**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 May 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, includingarea 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 ý  No o

 

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

Yes  o  No  ý

 

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

 
| **Class**                  | ** ** | **Number of Shares** |
|----------------------------|------------|----------------------|
| Common Stock, No Par Value |       | 9,688,000            |

 

 

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**Video Display Corporation and Subsidiaries**

**Index**

 
| PART I.                                | FINANCIAL  INFORMATION                                                                                                             |   |
|---------------------------------------------|------------------------------------------------------------------------------------------------------------------------------------|--------|
|                                        |                                                                                                                               |   |
|                                        | Item 1.  Financial Statements                                                                                                      |   |
|                                        |                                                                                                                               |   |
|                                        | Consolidated Balance Sheets –  May 31, 2005 (unaudited) and February 28, 2005                                       |   |
|                                        |                                                                                                                               |   |
|                                        | Consolidated Statements of Income -  Three months ended May 31, 2005 and 2004 (unaudited)                                     |   |
|                                        |                                                                                                                               |   |
|                                        | Consolidated  Statements of Shareholders’ Equity and Comprehensive Income -  Three months ended May 31, 2005 (unaudited) |   |
|                                        |                                                                                                                               |   |
|                                        | Consolidated  Statements of Cash Flows –  Three months ended May 31, 2005 and 2004 (unaudited)                           |   |
|                                        |                                                                                                                               |   |
|                                        | Notes  to Consolidated Financial Statements -  May 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 its  Senior Securities                                                                                       |   |
|                                        | Item 4. Submission of  Matters to a Vote of Security Holders                                                                       |   |
|                                        | Item 5. Other Information                                                                                                          |   |
|                                        | Item 6. Exhibits                                                                                                                   |   |
|                                        |                                                                                                                               |   |
| EXHIBIT 31.1  302 CERTIFICATION OF CEO |                                                                                                                               |
| EXHIBIT 31.2  302 CERTIFICATION OF CFO |                                                                                                                               |
| EXHIBIT 32.1 906 CERTFICATION OF CEO   |                                                                                                                               |
| EXHIBIT 32.2 906 CERTFICATION OF CFO   |                                                                                                                               |

 

2

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**Video Display Corporation andSubsidiaries**

**Consolidated Balance Sheets**

 
| ** **                                                                        | ** ** | **May 31,** | ** **     | **February 28,** | ** ** |
|-----------------------------------------------------------------------------------|------------|------------------|----------------|-----------------------|------------|
| ** **                                                                        | ** ** | **2005**         | ** **     | **2005**              | ** ** |
| ** **                                                                        | ** ** | **(unaudited)**  | ** **     | ** **            | ** ** |
| **Assets**                                                                        |       |             | ** **     |                  |       |
| Current Assets                                                                    |       |             | ** **     |                  |       |
| Cash and cash  equivalents                                                        | ** ** | **$**            | **2,892,000**  | ** **            | $          | 1,471,000 |   |
| Accounts  receivable, less allowance for possible losses of $432,000 and $339,000 | ** ** | **11,567,000**   | ** **     | 11,929,000            |       |
| Inventories  (Note C and D)                                                       | ** ** | **34,767,000**   | ** **     | 32,105,000            |       |
| Deferred income  taxes                                                            |       | **2,417,000**    | ** **     | 2,555,000             |       |
| Prepaid expenses  and other                                                       | ** ** | **1,121,000**    | ** **     | 744,000               |       |
| Total current  assets                                                             | ** ** | **52,764,000**   | ** **     | 48,804,000            |       |
|                                                                              |       |             | ** **     |                  |       |
| Property, plant  and equipment:                                                   |       |             | ** **     |                  |       |
| Land                                                                              | ** ** | **540,000**      | ** **     | 540,000               |       |
| Buildings                                                                         | ** ** | **7,191,000**    | ** **     | 7,155,000             |       |
| Machinery and  equipment                                                          | ** ** | **19,644,000**   | ** **     | 19,485,000            |       |
|                                                                              |       | **27,375,000**   | ** **     | 27,180,000            |       |
| Accumulated  depreciation                                                         | ** ** | **(19,786,000**  | **)**          | (19,543,000           | )          |
| Net property,  plant, and equipment                                               | ** ** | **7,589,000**    | ** **     | 7,637,000             |       |
|                                                                              |       |             | ** **     |                  |       |
| Goodwill (Note  C)                                                                | ** ** | **1,318,000**    | ** **     | 1,318,000             |       |
| Other assets  (Note C)                                                            | ** ** | **4,506,000**    | ** **     | 4,020,000             |       |
|                                                                              |       |             | ** **     |                  |       |
| Total assets                                                                      | ** ** | **$**            | **66,177,000** | ** **            | $          | 61,779,000 |   |

 

The accompanying notesare an integral part of these statements.

 

3

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**Video Display Corporation andSubsidiaries**

**ConsolidatedBalance Sheets**

 
| ** **                                                                                                       | ** ** | **May 31,** | ** **     | **February 28,** | ** ** |
|------------------------------------------------------------------------------------------------------------------|------------|------------------|----------------|-----------------------|------------|
| ** **                                                                                                       | ** ** | **2005**         | ** **     | **2005**              | ** ** |
| ** **                                                                                                       | ** ** | **(unaudited)**  | ** **     | ** **            | ** ** |
| **Liabilities  and Shareholders’ Equity**                                                                   |       |             |           |                  |       |
| Current  liabilities                                                                                             |       |             |           |                  |       |
| Accounts payable                                                                                                 | ** ** | **$**            | **4,552,000**  |                  | $          | 5,190,000 |   |
| Accrued  liabilities                                                                                             | ** ** | **3,582,000**    |           | 3,080,000             |       |
| Lines of credit  (Note F)                                                                                        | ** ** | **—**       |           | 2,688,000             |       |
| Notes payable to  officers and directors                                                                         | ** ** | **45,000**       |           | 49,000                |       |
| Current  maturities of long-term debt (Note E)                                                                   | ** ** | **85,000**       |           | 577,000               |       |
| Total current  liabilities                                                                                       | ** ** | **8,264,000**    |           | 11,584,000            |       |
|                                                                                                             |       |             |           |                  |       |
| Lines of credit  (Note F)                                                                                        | ** ** | **26,640,000**   |           | 19,296,000            |       |
| Long-term debt,  less current maturities (Note E)                                                                | ** ** | **838,000**      |           | 848,000               |       |
| Notes payable to  officers and directors, less current maturities                                                | ** ** | **136,000**      |           | 146,000               |       |
| Convertible  notes payable, net of discount of $56,000 and $94,000                                               | ** ** | **194,000**      | ** **     | 281,000               |       |
| Deferred income  taxes                                                                                           | ** ** | **427,000**      |           | 434,000               |       |
| Total  liabilities                                                                                               | ** ** | **36,499,000**   |           | 32,589,000            |       |
|                                                                                                             |       |             |           |                  |       |
| **Minority  Interests**                                                                                          | ** ** | **123,000**      |           | 123,000               |       |
|                                                                                                             |       |             |           |                  |       |
| **Commitments**                                                                                                  | ** ** | **—**       |           | —                |       |
|                                                                                                             |       |             |           |                  |       |
| **Shareholders’  Equity**(Note C and  H)                                                                    |       |             |           |                  |       |
| Preferred stock,  no par value – 10,000,000 shares authorized; none issued and outstanding                  | ** ** | **—**       |           | —                |       |
| Common stock, no  par value – 50,000,000 shares authorized; 9,688,000 and 9,704,000 issued and  outstanding | ** ** | **6,834,000**    |           | 7,026,000             |       |
| Additional paid  in capital                                                                                      | ** ** | **92,000**       |           | 92,000                |       |
| Retained  earnings                                                                                               | ** ** | **22,624,000**   |           | 22,018,000            |       |
| Accumulated  other comprehensive loss                                                                            | ** ** | **5,000**        |           | (69,000               | )          |
| Total  shareholders’ equity                                                                                 | ** ** | **29,555,000**   |           | 29,067,000            |       |
| Total  liabilities and shareholders’ equity                                                                 | ** ** | **$**            | **66,177,000** |                  | $          | 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  May 31,** | ** **     |
|------------------------------------------------------|------------|--------------------------------------|----------------|
| ** **                                           | ** ** | **2005**                             | ** **     | **2004** | ** ** |
|                                                 |       |                                 |           |   |   |
| Net sales                                            | ** ** | **$**                                | **20,442,000** | ** ** | $ | 19,900,000 |   |
|                                                 |       |                                 | ** **     |   |   |
| Cost of goods  sold                                  | ** ** | **13,906,000**                       | ** **     | 13,314,000 |   |
|                                                 |       |                                 | ** **     |   |   |
| Gross profit                                         | ** ** | **6,536,000**                        | ** **     | 6,586,000 |   |
|                                                 |       |                                 | ** **     |   |   |
| Operating  expenses                                  |       |                                 | ** **     |   |   |
| Selling and delivery                                 | ** ** | **1,714,000**                        | ** **     | 1,748,000 |   |
| General and  administrative                          | ** ** | **3,568,000**                        | ** **     | 2,911,000 |   |
| ** **                                           |       | **5,282,000**                        | ** **     | 4,659,000 |   |
|                                                 |       |                                 | ** **     |   |   |
| Operating profit                                     | ** ** | **1,254,000**                        | ** **     | 1,927,000 |   |
|                                                 |       |                                 | ** **     |   |   |
| Other income  (expense)                              |       |                                 | ** **     |   |   |
| Interest expense                                     | ** ** | **(337,000**                         | **)**          | (257,000 | ) |
| Other, net                                           | ** ** | **63,000**                           | ** **     | 127,000 |   |
| ** **                                           |       | **(274,000**                         | **)**          | (130,000 | ) |
|                                                 |       |                                 | ** **     |   |   |
| Income before  income taxes                          | ** ** | **980,000**                          | ** **     | 1,797,000 |   |
|                                                 |       |                                 | ** **     |   |   |
| Income tax  expense                                  | ** ** | **374,000**                          | ** **     | 682,000 |   |
|                                                 |       |                                 | ** **     |   |   |
| Net income                                           | ** ** | **$**                                | **606,000**    | ** ** | $ | 1,115,000 |   |
|                                                 |       |                                 | ** **     |   |   |
| Basic earnings  per share of common stock (Note H)   | ** ** | **$**                                | **0.06**       | ** ** | $ | 0.12 |   |
|                                                 |       |                                 | ** **     |   |   |
| Diluted earnings  per share of common stock (Note H) | ** ** | **$**                                | **0.06**       | ** ** | $ | 0.11 |   |
|                                                 |       |                                 | ** **     |   |   |
| Basic weighted  average shares outstanding           | ** ** | **9,685,000**                        | ** **     | 9,670,000 |   |
|                                                 |       |                                 | ** **     |   |   |
| Diluted weighted  average shares outstanding         | ** ** | **9,928,000**                        | ** **     | 9,890,000 |   |

 

The accompanying notesare an integral part of these statements.

 

5

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**Video Display Corporation and Subsidiaries**

**Consolidated Statements ofShareholders’ Equity and Comprehensive Income**

**the Three Months Ended May 31, 2005 (unaudited)**

 
| ** **                               | ** ** | ** ** | ** ** | ** ** | ** ** | ** **     | ** ** | ** **   | ** ** | **Other**         | ** ** | **Current**       | ** ** |
|------------------------------------------|------------|------------|------------|------------|------------|----------------|------------|--------------|------------|-------------------|------------|-------------------|------------|
| ** **                               | ** ** | ** ** | ** ** | ** ** | ** ** | **Additional** | ** ** | ** **   | ** ** | **Accumulated**   | ** ** | **Period**        | ** ** |
| ** **                               | ** ** | **Common** | ** ** | **Share**  | ** ** | **Paid In**    | ** ** | **Retained** | ** ** | **Comprehensive** | ** ** | **Comprehensive** | ** ** |
| ** **                               | ** ** | **Shares** | ** ** | **Amount** | ** ** | **Capital**    | ** ** | **Earnings** | ** ** | **Income (Loss)** | ** ** | **Income**        | ** ** |
|                                     |       |       |       |       |       |           |       |         |       |              |       |              |       |
| Balance at  February 28, 2005       |       | 9,704,000  |       | $          | 7,026,000  |           | $          | 92,000       |       | $                 | 22,018,000 |              | $          | (69,000 | ) |   |   |
|                                     |       |       |       |       |       |           |       |         |       |              |       |              |       |
| Net income for  the period               |       | —     |       | —     |       | —         |       | 606,000      |       | —            |       | $                 | 606,000    |   |
| Conversion of  debt to common stock      |       | 10,000     |       | 125,000    |       | —         |       | —       |       | —            |       |              |       |
| Repurchase of  common stock              |       | (26,000    | )          | (317,000   | )          | —         |       | —       |       | —            |       |              |       |
| Foreign currency  translation adjustment |       | —     |       | —     |       | —         |       | —       |       | 74,000            |       | 74,000            |       |
| Total  comprehensive income              |       |       |       |       |       |           |       |         |       |              |       | $                 | 680,000    |   |
|                                     |       |       |       |       |       |           |       |         |       |              |       |              |       |
| Balance at  May 31, 2005            |       | 9,688,000  |       | $          | 6,834,000  |           | $          | 92,000       |       | $                 | 22,624,000 |              | $          | 5,000 |   |   |   |

 

The accompanying notesare an integral part of these statements.

 

6

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**Video Display Corporation and Subsidiaries**

**Consolidated Statements of CashFlows (unaudited)**

 
| ** **                                                                             | ** ** | **Three Months Ended  May 31,** | ** **    |
|----------------------------------------------------------------------------------------|------------|--------------------------------------|---------------|
| ** **                                                                             | ** ** | **2005**                             | ** **    | **2004** | ** ** |
| **Operating  Activities**                                                              |       |                                 | ** **    |   |   |
| Net income                                                                             | ** ** | **$**                                | **606,000**   | ** ** | $ | 1,115,000 |   |
| **Adjustments  to reconcile net income to net cash provided by (used in) operations:** | ** ** |                                 | ** **    |   |   |
| Depreciation and  amortization                                                         | ** ** | **388,000**                          | ** **    | 242,000 |   |
| Provision for  bad debts                                                               | ** ** | **93,000**                           | ** **    | 29,000 |   |
| Provision for  inventory reserve                                                       | ** ** | **300,000**                          | ** **    | 301,000 |   |
| Deferred income  taxes                                                                 | ** ** | **131,000**                          | ** **    | — |   |
| Interest on  convertible note                                                          | ** ** | **38,000**                           | ** **    | — |   |
| **Changes  in working capital, net of effects from acquisitions:**                     |       |                                 | ** **    |   |   |
| Accounts  receivable                                                                   | ** ** | **269,000**                          | ** **    | 482,000 |   |
| Inventories                                                                            | ** ** | **(2,189,000**                       | **)**         | (1,791,000 | ) |
| Prepaid expenses  and other assets                                                     | ** ** | **(478,000**                         | **)**         | 602,000 |   |
| Accounts payable  and accrued liabilities                                              | ** ** | **(136,000**                         | **)**         | 435,000 |   |
| Net cash (used  in) provided by operating activities                                   | ** ** | **(978,000**                         | **)**         | 1,415,000 |   |
|                                                                                   |       |                                 | ** **    |   |   |
| **Investing  activities**                                                              |       |                                 | ** **    |   |   |
| Capital  expenditures                                                                  | ** ** | **(121,000**                         | **)**         | (47,000 | ) |
| Cash paid for  acquisition                                                             | ** ** | **(1,377,000**                       | **)**         | (150,000 | ) |
| Other investing  activities                                                            | ** ** | **—**                           | ** **    | — |   |
| Net cash used in  investing activities                                                 | ** ** | **(1,498,000**                       | **)**         | (197,000 | ) |
|                                                                                   |       |                                 | ** **    |   |   |
| **Financing  activities**                                                              |       |                                 | ** **    |   |   |
| Proceeds from  long-term debt and lines of credit                                      | ** ** | **11,188,000**                       | ** **    | 8,975,000 |   |
| Repayments of  long-term debt and lines of credit                                      | ** ** | **(7,034,000**                       | **)**         | (10,470,000 | ) |
| Repayments of  loans from related parties                                              | ** ** | **(14,000**                          | **)**         | (8,000 | ) |
| Repurchase of  common stock                                                            | ** ** | **(317,000**                         | **)**         | — |   |
| Proceeds from  exercise of stock options                                               | ** ** | **—**                           | ** **    | 5,000 |   |
| Net cash  provided by (used in) financing activities                                   | ** ** | **3,823,000**                        | ** **    | (1,498,000 | ) |
|                                                                                   |       |                                 | ** **    |   |   |
| Effect of  exchange rates on cash                                                      | ** ** | **74,000**                           | ** **    | 7,000 |   |
|                                                                                   |       |                                 | ** **    |   |   |
| Net change in  cash                                                                    | ** ** | **1,421,000**                        | ** **    | (273,000 | ) |
|                                                                                   |       |                                 | ** **    |   |   |
| Cash, beginning  of period                                                             | ** ** | **1,471,000**                        | ** **    | 3,021,000 |   |
|                                                                                   |       |                                 | ** **    |   |   |
| Cash, end of  period                                                                   | ** ** | **$**                                | **2,892,000** | ** ** | $ | 2,748,000 |   |

 

The accompanying notesare an 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 include the accounts of the Company and its majority ownedsubsidiaries after elimination of all significant intercompany accounts andtransactions. Certain prior period balances have been reclassified to conformto 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 –NEW 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 AccountingPrincipal 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 as based on their fairvalues.  Currently the Company accounts forthese payments 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 may 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.  As part of the agreement, the IDS divisionwill continue operations at its current location until the end of its lease, atwhich time it will move to new facilities and be known as Aydin North and be apart of the Company’s Pennsylvania based Aydin operations.  The IDS operations of Three 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 $12 dollars per share, the market valueof the stock at the date of purchase. The common stock had a put feature whereby Data Ray could redeem thestock for $5.50 per share if the price per share of the Company’s stock wasbelow $6.00 after 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 |   |

 

9

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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 D - INVENTORIES

 

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

 

Inventories consisted ofthe following:

 
| ** **                 | ** ** | **May 31,** | ** **     | **February 28,** | ** ** |
|----------------------------|------------|------------------|----------------|-----------------------|------------|
| ** **                 | ** ** | **2005**         | ** **     | **2005**              | ** ** |
| ** **                 | ** ** | **(unaudited)**  | ** **     | ** **            | ** ** |
|                       |       |             |           |                  |       |
| Raw materials              | ** ** | **$**            | **12,441,000** | ** **            | $          | 7,834,000 |   |
| Work-in-process            | ** ** | **3,152,000**    | ** **     | 3,800,000             |       |
| Finished goods             | ** ** | **22,531,000**   | ** **     | 23,528,000            |       |
|                       |       | **38,124,000**   | ** **     | 35,162,000            |       |
| Reserves for  obsolescence | ** ** | **(3,357,000**   | **)**          | (3,057,000            | )          |
|                       |       | **$**            | **34,767,000** | ** **            | $          | 32,105,000 |   |

 

NOTE E - LONG-TERM DEBT

 

Long-term debt consistedof the following:

 
| ** **                                                                                                                                                                                                                                                                                                       | ** ** | **May 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 May 31, 2005);  monthly principal and interest payments of $5,000 payable through  October 2021; collateralized by land and building of Teltron  Technologies, Inc.                                                      | ** ** | **553,000**      |        | 557,000               |       |
|                                                                                                                                                                                                                                                                                                             |       |             |        |                  |       |
| Other                                                                                                                                                                                                                                                                                                            | ** ** | **370,000**      |        | 389,000               |       |
| ** **                                                                                                                                                                                                                                                                                                       |       | **923,000**      |        | 1,425,000             |       |
| Less current  maturities                                                                                                                                                                                                                                                                                         | ** ** | **(85,000**      | **)**       | (577,000              | )          |
| ** **                                                                                                                                                                                                                                                                                                       |       | **$**            | **838,000** |                  | $          | 848,000 |   |

 

10

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NOTE F - LINES OF CREDIT

 

At May 31, 2005, theCompany 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.  As of May 31, 2005, the outstandingbalance of this line of credit was $23,140,000 and the available amount forborrowing was $4,360,000.  The line ofcredit agreement contains covenants, including requirements related to tangiblecash flow, asset and debt service coverage. Additionally, the bank requires that any contemplated acquisitions beaccretive.  As of May 31, 2005, theCompany was in compliance with all covenants.

 

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 as a floatingLIBOR rated based on a ratio of debt to EBITDA, as defined.  As of May 31, 2005, the outstandingbalance of this line of credit was $3,500,000 and the available amount forborrowing was $0.  The line of creditagreement contains covenants, including requirements related to tangible cash flow,asset and debt service coverage.  As of May 31,2005, the Company was in compliance with all covenants.

 

NOTE G – SUPPLEMENTALCASH FLOW INFORMATION

 
| ** **                                                            | ** ** | **Three Months  Ended** | ** **    |
|-----------------------------------------------------------------------|------------|-------------------------|---------------|
| ** **                                                            | ** ** | **May 31,**        | ** **    | **May 31,** | ** ** |
| ** **                                                            | ** ** | **2005**                | ** **    | **2004** | ** ** |
| Cash Paid for:                                                        |       |                    |          |   |   |
| Interest                                                              | ** ** | **$**                   | **337,000**   |   | $ | 257,000 |   |
| Income taxes,  net of refunds                                         | ** ** | **$**                   | **1,174,000** |   | $ | 178,000 |   |
|                                                                  |       |                    |          |   |   |
| 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 H – SHAREHOLDERS’EQUITY

 

**EarningsPer Share**

 

Basic earnings per shareis computed by dividing income available to common shareholders by the weightedaverage number of 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 is areconciliation from basic earnings per share to diluted earnings per share foreach of the periods presented.

 
| ** **                       | ** ** | **Net Income** | ** ** | **Weighted  Average Shares  Outstanding** | ** ** | **Earnings Per  Share** | ** ** |
|----------------------------------|------------|----------------|------------|-------------------------------------------|------------|-------------------------|------------|
| Quarter ended  May 31, 2005 |       |           |       |                                      |       |                    |       |
| Basic                            |       | $              | 606,000    |                                      | 9,685,000  |                    | $          | 0.06 |   |
| Effect of  dilution:             | ** ** | ** **     | ** ** | ** **                                | ** ** | ** **              | ** ** |
| Convertible debt                 |       | 23,000         |       | 20,000                                    | ** ** | ** **              | ** ** |
| Options                          |       | —         |       | 223,000                                   | ** ** | ** **              | ** ** |
| Diluted                          |       | $              | 629,000    |                                      | 9,928,000  |                    | $          | 0.06 |   |
|                             |       |           |       |                                      |       |                    |       |
| Quarter ended  May 31, 2004 |       |           |       |                                      |       |                    |       |
| Basic                            |       | $              | 1,115,000  |                                      | 9,670,000  |                    | $          | 0.12 |   |
| Effect of  dilution:             | ** ** | ** **     | ** ** | ** **                                | ** ** | ** **              | ** ** |
| Options                          |       | —         |       | 220,000                                   | ** ** | ** **              | ** ** |
| Diluted                          |       | $              | 1,115,000  |                                      | 9,890,000  |                    | $          | 0.11 |   |

 

11

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**Stock-BasedCompensation Plans**

 

The Company has anincentive stock option plan whereby total options to purchase 142,000 sharesmay be granted to key employees at a price not less than fair market value atthe time the options are granted and are exercisable beginning on the firstanniversary of the grant date for a period 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. No stockoptions were granted during the quarters ended May 31, 2005 and 2004,respectively, and, as such, no related compensation expense is recorded in theaccompanying consolidated financial statements. 

 

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 income per share would have been as follows:

 
| ** **                                                                               | ** ** | **Three Months  Ended** | ** **  |
|------------------------------------------------------------------------------------------|------------|-------------------------|-------------|
| ** **                                                                               | ** ** | **May 31,**        | ** **  | **May 31,** | ** ** |
| ** **                                                                               | ** ** | **2005**                | ** **  | **2004** | ** ** |
| Net income, as reported                                                                  | ** ** | **$**                   | **606,000** |   | $ | 1,115,000 |   |
| Stock-based employee compensation expense determined  under fair value basis, net of tax | ** ** | **(14,000**             | **)**       | (9,000 | ) |
| Pro forma net income                                                                     | ** ** | **$**                   | **592,000** | ** ** | $ | 1,106,000 |   |
|                                                                                     |       |                    | ** **  |   |   |
| Net (loss) earnings per share:                                                           |       |                    | ** **  |   |   |
| Basic – as reported                                                                 | ** ** | **$**                   | **0.06**    | ** ** | $ | 0.12 |   |
| Basic – pro forma                                                                   | ** ** | **$**                   | **0.06**    | ** ** | $ | 0.12 |   |
| Diluted – as reported                                                               | ** ** | **$**                   | **0.06**    | ** ** | $ | 0.11 |   |
| Diluted – pro forma                                                                 | ** ** | **$**                   | **0.06**    | ** ** | $ | 0.11 |   |

 

**Stock Repurchase Program**

 

The Company has a stockrepurchase program, pursuant to which it is authorized to repurchase up to462,500 shares of 

 

12

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the Company’s commonstock in the open market. The Company repurchased 25,621 shares in May 2005.  No shares were repurchased in the firstquarter of fiscal 2005.

 

13

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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.

 

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

 

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

 

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

 

***First Quarter 2006 Highlights***

 

•      ***Data Display revenue*** - the Company’s data display revenuesincreased $725,000 or 32.8% compared to the first quarter of fiscal 2005.  These increases reflect the Company’s salesof projection tubes from its Data Display location in Tucker, GA, which carry ahigher unit price than its normal inventory.

 

•      ***Acquisition*** – during the first quarter of fiscal 2006,the Company acquired the IDS division of Three Five Systems, Inc.,consisting of inventory and certain assets. The IDS division will continue to operate out of its current facilitiesuntil the end of its lease before moving to new facilities in Massachusetts andbe known as Aydin North.

 

•      ***New credit facility*** – in April 2005, the Company finalizeda new line of credit to replace a prior facility.  Under the terms of this new facility, the Companypaid off the existing line of credit as well as a mortgage securing the landand building of Fox International, Ltd. The maximum amount available for borrowings under this new line is$3,500,000 compared to $2,750,000 under the prior facility.  Proceeds from this line are available forworking capital needs of the Company.

 

***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. This level of inventory is higher than some of the Company’scompetitors due to the fact that it sells a number of products representingolder, or trailing edge, technology that may not be available from othersources. The market for these trailing edge technology products is decliningand, as manufacturers for these 

 

14

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productsdiscontinue production or exit the business, the Company may make last timebuys. In the monitor portion of the Company’s business, the market for itsproducts is characterized by fairly rapid change as a result of the developmentof new technologies, particularly in the flat panel display area. If theCompany fails to anticipate the changing needs of its customers and accuratelyforecast their requirements, it may accumulate inventories of products whichits customers no longer need and which the Company will be unable to sell orreturn to its vendors.

 

Thewholesale distribution segment also maintains in inventory a broad range ofproducts (which contributes to a higher total inventory) in order to be able topromptly provide those customers who are buying products, or obtaining warrantyreplacements, for electronic part components.

 

Results ofOperations

 

The followingtable sets forth, for the three months ended May 31, 2004 and 2003, thepercentages which selected items in the Statements of Income bear to totalsales:

 

| ** **                        | ** ** | **Three Months Ended  May 31,** | ** ** |
|-----------------------------------|------------|--------------------------------------|------------|
| ** **                        | ** ** | **2005**                             | ** ** | **2004** | ** ** |
| Sales                             |       |                                 |       |   |   |
| Display Segment                   |       |                                 |       |   |   |
| Monitors                          |       | 56.8                                 | %          | 61.6 | % |
| Data Display  CRT’s          |       | 14.4                                 |       | 11.1 |   |
| Entertainment  CRT’s         |       | 5.2                                  |       | 5.8 |   |
| Electron Guns  and Components     |       | 0.8                                  |       | 1.1 |   |
|                              |       | 77.2                                 |       | 79.7 |   |
| Wholesale  Consumer Parts Segment |       | 22.8                                 |       | 20.3 |   |
|                              |       | 100.0%                               |       | 100.0 | % |
|                              |       |                                 |       |   |   |
| Costs and  expenses               |       |                                 |       |   |   |
| Cost of goods  sold               |       | 68.0                                 | %          | 66.9 | % |
| Selling and  delivery             |       | 8.4                                  |       | 8.8 |   |
| General and  administrative       |       | 17.5                                 |       | 14.6 |   |
|                              |       | 93.9                                 |       | 90.3 |   |
|                              |       |                                 |       |   |   |
| Income from  Operations           |       | 6.1                                  |       | 9.7 |   |
|                              |       |                                 |       |   |   |
| Interest expense                  |       | (1.6                                 | )          | (1.3 | ) |
| Other income                      |       | 0.3                                  |       | 0.6 |   |
| Income before  income taxes       |       | 4.8                                  |       | 9.0 |   |
| Provision for income  taxes       |       | (1.8                                 | )          | (3.4 | ) |
|                              |       |                                 |       |   |   |
| Net income                        |       | 3.0                                  | %          | 5.6 | % |

 

15

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Net sales

 

Consolidated net salesincreased $542,000 for the quarter ended May 31, 2005 as compared to thequarter ended May 31, 2004.  Displaysegment sales decreased $76,000 while wholesale consumer parts segment sales increased$618,000 for the comparative periods.

 

The net decrease in Displaysegment sales is attributed to declines within the monitor operations of $651,000.  This decrease is attributed in large part to weakerdemand for the Company’s products from military and defense contractors for thequarter ended May 31, 2005. The data display operations showed an increaseof $725,000, which is the result of the Company distributing projection tubesfrom its Data Display location in Tucker, GA. These projection tubes carry a higher sales price than the Company’snormal inventory.  Offsetting declinesoccurred in the entertainment, and component parts operations of $91,000 and $59,000,respectively.

 

The net loss in monitordivision sales includes decreases from Aydin Displays of $788,000 and XKD of $545,000.  These decreases reflect declines in revenuesfrom contract orders received from the Boeing Co., Lockheed Martin andothers.  There were offsetting increasesduring the first quarter of $176,000 at the Lexel operation, and $343,000 atthe Display Systems operations.

 

The data display divisionshowed an increase in sales of $725,000 compared to the first quarter of fiscal2004.  Management attributes thisprimarily to its decision in late fiscal 2004 to distribute projection tubedisplays from its Data Display location in Tucker, GA.  These projection tubes carry a higher salesprice than the Company’s normal inventory.

 

Within the entertainmentdivision, sales of television CRTs decreased $91,000 for the quarter ended May 31,2005 as compared to the same period a year ago. The Company is the primary supplier of replacement television CRTs tothe domestic entertainment market.  Amajority of the entertainment segment’s sales (37%) are to major televisionretailers as replacements for products sold under manufacturer and extendedwarranties.  Due to continued lowerretail sales prices for mid-size television sets (25” to 30”), fewer extendedwarranties were sold by retailers, a trend consistent with the past two fiscalyears.  The Company remains the primarysupplier of product 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.  Due to the fact that theCompany is in the replacement market, it has the ability to track retail salestrends and, accordingly, can attempt to adjust quantities of certain size CRTscarried in stock and reduce the exposure to obsolescence.

 

The component partsdivision recorded declines of $59,000 for the quarter ended May 31, 2005as compared to the same period a year ago. Electron gun and stem sales were negatively impacted by weaker demand duringthe quarter, while the Company’s Wintron location was negatively impacted as ittransitions to newer technologies. Wintron is marketing two new camera technologies.  One will assist border guards with under carinspections, another will assist correctional facilities in supervision ofinmates.  Electron gun sales havehistorically been dependent upon the demand by domestic and foreign televisionCRT remanufacturers.  These sales havedeclined as consumers move towards purchasing new technology as opposed torepairing existing sets.

 

Wholesale segment netsales increased $618,000 for the quarter ended May 31, 2005 compared tothe same period a year ago.  Managementattributes this increase to the opening a new call center in the second half offiscal 2005, which generated approximately $323,000 in additional revenues.  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.

 

16

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###### Gross margins

 

Consolidated gross profitmargins decreased slightly to 32.0% from 33.1% for the quarter ended May 31,2005 as compared to May 31, 2004.  Displaysegment margins decreased to 26.0% from 28.4% while the wholesale consumerparts segment increased to 52.3% from 44.8% for the comparable periods.

 

Display segmentmargins were impacted by a variety of factors. The Company’s monitor operations gross margins decreased to 25.0%compared to 30.4% a year ago.  Thisdecrease is attributed to lower sales volume within the monitor operations of$651,000 for the comparable periods.  Withinthe Company’s component parts operations, gross margins decreased to 29.9% from37.3% a year ago.  This decrease isattributed to weaker demand within these operations as compared to a yearago.  Additionally, the Company’s DataDisplay operation is distributing projection tube displays, which carry ahigher profit margin than its normal inventory.

 

Grossmargins for the wholesale consumer parts segment increased for the quarterended May 31, 2005 as compared to the same quarter a year ago.  This increase is primarily due to additional revenuegenerated from its new call center, which was approximately $323,000 for thequarter ended May 31, 2005.  Expensesfor the call center are classified as operating expenses.

 

##### Operating expenses

 

Operating expenses as apercentage of sales increased to 25.8% for the quarter ended May 31, 2005as compared to 23.4% for the quarter ended May 31, 2003.  Display segment operating expenses increased$309,000 and the wholesale segment expenses decreased $314,000 from thecomparative period a year ago.

 

Display expense increasesincluded increases within the monitor operations of $175,000, reflecting thecontinued growth and product development costs. There were also increases within the data display operations of$140,000, reflecting increased corporate overhead costs.

 

Wholesale segmentexpenses increased $314,000 compared to the first quarter of fiscal 2005,primarily due to additional expenses associated with the new call center openedin late fiscal 2005.  These expenses(primarily payroll and telephone) are classified in general and administrativeexpense in the consolidated financial statements.

 

###### Interest expense

 

Interest expense increased$80,000 in the first quarter of fiscal 2006 as compared to the first quarter offiscal 2005.  The Company maintainsvarious debt agreements with different interest rates, most of which are basedon the prime rate or LIBOR.  Overall debtincreased during the comparative periods by $8,365,000, which was the primaryreason for the increase in interest expense.

 

###### Income taxes

 

The effective taxrate for the quarter ended May 31, 2005 is 38.1% as compared to 38.0% ayear ago.  These rates are greater thanthe Federal statutory rate primarily due to the effect of state taxes and thepermanent non-deductibility of certain expenses for tax purposes.

 

##### 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 no significant gains or losses recognizedin either period related to the UK subsidiary.

 

17

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Liquidity andcapital resources

 

Asof May 31, 2005, the Company had total cash and cash equivalents of $2,892,000.  The Company’s working capital was $44,500,000and $37,220,000 at May 31, 2005 and February 28, 2005.  Inrecent years, the Company has financed its growth and cash needs primarilythrough income from operations, borrowings under revolving credit facilitiesand long-term debt. Liquidity provided by operating activities of the Companyis reduced by working capital requirements, largely inventories and accountsreceivables, debt service, capital expenditures, product line additions and, infiscal 2005, 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 byoperations for the period ended May 31, 2005 was $978,000 as compared tocash provided by operations of $1,415,000 in the same period a year ago.  Net income for the first quarter ended May 31,2005 adjusted for non-cash items provided cash of $1,556,000.  Working capital requirementsincreased $2,534,000 in the first quarter of fiscal 2005 due primarily to greaterinvestments in inventories which used cash of $2,189,000. Decreases in accountspayable and accrued liabilities used cash of $136,000, while increases inprepaid expenses used cash of $478,000. Inventory increased $2,189,000 in the first quarter of fiscal 2006 dueprimarily to purchase requirements within the monitor segment required to fillopen backlog orders.  Accounts receivabledecreased $269,000.  In the first quarterof fiscal 2005, working capital requirements decreased primarily from moreaggressive collection efforts of receivables, which provided cash of $482,000,and decreases in prepaid expenses, which provided cash of $602,000 andincreases in accounts payable and accrued expenses, which provided cash of $435,000.  Investments in inventories increased workingcapital requirements $1,791,000.

 

Investingactivities used cash of $1,498,000 and $197,000 in the first quarter fiscal 2006and 2005, respectively.  Capitalexpenditures were $121,000 in the first quarter of fiscal 2005 as compared to $47,000for the same period a year ago. Capital expenditures in 2005 were primarily forbuilding improvements and computer hardware. Capital expenditures were primarily within the monitor segment tosupport the growth within this segment. The Company does not anticipate any significant investments in capitalassets for 2006.  Cash of $1,377,000 wasused to acquire the IDS division of Three Five Systems, Inc.

 

Financingactivities provided cash of $3,823,000 in the first quarter of fiscal 2006 andused cash of $1,498,000 in the first quarter of fiscal 2005.  During the first quarter of fiscal 2006, theCompany used cash of $11,188,000 from lines of credit primarily to financeworking capital needs.  Cash of $7,048,000was used to repay advances from the Company’s lines of credit and for overalldebt reduction.  Cash of $317,000 wasused to repurchase shares of the Company’s common stock.

 

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, 

 

18

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capitalexpenditures and acquisitions have certain restrictions. Substantially all ofthe Company’s retained earnings are 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 25,621shares in May 2005.  No shares wererepurchased in fiscal 2005.  Under thisprogram, an additional 170,500 shares remain authorized to be repurchased bythe Company.

 

TheCompany paid a cash dividend of $393,000 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 Companyis able to adjust inventory-stocking levels according to the projected demand.The average 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 OEM’s, 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.

 

*RevenueRecognition*

 

Revenue is recognized onthe sale of products when the products are shipped, all significant contractualobligations have been satisfied, and the collection of the resulting receivableis reasonably assured.  The Company’sdelivery 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 operations.

 

A portion of the Company’srevenue is derived from contracts to manufacture CRT’s 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 the ratioof 

 

19

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costs incurred toestimated total costs at completion as the measurement basis for progresstoward completion and revenue recognition. Any losses identified on contracts are recognized immediately.  Contract accounting requires significantjudgment relative to assessing risks, estimating contract costs and makingrelated assumptions for schedule and technical issues.  With respect to contract change orders,claims or similar items, judgment must be used in estimating related amountsand assessing the potential for realization. These amounts are only included in contract value when they can bereliably 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 reserve is determined by recording a specific reserve for knownwarranty issues and a general reserve based on historical claims experience.The Company considers actual warranty claims compared to net sales, thenadjusts its reserve liability accordingly. Actual claims incurred could differ from the original estimates,requiring adjustments to the reserve. Management feels that historically its procedures have been adequate anddoes not anticipate that its assumptions are reasonably likely to change in thefuture.

 

*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.

 

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 $27,744,000 of outstanding debtat May 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 decrease of approximately $277,000 in pre-tax netincome assuming no further changes in the amount of borrowings subject tovariable rate interest from amounts outstanding at May 31, 2005. TheCompany 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

 

The Company’s management, undersupervision of the Chief Executive Officer and Chief Financial Officer, isresponsible for establishing and maintaining disclosure controls and proceduresfor the Company and its subsidiaries. As of the end of the period covered bythis quarterly report, with the participation of the Chief Executive Officerand the Chief Financial Officer, management completed an evaluation of theCompany’s disclosure controls and procedures. Based upon this evaluation, theChief Executive Officer and Chief Financial Officer have concluded that thedisclosure controls and procedures are effective to ensure that all materialinformation relating to the Company and its subsidiaries is made known to themby others within the organization as appropriate to allow timely decisionsregarding required disclosures.

 

Duringthe quarter ended May 31, 2005, the Company made changes to its internalcontrols.  These changes require thatCompany divisional accounting personnel be required to submit all non-repetitivemonthly, or other period, journal entries to Corporate management for reviewand approval prior to entry into divisional or Corporate records.  In addition, management has hired additionalfinancial reporting personnel to properly ensure all non-routine transactionsare identified and recorded in a timely manner.  Except for the foregoing changes, there wereno changes in the Company’s internal control over financial reporting duringthe most recent fiscal quarter that have materially affected, or are reasonablylikely to materially affect, the internal control over financial reporting.

 

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PART II

 

Item 1.    LegalProceedings

 

No newlegal proceedings or material changes in existing litigation occurred duringthe quarter ended May 31, 2005.

 

Item 2.    UnregisteredSales of Equity Securities and Use of Proceeds

 

TheCompany made no sales of unregistered equity securities, nor did the Companyrepurchase any shares of its equity securities, during the quarter ended May 31,2005.

 

Item 3.    Defaultsupon Senior Securities

 

None.

 

Item 4.    Submissionof Matters to a Vote of Security Holders

 
| a)     | The company held  a special meeting of stockholders on May 2, 2005 and solicited votes by  proxy in conjunction with such meeting. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                    |
| b)     | The following  matters were approved by the shareholders:                                                                               |
|   | (i)                                                                                                                                     | To approve an  amendment to the Company’s articles of incorporation that would increase the  number of shares of capital stock the Company has authority to issue from  12,000,000 shares to 60,000,000 shares, consisting of 50,000,000 shares of  common stock without par value (an increase from 10,000,000 shares) and  10,000,000 shares of preferred stock without par value (an increase from  2,000,000 shares). |

 
| **For**   | ** ** | **Against** | ** ** | **Abstain** | ** ** |
|-----------|------------|-------------|------------|-------------|------------|
| 5,380,006 |       | 714,847     |       | 0           |       |

 
|   | (ii) | To approve an  amendment to the Company’s articles of incorporation that would add a new article that  would provide that the directors of the Corporation shall have no personal  liability to the Company or it’s shareholders for monetary damages for breach  of duty of care or other duty as a director resulting from any act or  omission, other than personal liability of a director for certain enumerated  acts as specified by the Georgia Business Corporation Code. |
|--------|------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 
| **For**   | ** ** | **Against** | ** ** | **Abstain** | ** ** | **Not Voted** | ** ** |
|-----------|------------|-------------|------------|-------------|------------|---------------|------------|
| 5,050,128 |       | 1,411       |       | 0           |       | 1,043,314     |       |

 

Item 5.    Otherinformation

 

None

 

Item 6.    Exhibits

 

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| **Exhibit Number** | ** ** | **Exhibit Description**    |
|-------------------------|------------|---------------------------------|
|                    |       |                            |
| 31.1                    |       | Section 302  Certification |
| 31.2                    |       | Section 302  Certification |
| 32.1                    |       | Section 906  Certification |
| 32.2                    |       | Section 906  Certification |

 

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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 |
|---------------------|--------|----------------------------|
|                |   |                       |
|                |   |                       |
| July 15,  2005 | By:    | /s/ Ronald D.  Ordway      |   |
|                |   | Ronald D. Ordway           |
|                |   | Chief Executive  Officer   |
|                |   |                       |
|                |   |                       |
|                | By:    | /s/ Gregory A.  Kittle     |   |
|                |   | Gregory A.  Kittle         |
|                |   | Chief Financial  Officer   |

 

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