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(1) Overview
Headquartered in West Warwick, Rhode Island, Astro-Med Inc. designs, develops, manufactures and distributes a broad range of specialty printers and data acquisition and analysis systems. Our products are distributed through our own sales force and authorized dealers in the United States. We also sell to customers outside of the United States primarily through our branch offices in Canada and Europe as well as with independent dealers and representatives. Astro-Med, Inc. products are sold under the brand names Astro-Med ® Test & Measurement and QuickLabel ® Systems and are employed around the world in a wide range of aerospace, automotive, communications, chemical, food and beverage, military, industrial, and packaging applications.
Unless otherwise indicated, references to “Astro-Med,” the “Company,” “we,” “our,” and “us” in this Quarterly Report on Form 10-Q refer to Astro-Med, Inc. and its consolidated subsidiaries.
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(2) Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared by Astro-Med pursuant to the rules and regulations of the Securities and Exchange Commission, and reflect all adjustments consisting of normal recurring adjustments which, in the opinion of management, are necessary for a fair presentation of the results of the interim periods included herein. These financial statements do not include all disclosures associated with annual financial statements and, accordingly, should be read in conjunction with footnotes contained in the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2013.
On January 31, 2013, we completed the sale of substantially all of the assets of our Grass Technologies Product Group. Consequently, we have classified the results of operations of the Grass Technologies Product Group as discontinued operations for all periods presented. Refer to Note 14, “Discontinued Operations,” for further discussion.
Results of operations for the interim periods presented herein are not necessarily indicative of the results that may be expected for the full year.
The presentation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported and disclosed in the consolidated financial statements and accompanying notes. Some of the more significant estimates relate to the allowances for doubtful accounts and credits, inventory valuation, impairment of long-lived assets and goodwill, income taxes, share-based compensation and warranty reserves. Management’s estimates are based on the facts and circumstances available at the time estimates are made, past historical experience, risk of loss, general economic conditions and trends, and management’s assessments of the probable future outcome of these matters. Consequently, actual results could differ from those estimates.
Certain amounts in prior year’s financial statements have been reclassified to conform to the current year’s presentation.
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(3) Principles of Consolidation
The accompanying condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions are eliminated in consolidation.
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(6) Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market and include material, labor and manufacturing overhead. The components of inventories are as follows:
May 4, 2013 | January 31, 2013 | |||||||
(In thousands) | ||||||||
Materials and Supplies |
$ | 5,864 | $ | 6,654 | ||||
Work-In-Process |
1,525 | 591 | ||||||
Finished Goods |
4,366 | 3,934 | ||||||
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$ | 11,755 | $ | 11,179 | |||||
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(7) Income Taxes
The Company’s effective tax rates for income (loss) from continuing operations based on the projected effective tax rate for the full year, are as follows:
Three Months Ended | ||||
Fiscal 2014 |
42.1 | % | ||
Fiscal 2013 |
(34.7 | )% |
During the first quarter of fiscal 2014, the Company recognized an income tax benefit on the loss from continuing operations of approximately $319,000. During the three months ended April 28, 2012, the Company recognized income tax benefit on income from continuing operations of approximately $144,000 which included an expense of $141,000 on the quarter’s pretax income from continuing operations and a benefit of $285,000 related to the favorable resolution of a previously uncertain tax position.
As of May 4, 2013, the Company’s cumulative unrecognized tax benefits totaled $921,000 compared to $941,000 as of January 31, 2013. There were no developments affecting unrecognized tax benefits during the quarter ended May 4, 2013.
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(8) Line of Credit and Note Receivable
On January 30, 2012, the Company completed the sale of its label manufacturing operations in Asheboro, North Carolina to Label Line Ltd. The net sales price of $1,000,000 was received in the form of a promissory note issued by Label Line Ltd. and is fully secured by a first lien on various collateral, including the Asheboro plant and plant assets. The note bears interest at a rate equal to the lesser of (i) the United States prime rate as of January 30, 2013 plus 50 basis points or (ii) six percent per annum and is payable in sixteen quarterly installments of principal and interest commencing on January 30, 2013. The Note Receivable is disclosed at its present value on the accompanying condensed consolidated balance sheets for the periods ended May 4, 2013 and January 31, 2013.
The terms of the Asheboro sale also included an agreement for Astro-Med to provide Label Line Ltd. with additional financing in the form of a revolving line of credit in the amount of $600,000. This line of credit is fully secured by first lien on various collateral of Label Line Ltd., including the Asheboro plant and plant assets and bears interest at a rate equal to the United States prime rate plus an additional margin of two percent of the outstanding credit balance. The line of credit had an initial term of one-year from the date of the sale which may be extended for consecutive one-year terms on mutual agreement of both parties. On March 27, 2013, Astro-Med signed an agreement to extend this line of credit through January 30, 2014. As of May 4, 2013, $300,000 remains outstanding on this revolving line of credit.
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(9) Segment Information
Astro-Med reports two segments consistent with its sales product groups: Test & Measurement (T&M) and QuickLabel Systems (QuickLabel). On January 31, 2013, the Company completed the sale of substantially all of the assets of its Grass Technologies Product Group (Grass) in order to focus on its existing core businesses. Consequently, the Company has classified the results of operations of Grass as discontinued operations for all periods presented. Refer to Note 14, “Discontinued Operations for a further discussion.
The Company evaluates segment performance based on the segment profit before corporate expenses.
Summarized below are the Net Sales and Segment Operating Profit for each reporting segment:
Three Months Ended | ||||||||||||||||
Net Sales | Segment Operating Profit | |||||||||||||||
(In thousands) |
May 4, 2013 |
April 28, 2012 |
May 4, 2013 |
April 28, 2012 |
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T&M |
$ | 4,089 | $ | 3,972 | $ | 201 | $ | 543 | ||||||||
QuickLabel |
11,396 | 10,364 | 891 | 903 | ||||||||||||
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Total |
$ | 15,485 | $ | 14,336 | 1,092 | 1,446 | ||||||||||
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Product Replacement Related Costs |
672 | — | ||||||||||||||
Corporate Expenses |
1,142 | 1,018 | ||||||||||||||
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Operating Income (Loss) |
(722 | ) | 428 | |||||||||||||
Other Expense—Net |
(36 | ) | (13 | ) | ||||||||||||
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Income (Loss) From Continuing Operations Before Income Taxes |
(758 | ) | 415 | |||||||||||||
Income Tax Benefit |
(319 | ) | (144 | ) | ||||||||||||
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(439 | ) | 559 | ||||||||||||||
Income (Loss) From Discontinued Operations, Net of Income Taxes |
(10 | ) | 278 | |||||||||||||
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Net Income (Loss) |
$ | (449 | ) | $ | 837 | |||||||||||
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(10) Recent Accounting Pronouncements
Comprehensive Income
In February 2013, the Financial Standards Accounting Board issued Accounting Standard Update 2013-02, (“ASU-2013-02”) “Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income,” which requires entities to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, entities are required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income, entities are required to cross-reference to other disclosures that provide additional detail on these amounts. ASU 2013-02 was effective prospectively for reporting periods beginning after December 15, 2012. We adopted this guidance in our first quarter ending May 4, 2013 and have provided the disclosure required in Note 13. Since ASU 2013-02 only impacts presentation and disclosure requirements, the adoption of this guidance did not have a material impact on the Company’s financial position or results of operations.
No other new accounting pronouncements, issued or effective during the first quarter of the current year, have had or are expected to have a material impact on our consolidated financial statements.
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(11) Securities Available for Sale
Pursuant to our investment policy, securities available for sale include state and municipal securities with various contractual or anticipated maturity dates ranging from one to 26 months. Securities available for sale are carried at fair value, with unrealized gains and losses reported as a component of accumulated other comprehensive income (loss) in shareholders’ equity until realized. Realized gains and losses from the sale of available for sale securities, if any, are determined on a specific identification basis. A decline in the fair value of any available for sale security below cost that is determined to be other than temporary will result in a write-down of its carrying amount to fair value. No such impairment charges were recorded for any period presented. All short-term investment securities have original maturities greater than 90 days.
The fair value, amortized cost and gross unrealized gains and losses of the securities are as follows:
(In thousands) | Amortized Cost | Gross Unrealized Gains |
Gross Unrealized Losses |
Fair Value | ||||||||||||
May 4, 2013 |
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State and Municipal Obligations |
$ | 20,090 | $ | 12 | $ | (2 | ) | $ | 20,100 | |||||||
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January 31, 2013 |
Amortized Cost | Gross Unrealized Gains |
Gross Unrealized Losses |
Fair Value | ||||||||||||
State and Municipal Obligations |
$ | 8,499 | $ | 10 | $ | — | $ | 8,509 | ||||||||
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(12) Fair Value
We measure our financial assets at fair value on a recurring basis in accordance with the guidance provided in ASC 820, “Fair Value Measurement and Disclosures” which defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). In addition, ASC 820 establishes a three-tiered hierarchy for inputs used in management’s determination of fair value of financial instruments that emphasizes the use of observable inputs over the use of unobservable inputs by requiring that observable inputs be used when available. Observable inputs are inputs that reflect management’s belief about the assumptions market participants would use in pricing a financial instrument based on the best information available in the circumstances.
The fair value hierarchy is summarized as follows:
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Level 1—Quoted prices in active markets for identical assets or liabilities; |
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Level 2—Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and |
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Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. |
Cash and cash equivalents; accounts receivables; line of credit receivable; notes receivable; accounts payable; accrued compensation and other expenses and income tax payable are reflected in the condensed consolidated balance sheet at carrying value, which approximates fair value due to the short term nature of the these instruments.
Assets measured at fair value on a recurring basis are summarized below:
(In thousands) | ||||||||||||||||
May 4, 2013 |
Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Money Market Funds (included in Cash and Cash Equivalents) |
$ | 7,043 | $ | — | $ | — | $ | 7,043 | ||||||||
State and Municipal Obligations (included in Securities Available for Sale) |
20,100 | — | — | 20,100 | ||||||||||||
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Total |
$ | 27,143 | $ | — | $ | — | $ | 27,143 | ||||||||
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January 31, 2013 |
Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Money Market Funds (included in Cash and Cash Equivalents) |
$ | 8,784 | $ | — | $ | — | $ | 8,784 | ||||||||
State and Municipal Obligations (included in Securities Available for Sale) |
8,509 | 8,509 | ||||||||||||||
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Total |
$ | 17,293 | $ | — | $ | — | $ | 17,293 | ||||||||
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For our money market funds and state and municipal obligations, we utilize the market approach to measure fair value. The market approach is based on using quoted market prices for identical assets.
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(13) Accumulated Other Comprehensive Income
The changes in the balance of accumulated other comprehensive income by component are as follows:
(In thousands) | Foreign Currency Translation Adjustments |
Unrealized Holding Gain (Loss) on Available for Sale Securities |
Total | |||||||||
Balance at January 31, 2013 |
$ | 166 | $ | 7 | $ | 173 | ||||||
Other Comprehensive Income (Loss) |
(154 | ) | (1 | ) | (155 | ) | ||||||
Amounts reclassified to Net Income |
— | — | — | |||||||||
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Net Other Comprehensive Income (Loss) |
(154 | ) | (1 | ) | (155 | ) | ||||||
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Balance at May 4, 2013 |
$ | 12 | $ | 6 | $ | 18 | ||||||
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The amounts presented above in other comprehensive income are net of taxes.
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(14) Discontinued Operations
On January 31, 2013, the Company completed the sale of substantially all of the assets of its Grass Technologies Product Group (Grass) which manufactured polysomnography and electroencephalography systems and related accessories and propriety electrodes for use in both research and clinical settings. The assets sold consisted primarily of working capital (exclusive of inventory and accounts payable related to manufacturing), the engineering, sales and support workforce, intellectual property and certain other related assets. The proceeds from the sale consisted of $18.6 million in cash, of which $1.8 million is being held in escrow for twelve months following the closing date of the transaction in order to provide indemnity to the purchaser in the event of any breach in the representations, warranties and covenants of Astro-Med and is fully reserved for in Other Accrued Expenses in the accompanying condensed consolidated balance sheets.
As part of this transaction, Astro-Med entered into a Transition Service Agreement with the purchaser pursuant to which the Company will provide transition services and continue to manufacture Grass products for the purchaser for a period of between nine and twelve months following the closing date, after which the purchaser will acquire any remaining inventory. The Company has determined that cash flows from this activity will not be significant and therefore Grass has been presented as a discontinued operation for all periods presented.
Results for discontinued operations are as follows:
May 4, 2013 |
April 28, 2012 |
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(In thousands) | ||||||||
Net Sales |
$ | 1,745 | $ | 4,089 | ||||
Gross Profit |
$ | 48 | $ | 1,872 | ||||
Net Income (Loss) from Discontinued Operations |
$ | (10 | ) | $ | 278 |
As a result of the sale of the Grass assets, the Company is in the process of selling its facility located in Rockland, Massachusetts, which was the former location of Grass production. This property is being actively marketed with sale considered probable within the next twelve months and as such, the property is classified as an asset held for sale in the accompanying condensed consolidated balance sheets.
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(15) Commitments and Contingencies
Product Replacement Program
In April 2013, tests conducted by the Company revealed that one of its suppliers had been using non-conforming material in the cover of the power supply used in certain models of Astro-Med’s Test & Measurement printers. No malfunctions have been reported by customers as a result of the non-conforming material.
Upon identifying this issue, Astro-Med immediately suspended production of the printers, notified all customers and contacted the supplier who confirmed the problem. Astro-Med is working with its customers to replace the non-conforming material on existing printers with conforming material and will do this on a gradual basis over several months. The estimated the costs associated with the replacement program is $672,000, which was based upon the number of printers shipped during the period the non-conforming material was used. Those costs and the related reserve have been recognized and recorded in the current quarter and are included in the accompanying condensed consolidated financial statements.
Astro-Med is currently receiving power supplies with compliant materials and has resumed printer production and shipments to customers.
Since Astro-Med’s vendor deviated from the agreed upon specifications for the power supply while providing certificates of conformance to the original specifications, the Company intends to seek full recovery from the supplier for all costs and any other damages associated with this issue.
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Comprehensive Income
In February 2013, the Financial Standards Accounting Board issued Accounting Standard Update 2013-02, (“ASU-2013-02”) “Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income,” which requires entities to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, entities are required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income, entities are required to cross-reference to other disclosures that provide additional detail on these amounts. ASU 2013-02 was effective prospectively for reporting periods beginning after December 15, 2012. We adopted this guidance in our first quarter ending May 4, 2013 and have provided the disclosure required in Note 13. Since ASU 2013-02 only impacts presentation and disclosure requirements, the adoption of this guidance did not have a material impact on the Company’s financial position or results of operations.
We measure our financial assets at fair value on a recurring basis in accordance with the guidance provided in ASC 820, “Fair Value Measurement and Disclosures” which defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). In addition, ASC 820 establishes a three-tiered hierarchy for inputs used in management’s determination of fair value of financial instruments that emphasizes the use of observable inputs over the use of unobservable inputs by requiring that observable inputs be used when available. Observable inputs are inputs that reflect management’s belief about the assumptions market participants would use in pricing a financial instrument based on the best information available in the circumstances.
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May 4, 2013 | January 31, 2013 | |||||||
(In thousands) | ||||||||
Materials and Supplies |
$ | 5,864 | $ | 6,654 | ||||
Work-In-Process |
1,525 | 591 | ||||||
Finished Goods |
4,366 | 3,934 | ||||||
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$ | 11,755 | $ | 11,179 | |||||
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Three Months Ended | ||||
Fiscal 2014 |
42.1 | % | ||
Fiscal 2013 |
(34.7 | )% |
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Three Months Ended | ||||||||||||||||
Net Sales | Segment Operating Profit | |||||||||||||||
(In thousands) |
May 4, 2013 |
April 28, 2012 |
May 4, 2013 |
April 28, 2012 |
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T&M |
$ | 4,089 | $ | 3,972 | $ | 201 | $ | 543 | ||||||||
QuickLabel |
11,396 | 10,364 | 891 | 903 | ||||||||||||
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Total |
$ | 15,485 | $ | 14,336 | 1,092 | 1,446 | ||||||||||
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Product Replacement Related Costs |
672 | — | ||||||||||||||
Corporate Expenses |
1,142 | 1,018 | ||||||||||||||
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Operating Income (Loss) |
(722 | ) | 428 | |||||||||||||
Other Expense—Net |
(36 | ) | (13 | ) | ||||||||||||
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Income (Loss) From Continuing Operations Before Income Taxes |
(758 | ) | 415 | |||||||||||||
Income Tax Benefit |
(319 | ) | (144 | ) | ||||||||||||
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(439 | ) | 559 | ||||||||||||||
Income (Loss) From Discontinued Operations, Net of Income Taxes |
(10 | ) | 278 | |||||||||||||
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Net Income (Loss) |
$ | (449 | ) | $ | 837 | |||||||||||
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(In thousands) | Amortized Cost | Gross Unrealized Gains |
Gross Unrealized Losses |
Fair Value | ||||||||||||
May 4, 2013 |
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State and Municipal Obligations |
$ | 20,090 | $ | 12 | $ | (2 | ) | $ | 20,100 | |||||||
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January 31, 2013 |
Amortized Cost | Gross Unrealized Gains |
Gross Unrealized Losses |
Fair Value | ||||||||||||
State and Municipal Obligations |
$ | 8,499 | $ | 10 | $ | — | $ | 8,509 | ||||||||
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(In thousands) | ||||||||||||||||
May 4, 2013 |
Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Money Market Funds (included in Cash and Cash Equivalents) |
$ | 7,043 | $ | — | $ | — | $ | 7,043 | ||||||||
State and Municipal Obligations (included in Securities Available for Sale) |
20,100 | — | — | 20,100 | ||||||||||||
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Total |
$ | 27,143 | $ | — | $ | — | $ | 27,143 | ||||||||
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January 31, 2013 |
Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Money Market Funds (included in Cash and Cash Equivalents) |
$ | 8,784 | $ | — | $ | — | $ | 8,784 | ||||||||
State and Municipal Obligations (included in Securities Available for Sale) |
8,509 | 8,509 | ||||||||||||||
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Total |
$ | 17,293 | $ | — | $ | — | $ | 17,293 | ||||||||
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(In thousands) | Foreign Currency Translation Adjustments |
Unrealized Holding Gain (Loss) on Available for Sale Securities |
Total | |||||||||
Balance at January 31, 2013 |
$ | 166 | $ | 7 | $ | 173 | ||||||
Other Comprehensive Income (Loss) |
(154 | ) | (1 | ) | (155 | ) | ||||||
Amounts reclassified to Net Income |
— | — | — | |||||||||
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Net Other Comprehensive Income (Loss) |
(154 | ) | (1 | ) | (155 | ) | ||||||
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Balance at May 4, 2013 |
$ | 12 | $ | 6 | $ | 18 | ||||||
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May 4, 2013 |
April 28, 2012 |
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(In thousands) | ||||||||
Net Sales |
$ | 1,745 | $ | 4,089 | ||||
Gross Profit |
$ | 48 | $ | 1,872 | ||||
Net Income (Loss) from Discontinued Operations |
$ | (10 | ) | $ | 278 |
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