ITEM 1. BUSINESS
GENERAL
Video Display Corporation (the "Company") principally manufactures and supplies cathode ray tubes ("CRTs") and related component parts and assemblies in the worldwide replacement market for use in data display screens, including computer monitors, medical monitoring equipment, military applications and various other data display applications and in television sets. The Company also acts as a wholesale distributor of electronic parts and CRTs purchased from domestic and foreign manufacturers.
DESCRIPTION OF PRINCIPAL BUSINESS
Video Display Corporation was incorporated in the State of Connecticut in 1975, and through a tax free reorganization became a Georgia corporation in 1984. The Company began its operations as a single recycling plant in Stone Mountain, Georgia providing replacement CRTs for color and black/white television sets. Beginning in 1983, with the growth of the computer industry, the Company expanded to meet the needs of the replacement market for computer monitors and other data display screens. To accomplish this objective, the Company acquired production equipment and customers from other smaller CRT remanufacturers. In fiscal 1993, the Company, through its Mexican subsidiary Video Electronics S.A. de C.V. ("Video Electronics"), obtained the CSA (Canadian Standards Association) and UL (Underwriters Laboratory) safety approvals for its recycled products. The Company and its plants in Louisiana, Pennsylvania, Georgia, Texas, New York and Monterrey, Mexico combine to form a national CRT-OEM (original equipment manufacturer) manufacturing and distribution network with recycling capabilities and many years of OEM production experience.
In fiscal 1996, the Company acquired the assets and assumed certain of the liabilities of Teltron Technologies, Inc. ("Teltron") and the stock of Z-Axis, Inc. ("Z-Axis"). Teltron is involved in the development and production of new and recycled camera and cathode ray tubes and special purpose sensors. Teltron's products are used in camera tube applications including nuclear inspection, UV sensing, x-ray, and astronomy; military applications including avionics instrument displays, marine radar displays, helmet mounted displays, vehicular displays, and target monitoring image tubes; and in cathode ray tube applications including OEM displays, flying spot scanners, photo typesetting and electrostatic deflection tube applications. Z-Axis is involved in the design and production of color and monochrome video display monitors. Z-Axis' monitors are used in industrial control, medical instruments, test equipment, visual aid devices, on-board tracking systems, point-of-sale terminals and naval tactical displays.
The Company, through its acquisitions of Southwest Vacuum Devices, Inc. ("Southwest") formerly of Tucson, Arizona, now located in Atlanta, Georgia; a majority interest in English based Video Display (Europe) Ltd. ("VDC, Ltd.") and the majority of the outstanding shares of Apex Electronics, Inc. ("Apex") of Passaic, New Jersey is involved in the manufacturing, marketing and distribution of electron guns and related hardware. The electron gun is the main component of a CRT and these companies give Video Display the ability to supply virtually all of its electron gun requirements.
In the late 1980's, the Company entered the market of wholesale distribution of consumer electronic parts and consumer products and accessories with the acquisition of Fox International Ltd., Inc. ("Fox") of Cleveland, Ohio and Vanco International, Inc. of Chicago, Illinois. Fox later added locations in Chicago, Illinois, Setauket, New York and Orlando, Florida (subsequently closed) by acquiring assets and existing leases of operating distributors. Upon acquiring these locations, Fox increased the total inventory lines and implemented the Company's operating policies so that all locations of Fox operate on a similar basis. Fox
is involved in the wholesale distribution of consumer electronic parts for most major U.S. and foreign electronic manufacturers.
Video Display Corporation continues to explore opportunities to expand the products offered in the replacement market. This expansion will be achieved by adding new products to its inventory or by acquiring existing companies which enhance the Company's position in the electronic replacement market. Research and development primarily consists of establishing the interchangeability of products from various manufacturers and when advantageous, manufacturing products to replace original electronic parts.
INDUSTRY SEGMENTS
This information is provided in the notes to consolidated financial statements, Note 9, Page.
PRODUCTS
CATHODE RAY TUBES ("CRTS")
Since its organization in 1975, Video Display Corporation has been engaged in the distribution and manufacture of CRTs using new and recycled CRT glass bulbs, primarily in the replacement market, for use in data display screens, including computer terminal monitors, medical monitoring equipment and various other data display applications and in television sets. The Company currently markets CRTs in over 3,000 types and sizes.
The Company's CRT operations are conducted at its facilities near Atlanta, Georgia, and at facilities located in: White Mills, Pennsylvania (Chroma); Bossier City, Louisiana (Novatron); Monterrey, Mexico (Video Electronics); Phelps, New York (Z-Axis); Birdsboro, Pennsylvania (Teltron); and Dallas, Texas (Magna View). At each facility, the Company acquires, primarily from its customers, used CRTs and recycles the glass bulb to meet original specifications.
The recycling process for monochrome CRTs involves the cleaning and reconditioning of the glass bulb and the insertion of new electronic components, which are purchased from original equipment manufacturers and the Company's electron gun subsidiaries. The Company's Atlanta and Monterrey, Mexico facilities also assemble monochrome CRTs using new glass bulbs obtained from suppliers in standard sizes where customer requirements warrant the higher cost of new glass. The recycling of color CRTs involves the insertion of new electronic components, while leaving the original display screen intact. All CRTs manufactured by the Company are tested for quality in accordance with standards approved by Underwriter's Laboratories, Inc. and are shipped to customers or warehoused to meet future customer demand. The Company provides one-year limited warranties on its computer and other data display CRTs and two- year limited warranties on its color television components. Management believes that the Company is the largest recycler of CRTs in the domestic replacement markets for both television and data display uses.
The Company also distributes new CRTs and other electronic tubes purchased from original manufacturers, both domestic and international. Some of these manufacturers offer large quantities of overstocked original manufactured tubes from time to time at significant price reductions. The Company acquires these tubes when the existing replacement market demonstrates adequate future demand and the purchase price allows a reasonable profit for the risk. However, these purchased inventories sometimes do not turn as quickly as other inventories. In fiscal 1998, distribution of new CRTs purchased from domestic and foreign manufacturers accounted for approximately sixty-five percent (65%) of the Company's data display CRT sales. Although the Company will continue to source CRTs from these manufacturers, it
believes that as the demand for data display CRTs increases, the environmental concerns and the cost benefits of recycling will result in an increasing percentage of the Company's sales from recycled CRTs.
The Company markets its products through approximately 250 independent wholesale electronics distributors located throughout the U.S. and sells directly to original equipment manufacturers and their service organizations. The Company also supplies, under private-brand labeling, many of the replacement tubes marketed by several national brand name television set manufacturers.
In late fiscal 1996, the Company obtained a contract from a prime contractor with the United States government to provide CRT's for the AWACS military aircraft. The Company expects revenues from this contract of approximately $1.5 million over three years. Through February 28, 1998, the Company has recognized $1,295,000 in revenues under the contract.
In addition to factors affecting the overall market for such products, the Company's sales volumes in both the color television and the data display CRT replacement markets are dependent upon the Company's ability to provide prompt response to customers' orders, while maintaining quality control and competitive pricing. While the Company's manufacturing activities are scheduled primarily around orders received, it also manufactures a wide variety of CRTs for stock inventory in anticipation of customer demand.
ELECTRON GUNS AND COMPONENTS
The Company through its electron gun manufacturing subsidiaries; Southwest, VDC, Ltd., and Apex; manufacture electron gun assemblies comprised of small metal and ceramic parts in a glass housing. The assembly process is highly labor intensive. While the particular electron guns being sold are of the Company's own design, most are replacements for electron guns previously designed for original equipment CRTs used in television sets and computer monitors. Therefore, the total amount of research and development expense is not significant and is not segregated in the consolidated financial statements, but is instead included in cost of sales. Raw materials consist of glass and metal stamped parts.
The Company, through its electron gun division, primarily markets electron gun component parts to OEM companies who manufacture high resolution and specialty tubes for unique applications. The majority of electron guns produced by this division is consumed internally among the Company's own CRT manufacturing facilities. Sales to these related divisions, which have been eliminated in the consolidated financial statements, amounted to approximately $520,000, $521,000 and $660,000 in fiscal 1998, 1997 and 1996, respectively.
Electron gun sales are historically dependent upon the demand by domestic and foreign television CRT remanufacturers. The Company continues to seek alternative growth oriented markets to fully utilize its electron gun and component assembly facilities.
ELECTRONIC PARTS
Fox distributes consumer electronic parts of most major consumer electronics manufacturers, both foreign and domestic. Fox resells these products to major electronic distributors, retail electronic repair facilities, third party contractual repair shops and directly to consumers. In its relationship with consumer electronic manufacturers, Fox receives the right, frequently exclusive, to ship parts to authorized dealers. Many of the manufacturers also direct inquiries for replacement parts to Fox. Each manufacturer requires a distributor to stock its most popular parts and monitors the order fill ratio to insure that their customers have access to sufficient replacement parts. Fox maintains very high fill ratios in order to secure favored distributor status from the manufacturers, requiring a significant investment in inventories. To a limited extent, Fox has the ability to rotate its state with certain vendors to mitigate any risk of investment in inventories.
The Company also imports, packages and distributes consumer electronic accessories for mobile and home audio, video, telephone, CB radio and general electronic usage through Vanco of Waukegan, Illinois. Approximately 95% of the product is purchased in bulk from various vendors in the Orient and repackaged in Vanco's warehouse for distribution. The Company primarily markets its products to retail electronic repair facilities, third party contractual repair shops and directly to the consumer. Many of the Company's customers are referred by the manufacturers. The Company also publishes a catalog which is primarily aimed at the small shop owner and the personal consumer. Some of the Company's products are resold by other distributors of electronic parts under the Vanco and Marmac product names.
RESEARCH AND DEVELOPMENT
The objective of the Company's research and development activities is to increase efficiency and quality in its manufacturing and assembly operations and to enhance its products by implementing new developments in cathode ray and electron optic technology. The Company's commercial and military divisions continue their research and development in advanced infrared imaging ("FLIR"). Recently, the Company has funded additional FLIR research in partnership with the University of Rhode Island. Potential future markets for FLIR include military and security surveillance, target acquisition, fire fighting, and industrial and medical thermography. Through fiscal 1998 the Company has not incurred significant costs for basic research or new product development and therefore, has not segregated them as a separate item but are included in the consolidated financial statements as a part of costs of goods sold. As the Company continues to increase its development of new technology, these costs will be monitored and separately categorized if material.
EMPLOYEES
As of February 28, 1998, the Company employed a total of 667 persons on a full time basis. Of these, 110 are employed in executive, administrative, and clerical positions, 57 are employed in sales and distribution, and 500 are employed in manufacturing operations. Of the Company's 667 employees, 264 are employed at the Company's Mexican subsidiary. None of the domestic employees are represented by a union, and the Company believes its employee relations to be satisfactory.
COMPETITION
Although the Company believes that it is the largest domestic recycler and distributor of recycled CRTs in the United States CRT replacement market, it competes with other CRT manufacturers, as well as OEM's, many of which have greater financial resources than the Company. The Company believes it is the only company that offers complete service in replacement markets with its manufacturing and recycling capabilities. As a wholesale distributor of original equipment purchased from other manufacturers, the Company also competes with numerous other distributors, as well as the manufacturers' own distribution centers, many of which are larger and have substantially greater financial resources than the Company. The Company's ability to compete effectively in this market is dependent upon its continued ability to respond promptly to customer orders and to offer competitive pricing. The Company expects that competition may increase, especially in the computer and other display replacement markets, should domestic and foreign competitors expand their presence in the domestic replacement markets.
Compared to domestic manufacturing prices on new CRTs, the Company's prices are competitive due to lower manufacturing costs associated with recycling the glass portion of previously used tubes which the Company obtains from customers and others at a fraction of the cost of new glass. The Company has, to date, been able to maintain competitive pricing with respect to imported CRTs because, generally, the CRT replacement market is characterized by customers requiring a variety of types of CRTs in quantities not sufficiently large enough to absorb the additional transportation costs incurred by foreign CRT manufacturers.
The Company believes it has a competitive advantage in providing CRTs to the U.S. government through its acquisition of Teltron as this operation has over thirty years experience in providing reliable products and services to the U.S. government.
The Company's competition in the consumer electronics parts segment comes primarily from other parts distributors. Many of these distributors are smaller than the Company but a few are of equal or greater sales size. Prices for major manufacturers' products can be directly affected by the manufacturers' suggested resale price. The Company feels that its service to customers and warehousing and shipping network give it a competitive advantage. Growth is expected in the product lines as the Company utilizes its advantages of offering a complete inventory of parts and service to all of its different customer groups.
ITEM 2.
ITEM 2. PROPERTIES
The Company leases its corporate headquarters at 1868 Tucker Industrial Drive in Tucker, Georgia (within the Atlanta metropolitan area) and occupies approximately 10,000 square feet of the total 59,000 square feet at this location. The remainder is utilized as warehouse and assembly facilities. This location as well as several others are leased from related parties at current market rates. See "Item 13 - Certain Relationships and Related Transactions".
The following table details manufacturing, warehouse, and administrative facilities:
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of the Company's security holders during the fiscal year ended February 28, 1998.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS
The Company's common stock is traded on the over-the-counter market under the symbol VIDE.
The following table shows the range of prices for the Company's common stock as reported by the National Association of Securities Dealers Automated Quotation System ("NASDAQ") for each quarterly period beginning on March 1, 1996.
There were approximately 1,100 holders of record of the Company's common stock as of May 26, 1998.
The Company has issued options to purchase shares of its common stock. For more specific information concerning the outstanding options, see "Item 11 - Executive Compensation" and the notes to the consolidated financial statements.
The Company has not paid dividends in the past. Payment of dividends in the future will be dependent upon the earnings and financial condition of the Company and other factors which the Board of Directors may deem appropriate. The Company is restricted by certain loan agreements regarding the payout of dividends.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth certain selected financial data with respect to the Company's last five fiscal years. This selected financial data should be read in conjunction with the consolidated financial statements of the Company and the notes thereto appearing elsewhere herein:
(a) Includes convertible debentures of $1,775,000 and $2,000,000 in fiscal 1998 and 1997, respectively.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995: Except for the historical information contained herein, the matters discussed herein are forward-looking statements that involve risk and uncertainties, including but not limited to (i) economic, competitive, governmental and technological factors affecting the Company's operations, markets, products, services and prices, and (ii) other factors discussed in the Company's filings with the Securities and Exchange Commission.
RESULTS OF OPERATIONS
The following table sets forth, for the years indicated, the percentages which selected items in the Statements of Income bear to total revenues:
FISCAL 1998 COMPARED TO FISCAL 1997
NET SALES
Consolidated net sales for fiscal 1998 increased $4,048,000 or 7.5% over fiscal 1997 net sales. Of this increase, the CRT segment sales increased $6,117,000 or 21.7%, which was offset by declines in sales of the combined distribution of consumer electronic parts segment had an offsetting decrease of $2,069,000 or 8.1%.
Within the CRT segment, data display CRT sales were up $4,193,000 or 21.8%, television CRT sales were up $1,857,000 or 23.1% and electron gun sales were up $67,000 or 6.9%. All divisions comprising the CRT segment contributed to the sales increases. One of the largest gains occurred within the television
CRT market with the Company being awarded a significant contract to perform the in warranty and out of warranty service of replacement parts. Additionally, sales increased at the Company's two newest data display division subsidiaries as they continued to expand their corresponding market share of commercial and military monitors. Also, the Company increased marketing efforts for projection and commercial data display tubes which benefited sales $1.5 million in the current year.
The wholesale consumer electronic parts segment sales decreased from the prior year. There was an overall decline in sales to major electronics distributors during the year of approximately $500,000. Additionally this division continued to see declining trends of small distribution and consumer shops being absorbed or eliminated by large discount chains. The Company is seeking other opportunities to increase higher margin consumer electronic sales including the development of a world wide web internet parts inquiry and order system to be completed in fiscal 1999.
GROSS MARGINS
Consolidated gross profit margins increased 11.1% in fiscal 1998 to 37.9% from 34.1% in fiscal 1997. CRT segment margins increased 14.9% to 38.6% and wholesale consumer electronics parts segment increased 5.2% to 36.4%.
The CRT segment margins are healthier due to the Company's ability to make significant bulk purchases of tubes, primarily television tubes, at significantly reduced prices and sell these tubes during the year. These tubes are purchased from OEMs at the end of their production runs for use in the replacement market. Additionally, the CRT segment had a higher plant utilization at several of its locations where an increase in volume did not correspondingly increase overhead rates and in some facilities direct labor costs, resulting in a favorable impact to the Company margins.
The increase in margins within the wholesale consumer electronic parts division has been impacted due to two factors; bulk purchases of merchandise at reduced prices as well as overall price increases within the consumer electronics accessories product line. Included within these higher margins were increases to the Company's inventory obsolescence reserve of $197,000 for the CRT segment and $85,000 for the wholesale segment.
The Company anticipates that margins will remain strong during fiscal 1999 if opportunities to purchases inventory at reduced prices and maximization of existing plant capacities continue.
OPERATING EXPENSES
Operating expenses increased $324,000 or 2.0% considering the effect of the annualization of expenses of the two subsidiaries acquired in fiscal 1997. However, overall, operating expenses decreased in fiscal 1998 4.4% to 25.9% as a percentage of sales.
Selling and delivery expenses decreased to $4,258,000 in spite of the increase in sales due to increased productivity of the sales staff without correlating increases in compensation as well as decreases in delivery expenses due to the Company's focus on less expensive delivery practices, especially within the wholesale parts division. Considering the effect of annualization discussed above, general and administrative expenses remained flat.
The Company continues to closely monitor expenses and seeks ways to reduce them.
INTEREST EXPENSE
Interest expense declined $75,000 even though debt has declined from $15,832,000 at February 28, 1997 to $11,945,000 at February 28, 1998. The major reduction in the debt occurred in the latter half of the year. In conjunction with the restructuring of the debt with banks, as discussed in Note 5 to the consolidated financial statements, a portion of the debt was refinanced at a slightly higher rate of prime plus 1% rather than prime plus 1/2%. Subsequent to fiscal 1998, a significant portion of the higher interest rate debt has been paid down and a significant portion of long term debt was refinanced at a fixed rate of 7.25%. Additionally, twelve months of interest expense was recognized in the current year related to the subordinated debentures whereas only nine months impacted 1997.
INCOME TAXES
The effective tax rate for fiscal 1998 was 38.4% compared to 28.9% in fiscal 1997. The major component of this increase is related to the nontaxable profit contribution via loss carryforward utilization of the Company's Mexican subsidiary being significantly less in fiscal 1998.
FISCAL 1997 COMPARED TO FISCAL 1996
Net Sales
Consolidated net sales in fiscal 1997 increased $5,753,000 or 12% as compared to the same period a year ago. CRT sales in fiscal 1997 increased $4,275,000 or 17.9%. The consumer electronic parts division sales increased $1,478,000 or 6.1% compared to a year ago.
The CRT division sales increased $4,275,000 or 17.9%. The acquisitions of Teltron and Z-Axis during fiscal 1997 contributed sales of $5,254,000 to the CRT division results. The offsetting decline of $979,000 includes a $571,000 decline in electron gun sales. This decline is primarily a result of the relocation of the Tucson, Arizona gun facility in March 1996 to Stone Mountain, Georgia. The gun facility did not resume full operations until late July 1996. Television grade CRTs sales declined $227,000 due primarily to a reduction of export sales and a decrease in customer demand for this type of tube.
The consumer electronics parts division sales increased $1,478,000 or 6.1%. This net increase is comprised of a net $2,748,000 increase in sales of replacement parts to major electronics distributors during the current fiscal year. The offsetting decline of $1,270,000 reflects the growing trend of certain customers, small distribution companies and consumer shops, being absorbed or eliminated by large discount chains. Sales in the fire and safety product line were flat in fiscal 1997.
GROSS MARGINS
Consolidated gross profit margins decreased from 37.2% to 34.1% for the fiscal year ended 1997. CRT division margins decreased from 34.6% to 33.4%. Included in the prior year margins were significant bulk purchases of television grade tubes at reduced prices. Such purchases were not available to the Company in fiscal 1997. The acquisitions of Z-Axis and Teltron in the current year also contributed to the decline in margins as these two subsidiaries have historically had lower margins than the Company's CRT division. Also included in fiscal 1997 CRT division margins are adjustments for inventory obsolescence of $180,000.
Margins for the consumer parts distribution division declined from 40% to 34.6%. Margins were negatively affected due to increased sales to major electronic distributors at lower margins. Additionally, margins in the fire and safety product line decreased as a result of increased price competition with a major competitor.
OPERATING EXPENSES
Operating expenses increased $205,000 or 1.4% compared to one year ago. Included in these increases are the operating expenses of the acquired CRT companies of $958,000. Offsetting decreases of $753,000 included advertising, delivery and long distance service expenses that were targeted by the Company's management and reduced in fiscal 1997.
INTEREST EXPENSE
Interest expense increased $146,000 or 12.8% in fiscal 1997 due to increased borrowings incurred in the current fiscal year. The borrowings were in conjunction with the two acquisitions the Company made in fiscal 1997 resulting in increased debt of $2,900,000. These borrowings are at rates slightly higher (prime plus 1%) than the term loan and revolving line of credit facilities which are at prime plus 1/2%.
INCOME TAXES
The Company's effective tax rate for fiscal 1997 was 28.9% compared to 34.2% in fiscal 1996. See Note 8 of the consolidated financial statements for a table indicating the items affecting the effective tax rate.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital was $16,441,000 and $13,784,000 at February 28, 1998 and February 28, 1997, respectively. During fiscal 1998, operations provided net cash of $6,635,000 of which $1,141,000 was used for capital expenditures and other investments and $3,951,000 was used primarily to reduce debt. During fiscal 1997 and 1996, operations provided net cash of $830,000 and $2,687,000, respectively, which was primarily used for capital expenditures in 1997 and to reduce debt in 1996.
Subsequent to the fiscal 1998 year, the Company renegotiated its interest rate with its primary lender. The Company was successful in negotiating a favorable reduction on its debt from prime plus 1/2% to a 7 1/4% fixed rate. The revolver was extended for two years. Additionally, subsequent to February 28, 1998, the Company acquired the inventory and fixed assets of Wintron, Inc. for $400,000.
The Company continues to monitor its cash and financing positions, seeking to find ways to lower its interest costs and to produce positive operating cash flow. As in prior years, as sales contracts or acquisitions present themselves, there could be an impact to working capital requirements. As in the past, the intent is to finance such projects with existing bank lines; however, longer more permanent sources of capital may be required in certain circumstances.
FOREIGN CURRENCIES
During 1998, the Company began reporting its Mexican subsidiary on the basis of the functional currency being the U.S. dollar. Any exchange gains or losses due to the actual exchange of pesos and U.S. dollars is currently reflected in the Company's income statement. There were no significant gains or losses for the current fiscal year.
YEAR 2000 RISKS
As is the case with other companies using computers in their operations, the Company is faced with the task of addressing the Year 2000 issue during the next two years. The "Year 2000 Issue" arises from the widespread use of computer programs that rely on two-digit date codes to perform computations or decision- making functions. Management believes that the costs associated with their computer systems becoming Year 2000 compliant will not be significant.
There can be no guarantee that the measures taken by the Company will solve the Year 2000 issue. Specific factors which prevent the risk to be neutralized include, but are not limited to, the ability of other companies on which the Company's systems rely to modify or convert their systems to be Year 2000 compliant, the ability to locate and correct all relevant computer codes and similar uncertainties.
MANAGEMENT ESTIMATES
The preparation of financial statements in conformity with Generally Accepted Accounting Principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Examples include provisions for returns, bad debts, inventory obsolescence and the length of product life cycles and fixed asset lives. Actual results could vary from these estimates.
FORWARD-LOOKING INFORMATION
This report contains forward-looking statements and information that is based on management's beliefs, as well as assumptions made by, and information currently available to management. When used in this document, the words "anticipate," "believe," "estimate," "intends," "will," and "expect" and similar expressions are intended to identify forward-looking statements. Such statements involve a number of risks and uncertainties. Among the factors that could cause actual results to differ materially are the following: business conditions, rapid or unexpected technological changes, product development, inventory risks due to shifts in product demand, competition, domestic and foreign government relations, fluctuations in foreign exchange rates, rising costs for components or unavailability of components, the timing of orders booked, lender relationships, and the risk factors listing from time to time in the Company's reports filed with the Commission.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," which supersedes SFAS No. 14, "Financial Reporting of Segments of a Business Enterprise". SFAS No. 131 establishes financial and reporting standards for the reporting of public companies of information about operating segments in annual financial statements and for the first time, requires reporting of selected information about operating segments in interim financial statements issued to the public. It also establishes standards for disclosures regarding products and services, geographic areas and major customers. SFAS 131 defines operating segments as components of a company about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources in assessing performance.
SFAS No. 131 is effective for financial statements for periods beginning after December 15, 1997 and requires the restatement of comparative information for earlier periods. Management has been evaluating the impact the new statement will have on future financial statement disclosures and has determined that the impact will not be significant.
IMPACT OF INFLATION
Inflation has not had a material effect on the Company's results of operations to date except for that discussed in the foreign currency section above.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this Item is submitted in a separate section of this report on pages through.
ITEM 9.
ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES.
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information contained in Video Display Corporation's Proxy Statement to be filed within 120 days of the Company's 1998 fiscal year end, with respect to directors and executive officers of the Company, is incorporated herein by reference in response to this item. In no event shall the information contained in Video Display Corporation's Proxy Statement under the heading "Compensation and Stock Option Committee Report" or under the heading "Performance Graph" be incorporated herein by reference.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The information contained in Video Display Corporation's Proxy Statement to be filed within 120 days of the Company's 1998 fiscal year end, with respect to executive compensation and transactions, is incorporated herein by reference in response to this item. In no event shall the information contained in Video Display Corporation's Proxy Statement under the heading "Compensation and Stock Option Committee Report" or under the heading "Performance Graph" be incorporated herein by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information contained in Video Display Corporation's Proxy Statement to be filed within 120 days of the Company's 1998 fiscal year end, with respect to security ownership of certain beneficial owners and management, is incorporated herein by reference in response to this item.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information contained in Video Display Corporation's Proxy Statement to be filed within 120 days of the Company's 1998 fiscal year end, with respect to certain relationships and related transactions, is incorporated herein by reference in response to this item.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
1. Financial Statements:
Index to Consolidated Financial Statements.
2. Financial Statement Schedule:
Index to Consolidated Financial Statements Schedule.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed by the registrant during the last quarter of the period covered by this Report.
(c) Exhibits
* Incorporated by reference to other documents on file with the Securities and Exchange Commission which were previously filed.
** Indicates executive compensation plans and arrangements.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: VIDEO DISPLAY CORPORATION
May 28, 1998 By: /s/ Ronald D. Ordway -------------------------------- Ronald D. Ordway Chairman of the Board and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Video Display Corporation and Subsidiaries
Index to Consolidated Financial Statements
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Video Display Corporation Tucker, Georgia
We have audited the consolidated balance sheets of Video Display Corporation and subsidiaries as of February 28, 1998 and 1997, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended February 28, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Video Display Corporation and subsidiaries as of February 28, 1998 and 1997, and the consolidated results of their operations and their cash flows for each of the three years in the period ended February 28, 1998, in conformity with generally accepted accounting principles.
BDO Seidman, LLP
Atlanta, Georgia May 22, 1998
Video Display Corporation and Subsidiaries
Consolidated Balance Sheets
See accompanying notes to consolidated financial statements.
Video Display Corporation and Subsidiaries
Consolidated Balance Sheets
See accompanying notes to consolidated financial statements.
Video Display Corporation and Subsidiaries
Consolidated Statements of Income
See accompanying notes to consolidated financial statements.
Video Display Corporation and Subsidiaries
Consolidated Statements of Shareholders' Equity
See accompanying notes to consolidated financial statements.
Video Display Corporation and Subsidiaries
Consolidated Statements of Cash Flows
See accompanying notes to consolidated financial statements.
Video Display Corporation and Subsidiaries
Notes to Consolidated Statements
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
Video Display Corporation (the "Company") principally manufactures and distributes cathode ray tubes ("CRTs") in the worldwide replacement market for use in television sets and data display screens, including computer monitors, medical monitoring equipment, and various other data display applications. The Company also manufactures and distributes electron guns and associated parts which are significant components in new and recycled CRTs. The Company also acts as a wholesale distributor of electronic parts and CRTs purchased from domestic and foreign manufacturers. The Company's operations are principally located in the U.S.; however, the Company does have subsidiary operations located in Mexico and the UK. The Mexican operations consist principally of purchasing monochrome CRTs from the Company, and recycling and selling the CRTs back to the Company.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and its majority-owned subsidiaries after elimination of all intercompany accounts and transactions.
CONCENTRATIONS OF RISK AND MAJOR CUSTOMERS
Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash and accounts receivable. At times such cash in banks are in excess of the FDIC insurance limit. During 1998, the Company's sales to any one customer did not exceed 10% of consolidated sales. One of the Company's wholesale electronic parts distributors had sales to one customer that comprised approximately 28% and 21% of that subsidiary's sales in 1998 and 1997, respectively. Also, one of the Company's CRT branches had sales to two customers that comprised 53% and 50% of that subsidiary's sales in 1998 and 1997, respectively. Additionally, other subsidiaries have a few concentrated customers and vendors that could, if lost, negatively effect sales. The Company attempts to minimize credit risk by reviewing all customers' credit history before extending credit, and by monitoring customers' credit exposure on a daily basis. The Company establishes an allowance for doubtful accounts receivable based upon factors surrounding the credit risk of specific customers, historical trends and other information.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Depreciation and amortization are computed principally by the straight line method for financial reporting purposes over the following estimated useful lives: Buildings - ten to twenty five years; Machinery and Equipment - five to ten years. Depreciation expense totaled approximately $1,139,000, $1,223,000, and $1,504,000 in 1998, 1997 and 1996, respectively.
Management reviews and assesses long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In performing the review for recoverability, management estimates the future cash flows expected to result from the use of the asset. If the sum of the undiscounted expected cash flows is less than the carrying amount of the asset, an impairment loss is recognized based upon the estimated fair value of the asset.
Video Display Corporation and Subsidiaries
Notes to Consolidated Financial Statements
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or market.
GOODWILL
Goodwill is the excess of the purchase price over the fair value of net assets acquired in business combinations accounted for as purchases. Goodwill is amortized over on a straight-line basis over the periods benefited, principally five to fifteen years.
The Company's operational policy for the assessment and measurement of any impairment in goodwill which is other than temporary is to evaluate the recoverability and remaining life and determine whether it should be completely written off or the amortization period accelerated. The Company will recognize an impairment if undiscounted estimated future operating cash flows of the acquired business are determined to be less than the carrying amount. The amount of impairment, if any, is measured based on projected discounted future operating cash flows using a discount rate reflecting the Company's average cost of funds.
FOREIGN CURRENCY TRANSLATIONS
Assets and liabilities of foreign subsidiaries are translated using the exchange rate in effect at the end of the year. Revenues and expenses are translated using the average of the exchange rates in effect during the year. Translation adjustments and transaction gains and losses related to long-term intercompany transactions are accumulated as a separate component of shareholders' equity. As of January 1, 1997, the Mexican economy qualified as highly inflationary and since that date the financial statements have been accounted for on the basis that the functional currency of the Mexican subsidiary is the U.S. dollar. The conversion of the functional currency has not had a material effect on the Company's consolidated financial statements.
EARNINGS PER SHARE
In March 1997, the FASB issued SFAS No. 128, "Earnings Per Share" ("SFAS 128"). The new standard simplifies the standards for computing earnings per share and requires presentation of two new amounts, basic and diluted earnings per share for all periods presented.
Basic earnings per share is computed by dividing income available to common shareholders by the weighted average number of shares outstanding during each year. Shares issued during the year are weighted for the portion of the year that they were outstanding. Diluted earnings per share is calculated in a manner consistent with that of basic earnings per share while giving effect to all dilutive potential common shares that were outstanding during the period.
Video Display Corporation and Subsidiaries
Notes to Consolidated Statements
The following is a reconciliation from basic earnings per share to diluted earnings per share for each of the last three years.
REVENUE RECOGNITION
Revenue from product sales are recognized when goods are shipped. The Company does not offer rights of return to customers; however, it does offer one-year and two-year limited warranties on certain products. Warranty expense is not material to the Company's consolidated financial statements.
FINANCIAL INSTRUMENTS
Fair values of cash and cash equivalents, short-term investments and short-term debt approximate cost due to the short period of time to maturity. The recorded amounts of long-term debt are considered to approximate fair value due to either rates which fluctuate with the market or are otherwise commensurate with the current market. Fair values of investments are based on quoted market prices or pricing models using current market rates which approximate carrying value.
USE OF ESTIMATES
The preparation of financial statements in conformity with Generally Accepted Accounting Principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Examples include provisions for returns, bad debts, inventory obsolescence and the length of product life cycles and fixed asset lives. Actual results could vary from these estimates.
Video Display Corporation and Subsidiaries
Notes to Consolidated Financial Statements
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on account, demand deposits and certificates of deposit with maturities of less than three months.
INVESTMENTS
The Company has an investment in an unconsolidated subsidiary which is accounts for under the cost method of accounting. The Company owns certain marketable equity securities which are recorded at fair value based upon quoted market prices and classified as available-for-sale securities under Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities". Changes in fair value of these marketable equity securities are reflected in the statements of shareholders' equity. Investments are included under the caption "Other Assets".
FISCAL YEAR
All references herein to "1998", "1997" and "1996" mean the fiscal years ended February 28, 1998, 1997, and February 29, 1996, respectively.
RECLASSIFICATION
Certain balances have been reclassified in the 1997 and 1996 consolidated financial statements to conform with the 1998 presentation.
NOTE 2. INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or market.
Inventories consist of:
NOTE 3. NOTE RECEIVABLE
The Company holds an unsecured note receivable as a result of a litigation settlement. The note has a face value of $1,500,000 due in monthly installments of $15,000 over a term of 100 months. The note is non-interest bearing for the first 50 payments and interest bearing, at prime plus 1%, over the remaining 50 payments. As of February 28, 1998, the note is recorded at a total of $749,000, net of its discount and allowance and is included under the captions "Accounts Receivable" and Other Assets".
Video Display Corporation and Subsidiaries
Notes to Consolidated Financial Statements
NOTE 4. LONG-TERM DEBT
Long-term debt consists of the following:
Future maturities of long-term debt are as follows:
NOTE 5. LINES OF CREDIT
During early 1998, the Company refinanced its loan agreement ("Agreement") to provide for a $4,500,000 line of credit with its primary bank and $3,500,000 with a second bank secured by substantially all assets of the Company. In conjunction with this refinancing, the Company borrowed $2,800,000 from the CEO, as discussed in Note 6, to pay down the original line of credit. The line of credit had a termination date of July 1, 1998. The line of credit bears interest at the bank's base rate (8.25% as of February 28, 1998 and 1997) plus 1/2%. A commitment fee of 1/2% is charged on the unused portion of the line of credit. Borrowings under the line of credit are limited by eligible accounts receivable and inventory, as defined. Total amount available under the lines of credit was approximately $2,521,000 as of February 28, 1998. The outstanding balance on the line was $5,279,000 as of February 28, 1998. The Agreement contains affirmative and negative covenants including requirements related to tangible net worth, indebtedness to tangible net worth, cash flow coverage, and restricts dividend payments, capital expenditures and acquisitions. Substantially all of the Company's retained earnings are restricted based upon these covenants.
Video Display Corporation and Subsidiaries
Notes to Consolidated Financial Statements
Subsequent to February 28, 1998, the Company amended its line of credit with the primary bank to extend the termination date to July 1, 2000 and to lower the interest rate to a fixed rate of 7.25% per annum. The commitment fee of 1/2% on the unused portion was also eliminated. All other terms remained the same as the original line of credit. The Company does not anticipate problems renewing the line of credit with the secondary bank.
NOTE 6. NOTES PAYABLE TO SHAREHOLDERS
During fiscal 1998, the Company borrowed $2,800,000 from the CEO in conjunction with the bank refinancing as discussed in Note 5. During 1997, the Company borrowed $900,000 from the CEO to purchase the assets of Teltron Technologies, Inc. Both of these borrowings were combined into one note payable due on demand with interest payable monthly at prime plus one percent. During fiscal 1998, $800,000 was repaid. Subsequent to February 28, 1998, the Company repaid an additional $1,600,000.
In fiscal 1997, the Company had a $320,000 demand note payable to a shareholder and officer of the Company. That note was repaid in full during fiscal 1998.
NOTE 7. STOCK OPTIONS
The Company has an incentive stock option plan whereby total options to purchase 500,000 shares may be granted to key employees at a price not less than fair market value at the time the options are granted and are exercisable beginning on the first anniversary of the grant date for a period not to exceed ten years. Information regarding the option plan is as follows:
The weighted average fair value of options granted during the years ended February 28, 1998 and 1997 were $44,000 and $197,000, respectively. The weighted average remaining life of options outstanding at February 28, 1998 and 1997 was 7.7 years. The range of exercise prices was $2.00 to $10.25. As of February 28, 1998 and 1997, options for 257,000 and 227,000 shares, respectively, were exercisable.
The Company has adopted the disclosure-only provisions of SFAS No. 123, "Accounting for Stock-Based Compensation". Accordingly, no compensation cost has been recognized for stock options granted. Had
Video Display Corporation and Subsidiaries
Notes to Consolidated Financial Statements
compensation cost been determined based on the fair value at the grant date for awards in 1998, 1997 and 1996, consistent with the provisions of the Standard, the Company's net earnings and earnings per share would have changed as indicated by the pro forma amounts below:
The fair value of stock options used to compute pro forma net income applicable to common shareholders and earnings per share disclosures is the estimated present value at grant date using the Black-Scholes option-pricing model with the following weighted average assumptions for 1998, 1997 and 1996, respectively: expected volatility of 50%, 50% and 49%; a risk free interest rate of 5.66%, 6.36% and 5.78%; expected lives of 2.5, 2.5 and 3.5 years; and dividend yield of 0.00% for all years.
NOTE 8. INCOME TAXES
The components of the provision for income taxes are as follows:
Deferred income taxes for the years ended February 28, 1998 and 1997, reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.
Video Display Corporation and Subsidiaries
Notes to Consolidated Financial Statements
The sources of the temporary differences and their effect on the net deferred tax asset as of February 28, 1998 and 1997, are as follows:
Deferred tax assets are included under the caption "Prepaid expenses and other". Management believes realization of deferred tax assets is more likely than not.
The effective income tax rate differed from the statutory federal income tax rate as follows:
NOTE 9. INDUSTRY SEGMENTS
The Company has two industry segments: (a) the manufacture and distribution of cathode ray tubes and electron guns in the replacement market and (b) the distribution of electronic parts from foreign and domestic manufacturers. The Company's sales activity is predominantly in the United States.
Identifiable assets by industry segment are those assets that are used in the Company's operations in each industry.
Video Display Corporation and Subsidiaries
Notes to Consolidated Financial Statements
The following table sets forth net sales, operating profit, identifiable assets, capital expenditures, and depreciation and amortization for each industry segment:
NOTE 10. CONVERTIBLE SUBORDINATED DEBENTURES
The Company issued $2,000,000 in face value, 8% five year convertible subordinated debentures in payment of the acquisition of the stock of Z-Axis. The debentures can be converted at the holder's option into common shares based upon the quoted fair market value on the date such conversion is elected. An additional amount of debentures may be due based upon a performance contingency formula during the years ending 1997, 1998 and 1999. Z-Axis did not meet the performance contingency for fiscal years ended 1998 and 1997. During 1998, $225,000 of these debentures were partially converted into common shares, with the remainder redeemed for cash of $75,000.
NOTE 11. BENEFIT PLAN
The Company has a defined contribution plan that covers substantially all U.S. employees. Employees may contribute up to 15% of their compensation, as allowed by IRS regulations. At the Company's discretion, employee contributions of up to 8% of their compensation can be matched at 50% by the Company. The
Video Display Corporation and Subsidiaries
Notes to Consolidated Financial Statements
Company elected to match 50% of the first 4% of compensation or $75,000 for fiscal 1998 and 50% of the first 2% of compensation, or $48,000 and $32,000, in fiscal 1997 and 1996, respectively.
NOTE 12. COMMITMENTS
The Company leases various manufacturing facilities and transportation equipment under leases classified as operating leases. These leases provide that the Company pay taxes, insurance and other expenses on the leased property and equipment. Rent expense under these leases was approximately $1,294,000, $1,405,000 and $1,364,000 in 1998, 1997 and 1996, respectively.
Future minimum rental payments due under these leases are as follows:
The Company leases five of its manufacturing facilities and certain warehouse space from shareholders and officers under net operating leases expiring at various dates through 2005. Rent expense under these leases totaled approximately $662,000, $661,000 and $562,000 in 1998, 1997 and 1996, respectively.
Future minimum rental payments due under these leases with related parties are as follows:
NOTE 13. SUPPLEMENTAL CASH FLOW INFORMATION
Video Display Corporation and Subsidiaries
Notes to Consolidated Financial Statements
NON-CASH TRANSACTIONS:
During 1997, the Company purchased all of the common stock of Z-Axis for $2,000,000 as follows:
Fair value of the assets acquired, including $2,422,000 goodwill Liabilities assumed (422,000) ------------- Issuance of subordinated debentures $2,000,000 =============
During 1997, the Company purchased all of the assets and assumed certain liabilities of Teltron for $963,000 as follows:
Fair value of the assets acquired $1,675,000 Liabilities assumed (712,000) Cash paid (63,000) ------------- Issuance of demand note payable $ 900,000 =============
During 1998, a holder of the series of Z-Axis convertible subordinated debentures exercised their right to convert their holding as follows:
30,000 shares of Video Display Corporation common stock at its fair market value on that date of $5 per share Cash paid 75,000 ------------- Subordinated debentures redeemed $ 225,000 =============
Video Display Corporation and Subsidiaries
Notes to Consolidated Financial Statements
NOTE 14. QUARTERLY DATA AND SHARE INFORMATION
The following table sets fourth, for the fiscal periods indicated, selected consolidated financial data and information regarding the market price per share of the Company's Common Stock.
The summation of quarterly earnings per share may not agree with annual earnings per share.
Video Display Corporation and Subsidiaries
Index to Consolidated Financial Statements Schedule
Report of Independent Certified Pubic Accountants on Financial Statements Schedule
Schedule II - Valuation and Qualifying Accounts and Reserves
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Video Display Corporation Tucker, Georgia
The audits referred to in our Report dated May 22, 1998 relating to the Consolidated Financial Statements of Video Display Corporation and subsidiaries which is contained in Item 8 of this Form 10-K, included the audit of the Financial Statement Schedule II (Valuation and Qualifying Accounts and Reserves) set forth in the Form 10-K. The Financial Statement Schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on the Financial Statement Schedule.
In our opinion, such schedule presents fairly, in all material respects, the information set forth therein.
BDO Seidman, LLP
Atlanta, Georgia May 22, 1998
VIDEO DISPLAY CORPORATION AND SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(a) Uncollectible accounts written off. (b) Obsolete inventory written off.