**UNITED STATES**

**SECURITIES 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**

 

**ForQuarterly Period Ended August 31, 2005**

 

**Commission File Number 0-13394**

 

**VIDEO DISPLAY CORPORATION**

(Exact name of registrant as specified on its charter)

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

 

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

(Address of principal executive offices and zip code)

 

**770-938-2080**

(Registrant’s telephone number including area code)

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by section 13or 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 forthe past 90 days.  Yes ýNo o

 

Indicate by check markwhether the registrant is an accelerated filer (as defined in Rule 12b-2of the Exchange Act).Yes o  No ý

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).Yes o No ý

 

Shares outstanding ofeach of the registrant’s classes of common stock at August 31, 2005:

 
| **Class**                  | ** ** | **Number of Shares** |
|----------------------------|------------|----------------------|
| Common Stock, No Par Value |       | 9,694,000            |

 

 

----

 

**Video Display Corporation and Subsidiaries**

**Index**

 
| PART I.                                | FINANCIAL  INFORMATION                                                                                     |   |
|---------------------------------------------|------------------------------------------------------------------------------------------------------------|--------|
|                                        |                                                                                                       |   |
|                                        | Item 1.  Financial Statements                                                                              |   |
|                                        |                                                                                                       |   |
|                                        | Consolidated  Balance Sheets –  August 31, 2005 (unaudited) and February 28, 2005           |   |
|                                        |                                                                                                       |   |
|                                        | Consolidated  Statements of Income -  Three and six months ended August 31, 2005 and 2004 (unaudited) |   |
|                                        |                                                                                                       |   |
|                                        | Consolidated  Statements of Shareholders’ Equity -  Six months ended August 31, 2005 (unaudited) |   |
|                                        |                                                                                                       |   |
|                                        | Consolidated  Statements of Cash Flows –  Six months ended August 31, 2005 and 2004 (unaudited)  |   |
|                                        |                                                                                                       |   |
|                                        | Notes  to Consolidated Financial Statements -  August 31, 2005 (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 Senior  Securities                                                                   |   |
|                                        | Item 4. Submission of  Matters to a Vote of Security Holders                                               |   |
|                                        | Item 5. Other Information                                                                                  |   |
|                                        | Item 6. Exhibits                                                                                           |   |
|                                        |                                                                                                       |   |
| SIGNATURES                                  |                                                                                                       |
|                                        |                                                                                                       |
| EXHIBIT 31.1 302 CERTIFICATION  OF CEO |                                                                                                       |
| EXHIBIT 31.2 302 CERTIFICATION  OF CFO |                                                                                                       |
| EXHIBIT 32.1 906 CERTIFICATIONS        |                                                                                                       |

 

2

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**Video Display Corporation and Subsidiaries**

**Consolidated Balance Sheets**

 
| ** **                                                                        | ** ** | **August 31,** | ** **     | **February 28,** | ** ** |
|-----------------------------------------------------------------------------------|------------|---------------------|----------------|-----------------------|------------|
| ** **                                                                        | ** ** | **2005**            | ** **     | **2005**              | ** ** |
| ** **                                                                        | ** ** | **(unaudited)**     | ** **     | ** **            | ** ** |
| **Assets**                                                                        |       |                |           |                  |       |
| Current assets                                                                    |       |                |           |                  |       |
| Cash and cash  equivalents                                                        | ** ** | **$**               | **2,185,000**  |                  | $          | 1,471,000 |   |
| Accounts  receivable, less allowance for possible losses of $451,000 and $339,000 | ** ** | **14,641,000**      |           | 11,929,000            |       |
| Inventories                                                                       | ** ** | **34,565,000**      | ** **     | 32,105,000            |       |
| Deferred income  taxes                                                            | ** ** | **2,821,000**       | ** **     | 2,555,000             |       |
| Prepaid expenses  and other                                                       | ** ** | **905,000**         | ** **     | 744,000               |       |
| Total current  assets                                                             | ** ** | **55,117,000**      | ** **     | 48,804,000            |       |
|                                                                              |       |                | ** **     |                  |       |
| Property, plant and equipment:                                                    |       |                | ** **     |                  |       |
| Land                                                                              | ** ** | **540,000**         | ** **     | 540,000               |       |
| Buildings                                                                         | ** ** | **7,338,000**       | ** **     | 7,155,000             |       |
| Machinery and  equipment                                                          | ** ** | **19,972,000**      | ** **     | 19,485,000            |       |
|                                                                              |       | **27,850,000**      | ** **     | 27,180,000            |       |
| Accumulated  depreciation                                                         | ** ** | **(20,077,000**     | **)**          | (19,543,000           | )          |
| Net property,  plant, and equipment                                               | ** ** | **7,773,000**       | ** **     | 7,637,000             |       |
|                                                                              |       |                | ** **     |                  |       |
| Goodwill                                                                          | ** ** | **1,318,000**       | ** **     | 1,318,000             |       |
| Other assets                                                                      | ** ** | **3,966,000**       | ** **     | 4,020,000             |       |
|                                                                              |       |                | ** **     |                  |       |
| Total assets                                                                      | ** ** | **$**               | **68,174,000** | ** **            | $          | 61,779,000 |   |

 

The accompanying notesare an integral part of these statements.

 

3

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| ** **                                                                                                       | ** ** | **August 31,** | ** **     | **February 28,** | ** ** |
|------------------------------------------------------------------------------------------------------------------|------------|---------------------|----------------|-----------------------|------------|
| ** **                                                                                                       | ** ** | **2005**            | ** **     | **2005**              | ** ** |
| ** **                                                                                                       | ** ** | **(unaudited)**     | ** **     | ** **            | ** ** |
| **Liabilities and Shareholders’ Equity**                                                                    |       |                |           |                  |       |
| Current liabilities                                                                                              |       |                |           |                  |       |
| Accounts payable                                                                                                 | ** ** | **$**               | **5,335,000**  |                  | $          | 5,190,000 |   |
| Accrued  liabilities                                                                                             | ** ** | **3,935,000**       |           | 3,080,000             |       |
| Line of credit                                                                                                   | ** ** | **—**          |           | 2,688,000             |       |
| Notes payable to  officers and directors                                                                         | ** ** | **1,043,000**       |           | 49,000                |       |
| Current  maturities of long-term debt                                                                            | ** ** | **148,000**         |           | 577,000               |       |
| Total current  liabilities                                                                                       | ** ** | **10,461,000**      |           | 11,584,000            |       |
|                                                                                                             |       |                |           |                  |       |
| Lines of credit                                                                                                  | ** ** | **25,178,000**      |           | 19,296,000            |       |
| Long-term debt, less current maturities                                                                          | ** ** | **829,000**         |           | 848,000               |       |
| Notes payable to officers and directors, less  current maturities                                                | ** ** | **128,000**         |           | 146,000               |       |
| Convertible notes payable, net of discount of  $50,000 and $94,000                                               | ** ** | **200,000**         |           | 281,000               |       |
| Deferred income taxes                                                                                            | ** ** | **464,000**         |           | 434,000               |       |
| Total  liabilities                                                                                               | ** ** | **37,260,000**      |           | 32,589,000            |       |
|                                                                                                             |       |                |           |                  |       |
| **Minority Interests**                                                                                           | ** ** | **123,000**         |           | 123,000               |       |
|                                                                                                             |       |                |           |                  |       |
| **Commitments**                                                                                                  | ** ** | **—**          |           | —                |       |
|                                                                                                             |       |                |           |                  |       |
| **Shareholders’ Equity**                                                                                    |       |                |           |                  |       |
| Preferred stock,  no par value – 10,000,000 shares authorized; none issued and outstanding                  | ** ** | **—**          |           | —                |       |
| Common stock, no  par value – 50,000,000 shares authorized; 9,694,000 and 9,704,000 issued and  outstanding | ** ** | **6,856,000**       |           | 7,026,000             |       |
| Additional paid-in capital                                                                                       | ** ** | **92,000**          |           | 92,000                |       |
| Retained earnings                                                                                                | ** ** | **23,740,000**      |           | 22,018,000            |       |
| Accumulated other comprehensive income (loss)                                                                    | ** ** | **103,000**         |           | (69,000               | )          |
| Total  shareholders’ equity                                                                                 | ** ** | **30,791,000**      |           | 29,067,000            |       |
| Total liabilities and shareholders’ equity                                                                  | ** ** | **$**               | **68,174,000** |                  | $          | 61,779,000 |   |

 

The accompanying notesare an integral part of 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,** | ** ** |
|---------------------------------------------|------------|-----------------------------------------|----------------|---------------------------------------|------------|
|                                        | ** ** | **2005**                                | ** **     | **2004**                              | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                        |       |                                    |           |                                  |       |   |   |   |   |
| Net sales                                   |       | **$**                                   | **23,332,000** | ** **                            | $          | 20,667,000 |   | **$** | **43,774,000** | ** ** | $ | 40,567,000 |   |
|                                        |       | ** **                              | ** **     |                                  |       | ** ** | ** ** |   |   |
| Cost of goods sold                          |       | **15,728,000**                          | ** **     | 13,832,000                            |       | **29,634,000** | ** ** | 27,146,000 |   |
|                                        |       | ** **                              | ** **     |                                  |       | ** ** | ** ** |   |   |
| Gross profit                                |       | **7,604,000**                           | ** **     | 6,835,000                             |       | **14,140,000** | ** ** | 13,421,000 |   |
|                                        |       | ** **                              | ** **     |                                  |       | ** ** | ** ** |   |   |
| Operating expenses                          |       | ** **                              | ** **     |                                  |       | ** ** | ** ** |   |   |
| Selling and  delivery                       |       | **1,883,000**                           | ** **     | 1,761,000                             |       | **3,597,000** | ** ** | 3,508,000 |   |
| General and  administrative                 |       | **3,603,000**                           | ** **     | 3,017,000                             |       | **7,172,000** | ** ** | 5,929,000 |   |
|                                        | ** ** | **5,486,000**                           | ** **     | 4,778,000                             |       | **10,769,000** | ** ** | 9,437,000 |   |
|                                        |       | ** **                              | ** **     |                                  |       | ** ** | ** ** |   |   |
| Operating profit                            |       | **2,118,000**                           | ** **     | 2,057,000                             |       | **3,371,000** | ** ** | 3,984,000 |   |
|                                        |       | ** **                              | ** **     |                                  |       | ** ** | ** ** |   |   |
| Other income (expense)                      |       | ** **                              | ** **     |                                  |       | ** ** | ** ** |   |   |
| Interest expense                            |       | **(338,000**                            | **)**          | (232,000                              | )          | **(675,000** | **)** | (489,000 | ) |
| Other, net                                  |       | **16,000**                              | ** **     | 35,000                                |       | **80,000** | ** ** | 162,000 |   |
|                                        | ** ** | **(322,000**                            | **)**          | (197,000                              | )          | **(595,000** | **)** | (327,000 | ) |
|                                        |       | ** **                              | ** **     |                                  |       | ** ** | ** ** |   |   |
| Income before  income taxes                 |       | **1,796,000**                           | ** **     | 1,860,000                             |       | **2,776,000** | ** ** | 3,657,000 |   |
|                                        |       | ** **                              | ** **     |                                  |       | ** ** | ** ** |   |   |
| Income tax expense                          |       | **680,000**                             | ** **     | 708,000                               |       | **1,054,000** | ** ** | 1,390,000 |   |
|                                        |       | ** **                              | ** **     |                                  |       | ** ** | ** ** |   |   |
| Net income                                  |       | **$**                                   | **1,116,000**  | ** **                            | $          | 1,152,000 |   | **$** | **1,722,000** | ** ** | $ | 2,267,000 |   |
|                                        |       | ** **                              | ** **     |                                  |       | ** ** | ** ** |   |   |
| Basic earnings per share of common stock    | ** ** | **$**                                   | **0.12**       | ** **                            | $          | 0.12 |   | **$** | **0.18** | ** ** | $ | 0.24 |   |
|                                        |       | ** **                              | ** **     |                                  |       | ** ** | ** ** |   |   |
| Diluted earnings per share of common stock  | ** ** | **$**                                   | **0.11**       | ** **                            | $          | 0.12 |   | **$** | **0.17** | ** ** | $ | 0.23 |   |
|                                        |       | ** **                              | ** **     |                                  |       | ** ** | ** ** |   |   |
| Basic weighted average shares outstanding   |       | **9,690,000**                           | ** **     | 9,656,000                             |       | **9,696,000** | ** ** | 9,644,000 |   |
|                                        |       | ** **                              | ** **     |                                  |       | ** ** | ** ** |   |   |
| Diluted weighted average shares outstanding |       | **9,925,000**                           | ** **     | 9,892,000                             |       | **9,914,000** | ** ** | 9,864,000 |   |

 

The accompanying notesare an integral part of these statements.

 

5

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**Video Display Corporation and Subsidiaries**

**Consolidated Statement ofShareholders’ Equity**

**For the Six Months Ended August 31, 2005(unaudited)**

 
| ** **                               | ** ** | ** ** | ** ** | ** ** | ** ** | ** **     | ** ** | ** **   | ** ** | **Accumulated**   | ** ** |
|------------------------------------------|------------|------------|------------|------------|------------|----------------|------------|--------------|------------|-------------------|------------|
| ** **                               | ** ** | ** ** | ** ** | ** ** | ** ** | **Additional** | ** ** | ** **   | ** ** | **Other**         | ** ** |
| ** **                               | ** ** | **Common** | ** ** | **Share**  | ** ** | **Paid In**    | ** ** | **Retained** | ** ** | **Comprehensive** | ** ** |
| ** **                               | ** ** | **Shares** | ** ** | **Amount** | ** ** | **Capital**    | ** ** | **Earnings** | ** ** | **Income (Loss)** | ** ** |
|                                     |       |       |       |       |       |           |       |         |       |              |       |
| Balance at February 28, 2005        |       | 9,704,000  |       | $          | 7,026,000  |           | $          | 92,000       |       | $                 | 22,018,000 |   | $ | (69,000 | ) |
|                                     |       |       |       |       |       |           |       |         |       |              |       |
| Net income for  the period               |       | —     |       | —     |       | —         |       | 1,722,000    |       | —            |       |
| Foreign currency  translation adjustment |       | —     |       | —     |       | —         |       | —       |       | 172,000           |       |
| Repurchase of  common stock              |       | (26,000    | )          | (317,000   | )          | —         |       | —       |       | —            |       |
| Exercise of  stock options               |       | 6,000      |       | 22,000     |       | —         |       | —       |       | —            |       |
| Conversion of  debt to common stock      |       | 10,000     |       | 125,000    |       | —         |       | —       |       | —            |       |
|                                     |       |       |       |       |       |           |       |         |       |              |       |
| Balance at August 31, 2005          |       | 9,694,000  |       | $          | 6,856,000  |           | $          | 92,000       |       | $                 | 23,740,000 |   | $ | 103,000 |   |

 

The accompanying notesare an integral part of these statements.

 

6

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**Video Display Corporation and Subsidiaries**

**Consolidated Statements of CashFlows (unaudited)**

 
| ** **                                                                                        | ** ** | **Six Months Ended  August 31,** | ** **    |
|---------------------------------------------------------------------------------------------------|------------|---------------------------------------|---------------|
| ** **                                                                                        | ** ** | **2005**                              | ** **    | **2004** | ** ** |
|                                                                                              |       |                                  | ** **    |   |   |
| **Operating  Activities**                                                                         |       |                                  | ** **    |   |   |
| Net income                                                                                        | ** ** | **$**                                 | **1,722,000** | ** ** | $ | 2,267,000 |   |
| **Adjustments  to reconcile net income to net cash (used in) provided by operating  activities:** |       |                                  | ** **    |   |   |
| Depreciation and  amortization                                                                    | ** ** | **840,000**                           | ** **    | 600,000 |   |
| Provision for  bad debts                                                                          | ** ** | **111,000**                           | ** **    | 61,000 |   |
| Provision for  inventory reserve                                                                  | ** ** | **694,000**                           | ** **    | 526,000 |   |
| Deferred income  taxes                                                                            | ** ** | **(237,000**                          | **)**         | (323,000 | ) |
| **Changes  in working capital, net of effects from acquisitions:**                                |       |                                  | ** **    |   |   |
| Accounts  receivable                                                                              | ** ** | **(2,823,000**                        | **)**         | 1,836,000 |   |
| Inventories                                                                                       | ** ** | **(2,381,000**                        | **)**         | (2,878,000 | ) |
| Prepaid expenses  and other assets                                                                | ** ** | **161,000**                           | ** **    | (2,000 | ) |
| Accounts payable  and accrued liabilities                                                         | ** ** | **1,000,000**                         | ** **    | 389,000 |   |
| Net cash (used  in) provided by operating activities                                              | ** ** | **(913,000**                          | **)**         | 2,476,000 |   |
|                                                                                              |       |                                  | ** **    |   |   |
| **Investing  Activities**                                                                         |       |                                  | ** **    |   |   |
| Capital  expenditures                                                                             | ** ** | **(595,000**                          | **)**         | (314,000 | ) |
| Cash paid for  acquisition                                                                        | ** ** | **(1,377,000**                        | **)**         | (150,000 | ) |
| Net cash used in  investing activities                                                            | ** ** | **(1,972,000**                        | **)**         | (464,000 | ) |
|                                                                                              |       |                                  | ** **    |   |   |
| **Financing  Activities**                                                                         |       |                                  | ** **    |   |   |
| Proceeds from  long-term debt and lines of credit                                                 | ** ** | **17,190,000**                        | ** **    | 16,221,000 |   |
| Repayments of  long-term debt and lines of credit                                                 | ** ** | **(14,444,000**                       | **)**         | (16,655,000 | ) |
| Proceeds from  loans from related parties                                                         | ** ** | **1,000,000**                         | ** **    | — |   |
| Repayments of  loans from related parties                                                         | ** ** | **(24,000**                           | **)**         | (678,000 | ) |
| Repurchase of  common stock                                                                       | ** ** | **(317,000**                          | **)**         | — |   |
| Proceeds from  exercise of stock options                                                          | ** ** | **22,000**                            | ** **    | 47,000 |   |
| Net cash  provided by (used in) financing activities                                              | ** ** | **3,427,000**                         | ** **    | (1,065,000 | ) |
|                                                                                              |       |                                  | ** **    |   |   |
| Effect of  exchange rates on cash                                                                 | ** ** | **172,000**                           | ** **    | (26,000 | ) |
|                                                                                              |       |                                  | ** **    |   |   |
| Net increase in  cash                                                                             | ** ** | **714,000**                           | ** **    | 921,000 |   |
|                                                                                              |       |                                  | ** **    |   |   |
| Cash, beginning  of period                                                                        | ** ** | **1,471,000**                         | ** **    | 3,021,000 |   |
|                                                                                              |       |                                  | ** **    |   |   |
| Cash, end of  period                                                                              | ** ** | **$**                                 | **2,185,000** | ** ** | $ | 3,942,000 |   |

 

The accompanying notes arean integral part of these statements.

 

7

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**Video Display Corporation and Subsidiaries**

**Notes to Consolidated FinancialStatements (unaudited)**

 

NOTE A - SUMMARY OFSIGNIFICANT ACCOUNTING POLICIES

 

Ascontemplated by the Securities and Exchange Commission (the “Commission”)instructions to Form 10-Q, the following footnotes have been condensedand, therefore, do not contain all disclosures required in connection withannual financial statements.  Referenceshould be made to the Company’s year-end financial statements and notes theretocontained in its Annual Report on Form 10-K for the fiscal year ended February 28,2005, as filed with the Commission.

 

Thefinancial information included in this report has been prepared by the Company,without audit.  In the opinion ofmanagement, the financial information included in this report contains alladjustments (all of which are normal and recurring) necessary for a fairpresentation of the results for the interim periods.  Nevertheless, the results shown for interimperiods are not necessarily indicative of results to be expected for the fullyear.  The February 28, 2005consolidated balance sheet data was derived from audited financial statements,but does not include all disclosures required by accounting principlesgenerally accepted in the United States.

 

The consolidatedfinancial statements included the accounts of the Company and its majorityowned subsidiaries after elimination of all significant intercompany accountsand transactions.   Certain prior period balances have beenreclassified to conform to the current period presentation.

 

The Company has asubsidiary in the U.K., which uses the British pound as its functionalcurrency. Assets and liabilities of this foreign subsidiary are translatedusing 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 –RECENT ACCOUNTING PRONOUNCEMENTS

 

In December 2004, the Financial Accounting Standards Board(FASB) issued Statement No. 123 (R) (revised 2004) *Share-Basedpayment*, which is a revision of FASB Statement No. 123, *Accounting for Stock-Based Compensation*.  Statement 123 (R) supersedes AccountingPrinciples Board Opinion (APB) No. 25, *Accounting for StockIssued to Employees*, and amends FASB No. 95, *Statement of Cash Flows*. Generally, the approach to accounting in Statement 123 (R) requires allshare-based payments to employees, including grants of employee stock options,to be recognized in the financial statements based on their fair values.  Currently the Company accounts for thesepayments under the intrinsic value provisions of APB No. 25 with noexpense recognition in the financial statements.  Statement 123 (R) is effective for theCompany beginning March 1, 2006. The Statement offers several alternatives for implementation.  At this time, management has not made adecision as to the alternative it will select.

 

In November 2004, the FASB issued Statement of FinancialAccounting Standards No. 151 (“SFAS No. 151”), *InventoryCosts*, an amendment of APB No. 43, Chapter 4.  The amendments made by SFAS No. 151 willimprove financial reporting by requiring that abnormal amounts of idle facilityexpense, freight, handling costs, and wasted materials (spoilage) be recognizedas current-period charges and by requiring the allocation of fixed productionoverheads to inventory based on the normal capacity of productionfacilities.  SFAS No. 151 iseffective for inventory costs incurred during fiscal years beginning after June 15,2005.  Earlier application is permittedfor inventory costs incurred during fiscal years beginning after November 24,2004.  The Company is currentlyevaluating the impact that adoption of SFAS No. 151 will have on itsfinancial position and results of operations.

 

In December 2004, the FASB issued SFAS 153, “*Exchanges of Nonmonetary Assets*”*.*  This statement explains that exchanges ofnonmonetary assets should be measured based on the fair value of the assetsexchanged.  This statement is

 

8

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effective for fiscal years beginning after June 15,2005.  The Company does not anticipatethis pronouncement to have a material impact on the consolidated financialstatements.

 

In June 2005, the FASB issued SFAS 154, “*AccountingChanges and Error Corrections*”. This statement revises the reporting requirements related to changes inaccounting principles or adoption of new accounting pronouncements.  This statement is effective for fiscal yearsbeginning after December 15, 2005. The Company does not anticipate this pronouncement to have a materialimpact on the consolidated financial statements.

 

NOTE C – BUSINESSACQUISITION

 

In May 2005,the Company acquired the IDS division of Three Five Systems, Inc.  Three Five Systems specializes in flat panel,touch screen and rack mount systems with custom military, industrial andcommercial requirements.  As part of thistransaction, the Company acquired fixed assets of $74,000, inventories of$773,000, and various other assets of $530,000 in exchange for cash of$1,377,000.  The other assets includeproduct development designs and drawings and a customer list, as well as anon-compete agreement.  The productdevelopment designs and drawings will be amortized over a five year period,while the customer list will be amortized over a three year period, which theCompany estimates to be the useful life of these assets.  The IDS division has moved to new facilitiesand is known as Aydin North and is a part of the Company’s Pennsylvania basedAydin operations.  The IDS operations ofThree Five Systems, Inc. are not significant to the Company.

 

The aggregate purchaseprice has been allocated based on fair values as of the date of the completionof the acquisition as follows:

 
| Inventories                                      |   | $       | 773,000   |   |
|--------------------------------------------------|--------|---------|-----------|--------|
| Machinery & equipment                   |   | 74,000  |      |
| Product designs, customer lists and other assets |   | 530,000 |      |
|                                             |   | $       | 1,377,000 |   |

 

In March 2004,the Company acquired the monitor operations of Colorado based Data Ray, Inc.  The Company acquired inventory, fixed assetsand various other assets of $459,000 in exchange for cash of $150,000 and$400,000 of the Company’s common stock, resulting in goodwill of approximately$91,000.  These operations wereconsolidated 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 $6 per share, the market value of thestock at the date of purchase.  Thecommon stock had a put feature whereby Data Ray could redeem the stock for$5.50 per share if the price per share of the Company’s stock was below $6.00after the one year anniversary date of the purchase agreement.  The price of the stock was in excess of $6.00at the one year anniversary date of the agreement.  The monitor operations of Data Ray are notsignificant to the Company.

 

Thefollowing table presents the total purchase price of the acquisition:

 
| Cash                                       |   | $       | 150,000 |   |
|--------------------------------------------|--------|---------|---------|--------|
| Value of Video Display common stock issued |   | 400,000 |    |
| Total Purchase Price Consideration         |   | $       | 550,000 |   |

 

The aggregate purchaseprice has been allocated based on fair values as of the date of the completionof the acquisition as follows:

 
| Finished goods            |   | $       | 279,000 |   |
|---------------------------|--------|---------|---------|--------|
| Machinery & equipment |   | 80,000  |    |
| Goodwill                  |   | 91,000  |    |
| Other assets              |   | 100,000 |    |
|                      |   | $       | 550,000 |   |
|                           |        |         |         |        |  |

 

NOTE C – INVENTORIES

 

Inventories are stated atthe lower of cost (first in, first out) or market.

 

Inventories consisted ofthe following:

 

9

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| ** **                | ** ** | **August 31,** | ** **     | **February 28,** | ** ** |
|---------------------------|------------|---------------------|----------------|-----------------------|------------|
| ** **                | ** ** | **2005**            | ** **     | **2005**              | ** ** |
| ** **                | ** ** | **(unaudited)**     | ** **     | ** **            | ** ** |
|                      |       |                |           |                  |       |
| Raw materials             | ** ** | **$**               | **12,145,000** | ** **            | $          | 7,834,000 |   |
| Work-in-process           | ** ** | **3,166,000**       | ** **     | 3,800,000             |       |
| Finished goods            | ** ** | **23,005,000**      | ** **     | 23,528,000            |       |
|                      |       | **38,316,000**      | ** **     | 35,162,000            |       |
| Reserves for obsolescence | ** ** | **(3,751,000**      | **)**          | (3,057,000            | )          |
|                      |       | **$**               | **34,565,000** | ** **            | $          | 32,105,000 |   |

 

NOTE D – LONG-TERM DEBT

 

Long-term debt consistedof the following:

 
| ** **                                                                                                                                                                                                                                                                                                       | ** ** | **August 31,** | ** **  | **February 28,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------|-------------|-----------------------|------------|
| ** **                                                                                                                                                                                                                                                                                                       | ** ** | **2005**            | ** **  | **2005**              | ** ** |
| ** **                                                                                                                                                                                                                                                                                                       | ** ** | **(unaudited)**     | ** **  | ** **            | ** ** |
| Mortgage payable  to bank; variable interest rate; monthly principal and interest payments of  $6,000 payable until December 2008 with a final principal payment of $350,000  in December 2008, collateralized by land and building of Fox  International, Inc.; paid in full in April 2005. | ** ** | **$**               | **—**  | ** **            | $          | 479,000 |   |
|                                                                                                                                                                                                                                                                                                             |       | ** **          | ** **  |                  |       |
| Mortgage payable  to bank; interest rate at FHLB plus 1.95% (7.35% as of August 31, 2005);  monthly principal and interest payments of $5,000 payable through  October 2021; collateralized by land and building of Teltron  Technologies, Inc.                                                   | ** ** | **548,000**         | ** **  | 557,000               |       |
|                                                                                                                                                                                                                                                                                                             |       | ** **          | ** **  |                  |       |
| Other                                                                                                                                                                                                                                                                                                            | ** ** | **429,000**         | ** **  | 389,000               |       |
|                                                                                                                                                                                                                                                                                                             |       | **977,000**         | ** **  | 1,425,000             |       |
| Less current maturities                                                                                                                                                                                                                                                                                          | ** ** | **148,000**         | ** **  | 577,000               |       |
|                                                                                                                                                                                                                                                                                                             |       | **$**               | **829,000** | ** **            | $          | 848,000 |   |

 

NOTE E - LINES OF CREDIT

 

At August 31, 2005,the Company had a $27,500,000 credit facility with a bank, collateralized byequipment, inventories and accounts receivable of the Company.  The interest rate on this line is a floatingLIBOR rate based on a ratio of debt to EBITDA, as defined in the loandocuments.  As of August 31, 2005,the outstanding balance of this line of credit was $21,678,000 and theavailable amount for borrowing was $5,822,000. The line of credit agreement contains covenants, including requirementsrelated to tangible cash flow, asset and debt service coverage.  Additionally, the bank requires that anycontemplated acquisitions be accretive. As of August 31, 2005, the Company was in compliance with all covenants.  This line of credit agreement expires in November 2006,and accordingly, is classified under long-term liabilities on the Company’sbalance sheet.

 

Additionally, in April 2005,the Company converted a $2,750,000 line of credit (collateralized by assets ofFox International, Inc.) with another bank to a $3,500,000 line of creditwith a bank.  As part of the newfinancing, the lender paid off the balance of the previous line as well as amortgage secured by the land and building of Fox International, Inc.  The interest rate on this line is a floatingLIBOR rated based on a ratio of debt to EBITDA, as defined in the loandocuments.  As of August 31, 2005,the outstanding balance of this line of credit was $3,500,000 and the availableamount for borrowing was $0.  The line ofcredit agreement contains covenants, including requirements related to

 

10

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tangible cash flow, asset and debt service coverage.  As of August 31, 2005, the Company wasin compliance with all covenants.  Thisline of credit agreement expires in November 2006, and accordingly, isclassified under long-term liabilities on the Company’s balance sheet.

 

NOTE F – SUPPLEMENTALCASH FLOW INFORMATION

 
| ** **                                                           | ** ** | **Six Months  Ended** | ** **    |
|----------------------------------------------------------------------|------------|-----------------------|---------------|
| ** **                                                           | ** ** | **August 31,**   | ** **    | **August 31,** | ** ** |
| ** **                                                           | ** ** | **2005**              | ** **    | **2004** | ** ** |
| Cash Paid for:                                                       |       |                  |          |   |   |
| Interest                                                             | ** ** | **$**                 | **631,000**   |   | $ | 489,000 |   |
| Income taxes, net of refunds                                         | ** ** | **$**                 | **1,152,000** |   | $ | 857,000 |   |
|                                                                 |       |                  |          |   |   |
| Non-cash Transactions:                                               |       |                  |          |   |   |
| Conversion of note payable to common stock                           | ** ** | **$**                 | **125,000**   |   | $ | — |   |
| Issuance of common stock for monitor division of Data Ray, Inc. | ** ** | **$**                 | **—**    |   | $ | 400,000 |   |

 

NOTE G – SHAREHOLDERS’EQUITY

 

**EarningsPer Share**

 

Basic earnings per shareis computed by dividing income available to common shareholders by the weightedaverage number of common shares outstanding during each period.  Shares issued during the period are weightedfor the portion of the period that they were outstanding.  Diluted earnings per share is calculated in amanner consistent with that of basic earnings per share while giving effect toall dilutive potential common shares that were outstanding during the period.

 

The following table is areconciliation from basic earnings per share to diluted earnings per share foreach of the periods presented:

 
| ** **                         | ** ** | ** **     | ** ** | **Weighted Average** | ** ** | ** **       | ** ** |
|------------------------------------|------------|----------------|------------|----------------------|------------|------------------|------------|
| ** **                         | ** ** | ** **     | ** ** | **Common Shares**    | ** ** | **Earnings Per** | ** ** |
| ** **                         | ** ** | **Net Income** | ** ** | **Outstanding**      | ** ** | **Share**        | ** ** |
| Quarter ended August 31, 2005 |       |           |       |                 |       |             |       |
| Basic                              |       | $              | 1,116,000  |                 | 9,690,000  |             | $          | 0.12 |   |
| Effect of dilution:                |       |           |       |                 |       |             |       |
| Stock options                      |       | —         |       | 235,000              |       |             |       |
| Diluted                            |       | $              | 1,116,000  |                 | 9,925,000  |             | $          | 0.11 |   |
|                               |       |           |       |                 |       |             |       |
| Quarter ended August 31, 2004 |       |           |       |                 |       |             |       |
| Basic                              |       | $              | 1,152,000  |                 | 9,656,000  |             | $          | 0.12 |   |
| Effect of dilution:                |       |           |       |                 |       |             |       |
| Stock options                      |       | —         |       | 236,000              |       |             |       |
| Diluted                            |       | $              | 1,152,000  |                 | 9,892,000  |             | $          | 0.12 |   |

 

11

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| Six months ended August 31, 2005 |   |   |      |    |      |   |   |
|---------------------------------------|--------|--------|-----------|---------|-----------|--------|--------|
| Basic                                 |   | $      | 1,722,000 |    | 9,696,000 |   | $      | 0.18 |   |
| Effect of dilution:                   |   |   |      |    |      |   |   |
| Stock options                         |   | — |      | 218,000 |      |   |   |
| Diluted                               |   | $      | 1,722,000 |    | 9,914,000 |   | $      | 0.17 |   |
|                                  |   |   |      |    |      |   |   |
| Six months ended August 31, 2004 |   |   |      |    |      |   |   |
| Basic                                 |   | $      | 2,267,000 |    | 9,644,000 |   | $      | 0.24 |   |
| Effect of dilution:                   |   |   |      |    |      |   |   |
| Stock options                         |   | — |      | 220,000 |      |   |   |
| Diluted                               |   | $      | 2,267,000 |    | 9,864,000 |   | $      | 0.23 |   |

 

Prior yearearnings per share data have been adjusted to include the effect of a 2 for 1stock split effected in the form of a 100% stock dividend inNovember 2004.

 

**Stock-BasedCompensation Plans**

 

The Company has anincentive stock option plan whereby options may be granted to key employees ata price not less than fair market value at the time the options are granted andare exercisable beginning on the first anniversary of the grant date for aperiod not to exceed ten years. Statement of Financial Accounting Standards No. 123 encourages, but doesnot require, companies to record compensation cost for stock-based employeecompensation plans at fair value.  TheCompany has chosen to continue to account for stock-based compensation usingthe intrinsic value method prescribed in Accounting Principles Board Opinion No. 25,“Accounting for Stock Issued to Employees”, and related Interpretations.Accordingly, compensation cost for stock options is 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 stock optionsduring each of the quarters ended August 31, 2005 and 2004.

 

Had compensation cost been determined based upon the fair value atthe grant date for awards under the stock option plan consistent with themethodology prescribed under SFAS No. 123, the effect on the Company’s proforma net income and net earnings per share would have been as follows:

 
| ** **                                                                               | ** ** | **Three Months Ended** | ** **    | **Six Months Ended** | ** ** |
|------------------------------------------------------------------------------------------|------------|------------------------|---------------|----------------------|------------|
| ** **                                                                               | ** ** | **August 31,**    | ** **    | **August 31,**  | ** ** | **August 31,** | ** ** | **August 31,** | ** ** |
| ** **                                                                               | ** ** | **2005**               | ** **    | **2004**             | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net income, as  reported                                                                 | ** ** | **$**                  | **1,116,000** | ** **           | $          | 1,152,000 |   | **$** | **1,722,000** | ** ** | $ | 2,267,000 |   |
| Stock-based  employee compensation expense, as reported                                  | ** ** | **—**             | ** **    | —               |       | **—** | ** ** | — |   |
| Stock-based  employee compensation expense determined under fair value basis, net of tax | ** ** | **(8,000**             | **)**         | (12,000              | )          | **(15,000** | **)** | (21,000 | ) |
| Pro forma net  income                                                                    | ** ** | **$**                  | **1,108,000** | ** **           | $          | 1,140,000 |   | **$** | **1,707,000** | ** ** | $ | 2,246,000 |   |
|                                                                                     |       |                   | ** **    |                 |       |   | ** ** |   |   |
| Net earnings per  share:                                                                 |       |                   | ** **    |                 |       |   | ** ** |   |   |
| Basic – as  reported                                                                | ** ** | **$**                  | **0.12**      | ** **           | $          | 0.12 |   | **$** | **0.18** | ** ** | $ | 0.24 |   |
| Basic – pro  forma                                                                  | ** ** | **$**                  | **0.12**      | ** **           | $          | 0.12 |   | **$** | **0.18** | ** ** | $ | 0.23 |   |
| Diluted – as  reported                                                              | ** ** | **$**                  | **0.11**      | ** **           | $          | 0.12 |   | **$** | **0.17** | ** ** | $ | 0.23 |   |
| Diluted – pro  forma                                                                | ** ** | **$**                  | **0.11**      | ** **           | $          | 0.12 |   | **$** | **0.17** | ** ** | $ | 0.23 |   |

 

12

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**Stock Repurchase Program**

 

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. The Company repurchased 25,621 shares in May 2005.  No shares were repurchased in fiscal2005.  Under this program, an additional170,500 shares remain authorized to be repurchased by the Company.

 

NOTEH – COMPREHENSIVE INCOME

 

Statementof Financial Accounting Standards No. 130 “Reporting Comprehensive Income”establishes standards for reporting and display of nonowner changes inshareholders’ equity.  For the Company,total nonowner changes in shareholders’ equity include net income and thechange in the cumulative foreign exchange translation adjustment component ofshareholders’ equity.  During the threemonths ended August 31, 2005 and 2004, total comprehensive income was$1,214,000 and $1,211,000, respectively.  During the six months ended August 31, 2005 and 2004, total comprehensiveincome was $1,894,000 and $2,333,000, respectively.

 

NOTEI – RELATED PARTY TRANSACTIONS

 

InAugust 2005, the Company’s chief executive officer advanced the Company$1,000,000.  This loan was repaidsubsequent to quarter end in September 2005.

 

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**Video Display Corporation andSubsidiaries**

 

ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussionshould be read in conjunction with the attached interim consolidated financialstatements and with the Company’s 2005 Annual Report to Stockholders, whichincluded audited financial statements and notes thereto for the fiscal yearended February 28, 2005, as well as Management’s Discussion and Analysisof Financial Condition and Results of Operations.

 

**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 segments - (1) the manufacture anddistribution of monitors, projection systems and CRT displays and (2) thewholesale distribution of consumer electronic parts. The display segment isorganized into four interrelated operations aggregated into one operatingsegment pursuant to the aggregation criteria of SFAS 131:

 

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

 

•                  **DataDisplay** – offers a completerange of CRTs for use in data display screen, including computer terminalmonitors and medical monitoring equipment.

 

•                  **HomeEntertainment**– offers acomplete range of CRTs and projection tubes for television and home theaterequipment.

 

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

 

***Second Quarter and Year to Date 2006 Highlights***

 

•                  ***Monitor division revenue*** - the Company’s monitor division continued a strong growth trend.  The Company continues to strengthen itsability to compete in various niche markets within the defense, medical andprojection display industries.  Net saleswithin this segment increased in the second quarter of fiscal 2006 by $1,497,000or 11.4% compared to the second quarter of fiscal 2005.  For the six months ended August 31, 2005,net revenue increased $846,000 or 3.3% compared to the same period a yearago.  This increase reflects the Company’sacquisition of the Evans & Sutherland product line in November 2004,which was consolidated with the Company’s Display Systems operations in CapeCanaveral, FL.

 

•                  ***Data Display division revenue****–*the Company’s datadisplay division sales increased $813,000 and $1,538,000 for the three and sixmonth periods ended August 31, 2005 as compared to the same periods a yearago.  These increases reflect the Company’sdecision to distribute projection tubes from its Data Display location inTucker, GA.  These projection units carrya higher sales price per unit than the company’s normal inventory.

 

•                  ***Acquisition*** –during the first quarter of fiscal 2006, the Company acquired the IDS divisionof Three Five Systems, Inc., consisting of inventory and certain assets.  The newly acquired operation has acquiredleased facilities in Marlboro, MA and has now completed its relocation to thenew facility and will operate as a division of the Company’s Aydin DisplaySystems operations.

 

•                  ***New credit facility***– in April 2005, the Company finalized a new line of credit to replace aprior facility.  Under the terms of thisnew facility, the Company paid off the existing line of credit as well as amortgage securing the land and building of Fox International, Ltd.  The maximum amount available for borrowingsunder this new line is $3,500,000 compared to $2,750,000 under the priorfacility.  Proceeds from this line areavailable for working capital needs of the Company.

 

14

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  ***Fiscal 2006 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 CRTs 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 technology products isdeclining and, as manufacturers for these products discontinue production orexit the business, the Company may make last time buys. In the monitor operationsof the Company’s business, the market for its products is characterized byfairly rapid change as a result of the development of new technologies,particularly in the flat panel display area. If the Company fails to anticipatethe changing needs of its customers and accurately forecast their requirements,it may accumulate inventories of products which its customers no longer needand which the Company will be unable to sell or return to its vendors.  Because of this, the Company’s managementmonitors the adequacy of its inventory reserves regularly, and at August 31,2005, believes its reserves to be adequate.

 

***Interest rate exposure*** – The Company had outstanding bank debt inexcess of $25,000,000 as of August 31, 2005, all of which is subject tointerest rate fluctuations by the Company’s lenders.  Higher rates applied by the Federal ReserveBoard over the past four fiscal quarters and anticipated continued rate hikeshave had and will continue to negatively impact the Company’s earnings.  It is the intent of the Company tocontinually monitor interest rates and consider converting portions of theCompany’s debt from floating rates to fixed rates should conditions befavorable for such interest rate swaps or hedges.

 

15

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Results ofOperations

 

The followingtable sets forth, for the three and six months ended August 31, 2005 and2004, the percentages which selected items in the Statements of Income bear tototal sales:

 
| ** **                        | ** ** | **Three Months**          | ** ** | **Six Months**            | ** ** |
|-----------------------------------|------------|---------------------------|------------|---------------------------|------------|
| ** **                        | ** ** | **Ended August 31,** | ** ** | **Ended August 31,** | ** ** |
| ** **                        | ** ** | **2005**                  | ** ** | **2004**                  | ** ** | **2005** | ** ** | **2004** | ** ** |
| Sales                             |       |                      |       |                      |       |   |   |   |   |
| Display Segment                   |       |                      |       |                      |       |   |   |   |   |
| Monitors                          |       | 62.7                      | %          | 63.5                      | %          | 59.9 | % | 62.6 | % |
| Data Display  CRTs                |       | 10.7                      |       | 8.2                       | %          | 12.4 |   | 9.6 |   |
| Entertainment  CRTs               |       | 4.0                       |       | 5.3                       |       | 4.6 |   | 5.6 |   |
| Electron Guns  and Components     |       | 1.1                       |       | 0.9                       |       | 0.9 |   | 1.0 |   |
| Total Display  Segment            |       | 78.5                      | %          | 77.9                      | %          | 77.9 | % | 78.8 | % |
| Wholesale  Consumer Parts Segment |       | 21.5                      |       | 22.1                      |       | 22.1 |   | 21.2 |   |
|                              |       | 100.0%                    |       | 100.0                     | %          | 100.0 | % | 100.0 | % |
| Costs and expenses                |       |                      |       |                      |       |   |   |   |   |
| Cost of goods  sold               |       | 67.4                      | %          | 66.9                      | %          | 67.7 | % | 66.9 | % |
| Selling and  delivery             |       | 8.1                       |       | 8.5                       |       | 8.2 |   | 8.6 |   |
| General and  administrative       |       | 15.4                      |       | 14.6                      |       | 16.4 |   | 14.6 |   |
|                              |       | 90.9%                     |       | 90.0                      | %          | 92.3 | % | 90.1 | % |
|                              |       |                      |       |                      |       |   |   |   |   |
| Income from Operations            |       | 9.1                       | %          | 10.0                      | %          | 7.7 | % | 9.8 | % |
|                              |       |                      |       |                      |       |   |   |   |   |
| Interest expense                  |       | 1.4                       | %          | 1.1                       | %          | 1.5 | % | 1.2 | % |
| Other income                      |       | 0.1                       |       | 0.2                       |       | 0.2 |   | 0.4 |   |
| Income before income taxes        |       | 7.8                       | %          | 9.1                       | %          | 6.4 | % | 9.0 | % |
| Provision for income taxes        |       | 2.9                       |       | 3.4                       |       | 2.4 |   | 3.4 |   |
|                              |       |                      |       |                      |       |   |   |   |   |
| Net Income                        |       | 4.9                       | %          | 5.6                       | %          | 4.0 | % | 5.6 | % |

 

Net sales

 

Consolidated netsales increased $2,666,000 and $3,207,000 for the three and six months ended August 31,2005 as compared to the same periods ended August 31, 2004.  Display segment sales increased $2,213,000and $2,136,000 for the three and six-month comparative periods ended August 31,2005.  Sales within the Wholesale ConsumerParts segment increased $453,000 for the three-month comparative period and $1,071,000for the six-month comparative periods.

 

The net increases in DisplaySegment sales is attributed to growth within the monitor operations of$1,497,000 for the three months ended August 31, 2005 and $846,000 for thesix months ended August 31, 2005 as compared to the same periods a yearago.  These increases are due in largepart to stronger demand from military and defense contractors, and also reflectincreases resulting from the Company’s acquisition of Evans and Sutherland inthe third quarter of fiscal 2005.  Thedata display sales showed an increase of $813,000 for the three month periodand $1,538,000 for the six month periods ended August 31, 2005 as compared tothe comparative period of a year ago. These increases are the result of the Company distributing projectiontubes from its Data Display location in Tucker, GA.  These projection tubes carry a higher sellingprice than Data Display’s normal inventory. The components division showed an increase in sales for the three monthperiod ended August 31, 2005 of $58,000 while sales for the six monthcomparative period remained flat.

 

Within the entertainmentdivision, sales declined $156,000 and $247,000 for the three and six monthcomparative periods.  The Company is theprimary supplier of replacement television CRTs to the domestic entertainmentmarket.  A

 

16

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large portion of theentertainment segment’s sales (37%) are to major television retailers asreplacements for products sold under manufacturer and extended warranties.  Due to continued lower retail sales pricesfor mid-size television sets (25” to 30”), fewer extended warranties were soldby retailers, a trend consistent with the past two fiscal years.  The Company remains the primary supplier ofproduct to meet manufacturers’ standard warranties.  Growth in this division will be impacted bythe timing and number of extended warranties sold for the larger, moreexpensive sets.  Because the Company isin the replacement market, it has the ability to track retail sales trends and,accordingly, can attempt to adjust quantities of certain size CRTs carried instock and reduce exposure to obsolescence.

 

Sales within thecomponent parts division were relatively flat for the comparative periods.  Sales in this division have declined over thepast two fiscal years due to weaker demand for electron gun and stem sales.  Electron gun sales have historically beendependent upon the demand by domestic and foreign television CRTremanufacturers.  These sales havedeclined over the past few years as consumers move towards purchasing newtechnology 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.

 

Wholesale consumer partssegment net sales increased $453,000 and $1,071,000 for the three and six monthperiods ended August 31, 2005 compared to the same periods a year ago.  Management attributes these increases to theopening a new call center in the second half of fiscal 2005.  This call center acts as a consumer anddealer support center for both in-warranty and out-of-warranty householdproducts, appliances, parts and accessories for Black & Decker,Delonghi, Norelco, Coby and various other manufacturers.  This call center also acts as a technicalsupport center for these same manufacturers. Other increases within this segment reflect increased volume of sales toBest Buy and Applica for the comparative periods.

 

###### Gross margins

 

 Consolidated gross margins decreased slightly from33.1% to 32.6% for the quarter and from 33.1% to 32.3% for the six months endedAugust 31, 2005 as compared to the same period ended August 31, 2004.  Display segment margins decreased from 31.2%to 27.1% and from 30.7% to 26.6% for the comparative three and six monthperiods.  The wholesale consumer partssegment margins increased from 39.7% to 52.7% and from 42.1% to 52.5% for the threeand six month comparative periods.

 

Grossmargins within the Company’s monitor operations decreased to 25.8% for the sixmonths ended August 31, 2005 compared to 30.9% for the same period a yearago and from 31.2% to 28.9% for the three months ended August 31, 2005.  These decreases are primarily attributable todecreased sales volume at the Company’s Teltron, Z-Axis and Lexel locations aswell as management’s decision to close the XKD location at the end of fiscal2005.

 

Grossmargins for the wholesale consumer parts segment increased to 52.7% for thequarter ended August 31, 2005 as compared to 39.7% for the same quarter ayear ago.  Gross margins increased from42.1% to 52.5% for the six month comparative periods.  This increase is primarily due to additionalrevenue generated from its new call center. Expenses for the call center are classified as operating expenses.

 

##### Operating expenses

 

Operatingexpenses as a percentage of sales were relatively flat for the quarter ended August 31,2005 as compared to August 31, 2004 and increased slightly from 23.3% to 24.6%for the six month comparative periods.  

 

Display segment expenseswere flat for the three month comparative periods and increased $313,000 forthe six month comparative periods ended August 31.  Management attributes the majority of thisincrease to corporate expenses, such as increased professional fees.

 

17

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Wholesale consumer partssegment expenses increased $704,000 and $1,019,000 compared to the three andsix month periods a year ago, primarily due to additional expenses associatedwith the new call center opened in late fiscal 2005.  These expenses (primarily payroll and telephone)are classified in general and administrative expense in the consolidatedfinancial statements.

 

###### Interest expense

 

Interestexpense increased $106,000 and $186,000 for the three and six months ended August 31,2005 as compared to the same periods a year ago.  The Company maintains various debt agreementswith different interest rates, most of which are based on the prime rate orLIBOR.   Overall debt increased $7,362,000during the comparable periods, which was the primary reason for the increase ininterest expense.

 

###### Income taxes

 

The effective taxrate for the six months ended August 31, 2005 is 38.0%, unchanged from 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.

 

##### Foreign currency translation

 

Gains or losses resultingfrom the transactions with its UK subsidiary are reported in current operationswhile currency translation adjustments are recognized in a separate componentof shareholders’ equity.  There were nosignificant gains or losses recognized in either period related to the UKsubsidiary.

 

Liquidity andcapital resources

 

As of August 31, 2005,the Company had total cash and cash equivalents of $2,185,000.  The Company’s working capital was $44,656,000and $37,220,000 at August 31, 2005 and February 28, 2005,respectively.  In recent years, theCompany has financed its growth and cash needs primarily through income fromoperations, borrowings under revolving credit facilities and long-termdebt.  Liquidity provided by operatingactivities of the Company is reduced by working capital requirements, largelyinventories and accounts receivable, debt service, capital expenditures,product line additions and 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 May 2005,the Company acquired the IDS division of Three Five Systems, Inc.  The acquisition consisted of cash to theseller of $1,377,000 total consideration.

 

Cash used by operationsfor the six months ended August 31, 2005 was $913,000 as compared to cashprovided of $2,476,000 for the same period a year ago.   This decrease is attributable to slowercollections of receivables as compared to the same period a year ago, offset byincreases in accounts payable and accrued liabilities.

 

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Investing activities usedcash of $1,972,000 in the first six months of fiscal 2006, compared to $464,000for fiscal 2005.    Thisincrease was the result of cash of $1,377,000 used to acquire the IDS divisionof Three Five Systems, Inc.  Capitalexpenditures increased slightly for the comparable periods.  These expenditures relate primarily toinvestments in new computer equipment within the Company’s monitor operations.

 

Financing activities providedcash of $3,427,000 for the six months ended August 31, 2005, and used cashof $1,065,000 for the same period a year ago. The Company executed a new line of credit in November 2004, whichprovided a higher borrowing availability. The increase in borrowings was partially offset by the Company’sdecision to repurchase $317,000 of its common stock in fiscal 2006.  No shares were repurchased in fiscal 2005.

 

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. The Company repurchased 25,621 shares in May 2005.  No shares were repurchased in fiscal2005.  Under this program, an additional170,500 shares remain authorized to be repurchased by the Company.

 

TheCompany paid a cash dividend of $392,000 in the fourth quarter of fiscal 2005.The policy regarding future payments of dividends will be reviewed periodicallyby the Board of Directors and will be based on the earnings and financialposition of the Company and other factors which the Board of Directors deemsappropriate.

 

##### Critical Accounting Policies

 

Management’s Discussionand Analysis of Results of Operations and Financial Condition are based uponthe Company’s consolidated financial statements.  These financial statements have been preparedin accordance with accounting principles generally accepted in the UnitedStates of America.  These principlesrequire the use of estimates and assumptions that affect amounts reported anddisclosed in the financial statements and related notes.  The accounting policies that may involve ahigher degree of judgments, estimates, and complexity include reserves oninventories, revenue recognition, the allowance for bad debts and warrantyreserves.  The Company uses the followingmethods and assumptions in determining its estimates:

 

*Reserveson inventories*

 

Reserves on inventoriesresult in a charge to operations when the estimated net realizable valuedeclines below cost.  Managementregularly reviews the Company’s investment in inventories for declines in valueand establishes reserves when it is apparent that the expected net realizablevalue of the inventory falls below its carrying amount. Management considersthe projected demand for CRTs in this estimate of net realizable value.Management is able to identify consumer buying trends, such as size andapplication, well in advance of supplying replacement CRTs. Thus, the Company isable to adjust inventory-stocking levels according to the projected demand. Theaverage life of a CRT is five to seven years, at which time the Company’sreplacement market develops. Management reviews inventory levels on a quarterlybasis.  Such reviews include observationsof product development trends of the OEMs, new products being marketed, andtechnological advances relative to the product capabilities of the Company’sexisting inventories.  There have been nosignificant changes in management’s estimates in fiscal 2006 and 2005; however,the Company cannot guarantee the accuracy of future forecasts since theseestimates are subject to change based on market conditions.

 

19

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*RevenueRecognition*

 

The Company recognizesrevenue on the sale of products when the products are shipped, all significantcontractual obligations have been satisfied, and the collection of theresulting receivable is reasonably assured. The Company’s delivery term typically is F.O.B. shipping point.

 

In accordance with EITF 00-10,shipping and handling fees billed to customers are classified in net sales inthe consolidated statements of operations. Shipping and handling costs incurred are classified in selling anddelivery in the consolidated statements of income.

 

A portion of the Company’srevenue is derived from contracts to manufacture CRTs to a buyers’specification.  These contracts areaccounted for under the provisions of the American Institute of CertifiedPublic Accountants’ Statement of Position No. 81-1, “Accounting forPerformance of Construction-Type and Certain Production-Type Contracts”.  These contracts are fixed-price and cost-pluscontracts and are recorded on the percentage of completion basis using theratio of costs incurred to estimated total costs at completion as themeasurement basis for progress toward completion and revenue recognition.  Any losses identified on contracts arerecognized immediately.  Contractaccounting requires significant judgment relative to assessing risks,estimating contract costs and making related assumptions for schedule andtechnical issues.  With respect tocontract change orders, claims or similar items, judgment must be used inestimating related amounts and assessing the potential for realization.  These amounts are only included in contractvalue when they can be reliably estimated and realization is probable.

 

The Wholesale Partssegment has several distribution agreements that it accounts for using thegross revenue basis as prescribed by EITF 99-19.  The Company uses the gross method because theCompany has general inventory risk, physical loss inventory risk and creditrisk.

 

*Allowancefor bad debts*

 

Theallowance for bad debts is determined by reviewing all accounts receivable andapplying historical credit loss experience to the current receivable portfoliowith consideration given to the current condition of the economy, assessment ofthe financial position of the creditors, as well as past payment history andoverall trends 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.  Historically, the Company’s allowance hasbeen sufficient for any customer write-offs. Although the Company cannot guarantee future results, managementbelieves its policies and procedures relating to customer exposure areadequate.

 

*Warranty reserves*

 

Thewarranty reserves are determined by recording a specific reserve for known warrantyissues and a general reserve based on historical claims experience. The Companyconsiders actual warranty claims compared to net sales, then adjusts itsreserve liability accordingly.  Actualclaims incurred could differ from the original estimates, requiring adjustmentsto the reserve.  Management feels thathistorically its procedures have been adequate and does not anticipate that itsassumptions are reasonably likely to change in the future.

 

*Other Accounting Policies*

 

Otherloss contingencies are recorded as liabilities when it is probable that aliability has been incurred and the amount of the loss is reasonablyestimable.  Disclosure is required whenthere is a reasonable possibility that the ultimate loss will exceed therecorded provision.  Contingentliabilities 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-LookingInformation

 

This report containsforward-looking statements and information that is based on management’sbeliefs, as well as assumptions made by, and information currently available tomanagement.  When used in this document,the words “anticipate”, “believe”, “estimate”, “intends”, “will”, and “expect”and similar expressions are intended to identify forward-lookingstatements.  Such statements involve anumber of risks and uncertainties.  Amongthe factors that could cause actual results to differ materially are thefollowing:  business conditions, rapid orunexpected technological changes, product development, inventory risks due toshifts in product demand, competition, domestic and foreign governmentrelations, fluctuations in foreign exchange rates, rising costs for componentsor unavailability of components, the timing of orders booked, lenderrelationships, and the risk factors listed from time to time in the Company’sreports filed with the Commission.

 

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ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUTMARKET RISK

 

The Company’sprimary market risks include fluctuations in interest rates and variability ininterest rate spread relationships, such as prime to LIBOR spreads.  Approximately $27,326,000 of outstanding debtat August 31, 2005 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 $273,000 inpre-tax net income assuming no further changes in the amount of borrowingssubject to variable rate interest from amounts outstanding at August 31,2005. The Company does not trade in derivative financial instruments.

 

The Company has asubsidiary in the U.K., which is not material, but uses the British pound asits functional currency. Due to its limited operations outside of the U.S., theCompany’s exposure to changes in foreign currency exchange rates between theU.S. dollar and foreign currencies or to weakening economic conditions inforeign markets is not expected to significantly impact the Company’s financialposition.

 

ITEM 4.  CONTROLS AND PROCEDURES

 

Our disclosure controlsand procedures (as defined in Exchange Act Rule 13a-15(e)) are designed toprovide reasonable assurance that information required to be disclosed in ourreports filed or submitted under the Securities Exchange Act of 1934, such asthis quarterly report on Form 10-Q, is recorded, processed, summarized andreported within the time periods specified in the SEC rules and forms. Ourdisclosure controls and procedures are also designed to ensure that suchinformation is accumulated and communicated to our management, including ourchief executive officer and chief financial officer, to allow timely decisionsregarding required disclosure.

 

Ourchief executive officer and chief financial officer have conducted anevaluation of the effectiveness of our disclosure controls and procedures as ofAugust 31, 2005. We perform this evaluation on a quarterly basis so thatthe conclusions concerning the effectiveness of our disclosure controls andprocedures can be reported in our annual report on Form 10-K and quarterlyreports on Form 10-Q. Based on this evaluation, our chief executiveofficer and chief financial officer have concluded that our disclosure controlsand procedures were effective as of August 31, 2005.

 

**Changes in Internal Controls**

 

Therehave not been any changes in the our internal controls over financial reporting(as such term is defined in Rules 13a-15(f) and 15d-15(f) underthe Exchange Act) during the fiscal quarter to which this report relates thathave materially affected, or are reasonably likely to materially affect, ourinternal controls over financial reporting.

 

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PART II

 
| Item 1. |   | Legal  Proceedings                                                                                                                     |
|---------|--------|----------------------------------------------------------------------------------------------------------------------------------------|
|    |   |                                                                                                                                   |
|    |   | No new material  legal proceedings or material changes in existing litigation occurred during  the quarter ended August 31, 2005. |
|    |   |                                                                                                                                   |
| Item 2. |   | Unregistered  Sales of Equity Securities and Use of Proceeds                                                                           |
|    |   |                                                                                                                                   |
|    |   | The following table summarizes repurchases of our stock in the  quarter ended August 31, 2005:                                    |

 
| ** **                                   | ** ** | ** **           | ** ** | ** **         | ** ** | **Total Number of Shares**             | ** ** | **Maximum Number of Shares**       | ** ** |
|----------------------------------------------|------------|----------------------|------------|--------------------|------------|----------------------------------------|------------|------------------------------------|------------|
| **Fiscal**                                   | ** ** | **Total Number of**  | ** ** | **Average Price**  | ** ** | **Purchased as Part of Publicly** | ** ** | **that May Yet Be Purchased** | ** ** |
| **Period**                                   | ** ** | **Shares Purchased** | ** ** | **Paid Per Share** | ** ** | **Announced Plans or Programs**        | ** ** | **Under the Plans or Programs***   | ** ** |
| June 1,  2005 through June 30, 2005     |       | 25,621               |       | $                  | 12.37      |                                   | 25,621     |                               | 144,500    |   |
|                                         |       |                 |       |               |       |                                   |       |                               |       |
| July 1,  2005 through July 31, 2005     |       | 0                    |       | $                  | 0.00       |                                   | 0          |                               | 144,500    |   |
|                                         |       |                 |       |               |       |                                   |       |                               |       |
| August 1,  2005 through August 31, 2005 |       | 0                    |       | $                  | 0.00       |                                   | 0          |                               | 144,500    |   |
|                                         |       |                 |       |               |       |                                   |       |                               |       |
| Total Fiscal  2006 Second Quarter            |       | 25,621               |       | $                  | 0.00       |                                   | 25,621     |                               | 144,500    |   |

 

Our Board of Directors approved the above sharepurchase authority in June 2003, when the Board approved resolutionsauthorizing us to repurchase an aggregate of up to 462,500 shares of commonstock.  This action was announced in June 2003.  The authorization has no expiration date.

 

Item 3.    DefaultsUpon Senior Securities

 

None.

 

Item 4.    Submissionof Matters to a Vote of Security Holders

 

a)     TheCompany held its annual meeting of stockholders on August 26, 2005 andsolicited votes by proxy in conjunction with such meeting.

 

b)    Thefollowing matter was approved by the shareholders:

 

(i)    The approval ofmanagement’s nominees to the Board of Directors with the nominees receivingthe      following votes:

 

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| ** **          | ** ** | **For**   | ** ** | **Withheld** | ** ** | **Abstain** | ** ** |
|---------------------|------------|-----------|------------|--------------|------------|-------------|------------|
| Ronald D. Ordway    |       | 9,179,563 |       | 2,003        |       | —      |       |
| Ervin Kuczogi       |       | 9,138,458 |       | 43,108       |       | —      |       |
| Peter Frend         |       | 9,138,258 |       | 43,308       |       | —      |       |
| Carolyn Howard      |       | 9,138,258 |       | 43,308       |       | —      |       |
| Ernest J. Thibeault |       | 9,179,563 |       | 2,003        |       | —      |       |

 

Item 5.    OtherInformation

 

None

 

Item 6.    Exhibits

 
| **Exhibit Number** | ** ** | **Exhibit Description**     |
|-------------------------|------------|----------------------------------|
|                    |       |                             |
| 31.1                    |       | Section 302  Certification  |
| 31.2                    |       | Section 302  Certification  |
| 32.1                    |       | Section 906  Certifications |

 

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SIGNATURES

 

Pursuant to therequirements of the Securities and Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned, theretoduly authorized.

 

 
|                   |   | VIDEO DISPLAY  CORPORATION |
|------------------------|--------|----------------------------|
|                   |   |                       |
|                   |   |                       |
| October 17,  2005 | By:    | /s/ Ronald D.  Ordway      |   |
|                   |   | Ronald D. Ordway           |
|                   |   | Chief Executive  Officer   |
|                   |   |                       |
|                   |   |                       |
| October 17,  2005 | By:    | /s/ Gregory A.  Kittle     |   |
|                   |   | Gregory A.  Kittle         |
|                   |   | Chief Financial  Officer   |

 

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