**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

 

**WASHINGTON, DC  20549**

 

**FORM 10-Q**

 

**ý**** Quarterly Report Pursuant to Section 13or 15(d) of the Securities Exchange Act of 1934**

 

**For Quarterly Period Ended August 31, 2004**

 

**Commission File Number 0-13394**

 

**VIDEODISPLAY CORPORATION**

(Exact name of registrant as specified on itscharter)

 

| **GEORGIA**                                                     | ** ** | **58-1217564**                       |
|-----------------------------------------------------------------|------------|--------------------------------------|
| (State or other jurisdiction of  incorporation or organization) |       | (I.R.S.Employer  Identification No.) |

 

**1868 TUCKER INDUSTRIAL DRIVE, TUCKER,GEORGIA  30084**

(Address of principal executive offices andzip code)

 

**770-938-2080**

(Registrant’s telephone number including areacode)

 

Indicate by check mark whether the registrant (1) has filed all reportsrequired to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.  Yes ý  No o

 

Indicate by check mark whether the registrant is an accelerated filer(as defined in Rule 12b-2 of the Exchange Act).

Yes o  No ý

 

Shares outstanding of each of the registrant’s classes of common stockat August 31, 2004:

 

| **Class**                  | ** ** | **Number  of Shares** |
|----------------------------|------------|-----------------------|
| Common Stock, No Par Value |       | 4,834,000             |

 

 

----

 

**VideoDisplay Corporation and Subsidiaries**

**Index**

 
| PART I.                               | FINANCIAL INFORMATION                                                                                                                                                                             |   |
|---------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|                                  |                                                                                                                                                                                              |   |
|                                  | Item 1.  Financial Statements                                                                                                                                                                |   |
|                                  |                                                                                                                                                                                              |   |
|                                  | Consolidated Balance Sheets –  August 31, 2004 (unaudited) and February 29, 2004 (audited)                                                                                         |   |
|                                  |                                                                                                                                                                                              |   |
|                                  | Consolidated Statements of Income -  Three and six months ended August 31, 2004 and 2003 (unaudited)                                                                                         |   |
|                                  |                                                                                                                                                                                              |   |
|                                  | Consolidated Statements of Shareholders’  Equity and Comprehensive Income -  Twelve months ended February 29, 2004 (audited) and the six months ended  August 31, 2004 (unaudited) |   |
|                                  |                                                                                                                                                                                              |   |
|                                  | Consolidated Statements of Cash Flows –  Six months ended August 31, 2004 and 2003 (unaudited)                                                                                          |   |
|                                  |                                                                                                                                                                                              |   |
|                                  | Notes to consolidated financial statements  -  August 31, 2004 (unaudited)                                                                                                                   |   |
|                                  |                                                                                                                                                                                              |   |
|                                  | Item 2.  Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                                                                         |   |
|                                  |                                                                                                                                                                                              |   |
|                                  | Item 3.  Quantitative and  Qualitative Disclosure About Market Risk                                                                                                                          |   |
|                                  |                                                                                                                                                                                              |   |
|                                  | Item 4.   Controls and Procedures                                                                                                                                                            |   |
|                                  |                                                                                                                                                                                              |   |
| PART  II.                             | OTHER  INFORMATION                                                                                                                                                                                |   |
|                                  |                                                                                                                                                                                              |   |
|                                  | Item 1.  Legal Proceedings                                                                                                                                                                        |   |
|                                  | Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds                                                                                                                              |   |
|                                  | Item 3.  Defaults upon its Senior Securities                                                                                                                                                      |   |
|                                  | Item 4.  Submission of Matters to a Vote of Security Holders                                                                                                                                      |   |
|                                  | Item 5.  Other Information                                                                                                                                                                        |   |
|                                  | Item  6.  Exhibits and Reports on Form 8-K                                                                                                                                                   |   |
|                                  |                                                                                                                                                                                              |
| SIGNATURES                            |                                                                                                                                                                                              |
|                                  |                                                                                                                                                                                              |
| EXHIBIT 31.1 302 CERTIFICATION OF CEO |                                                                                                                                                                                              |
| EXHIBIT 31.2 302 CERTIFICATION OF CFO |                                                                                                                                                                                              |
| EXHIBIT 32.1 906 CERTIFICATION OF CEO |                                                                                                                                                                                              |
| EXHIBIT 32.2 906 CERTIFICATION OF CFO |                                                                                                                                                                                              |

 

2

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**Video Display Corporation and Subsidiaries**

**Consolidated Balance Sheets**

 
| ** **                                                                        | ** ** | **August 31,  2004** | ** **     | **February 29,  2004** | ** ** |
|-----------------------------------------------------------------------------------|------------|---------------------------|----------------|-----------------------------|------------|
| ** **                                                                        | ** ** | **(unaudited)**           | ** **     | **(Note A)**                | ** ** |
| **Assets**                                                                        |       |                      |           |                        |       |
| Current assets                                                                    |       |                      | ** **     |                        |       |
| Cash and cash equivalents                                                         | ** ** | **$**                     | **3,942,000**  | ** **                  | $          | 3,021,000 |   |
| Accounts receivable, less allowance for possible  losses of $312,000 and $251,000 | ** ** | **9,013,000**             | ** **     | 10,910,000                  |       |
| Inventories (Notes C and F)                                                       | ** ** | **28,906,000**            | ** **     | 26,275,000                  |       |
| Deferred income taxes                                                             | ** ** | **2,644,000**             | ** **     | 2,299,000                   |       |
| Prepaid expenses and other current assets                                         | ** ** | **2,060,000**             | ** **     | 1,639,000                   |       |
| Total current assets                                                              | ** ** | **46,565,000**            | ** **     | 44,144,000                  |       |
|                                                                              |       |                      | ** **     |                        |       |
| Property, plant and equipment:                                                    |       |                      | ** **     |                        |       |
| Land                                                                              | ** ** | **540,000**               | ** **     | 540,000                     |       |
| Buildings                                                                         | ** ** | **7,090,000**             | ** **     | 7,016,000                   |       |
| Machinery and equipment                                                           | ** ** | **18,884,000**            | ** **     | 18,564,000                  |       |
|                                                                              |       | **26,514,000**            | ** **     | 26,120,000                  |       |
| Accumulated depreciation and amortization                                         | ** ** | **(18,978,000**           | **)**          | (18,384,000                 | )          |
| Net property, plant, and equipment                                                | ** ** | **7,536,000**             | ** **     | 7,736,000                   |       |
|                                                                              |       |                      | ** **     |                        |       |
| Goodwill                                                                          | ** ** | **1,318,000**             | ** **     | 1,227,000                   |       |
| Other assets                                                                      | ** ** | **1,118,000**             | ** **     | 1,444,000                   |       |
|                                                                              |       |                      | ** **     |                        |       |
| Total assets                                                                      | ** ** | **$**                     | **56,537,000** | ** **                  | $          | 54,551,000 |   |

 

The accompanying notes are an integral partof these statements.

 

3

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**Video Display Corporation and Subsidiaries**

**Consolidated Balance Sheets**

 
| ** **                                                                                                      | ** ** | **August 31,  2004** | ** **     | **February 29,  2004** | ** ** |
|-----------------------------------------------------------------------------------------------------------------|------------|---------------------------|----------------|-----------------------------|------------|
| ** **                                                                                                      | ** ** | **(unaudited)**           | ** **     | **(Note A)**                | ** ** |
| **Liabilities  and Shareholders’ Equity**                                                                  |       |                      |           |                        |       |
| Current liabilities                                                                                             |       |                      | ** **     |                        |       |
| Accounts payable                                                                                                | ** ** | **$**                     | **4,217,000**  | ** **                  | $          | 4,103,000 |   |
| Accrued liabilities                                                                                             | ** ** | **3,736,000**             | ** **     | 3,506,000                   |       |
| Line of credit (Note E)                                                                                         | ** ** | **2,610,000**             | ** **     | 2,610,000                   |       |
| Notes payable to shareholders                                                                                   | ** ** | **5,000**                 | ** **     | 19,000                      |       |
| Current maturities of long-term debt (Note  D)                                                                  | ** ** | **1,859,000**             | ** **     | 1,959,000                   |       |
| Total current liabilities                                                                                       | ** ** | **12,427,000**            | ** **     | 12,197,000                  |       |
|                                                                                                            |       |                      | ** **     |                        |       |
| Line of credit (Note E)                                                                                         | ** ** | **9,596,000**             | ** **     | 6,199,000                   |       |
| Long-term debt, less current maturities  (Note D)                                                               | ** ** | **878,000**               | ** **     | 2,018,000                   |       |
| Notes payable to shareholders, less current  maturities                                                         | ** ** | **5,016,000**             | ** **     | 8,272,000                   |       |
| Deferred income taxes                                                                                           | ** ** | **686,000**               | ** **     | 664,000                     |       |
| Total liabilities                                                                                               | ** ** | **28,603,000**            | ** **     | 29,350,000                  |       |
|                                                                                                            |       |                      | ** **     |                        |       |
| **Minority  Interests**                                                                                         | ** ** | **123,000**               | ** **     | 123,000                     |       |
| ** **                                                                                                      |       |                      | ** **     |                        |       |
| **Commitments  and Contingencies**                                                                              |       |                      | ** **     |                        |       |
|                                                                                                            |       |                      | ** **     |                        |       |
| **Shareholders’  Equity (Note G)**                                                                         |       |                      | ** **     |                        |       |
| Preferred stock, no par value – 2,000,000  shares authorized; none issued and outstanding                  | ** ** | **—**                | ** **     | —                      |       |
| Common stock, no par value – 10,000,000  shares authorized; 4,834,000 and 4,792,000 issued and outstanding | ** ** | **6,765,000**             | ** **     | 6,318,000                   |       |
| Additional paid in capital                                                                                      | ** ** | **92,000**                | ** **     | 92,000                      |       |
| Retained earnings                                                                                               | ** ** | **20,955,000**            | ** **     | 18,688,000                  |       |
| Accumulated other comprehensive loss                                                                            | ** ** | **(1,000**                | **)**          | (20,000                     | )          |
| Total shareholders’ equity                                                                                 | ** ** | **27,811,000**            | ** **     | 25,078,000                  |       |
| Total liabilities and shareholders’ equity                                                                 | ** ** | **$**                     | **56,537,000** | ** **                  | $          | 54,551,000 |   |
|                                                                                                                 |            |                           |                |                             |            |  |  |  |

 

The accompanying notes are an integral partof these statements.

 

4

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**Video Display Corporation and Subsidiaries**

**Consolidated Statements of Income****(unaudited)**

 
| ** **                                           | ** ** | **Three Months Ended  August 31,** | ** **     | **Six Months Ended  August 31,** | ** ** |
|------------------------------------------------------|------------|-----------------------------------------|----------------|---------------------------------------|------------|
| ** **                                           | ** ** | **2004**                                | ** **     | **2003**                              | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                                 |       |                                    |           |                                  |       |   |   |   |   |
| Net sales                                            |       | **$**                                   | **20,667,000** | ** **                            | $          | 19,115,000 |   | **$** | **40,567,000** | ** ** | $ | 38,128,000 |   |
|                                                 |       | ** **                              | ** **     |                                  |       | ** ** | ** ** |   |   |
| Cost of goods sold                                   |       | **13,832,000**                          | ** **     | 12,485,000                            |       | **27,146,000** | ** ** | 25,267,000 |   |
|                                                 |       | ** **                              | ** **     |                                  |       | ** ** | ** ** |   |   |
| Gross profit                                         |       | **6,835,000**                           | ** **     | 6,630,000                             |       | **13,421,000** | ** ** | 12,861,000 |   |
|                                                 |       | ** **                              | ** **     |                                  |       | ** ** | ** ** |   |   |
| Operating expenses                                   |       | ** **                              | ** **     |                                  |       | ** ** | ** ** |   |   |
| Selling and delivery                                 |       | **1,761,000**                           | ** **     | 1,685,000                             |       | **3,508,000** | ** ** | 3,464,000 |   |
| General and administrative                           |       | **3,017,000**                           | ** **     | 3,081,000                             |       | **5,929,000** | ** ** | 5,998,000 |   |
|                                                 | ** ** | **4,778,000**                           | ** **     | 4,766,000                             |       | **9,437,000** | ** ** | 9,462,000 |   |
|                                                 |       | ** **                              | ** **     |                                  |       | ** ** | ** ** |   |   |
| Operating profit                                     |       | **2,057,000**                           | ** **     | 1,864,000                             |       | **3,984,000** | ** ** | 3,399,000 |   |
|                                                 |       | ** **                              | ** **     |                                  |       | ** ** | ** ** |   |   |
| Other income (expense)                               |       | ** **                              | ** **     |                                  |       | ** ** | ** ** |   |   |
| Interest expense                                     |       | **(232,000**                            | **)**          | (322,000                              | )          | **(489,000** | **)** | (641,000 | ) |
| Other, net                                           |       | **35,000**                              | ** **     | 74,000                                |       | **162,000** | ** ** | 118,000 |   |
|                                                 | ** ** | **(197,000**                            | **)**          | (248,000                              | )          | **(327,000** | **)** | (523,000 | ) |
|                                                 |       | ** **                              | ** **     |                                  |       | ** ** | ** ** |   |   |
| Income before income taxes                           |       | **1,860,000**                           | ** **     | 1,616,000                             |       | **3,657,000** | ** ** | 2,876,000 |   |
|                                                 |       | ** **                              | ** **     |                                  |       | ** ** | ** ** |   |   |
| Income tax expense                                   |       | **708,000**                             | ** **     | 614,000                               |       | **1,390,000** | ** ** | 1,093,000 |   |
|                                                 |       | ** **                              | ** **     |                                  |       | ** ** | ** ** |   |   |
| Net income                                           |       | **$**                                   | **1,152,000**  | ** **                            | $          | 1,002,000 |   | **$** | **2,267,000** | ** ** | $ | 1,783,000 |   |
|                                                 |       | ** **                              | ** **     |                                  |       | ** ** | ** ** |   |   |
| Basic earnings per share of common stock  (Note G)   | ** ** | **$**                                   | **0.24**       | ** **                            | $          | 0.22 |   | **$** | **0.47** | ** ** | $ | 0.39 |   |
|                                                 |       | ** **                              | ** **     |                                  |       | ** ** | ** ** |   |   |
| Diluted earnings per share of common stock  (Note G) | ** ** | **$**                                   | **0.23**       | ** **                            | $          | 0.21 |   | **$** | **0.46** | ** ** | $ | 0.37 |   |
|                                                 |       | ** **                              | ** **     |                                  |       | ** ** | ** ** |   |   |
| Basic weighted average shares outstanding            |       | **4,828,000**                           | ** **     | 4,579,000                             |       | **4,822,000** | ** ** | 4,609,000 |   |
|                                                 |       | ** **                              | ** **     |                                  |       | ** ** | ** ** |   |   |
| Diluted weighted average shares outstanding          |       | **4,946,000**                           | ** **     | 4,922,000                             |       | **4,932,000** | ** ** | 4,946,000 |   |

 

The accompanying notes are an integral part ofthese statements.

 

5

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**Video Display Corporation and Subsidiaries**

**Consolidated Statements of Shareholders’****Equity and Comprehensive Income**

**for the Twelve Months Ended February 29,2004 (audited) and**

**the Six Months Ended August 31, 2004(unaudited)**

 
| ** **                                                                          | ** ** | **Common   Shares** | ** ** | **Share   Amount** | ** ** | **Additional   Paid In   Capital** | ** ** | **Accumulated   Other   Comprehensive   Income** | ** ** | **Retained   Earnings** | ** ** | **Current   Period   Comprehensive   Income** | ** ** |
|-------------------------------------------------------------------------------------|------------|---------------------|------------|--------------------|------------|------------------------------------|------------|--------------------------------------------------|------------|-------------------------|------------|-----------------------------------------------|------------|
|                                                                                |       |                |       |               |       |                               |       |                                             |       |                    |       |                                          |       |
| Balance at February 28, 2003                                                   |       | 4,700,000           |       | $                  | 5,293,000  |                               | $          | 92,000                                           |       | $                       | (233,000   | )                                             | $          | 17,004,000 |   |   |   |
|                                                                                |       |                |       |               |       |                               |       |                                             |       |                    |       |                                          |       |
| Net income for the year                                                             |       | —              |       | —             |       | —                             |       | —                                           |       | 3,165,000               |       | $                                             | 3,165,000  |   |
| Unrealized gain on marketable equity  securities                                    |       | —              |       | —             |       | —                             |       | 25,000                                           |       | —                  |       | 25,000                                        |       |
| Foreign currency translation adjustment                                             |       | —              |       | —             |       | —                             |       | 62,000                                           |       | —                  |       | 62,000                                        |       |
| Reclassification adjustment on the sale of  marketable equity securities for a loss |       | —              |       | —             |       | —                             |       | 126,000                                          |       | —                  |       | 126,000                                       |       |
| Total comprehensive loss                                                            |       |                |       |               |       |                               |       |                                             |       |                    |       | $                                             | 3,378,000  |   |
| Issuance of common stock under stock option  plan                                   |       | 75,000              |       | 312,000            |       | —                             |       | —                                           |       | —                  |       |                                          |       |
| Conversion of convertible debentures                                                |       | 240,000             |       | 1,000,000          |       | —                             |       | —                                           |       | —                  |       |                                          |       |
| Issuance of common stock                                                            |       | 8,000               |       | 51,000             |       | —                             |       | —                                           |       | —                  |       |                                          |       |
| Repurchase of common stock                                                          |       | (231,000            | )          | (338,000           | )          | —                             |       | —                                           |       | (1,236,000              | )          |                                          |       |
| Dividend paid on common stock                                                       |       | —              |       | —             |       | —                             |       | —                                           |       | (245,000                | )          |                                          |       |
|                                                                                |       |                |       |               |       |                               |       |                                             |       |                    |       |                                          |       |
| Balance at February 29, 2004                                                   |       | 4,792,000           |       | 6,318,000          |       | 92,000                             |       | (20,000                                          | )          | 18,688,000              |       |                                          |       |
|                                                                                |       |                |       |               |       |                               |       |                                             |       |                    |       |                                          |       |
| Net income for the period                                                           |       | —              |       | —             |       | —                             |       | —                                           |       | 2,267,000               |       | $                                             | 2,267,000  |   |
| Issuance of common stock under stock option  plan                                   |       | 9,000               |       | 47,000             |       | —                             |       | —                                           |       | —                  |       | 47,000                                        |       |
| Foreign currency translation adjustment                                             |       | —              |       | —             |       | —                             |       | 19,000                                           |       | —                  |       | 19,000                                        |       |
| Total comprehensive income                                                          |       |                |       |               |       |                               |       |                                             |       |                    |       | $                                             | 2,333,000  |   |
| Issuance of common stock                                                            |       | 33,000              |       | 400,000            |       | —                             |       | —                                           |       | —                  |       |                                          |       |
|                                                                                |       |                |       |               |       |                               |       |                                             |       |                    |       |                                          |       |
| Balance at August 31, 2004                                                     |       | 4,834,000           |       | $                  | 6,765,000  |                               | $          | 92,000                                           |       | $                       | (1,000     | )                                             | $          | 20,955,000 |   |   |   |

 

The accompanying notes are an integral partof these statements.

 

6

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**VideoDisplay Corporation and Subsidiaries**

**ConsolidatedStatements of****Cash Flows (unaudited)**

 
| ** **                                                                   | ** ** | **Six Months Ended  August 31,** | ** **    |
|------------------------------------------------------------------------------|------------|---------------------------------------|---------------|
| ** **                                                                   | ** ** | **2004**                              | ** **    | **2003** | ** ** |
|                                                                         |       |                                  | ** **    |   |   |
| **Operating  Activities**                                                    |       |                                  | ** **    |   |   |
| Net income                                                                   | ** ** | **$**                                 | **2,267,000** | ** ** | $ | 1,783,000 |   |
| **Adjustments  to reconcile net income to net cash provided by operations:** |       |                                  | ** **    |   |   |
| Depreciation and amortization                                                | ** ** | **600,000**                           | ** **    | 612,000 |   |
| Provision for bad debts                                                      | ** ** | **61,000**                            | ** **    | 87,000 |   |
| Deferred income tax benefit                                                  | ** ** | **(323,000**                          | **)**         | — |   |
| **Changes  in working capital:**                                             |       |                                  | ** **    |   |   |
| Accounts receivable                                                          | ** ** | **1,836,000**                         | ** **    | 1,139,000 |   |
| Inventories                                                                  | ** ** | **(2,352,000**                        | **)**         | 616,000 |   |
| Prepaid expenses and other assets                                            | ** ** | **(2,000**                            | **)**         | 543,000 |   |
| Accounts payable and accrued liabilities                                     | ** ** | **389,000**                           | ** **    | (110,000 | ) |
| Net cash provided by operating activities                                    | ** ** | **2,476,000**                         | ** **    | 4,670,000 |   |
|                                                                         |       |                                  | ** **    |   |   |
| **Investing  activities**                                                    |       |                                  | ** **    |   |   |
| Capital expenditures                                                         | ** ** | **(314,000**                          | **)**         | (375,000 | ) |
| Cash paid for acquisition                                                    | ** ** | **(150,000**                          | **)**         | — |   |
| Other investing activities                                                   | ** ** | **—**                            | ** **    | 47,000 |   |
| Net cash used in investing activities                                        | ** ** | **(464,000**                          | **)**         | (328,000 | ) |
|                                                                         |       |                                  | ** **    |   |   |
| **Financing  activities**                                                    |       |                                  | ** **    |   |   |
| Proceeds from long-term debt and lines of  credit                            | ** ** | **16,221,000**                        | ** **    | 9,497,000 |   |
| Payments on long-term debt and lines of  credit                              | ** ** | **(17,333,000**                       | **)**         | (14,181,000 | ) |
| Proceeds from exercise of stock options                                      | ** ** | **47,000**                            | ** **    | 13,000 |   |
| Purchase of common stock under repurchase  program                           | ** ** | **—**                            | ** **    | (813,000 | ) |
| Redemption of redeemable common stock                                        | ** ** | **—**                            | ** **    | (100,000 | ) |
| Proceeds from reissuance of common stock                                     | ** ** | **—**                            | ** **    | 51,000 |   |
| Net cash used in financing activities                                        | ** ** | **(1,065,000**                        | **)**         | (5,533,000 | ) |
|                                                                         |       |                                  | ** **    |   |   |
| Effect of exchange rates on cash                                             | ** ** | **(26,000**                           | **)**         | (12,000 | ) |
|                                                                         |       |                                  | ** **    |   |   |
| Net change in cash                                                           | ** ** | **921,000**                           | ** **    | (1,203,000 | ) |
|                                                                         |       |                                  | ** **    |   |   |
| Cash, beginning of period                                                    | ** ** | **3,021,000**                         | ** **    | 2,392,000 |   |
|                                                                         |       |                                  | ** **    |   |   |
| Cash, end of period                                                          | ** ** | **$**                                 | **3,942,000** | ** ** | $ | 1,189,000 |   |

 

The accompanying notes are an integral partof these statements.

 

7

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**Video Display Corporation and Subsidiaries**

**Notes to Consolidated****FinancialStatements (unaudited)**

 

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

The accompanying unaudited consolidated financial statements have beenprepared in accordance with generally accepted accounting principles forinterim financial information and in accordance with instructions for Form 10-Qas found in Article 10 of Regulation S-X. Accordingly, such consolidated financial statements do not include allof the information and disclosures required by generally accepted accountingprinciples for complete financial statements. In the opinion of management, all adjustments necessary for a fairpresentation of the results of operations for the periods covered have beenreflected in the statements.  Theaccompanying consolidated financial statements should be read in conjunctionwith the audited financial statements and notes thereto for the year ended February 29,2004 included in the Company’s Annual Report on Form 10-K.

 

The consolidated financial statements included the accounts of theCompany and its majority owned subsidiaries after elimination of allsignificant intercompany accounts and transactions. Certain prior periodbalances have been reclassified to conform to the current period presentation.

 

The Company has a subsidiary in the U.K., which uses the British poundas its functional currency. Assets and liabilities of this foreign subsidiaryare translated using the exchange rate in effect at the end of the period.  Revenues and expenses are translated usingthe average of the exchange rates in effect during the period.  Translation adjustments and transaction gainsand losses related to long-term intercompany transactions are accumulated as aseparate component of shareholders’ equity.

 

NOTE B – ADOPTION OF RECENT ACCOUNTINGPRONOUNCEMENTS

 

In January 2003, the FASB issued Financial Accounting StandardsBoard Interpretation No. 46 (FIN 46), “Consolidation of Variable InterestEntities”, which was revised in December 2003 (FIN 46R).  FIN 46R requires an investor with a majorityof the variable interests (primary beneficiary) in a variable interest entity(VIE) to consolidate the entity and also requires majority and significantvariable interest investors to provide certain disclosures.  A VIE is an entity in which the voting equityinvestors do not have a controlling financial interest or the equity investmentat risk is insufficient to finance the entity’s activities without receivingadditional subordinated financial support from other parties.  The provisions of FIN 46R were effectiveimmediately for all arrangements entered into with new VIEs created after January 31,2003.  For arrangements entered into withVIEs created before January 31, 2003, the provisions of FIN 46R wereeffective at the end of the first reporting period ending after March 15,2004.  The Company has not identified anyVIEs and, therefore, the adoption of this standard did not have a materialimpact on the Company’s financial position or results of operations.

 

In March 2004, the FASB issued an Exposure Draft for a proposedStatement of Financial Accounting Standards Statement to address the accountingfor stock-based employee plans.  Theproposed statement, in its current form, would eliminate the ability to accountfor share-based compensation transactions using APB 25 and instead require thatsuch transactions be accounted for using a fair-value-based method ofaccounting.  The adoption of thisstatement, in its current form, would result in income statement effectssimilar to what is currently disclosed using a proforma basis (see thediscussion under the caption *“Stock-Based CompensationPlans”* below) as allowed under Statement No. 123.  The adoption of this proposed statement inits current form is not expected to have a material impact on the Company’sfinancial statements.

 

8

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NOTE C - INVENTORIES

 

Inventories are stated at the lower of cost (first in, first out) ormarket.

 

Inventories consisted of the following:

 
| ** **                        | ** ** | **August 31,  2004** | ** **     | **February 29,  2004** | ** ** |
|-----------------------------------|------------|---------------------------|----------------|-----------------------------|------------|
|                              |       |                      |           |                        |       |
| Raw materials and work-in-process | ** ** | **$**                     | **15,372,000** | ** **                  | $          | 11,937,000 |   |
| Finished goods                    | ** ** | **16,264,000**            | ** **     | 16,844,000                  |       |
|                              |       | **31,636,000**            | ** **     | 28,781,000                  |       |
| Reserves for obsolescence         | ** ** | **(2,730,000**            | **)**          | (2,506,000                  | )          |
|                              |       | **$**                     | **28,906,000** | ** **                  | $          | 26,275,000 |   |

 

NOTE D - LONG-TERM DEBT

 

**Long-term debt consisted of the following:**

 
| ** **                                                                                                                                                                                                                                                                                                  | ** ** | **August 31,  2004** | ** **    | **February 29,  2004** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------|---------------|-----------------------------|------------|
| Term loan facility, floating interest rate  based on an adjusted LIBOR rate (4.50% as of August 31, 2004), quarterly  principal payments of $313,000 through November 2005; collateralized by  assets of Aydin Display, Inc.                                                                      | ** ** | **$**                     | **1,250,000** | ** **                  | $          | 1,875,000 |   |
|                                                                                                                                                                                                                                                                                                        |       | ** **                | ** **    |                        |       |
| Note payable to bank; interest rate of prime  (4.5% as of August 31, 2004) plus 1.5%; collateralized by assets of XKD  Corporation, paid in full.                                                                                                                                                      | ** ** | **—**                | ** **    | 542,000                     |       |
|                                                                                                                                                                                                                                                                                                        |       | ** **                | ** **    |                        |       |
| Mortgage payable to bank; variable interest  rate (5.5% as of August 31, 2004); monthly principal and interest  payments of $6,000 payable until December 2008 with a final principal  payment of $350,000 in December 2008, collateralized by land and  building of Fox International, Inc. | ** ** | **501,000**               | ** **    | 526,000                     |       |
|                                                                                                                                                                                                                                                                                                        |       | ** **                | ** **    |                        |       |
| Mortgage payable to bank; interest rate at  FHLB plus 1.95% (7.35% as of August 31, 2004); monthly principal and  interest payments of $5,000 payable through October 2021; collateralized  by land and building of Teltron Technologies, Inc.                                                    | ** ** | **565,000**               | ** **    | 573,000                     |       |
|                                                                                                                                                                                                                                                                                                        |       | ** **                | ** **    |                        |       |
| Other                                                                                                                                                                                                                                                                                                       | ** ** | **421,000**               | ** **    | 461,000                     |       |
|                                                                                                                                                                                                                                                                                                        |       | **2,737,000**             | ** **    | 3,977,000                   |       |
| Less current portion                                                                                                                                                                                                                                                                                        | ** ** | **(1,859,000**            | **)**         | (1,959,000                  | )          |
|                                                                                                                                                                                                                                                                                                        |       | **$**                     | **878,000**   | ** **                  | $          | 2,018,000 |   |

 

9

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NOTE E - LINES OF CREDIT

 

The Company has a $12,000,000 credit facility with a bank.  The interest rate on the line of credit is afloating LIBOR rate (3.98% at August 31, 2004) based on a ratio of debt toEBITDA, as defined.  The weighted averageinterest rate during the six months ended August 31, 2004 and the yearended February 29, 2004 was 3.71% and 3.70%. The average amount and maximumamount outstanding were $8,301,000 and $9,596,000, respectively, during the sixmonths ended August 31, 2004, and $6,754,000 and $8,801,000, respectively,during fiscal year 2004.  Borrowingsunder the line of credit are limited by eligible accounts receivable, inventoryand real estate, as defined, and includes a commitment fee of 0.25% for theunused portion.  As of August 31,2004, the outstanding balance on the line of credit was $9,596,000 and theavailable amount for borrowing was $2,404,000.

 

The line of credit agreement contains affirmative and negativecovenants, including requirements related to tangible net worth and debtservice coverage.  Additionally, dividendpayments, capital expenditures and acquisitions have certain restrictions.Substantially all of the Company’s retained earnings are restricted based uponthese covenants.  As of August 31,2004, the Company is in compliance with its loan covenants.

 

Additionally, the Company has a $2,750,000 secondary line of credit(collateralized by assets of Fox International, Inc.) with another bank.  Interest on this line is at the rate of primeplus 1%.  The line is limited by eligibleaccounts receivable and inventory.  Theoutstanding balance at August 31, 2004 was $2,610,000 and the available amountfor borrowing was $140,000.  This line isdue to expire on July 31, 2005 and, accordingly, is classified withincurrent liabilities in the consolidated financial statements.

 

NOTE F – SUPPLEMENTAL CASH FLOW INFORMATION

 
| ** **                                                       | ** ** | **Six Months  Ended**     | ** **  |
|------------------------------------------------------------------|------------|---------------------------|-------------|
| ** **                                                       | ** ** | **August 31,  2004** | ** **  | **August 31,  2003** | ** ** |
| Cash Paid for:                                                   |       |                      |        |   |   |
| Interest                                                         | ** ** | **$**                     | **489,000** |   | $ | 641,000 |   |
| Income taxes, net of refunds                                     | ** ** | **$**                     | **857,000** |   | $ | 382,000 |   |
|                                                             |       |                      |        |   |   |
| Non-cash Transactions:                                           |       |                      |        |   |   |
| Issuance of common stock for monitor  division of Data Ray, Inc. | ** ** | **$**                     | **400,000** |   | $ | — |   |

 

10

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NOTE G – SHAREHOLDERS’ EQUITY

 

**Earnings Per Share**

 

Basic earnings per share is computed by dividing income available tocommon shareholders by the weighted average number of shares outstanding duringeach period.  Shares issued during theperiod are weighted for the portion of the period that they wereoutstanding.  Diluted earnings per shareis calculated in a manner consistent with that of basic earnings per sharewhile giving effect to all dilutive potential common shares that wereoutstanding during the period.

 

The following table sets forth the computation of basic and dilutedearnings per share for the three and six-month periods ended August 31,2004 and 2003:

 
| ** **                            | ** ** | **Net Income** | ** ** | **Weighted   Average Shares   Outstanding** | ** ** | **Earnings Per   Share** | ** ** |
|---------------------------------------|------------|----------------|------------|---------------------------------------------|------------|--------------------------|------------|
| Quarter ended August 31, 2004    |       |           |       |                                        |       |                     |       |
| Basic                                 |       | $              | 1,152,000  |                                        | 4,828,000  |                     | $          | 0.24 |   |
| Effect of dilution:                   |       |           |       |                                        |       |                     |       |
| Stock options                         |       | —         |       | 118,000                                     |       |                     |       |
| Diluted                               |       | $              | 1,152,000  |                                        | 4,946,000  |                     | $          | 0.23 |   |
|                                  |       |           |       |                                        |       |                     |       |
| Quarter ended August 31, 2003    |       |           |       |                                        |       |                     |       |
| Basic                                 |       | $              | 1,002,000  |                                        | 4,579,000  |                     | $          | 0.22 |   |
| Effect of dilution:                   |       |           |       |                                        |       |                     |       |
| Stock options                         |       | —         |       | 97,000                                      |       |                     |       |
| Convertible debt                      |       | 13,000         |       | 246,000                                     |       |                     |       |
| Diluted                               |       | $              | 1,015,000  |                                        | 4,922,000  |                     | $          | 0.21 |   |
|                                  |       |           |       |                                        |       |                     |       |
| Six months ended August 31, 2004 |       |           |       |                                        |       |                     |       |
| Basic                                 |       | $              | 2,267,000  |                                        | 4,822,000  |                     | $          | 0.47 |   |
| Effect of dilution:                   |       |           |       |                                        |       |                     |       |
| Stock options                         |       | —         |       | 110,000                                     |       |                     |       |
| Diluted                               |       | $              | 2,267,000  |                                        | 4,932,000  |                     | $          | 0.46 |   |
|                                  |       |           |       |                                        |       |                     |       |
| Six months ended August 31, 2003 |       |           |       |                                        |       |                     |       |
| Basic                                 |       | $              | 1,783,000  |                                        | 4,609,000  |                     | $          | 0.39 |   |
| Effect of dilution:                   |       |           |       |                                        |       |                     |       |
| Stock options                         |       | —         |       | 91,000                                      |       |                     |       |
| Convertible debt                      |       | 27,000         |       | 246,000                                     |       |                     |       |
| Diluted                               |       | $              | 1,810,000  |                                        | 4,946,000  |                     | $          | 0.37 |   |

 

**Stock-Based Compensation Plans**

 

The Company has an incentive stock option plan whereby total options topurchase 150,000 shares may be granted to key employees at a price not lessthan fair market value at the time the options are granted and are exercisablebeginning on the first anniversary of the grant date for a period not to exceedten years.  Statement of FinancialAccounting Standards No. 123 encourages, but does not require companies to recordcompensation cost for stock-based employee compensation plans at fairvalue.  The Company has chosen tocontinue to account for stock-based compensation using the intrinsic valuemethod prescribed in Accounting Principles Board Opinion No. 25, “Accountingfor Stock Issued to Employees”, and related Interpretations. Accordingly,compensation cost for stock options is

 

11

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measured as the excess, ifany, of the quoted market price of the Company’s stock at the date of the grantover the amount an employee must pay to acquire the stock.  The option price of all the Company’s stockoptions is equal to the market value of the stock at the grant date.  The Company granted 9,000 and 6,000 stockoptions during the quarters ended August 31, 2004 and 2003, respectively. 

 

Based on the additionaldisclosure requirements of SEAS 148, "Accounting for Stock BasedCompensation — Transition and Disclosure — an Amendment to SFAS 123", thefollowing illustrates the assumptions and the effect on net income and netincome per share if the Company had applied the fair value recognitionprovisions of SFAS 123.

 
| ** **                                                                               | ** ** | **Three Months Ended** | ** **    | **Six Months Ended** | ** ** |
|------------------------------------------------------------------------------------------|------------|------------------------|---------------|----------------------|------------|
| ** **                                                                               | ** ** | **August 31,**    | ** **    | **August 31,**  | ** ** | **August 31,** | ** ** | **August 31,** | ** ** |
| ** **                                                                               | ** ** | **2004**               | ** **    | **2003**             | ** ** | **2004** | ** ** | **2003** | ** ** |
| Net income, as reported                                                                  | ** ** | **$**                  | **1,152,000** | ** **           | $          | 1,002,000 |   | **$** | **2,267,000** | ** ** | $ | 1,783,000 |   |
| Stock-based employee compensation expense,  as reported                                  | ** ** | **—**             | ** **    | —               |       | **—** | ** ** | — |   |
| Stock-based employee compensation expense  determined under fair value basis, net of tax | ** ** | **(12,000**            | **)**         | (15,000              | )          | **(21,000** | **)** | (27,000 | ) |
| Pro forma net income                                                                     | ** ** | **$**                  | **1,140,000** | ** **           | $          | 987,000 |   | **$** | **2,246,000** | ** ** | $ | 1,756,000 |   |
|                                                                                     |       | ** **             | ** **    |                 |       | ** ** | ** ** |   |   |
| Net earnings per share:                                                                  |       | ** **             | ** **    |                 |       | ** ** | ** ** |   |   |
| Basic – as reported                                                                 | ** ** | **$**                  | **0.24**      | ** **           | $          | 0.22 |   | **$** | **0.47** | ** ** | $ | 0.39 |   |
| Basic – pro forma                                                                   | ** ** | **$**                  | **0.24**      | ** **           | $          | 0.22 |   | **$** | **0.46** | ** ** | $ | 0.38 |   |
| Diluted – as reported                                                               | ** ** | **$**                  | **0.23**      | ** **           | $          | 0.21 |   | **$** | **0.46** | ** ** | $ | 0.37 |   |
| Diluted – pro forma                                                                 | ** ** | **$**                  | **0.23**      | ** **           | $          | 0.20 |   | **$** | **0.45** | ** ** | $ | 0.36 |   |

 

**Stock RepurchaseProgram**

 

The Company has a stock repurchase program, pursuant to which it isauthorized to repurchase up to 462,500 shares of the Company’s common stock inthe open market. Through August 31, 2004, the Company has repurchased292,000 shares under this program.  Noshares were repurchased during the first six months of the current fiscalyear.  

 

NOTE H – BUSINESS ACQUISITION

 

In March 2004, the Company acquired the monitor operations ofColorado based Data Ray, Inc.  TheCompany acquired inventory, fixed assets and various other assets of $459,000in exchange for cash of $150,000 and $400,000 of the Company’s common stock,resulting in goodwill of approximately $91,000. These operations were consolidated into the Company’s Z-Axis, Inc.operations located in Phelps, NY, since the date of acquisition.  The $400,000 of common stock was issued at$12 dollars per share, the market value of the stock at the date ofpurchase.  The common stock has a putfeature whereby Data Ray can redeem the stock for $11 per share if the price ofthe stock is below $12 after the one year anniversary date of the purchaseagreement.

 

12

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NOTE I – SUBSEQUENT EVENTS

 

**Acquisition**

 

On October 14, 2004, the Company announced it had finalized andcompleted its Asset Purchase Agreement with Evans & Sutherland.  Under this agreement, the Company will pay$5,250,000 for Evans & Sutherland’s ESCP® and Targetview CRT projectorproduct lines.  This acquisition will befinanced by a loan from an officer of the Company.  Under the terms of the final agreement, theCompany will consolidate all CRT projector manufacturing, sales and supportwith its established MarqueeTM projector operations in Cape Canaveral,Florida.  The Company expects thisconsolidation will be completed by the end of the year.

 

**Stock Split**

 

On September 8, 2004, the Company announced a two for one stocksplit of its common stock, payable as a stock dividend on November 1,2004, to shareholders of record at the close of business on September 23,2004.  Shareholders will receive oneshare of common stock for every one share of the Company stock held on therecord date.  Immediately prior to the distributionthere will be approximately 4,834,000 shares of common stock outstanding andimmediately after the distribution there will be approximately 9,668,000 sharesof common stock outstanding.  Thefollowing table presents proforma information for common shares outstanding andearnings per share if the dividend had been paid in the second quarter:

 
| ** **                                                         | ** ** | **Three Months Ended** | ** **    | **Six Months Ended** | ** ** |
|--------------------------------------------------------------------|------------|------------------------|---------------|----------------------|------------|
| ** **                                                         | ** ** | **August 31,**    | ** **    | **August 31,**  | ** ** | **August 31,** | ** ** | **August 31,** | ** ** |
| ** **                                                         | ** ** | **2004**               | ** **    | **2003**             | ** ** | **2004** | ** ** | **2003** | ** ** |
| Net income, as reported                                            | ** ** | **$**                  | **1,152,000** | ** **           | $          | 1,002,000 |   | **$** | **2,267,000** | ** ** | $ | 1,783,000 |   |
| Basic weighted average shares outstanding,  as reported            | ** ** | **4,828,000**          | ** **    | 4,579,000            |       | **4,822,000** | ** ** | 4,609,000 |   |
| Basic weighted average shares outstanding,  based on stock split   | ** ** | **9,656,000**          | ** **    | 9,158,000            |       | **9,644,000** | ** ** | 9,218,000 |   |
| Diluted weighted average shares  outstanding, as report            | ** ** | **4,946,000**          | ** **    | 4,922,000            |       | **4,932,000** | ** ** | 4,946,000 |   |
| Diluted weighted average shares  outstanding, based on stock split | ** ** | **9,892,000**          | ** **    | 9,844,000            |       | **9,864,000** | ** ** | 9,892,000 |   |
|                                                               |       | ** **             | ** **    |                 |       | ** ** | ** ** |   |   |
| Net earnings per share:                                            |       | ** **             | ** **    |                 |       | ** ** | ** ** |   |   |
| Basic – as reported                                           | ** ** | **$**                  | **0.24**      | ** **           | $          | 0.22 |   | **$** | **0.47** | ** ** | $ | 0.39 |   |
| Basic – pro forma                                             | ** ** | **$**                  | **0.12**      | ** **           | $          | 0.11 |   | **$** | **0.24** | ** ** | $ | 0.20 |   |
| Diluted – as reported                                         | ** ** | **$**                  | **0.23**      | ** **           | $          | 0.21 |   | **$** | **0.46** | ** ** | $ | 0.37 |   |
| Diluted – pro forma                                           | ** ** | **$**                  | **0.12**      | ** **           | $          | 0.11 |   | **$** | **0.23** | ** ** | $ | 0.19 |   |

 

13

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion should be read in conjunction with theattached interim consolidated financial statements and with the Company’s 2004Annual Report to Stockholders, which included audited financial statements andnotes thereto for the fiscal year ended February 29, 2004, as well asManagement’s Discussion and Analysis of Financial Condition and Results ofOperations.

 

**Overview**

 

TheCompany is a worldwide leader in the manufacture and distribution of a widerange of display devices, encompassing, among others, entertainment, military,medical and simulation display solutions. The Company is comprised of two distinct segments - (1) the manufactureand distribution of monitors, projection systems and CRTs and (2) the wholesaledistribution of consumer electronic parts. The monitor and CRT segment isorganized into four distinct subsegments or divisions:

 

•      **Monitors** – offers a complete range of CRTs, flatpanel displays and projection systems for use in training and simulation,military, medical and industrial applications.

•      **Data Display** – offers a complete range of CRTs for use indata display screen, including computer terminal monitors and medicalmonitoring equipment.

•      **Home Entertainment –** offers a complete range of CRTs andprojection tubes for television and home theater equipment.

•      **Components** – provides replacement electron guns forCRTs for independent customers as well as servicing the Company’s internalneeds.

 

***Second Quarter and Year to Date 2005 Highlights***

 

•      ***Monitor division revenue*** - the Company’s monitor division continued astrong growth trend.  The Company now hasthe ability to compete in various niche markets within the defense, medical andprojection display industries.  Net saleswithin this segment increased in the second quarter of fiscal 2005 by$1,314,000 or 11.1% compared to the second quarter of fiscal 2004.  For the six months ended August 31,2004, net revenue increased $2,455,000 or 10.7% compared to the same period ayear ago.  This increase reflects newmilitary contracts started in fiscal 2004.

•      ***Monitor division gross profit*****–**the Company’smonitor division sales increased 10.7%, while cost of sales increased6.3%.  The Company did more high volumecontract work during the first half of fiscal 2005 as compared to the firsthalf of fiscal 2004, while it was able to contain costs on orders of highervolume.

•      ***Reduction of debt*** – for the six months ended August 31,2004, the Company’s total debt was reduced by $1,813,000 compared to the sameperiod a year ago, which contributed to a $152,000 decrease in interest expensefor the first half of fiscal 2005.

 

***Fiscal 2005 Challenges***

 

***Inventory management*** - the Company continually monitorshistorical sales trends as well as projected future needs to ensure adequate onhand supplies of inventory and to ensure against overstocking of slower moving,obsolete items.

 

Certainof the Company’s divisions maintain significant inventories of CRT’s andcomponent parts in an effort to ensure its customers a reliable source ofsupply.  The Company’s inventory turnoveraverages 175 days, although in many cases the Company would anticipate holding90 to 100 days of inventory in the normal course of operations.  This level of inventory is higher than someof the Company’s competitors due to the fact that it sells a number of productsrepresenting older, or trailing edge, technology that may not be available fromother sources. The market for these trailing edge

 

14

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technologyproducts is declining and, as manufacturers for these products discontinueproduction or exit the business, the Company may make last time buys. In themonitor segment of the Company’s business, the market for its products ischaracterized by fairly rapid change as a result of the development of newtechnologies, particularly in the flat panel display area. If the Company failsto anticipate the changing needs of its customers and accurately forecast theirrequirements, it may accumulate inventories of products which its customers nolonger need and which the Company will be unable to sell or return to itsvendors.  Because of this, the Company’smanagement monitors the adequacy of its inventory reserves regularly, and at August 31,2004, believes its reserves to be adequate.

 

Results of Operations

 

The following table setsforth, for the three and six months ended August 31, 2004 and 2003, thepercentages which selected items in the Statements of Income bear to totalsales:

 
| ** **                       | ** ** | **Three Months  Ended August 31,** | ** ** | **Six Months  Ended August 31,** | ** ** |
|----------------------------------|------------|-----------------------------------------|------------|---------------------------------------|------------|
| ** **                       | ** ** | **2004**                                | ** ** | **2003**                              | ** ** | **2004** | ** ** | **2003** | ** ** |
| Sales                            |       |                                    |       |                                  |       |   |   |   |   |
| CRT Segment                      |       |                                    |       |                                  |       |   |   |   |   |
| Monitors                         |       | 63.5                                    | %          | 61.8                                  | %          | 62.6 | % | 60.2 | % |
| Data Display CRT’s          |       | 8.2                                     |       | 9.5                                   | %          | 9.6 |   | 9.7 |   |
| Entertainment CRT’s         |       | 5.3                                     |       | 7.0                                   |       | 5.6 |   | 7.5 |   |
| Electron Guns and Components     |       | 0.9                                     |       | 0.7                                   |       | 1.0 |   | 1.4 |   |
| Total CRT Segment                |       | 77.9                                    | %          | 79.0                                  | %          | 78.8 | % | 78.8 | % |
| Wholesale Consumer Parts Segment |       | 22.1                                    |       | 21.0                                  |       | 21.2 |   | 21.2 |   |
|                             |       | 100.0                                   | %          | 100.0                                 | %          | 100.0 | % | 100.0 | % |
| Costs and expenses               |       |                                    |       |                                  |       |   |   |   |   |
| Cost of goods sold               |       | 66.9                                    | %          | 65.3                                  | %          | 66.9 | % | 66.3 | % |
| Selling and delivery             |       | 8.5                                     |       | 8.8                                   |       | 8.6 |   | 9.1 |   |
| General and administrative       |       | 14.6                                    |       | 16.1                                  |       | 14.6 |   | 15.6 |   |
|                             |       | 90.0                                    | %          | 90.2                                  | %          | 90.1 | % | 91.0 | % |
|                             |       |                                    |       |                                  |       |   |   |   |   |
| Income from Operations           |       | 10.0                                    | %          | 9.8                                   | %          | 9.8 | % | 9.0 | % |
|                             |       |                                    |       |                                  |       |   |   |   |   |
| Interest expense                 |       | 1.1                                     | %          | 1.7                                   | %          | 1.2 | % | 1.7 | % |
| Other income                     |       | 0.2                                     |       | 0.4                                   |       | 0.4 |   | 0.3 |   |
| Income before income taxes       |       | 9.1                                     | %          | 8.5                                   | %          | 9.0 | % | 7.5 | % |
| Provision for income taxes       |       | 3.4                                     |       | 3.2                                   |       | 3.4 |   | 2.8 |   |
|                             |       |                                    |       |                                  |       |   |   |   |   |
| Net Income                       |       | 5.6                                     | %          | 5.3                                   | %          | 5.6 | % | 4.7 | % |

 

Net sales

 

Consolidated net salesincreased $1,552,000 and $2,439,000 for the three and six months ended August 31,2004 as compared to the same period ended August 31, 2003.  CRT division sales increased $1,002,000 and$1,946,000 for the three and six-month comparative periods ended August 31,2004.  The wholesale division salesincreased $550,000 for the three-month comparative period and $493,000 for thesix-month comparative periods ended August 31, 2004.

 

The net increase in CRT segment sales is attributed to growth withinthe monitor segment of $1,314,000 for the three months ended August 31,2004 and $2,455,000 for the six months ended August 31, 2004.  This increase is due in large

 

15

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part to stronger demand from military and defense contractors.  The data display segment showed a decrease of$117,000 for the three month period and an increase of $209,000 for the sixmonth comparative period.  Theentertainment segment showed decreases of $248,000 and $602,000 for the threeand six month periods, while the components segment showed an increase for thethree month period of $53,000 and a decrease of $116,000 for the six monthperiod.

 

The net gain in monitor segment sales for the six months ended August 31,2004 includes increases from Display Systems of $2,506,000 and Aydin Displaysof $2,886,000.  These increases reflectrevenues from new contract orders received from the Boeing Co., Lockheed Martinand others during the latter part of fiscal 2004.  There were offsetting declines of $2,745,000at the Lexel operation.  One of its majorcontracts was completed during fiscal 2004, though Lexel’s other product lines,including direct view storage tubes, maintained significant backlogs at August 31,2004.  Z-Axis sales decreased $229,000compared to a year ago, though management expects the recent acquisition of theData Ray, Inc. monitor business to positively impact Z-Axis’ sales during thesecond half of fiscal 2005.

 

The data display division showed an increase in sales of $209,000compared to the six month period ended August 31, 2003.  Management attributes this primarily to itsdecision in late fiscal 2004 to distribute projection tube displays from itsData Display location in Tucker, Georgia instead of its Novatron location,which is a part of the entertainment division.

 

Within the entertainment division, sales declined $248,000 and $602,000for the three and six month comparative periods.  The Company is the primary supplier ofreplacement television CRT’s to the domestic entertainment market.  A majority of the entertainment segment’ssales (37%) are to major television retailers as replacements for products soldunder manufacturer and extended warranties. Due to continued lower retail sales prices for mid-size television sets(25” to 30”), fewer extended warranties were sold by retailers, a trendconsistent with the past two fiscal years. The Company remains the primary supplier of product to meetmanufacturers’ standard warranties. Growth in this division will be impacted by the timing and number ofextended warranties sold for the larger, more expensive sets.  Because the Company is in the replacementmarket, it has the ability to track retail sales trends and, accordingly, canattempt to adjust quantities of certain size CRT’s carried in stock and reduceexposure to obsolescence.

 

Sales within the component parts division were relatively flat for thecomparative periods.  Sales in thisdivision have declined over the past two fiscal years due to weaker demand forelectron gun and stem sales.  Electrongun sales have historically been dependent upon the demand by domestic andforeign television CRT remanufacturers. These sales have declined over the past few years as consumers movetowards purchasing new technology as opposed to repairing existing sets.  The Company’s Wintron location is in theprocess of transitioning to two newer camera technologies.  One such technology will assist border guardswith under car inspections and another will assist correctional facilities withthe supervision of inmates.  Ifsuccessful, the Company feels these new technologies will have a positiveimpact on the component division sales.

 

Gross margins

 

Consolidated gross margins decreased from 34.7% to 33.1% for thequarter and from 33.7% to 33.1% for the six months ended August 31, 2004as compared to August 31, 2003.  CRTsegment margins were relatively flat for the three and six month comparativeperiods.  The wholesale parts segmentmargins decreased from 45.9% to 39.7% and from 47.2% to 42.1% for the samecomparative periods.

 

The wholesale parts segment margins were negatively impacted due tohigher sales to two customers, National Parts and Best Buy, which carry lowermargins.  Also, the wholesale partssegment has a distribution agreement with Applica and Norelco.  The revenues for these products include ahandling charge and shipping revenue which carry significant profitmargins.  These sales were down slightlycompared to the comparative periods a year ago.

 

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Operatingexpenses

 

Operating expenses as apercentage of sales decreased from 24.9% to 23.1% for the quarter ended August 31,2004 as compared to August 31, 2003 and from 24.8% to 23.3% for the samesix month comparative period.  CRTsegment selling expenses increased $103,000 while the wholesale parts segmentexpenses remained flat for the comparative periods.  Despite the increase in selling expenseswithin the CRT segment, selling expenses remained flat as a percentage of salesfor the comparative periods.

 

CRT segment increases included increases within the monitor segment of$164,000, reflecting the continued growth and need for support personnel withinthis division.  These increases wereoffset by declines within the data display segment of $67,000, which reflectlower payroll costs achieved through the reduction of personnel.

 

Interestexpense

 

Interest expense decreased $90,000 and $152,000 for the three and sixmonths ended August 31, 2004 as compared to the same periods a yearago.  The Company maintains various debtagreements with different interest rates, most of which are based on the primerate or LIBOR.   Overall debt decreased$1,813,000 during the comparable periods, which was the primary reason for thedecrease in interest expense.

 

Income taxes

 

The effective tax ratefor the six months ended August 31, 2004 is 38.0% as compared to 38.0% ayear ago.  These rates are greater thanthe Federal statutory rate primarily due to the effect of state taxes and thepermanent non-deductibility of certain expenses for tax purposes.

 

Foreigncurrency translation

 

Gains or losses resulting from the transactions with its UK subsidiaryare reported in current operations while currency translation adjustments arerecognized in a separate component of shareholders’ equity.  There were no significant gains or lossesrecognized in either period related to the UK subsidiary.

 

Liquidity and capital resources

 

As of August 31, 2004, the Company had total cash and cashequivalents of $3,942,000.  The Company’sworking capital was $34,138,000 and $31,947,000 at August 31, 2004 and February 29,2004.  In recent years, the Company hasfinanced its growth and cash needs primarily through income from operations,borrowings under revolving credit facilities and long-term debt.  Liquidity provided by operating activities ofthe Company is reduced by working capital requirements, largely inventories andaccounts receivable, debt service, capital expenditures, product line additionsand, in fiscal 2004, dividends.

 

TheCompany specializes in certain products representing trailing-edge technologythat may not be available from other sources, and may not be currentlymanufactured. In many instances, the Company’s products are components oflarger display systems for which immediate availability is critical for thecustomer. Accordingly, the Company enjoys higher gross margins, but typicallyhas larger investments in inventories than those of its competitors.

 

TheCompany continues to monitor its cash and financing positions seeking to findways to lower its interest costs and to produce positive operating cashflow.  The Company examines possibilitiesto grow its business as opportunities present themselves, such as new salescontracts or niche acquisitions. There could be an impact on working capitalrequirements to fund this growth.  As inthe past, the intent is to finance such projects with operating cash flows orexisting bank lines; however, more permanent sources of capital may be requiredin certain circumstances.  In March 2004,the Company acquired the assets of Colorado based Data-Ray Corporation’s CRTmonitor operations.  Consideration forthe purchase included the issuance of $400,000 of the Company’s common stockand $150,000 cash to the seller.

 

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Cash provided by operations for the six months ended August 31,2004 was $2,746,000 as compared to $4,670,000 for the same period a yearago.   Net income for the six monthsended August 31, 2004 adjusted for non-cash items provided cash of $2,605,000.  Working capital requirements decreased $129,000for the six months ended August 31, 2004 due primarily to improvedcollections of receivables, which provided cash of $1,836,000.  Increases in accounts payable,  accrued liabilities provided cash of $389,000.  Increases in inventory and prepaid expensesused cash of $2,352,000 and $2,000, respectively.  Inventory purchases were primarily increaseswithin the monitor segment required to fill open backlog orders.  For the six months ended August 31,2003, working capital requirements decreased primarily from more aggressivecollection efforts of receivables, which provided cash of $1,139,000, adecrease in prepaid expenses, which provided cash of $543,000, a decrease inpurchase requirements for inventories, which provided cash of $616,000.  Working capital requirements for the sixmonths ended August 31, 2003 increased $110,000 to reduce overall accountspayable and accrued liabilities.

 

Investing activities used cash of $464,000 in the first six months offiscal 2005, compared to $328,000 for fiscal 2004.  Capital expenditures were $314,000 for theperiod ended August 31, 2004 as compared to $375,000 for the period ended August 31,2003.  Capital expenditures in 2005 were primarilyfor building improvements and computer hardware.  Capital expenditures were primarily withinthe monitor segment to support the growth within this segment.  The Company does not anticipate anysignificant investments in capital assets for 2005.  In the first six months of fiscal 2005, theCompany paid $150,000 related to the acquisition of Data Ray, Inc.

 

Financing activities used cash of $1,065,000 for the six months ended August 31,2004, and used cash of $5,533,000 for the same period a year ago.  During the six months ended August 31,2004, the Company used net cash of $3,397,000 from lines of credit primarily tofinance working capital needs and also to repay $3,216,000 against outstandingborrowings from the CEO, reducing the balance of his note to $5,000,000.  Additionally, long-term debt was reduced by$1,240,000 for the six months ended August 31, 2004.  During the period ended August 31, 2003,the Company used cash of $4,684,000, primarily for debt reduction.

 

TheCompany’s debt agreements with financial institutions contain affirmative andnegative covenants, including requirements related to tangible net worth anddebt service coverage and new loans. Additionally, dividend payments, capital expenditures and acquisitionshave certain restrictions. Substantially all of the Company’s retained earningsare restricted based upon these covenants.

 

TheCompany has a stock repurchase program, pursuant to which it is authorized torepurchase up to 462,500 shares of the Company’s common stock in the openmarket. In the first quarter of fiscal 2004, 125,000 shares were repurchased for$812,000. No shares have been repurchased in fiscal 2005.  Under this program, 170,500 shares remainauthorized to be repurchased by the Company.

 

Inthe first quarter of fiscal 2004, the Company redeemed $100,000 of common stockpreviously issued for the purchase of inventory.  The Company paid a cash dividend of $245,000in the fourth quarter of fiscal 2004, which were the first dividends declaredand paid by the Company in its history. The policy regarding future payments ofdividends will be reviewed periodically by the Board of Directors and will bebased on the earnings and financial position of the Company and other factorswhich the Board of Directors deems appropriate.

 

On October 14, 2004, the Company entered into an Asset PurchaseAgreement with Evans & Sutherland. Under this agreement, the Company will pay $5,250,000 for Evans &Sutherland's ESCP® and Targetview CRT projector product lines.  This acquisition will be financed by a loanfrom an officer of the Company.  Underthe terms of the final agreement, the Company will consolidate all CRTprojector manufacturing, sales and support with its established MarqueeTMprojector operations in Cape Canaveral, Florida.  The Company expects this consolidation willbe completed by the end of the calendar year.

 

CriticalAccounting Policies

 

Management’s Discussion and Analysis of Results of Operations andFinancial Condition are based upon the Company’s consolidated financialstatements.  These financial statementshave been prepared in accordance with accounting principles generally acceptedin the United States of America.  Theseprinciples require the use of estimates and assumptions that affect amountsreported and disclosed in the financial statements and related notes.  The accounting policies that may involve ahigher degree of judgments, estimates, and complexity include reserves oninventories,

 

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revenue recognition, the allowance for bad debts and warrantyreserves.  The Company uses the followingmethods and assumptions in determining its estimates:

 

*Reserves on inventories*

 

Reserves on inventories result in a charge to operations when theestimated net realizable value declines below cost.  Management regularly reviews the Company’sinvestment in inventories for declines in value and establishes reserves whenit is apparent that the expected realizable value of the inventory falls belowits original cost. The age of the inventory is not as significant as is theprojected demand for CRTs. Management is able to identify consumer buyingtrends, such as size and application, well in advance of supplying replacementCRTs. Thus, the Company is able to adjust inventory-stocking levels accordingto the projected demand. The average life of a CRT is five to seven years, atwhich time the Company’s replacement market develops. These reviews includeobservations of product development trends of the OEM’s, new products beingmarketed, and technological advances relative to the product capabilities ofthe Company’s existing inventories. The Company’s reserves on inventoriesincreased $224,000 during the first six months of fiscal 2005.

 

*Revenue Recognition*

 

Revenue from product sales is recognized when goods are shipped.  The Company does not offer rights of returnto customers; however, it does offer one and two-year limited warranties oncertain products.

 

Revenue from contracts that are long-term in nature is recognized bythe percentage of completion method. Profit estimates are revised periodically based upon actual costsincurred.  Any expected losses identifiedon contracts are recognized immediately. Revenue related to short-term contracts is recognized upon shipment ofproduct, which is typically mandated by set delivery dates in the relatedcontract.

 

*Allowance for bad debts*

 

The allowance for bad debts is determined by reviewing known customerexposures and applying historical credit loss experience to the currentreceivable portfolio with consideration given to the current condition of theeconomy, assessment of the financial position of the creditors and overalltrends in past due accounts compared to established thresholds.  The company monitors credit exposure andassesses the adequacy of the allowance for bad debts on a regular basis.  The Company’s allowance for bad debtsincreased $61,000 during the first six months of fiscal 2005.

 

*Warrantyreserves*

 

The Company’s warranty reserve is determined by recording a specificreserve for known warranty issues and a general reserve based on historicalclaims experience.  Actual claimsincurred could differ from the original estimates, requiring adjustments to thereserve.  The Company’s warranty reservesdecreased $165,000 during the first six months of fiscal 2005.  The majority of this decrease occurred at theCompany’s Lexel operation in Lexington, KY due to improved quality on certainproducts that had experienced higher than average warranty claims.

 

*OtherAccounting Policies*

 

Other loss contingencies are recorded as liabilities when it isprobable that a liability has been incurred and the amount of the loss isreasonably estimable.  Disclosure isrequired when there is a reasonable possibility that the ultimate loss willexceed the recorded provision. Contingent liabilities are often resolved over long time periods.  Estimating probable losses requires analysisof multiple factors that often depend on judgments about potential actions bythird parties.

 

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Forward-Looking Information

 

This report contains forward-looking statements and information that isbased on management’s beliefs, as well as assumptions made by, and informationcurrently available to management.  Whenused in this document, the words “anticipate”, “believe”, “estimate”, “intends”,“will”, and “expect” and similar expressions are intended to identifyforward-looking statements.  Suchstatements involve a number of risks and uncertainties.  Among the factors that could cause actualresults to differ materially are the following: business conditions, rapid or unexpected technological changes, productdevelopment, inventory risks due to shifts in product demand, competition,domestic and foreign government relations, fluctuations in foreign exchangerates, rising costs for components or unavailability of components, the timingof orders booked, lender relationships, and the risk factors listed from timeto time in the Company’s reports filed with the Commission.

 

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSUREABOUT MARKET RISK

 

The Company’s primarymarket risks include fluctuations in interest rates and variability in interestrate spread relationships, such as prime to LIBOR spreads.  Approximately $19,964,000 of outstanding debtat August 31, 2004 related to long-term indebtedness under variable ratedebt.  Interest on the outstandingbalance of this debt will be charged based on a variable rate related to theprime rate or the LIBOR rate.  Both ratebases are incremented for margins specified in their agreements.  Thus, the Company’s interest rate is subjectto market risk in the form of fluctuations in interest rates. The effect of ahypothetical one percentage point increase across all maturities of variablerate debt would result in an annualized decrease of approximately $199,000 inpre-tax net income assuming no further changes in the amount of borrowingssubject to variable rate interest from amounts outstanding at August 31,2004. The Company does not trade in derivative financial instruments.

 

The Company has a subsidiary in the U.K., which is not material, butuses the British pound as its functional currency. Due to its limitedoperations outside of the U.S., the Company’s exposure to changes in foreigncurrency exchange rates between the U.S. dollar and foreign currencies or toweakening economic conditions in foreign markets is not expected tosignificantly impact the Company’s financial position.

 

ITEM 4.  CONTROLS AND PROCEDURES

 

a)     Evaluationof disclosure controls and procedures. Our chief executive officer and our chief financial officer, afterevaluating the effectiveness of our “disclosure controls and procedures” (asdefined in the Securities Exchange Act of 1934 Rules 13a-14(c) and 15d-14(c))as of the end of the period covered by this quarterly report (the “EvaluationDate”), have concluded that, as of the Evaluation Date, our disclosure controlsand procedures were adequate with regards to the domestic operations of theCompany and designed to ensure that material information relating to us and ourconsolidated subsidiaries would be made known to our chief executive officerand our chief financial officer by others within those entities.  The Company had begun implementing changes tothe disclosure controls and procedures for the international operations but atthe time of the Evaluation Date had not completed those changes.

 

b)    Changesin internal controls. Subsequent to the Evaluation Date there were changesimplemented to the international disclosure controls and procedures to providefor more accurate review and reconciliation of intercompany transactions.  There were no other significant changes inour internal controls or in other factors that could significantly affect our internalcontrols and procedures during the period covered by this quarterly report.

 

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PART II

 

Item 1.            LegalProceedings

 

No new legal proceedings or material changes in existing litigationoccurred during the quarter ended August 31, 2004.

 

Item 2.            UnregisteredSales of Equity Securities and Use of Proceeds

 

None.

 

Item 3.            Defaultsupon Senior Securities

 

None.

 

Item 4.            Submissionof Matters to a Vote of Security Holders

 

a)     The Company held its annual meeting ofstockholders on August 20, 2004 and solicited votes by proxy in

conjunction with such meeting.

 

b)    Thefollowing matter was approved by the shareholders:

(i)    The approval of management’snominees to the Board of Directors with the nominees receiving the followingvotes:

 
| ** **         | ** ** | **For**   | ** ** | **Withheld** | ** ** | **Abstain** | ** ** |
|--------------------|------------|-----------|------------|--------------|------------|-------------|------------|
| Ronald D. Ordway   |       | 4,389,986 |       | 269,963      |       | 152,980     |       |
| Ervin Kuczogi      |       | 4,389,746 |       | 270,203      |       | 152,980     |       |
| Peter Frend        |       | 4,389,986 |       | 269,963      |       | 152,980     |       |
| Carolyn Howard     |       | 4,389,986 |       | 269,963      |       | 152,980     |       |
| Carleton E. Sawyer |       | 4,389,986 |       | 269,963      |       | 152,980     |       |

 

Item 5.            Otherinformation

 

None

 

Item 6.            Exhibitsand Reports on Form 8-K

 

None

 

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SIGNATURES

 

Pursuant to the requirements of theSecurities and Exchange Act of 1934, the registrant has duly caused this reportto be signed on its behalf by the undersigned, thereto duly authorized.

 

 
|                  |   | VIDEO DISPLAY CORPORATION |
|-----------------------|--------|---------------------------|
|                  |   |                      |
|                  |   |                      |
| October 15, 2004 | By:    | /s/ Ronald D. Ordway      |   |
|                  |   | Ronald D. Ordway          |
|                  |   | Chief Executive Officer   |
|                  |   |                      |
|                  |   |                      |
| October 15, 2004 | By:    | /s/ Gregory A. Kittle     |   |
|                  |   | Gregory A. Kittle         |
|                  |   | Chief Financial Officer   |

 

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