a year ago. Net income for the first quarter ended May 31, 2002 adjusted for non-cash items provided cash of $825,000. Increases in accounts receivable and inventories used cash of $1,976,000 for the quarter ended May 31, 2002. During the quarter ended May 31, 2001, operating cash flows were provided primarily by net income adjusted for non-cash items of $698,000. Offsetting increases in accounts receivable, inventories, prepaid expenses, and other assets, and declines in accounts payable used cash of $1,826,000. The increase in accounts receivable of $884,000 during the first quarter of fiscal 2003 was due primarily to increased sales in the first quarter of fiscal 2003. The increase in inventories of $1,092,000 was primarily attributable to the purchase of inventory to support the new projection simulator product line in the Florida location as well as increased inventory requirements at the Lexel operation to support revenue growth. The decrease in prepaid expenses and increase in accounts payable and accrued liabilities reflects the net effects of tax payments in the first quarter of fiscal 2003. Investing activities provided $75,000 in the first quarter of fiscal 2003. Included in this were acquisitions of property plant and equipment of $316,000. Financing activities used $144,000 in the first quarter of fiscal 2003. There were no new debt agreements entered into in the first quarter of fiscal 2003. Available funds under current lines of credit and borrowings from the CEO provided cash used in operations. Additionally operations generated cash to pay down debt $149,000 during the first quarter of fiscal 2003. Subsequent to quarter end the Company repurchased 7,300 shares of common stock under its stock repurchase program. FORWARD-LOOKING INFORMATION 14 VIDEO DISPLAY CORPORATION AND SUBSIDIARIES This report contains forward-looking statements and information that is based on management's beliefs, as well as assumptions made by, and information currently available to management. When used in this document, the words "anticipate", "believe", "estimate", "intends", "will", and "expect" and similar expressions are intended to identify forward-looking statements. Such statements involve a number of risks and uncertainties. Among the factors that could cause actual results to differ materially are the following: business conditions, rapid or unexpected technological changes, product development, inventory risks due to shifts in product demand, competition, domestic and foreign government relations, fluctuations in foreign exchange rates, rising costs for components or unavailability of components, the timing of orders booked, lender relationships, and the risk factors listed from time to time in the Company's reports filed with the Commission. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK The Company's primary market risks include fluctuations in interest rates and variability in interest rate spread relationships, such as prime to LIBOR spreads. Approximately $26,131,000 of outstanding debt at May 31, 2002 related to long-term indebtedness under variable rate debt. Interest on the outstanding balance of this debt will be charged based on a variable rate related to the prime rate or the LIBOR rate. Both rate bases are incremented for margins specified in their agreements. Thus, the Company's interest rate is subject to market risk in the form of fluctuations in interest rates. The effect of a hypothetical one percentage point increase across all maturities of variable rate debt would result in an decrease of approximately $261,000 in pre-tax net income assuming no further changes in the amount of borrowings subject to variable rate interest from amounts outstanding at May 31, 2002. The Company does not trade in derivative financial instruments. The Company reports its Mexican subsidiary on the basis of the functional currency being the U.S. dollar as over 90% of the subsidiary's sales and purchases are with the parent with accounts receivable and accounts payable settled in U.S. dollars. Additionally, the subsidiary leases its facilities and incurs rent based upon U.S. dollars. Any exchange gains or losses due to the actual exchange of pesos and U.S. dollars are minimal. The Company also has a subsidiary in the U.K., which is not material, but uses the British pound as its functional currency. Due to its limited operations outside of the U.S., the Company's exposure to changes in foreign currency exchange rates between the U.S. dollar and foreign currencies or to weakening economic conditions in foreign markets is not expected to significantly effect the Company's financial position. 15 VIDEO DISPLAY CORPORATION AND SUBSIDIARIES PART II Item 1. Legal Proceedings No new legal proceedings or material changes in existing litigation occurred during the quarter ended May 31, 2002. Item 2. Changes in Securities and Use of Proceeds None. Item 3. Defaults upon Senior Securities None. Item 4. Submission of Matters to a Vote of Security Holders None Item 5. Other information None Item 6. Exhibits and Reports on Form 8-K The Company did not file any reports on Form 8-K during the quarter ended May 31, 2002. 16 SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereto duly authorized. VIDEO DISPLAY CORPORATION July 16, 2002 By: /s/ Ronald D. Ordway ------------------------- Ronald D. Ordway Chief Executive Officer By: /s/ Carol D. Franklin ------------------------- Carol D. Franklin Chief Financial Officer and Secretary 17 -----END PRIVACY-ENHANCED MESSAGE-----