**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

 

**WASHINGTON, DC  20549**

 

**FORM 10-Q**

 

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

 

**For Quarter Ended November 30, 2004**

 

**CommissionFile Number 0-13394**

 

**VIDEO DISPLAY CORPORATION**

(Exact name of registrantas specified on its charter)

 

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

 

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

(Address of principalexecutive offices)

 

**770-938-2080**

(Registrant’s telephonenumber including area code)

 

Indicate by check mark whether the registrant (1) has filed all reportsrequired to be filed by section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days. Yes ý  No o

 

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

Yes  o  No  ý

 

Shares outstanding of each of the registrant’s classes of common stockat January 12, 2005

 
| **Class**                   | ** ** | **Number  of Shares** |
|-----------------------------|------------|-----------------------|
| Common Stock, No Par  Value |       | 9,827,000             |

 

 

----

 

**VideoDisplay Corporation and Subsidiaries**

**Index**

 
| PART I.                                                                       | FINANCIAL INFORMATION                                                                                                                     |   |
|-------------------------------------------------------------------------------|-------------------------------------------------------------------------------------------------------------------------------------------|--------|
|                                                                          |                                                                                                                                      |   |
|                                                                          | Item 1. Financial Statements                                                                                                              |   |
|                                                                          |                                                                                                                                      |   |
|                                                                          | Consolidated Balance Sheets  –  November 30, 2004 (unaudited) and February 29, 2004                                                  |   |
|                                                                          |                                                                                                                                      |   |
|                                                                          | Consolidated  Statements of Income -  Three and nine months ended November 30, 2004 and 2003 (unaudited)                                  |   |
|                                                                          |                                                                                                                                      |   |
|                                                                          | Consolidated  Statements of Shareholders’ Equity and Comprehensive Income -  For the nine months ended November 30, 2004 (unaudited) |   |
|                                                                          |                                                                                                                                      |   |
|                                                                          | Consolidated  Statements of Cash Flows –  Nine months ended November 30, 2004 and 2003 (unaudited)                                   |   |
|                                                                          |                                                                                                                                      |   |
|                                                                          | Notes  to consolidated financial statements -  November 30, 2004 (unaudited)                                                              |   |
|                                                                          |                                                                                                                                      |   |
|                                                                          | Item  2. Management’s Discussion and Analysis of Financial Condition and Results of  Operations                                      |   |
|                                                                          |                                                                                                                                      |   |
|                                                                          | Item  3. Quantitative and Qualitative Disclosure About Market Risk                                                                        |   |
|                                                                          |                                                                                                                                      |   |
|                                                                          | Item  4. Controls and Procedures                                                                                                          |   |
|                                                                          |                                                                                                                                      |   |
| PART II.                                                                      | OTHER INFORMATION                                                                                                                         |   |
|                                                                          |                                                                                                                                      |   |
|                                                                          | Item 1. Legal Proceedings                                                                                                                 |   |
|                                                                          | Item 2. Unregistered  Sales of Equity Securities and Use of Proceeds                                                                      |   |
|                                                                          | Item 3. Defaults upon  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                                               |                                                                                                                                      |
| EXHIBIT 99.1 SAS 100 REPORT OF INDEPENDENT  REGISTERED PUBLIC ACCOUNTING FIRM |                                                                                                                                      |

 

2

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**Video Display Corporation andSubsidiaries**

**Consolidated Balance Sheets**

 
| ** **                                                                        | ** ** | **November 30,** | ** **     | **February 29,** | ** ** |
|-----------------------------------------------------------------------------------|------------|------------------|----------------|------------------|------------|
| ** **                                                                        | ** ** | **2004**         | ** **     | **2004**         | ** ** |
| ** **                                                                        | ** ** | **(unaudited)**  | ** **     | ** **       | ** ** |
| **Assets**                                                                        |       |             |           |             |       |
| Current Assets                                                                    |       |             |           |             |       |
| Cash and cash  equivalents                                                        | ** ** | **$**            | **4,120,000**  |             | $          | 3,021,000 |   |
| Accounts  receivable, less allowance for possible losses of $342,000 and $251,000 | ** ** | **10,939,000**   |           | 10,910,000       |       |
| Inventories (Note  C)                                                             | ** ** | **31,541,000**   |           | 26,275,000       |       |
| Deferred income  taxes                                                            | ** ** | **2,698,000**    |           | 2,299,000        |       |
| Costs and  estimated earnings in excess of billings                               | ** ** | **725,000**      |           | 411,000          |       |
| Prepaid expenses  and other                                                       | ** ** | **1,783,000**    |           | 1,228,000        |       |
| Total current  assets                                                             | ** ** | **51,806,000**   |           | 44,144,000       |       |
|                                                                              |       |             |           |             |       |
| Property, plant  and equipment:                                                   |       |             |           |             |       |
| Land                                                                              | ** ** | **540,000**      |           | 540,000          |       |
| Buildings                                                                         | ** ** | **7,128,000**    |           | 7,016,000        |       |
| Machinery and  equipment                                                          | ** ** | **19,310,000**   |           | 18,564,000       |       |
|                                                                              |       | **26,978,000**   |           | 26,120,000       |       |
| Accumulated  depreciation and amortization                                        | ** ** | **(19,270,000**  | )              | (18,384,000      | )          |
| Net property,  plant, and equipment                                               | ** ** | **7,708,000**    |           | 7,736,000        |       |
|                                                                              | ** ** | ** **       |           |             |       |
| Goodwill                                                                          | ** ** | **1,318,000**    |           | 1,227,000        |       |
| Intangible  assets (Notes H and I)                                                | ** ** | **3,662,000**    |           | 970,000          |       |
| Other assets                                                                      | ** ** | **133,000**      |           | 474,000          |       |
|                                                                              |       |             |           |             |       |
| Total assets                                                                      | ** ** | **$**            | **64,627,000** |             | $          | 54,551,000 |   |

 

The accompanyingnotes are an integral part of these statements.

 

3

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**Video Display Corporation andSubsidiaries**

**Consolidated Balance Sheets**

 
| ** **                                                                                                       | ** ** | **November 30,** | ** **     | **February 29,** | ** ** |
|------------------------------------------------------------------------------------------------------------------|------------|------------------|----------------|------------------|------------|
| ** **                                                                                                       | ** ** | **2004**         | ** **     | **2004**         | ** ** |
| ** **                                                                                                       | ** ** | **(unaudited)**  | ** **     | ** **       | ** ** |
| **Liabilities  and Shareholders’ Equity**                                                                   |       |             |           |             |       |
| Current  liabilities                                                                                             |       |             |           |             |       |
| Accounts payable                                                                                                 | ** ** | **$**            | **3,893,000**  |             | $          | 4,103,000 |   |
| Accrued  liabilities                                                                                             | ** ** | **4,726,000**    |           | 3,506,000        |       |
| Line of credit  (Note E)                                                                                         | ** ** | **2,742,000**    |           | 2,610,000        |       |
| Notes payable to  shareholders                                                                                   | ** ** | **9,000**        |           | 19,000           |       |
| Current  maturities of long-term debt (Note D)                                                                   | ** ** | **597,000**      |           | 1,959,000        |       |
| Total current  liabilities                                                                                       | ** ** | **11,967,000**   |           | 12,197,000       |       |
|                                                                                                             |       |             |           |             |       |
| Long-term debt,  less current maturities (Note D)                                                                | ** ** | **858,000**      |           | 2,018,000        |       |
| Line of credit  (Note E)                                                                                         | ** ** | **21,956,000**   |           | 6,199,000        |       |
| Notes payable to  shareholders, less current maturities                                                          | ** ** | **—**       |           | 8,272,000        |       |
| Deferred income  taxes                                                                                           | ** ** | **725,000**      |           | 664,000          |       |
| Total  liabilities                                                                                               | ** ** | **35,506,000**   |           | 29,350,000       |       |
|                                                                                                             |       |             |           |             |       |
| **Minority  Interests**                                                                                          | ** ** | **123,000**      |           | 123,000          |       |
| **Commitments  and Contingencies**                                                                               | ** ** | **—**       |           | **—**       |       |
|                                                                                                             |       |             |           |             |       |
| **Shareholders’  Equity** (Note G)                                                                          |       |             |           |             |       |
| Preferred stock,  no par value – 2,000,000 shares authorized; none issued and outstanding                   | ** ** | **—**       |           | **—**       |       |
| Common stock, no  par value – 20,000,000 shares authorized; 9,682,000 and 9,584,000 issued and  outstanding | ** ** | **6,875,000**    |           | 6,318,000        |       |
| Additional paid  in capital                                                                                      | ** ** | **92,000**       |           | 92,000           |       |
| Retained  earnings                                                                                               | ** ** | **22,031,000**   |           | 18,688,000       |       |
| Accumulated  other comprehensive loss                                                                            | ** ** | **—**       |           | (20,000          | )          |
| Total  shareholders’ equity                                                                                 | ** ** | **28,998,000**   |           | 25,078,000       |       |
| Total  liabilities and shareholders’ equity                                                                 | ** ** | **$**            | **64,627,000** |             | $          | 54,551,000 |   |

 

The accompanyingnotes are an integral part of these statements.

 

4

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**Video Display Corporation andSubsidiaries**

**Consolidated Statements of Income(unaudited)**

 
| ** **                                           | ** ** | **Three Months Ended  November 30,** | ** **     | **Nine Months Ended  November 30,** | ** ** |
|------------------------------------------------------|------------|--------------------------------------|----------------|-------------------------------------|------------|
| ** **                                           | ** ** | **2004**                             | ** **     | **2003**                            | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                                 |       |                                 |           |                                |       |   |   |   |   |
| Net sales                                            |       | **$**                                | **21,434,000** | ** **                          | $          | 18,065,000 |   | **$** | **62,001,000** | ** ** | $ | 56,193,000 |   |
|                                                 |       | ** **                           |           |                                |       | ** ** | ** ** |   |   |
| Cost of goods  sold                                  |       | **14,214,000**                       | ** **     | 12,689,000                          |       | **41,360,000** | ** ** | 37,956,000 |   |
|                                                 |       | ** **                           |           |                                |       | ** ** | ** ** |   |   |
| Gross profit                                         |       | **7,220,000**                        | ** **     | 5,376,000                           |       | **20,641,000** | ** ** | 18,237,000 |   |
|                                                 |       | ** **                           |           |                                |       | ** ** | ** ** |   |   |
| Operating  expenses                                  |       | ** **                           |           |                                |       | ** ** | ** ** |   |   |
| Selling and  delivery                                |       | **1,729,000**                        | ** **     | 1,642,000                           |       | **5,237,000** | ** ** | 5,105,000 |   |
| General and  administrative                          |       | **3,529,000**                        | ** **     | 2,755,000                           |       | **9,457,000** | ** ** | 8,754,000 |   |
|                                                 | ** ** | **5,258,000**                        | ** **     | 4,397,000                           | ** ** | **14,694,000** |   | 13,859,000 | ** ** |
|                                                 |       | ** **                           |           |                                |       | ** ** | ** ** |   |   |
| Operating profit                                     |       | **1,962,000**                        | ** **     | 979,000                             |       | **5,947,000** | ** ** | 4,378,000 |   |
|                                                 |       | ** **                           |           |                                |       | ** ** | ** ** |   |   |
| Other income  (expense)                              |       | ** **                           |           |                                |       | ** ** | ** ** |   |   |
| Interest expense                                     |       | **(244,000**                         | **)**          | (290,000                            | )          | **(732,000** | **)** | (931,000 | ) |
| Other, net                                           |       | **26,000**                           |           | (90,000                             | )          | **188,000** | ** ** | 29,000 |   |
|                                                 | ** ** | **(218,000**                         | **)**          | (380,000                            | )          | **(544,000** | **)** | (902,000 | ) |
|                                                 |       | ** **                           |           |                                |       | ** ** | ** ** |   |   |
| Income before  income taxes                          |       | **1,744,000**                        | ** **     | 599,000                             |       | **5,403,000** | ** ** | 3,476,000 |   |
|                                                 |       | ** **                           |           |                                |       | ** ** | ** ** |   |   |
| Income tax  expense                                  |       | **667,000**                          | ** **     | 227,000                             |       | **2,060,000** | ** ** | 1,320,000 |   |
|                                                 |       | ** **                           |           |                                |       | ** ** | ** ** |   |   |
| Net income                                           |       | **$**                                | **1,077,000**  | ** **                          | $          | 372,000 |   | **$** | **3,343,000** | ** ** | $ | 2,156,000 |   |
|                                                 |       | ** **                           |           |                                |       | ** ** | ** ** |   |   |
| Basic earnings  per share of common stock (Note G)   | ** ** | **$**                                | **.11**        |                                | $          | .04 |   | **$** | **.35** | ** ** | $ | .23 |   |
|                                                 |       | ** **                           |           |                                |       | ** ** | ** ** |   |   |
| Diluted earnings  per share of common stock (Note G) | ** ** | **$**                                | **.11**        |                                | $          | .04 |   | **$** | **.34** | ** ** | $ | .22 |   |
|                                                 |       | ** **                           |           |                                |       | ** ** | ** ** |   |   |
| Basic weighted  average shares outstanding           |       | **9,686,000**                        | ** **     | 9,400,000                           |       | **9,665,000** | ** ** | 9,280,000 |   |
|                                                 |       | ** **                           |           |                                |       | ** ** | ** ** |   |   |
| Diluted weighted  average shares outstanding         |       | **9,923,000**                        | ** **     | 9,614,000                           |       | **9,893,000** | ** ** | 9,768,000 |   |

 

The accompanying notes are an integral part of these statements.

 

5

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**Video Display Corporation and SubsidiariesConsolidated Statements ofShareholders’ Equity and Comprehensive IncomeFor the Nine Months Ended November 30, 2004 (unaudited)**

 
| ** **                                        | ** ** | ** ** | ** ** | ** ** | ** ** | ** **     | ** ** | **Accumulated**   | ** ** | ** **   | ** ** | **Current**       | ** ** |
|---------------------------------------------------|------------|------------|------------|------------|------------|----------------|------------|-------------------|------------|--------------|------------|-------------------|------------|
| ** **                                        | ** ** | ** ** | ** ** | ** ** | ** ** | **Additional** | ** ** | **Other**         | ** ** | ** **   | ** ** | **Period**        | ** ** |
| ** **                                        | ** ** | **Common** | ** ** | **Share**  | ** ** | **Paid In**    | ** ** | **Comprehensive** | ** ** | **Retained** | ** ** | **Comprehensive** | ** ** |
| ** **                                        | ** ** | **Shares** | ** ** | **Amount** | ** ** | **Capital**    | ** ** | **Income**        | ** ** | **Earnings** | ** ** | **Income**        | ** ** |
|                                              |       |       |       |       |       |           |       |              |       |         |       |              |       |
| Balance at  February 29, 2004 (Note G)            |       | 9,584,000  |       | $          | 6,318,000  |           | $          | 92,000            |       | $            | (20,000    | )                 | $          | 18,688,000 |   |   |   |
|                                              |       |       |       |       |       |           |       |              |       |         |       |              |       |
| Net income for  the period                        |       | —     |       | —     |       | —         |       | —            |       | 3,343,000    |       | $                 | 3,343,000  |   |
| Foreign currency  translation adjustment          |       | —     |       | —     |       | —         |       | 20,000            |       | —       |       | 20,000            |       |
| Total  comprehensive income                       |       |       |       |       |       |           |       |              |       |         |       | $                 | 3,363,000  |   |
|                                              |       |       |       |       |       |           |       |              |       |         |       |              |       |
| Issuance of  common stock under stock option plan |       | 32,000     |       | 157,000    |       | —         |       | —            |       | —       |       |              |       |
| Issuance of  common stock                         |       | 66,000     |       | 400,000    |       | —         |       | —            |       | —       |       |              |       |
|                                              |       |       |       |       |       |           |       |              |       |         |       |              |       |
| Balance at  November 30, 2004                     |       | 9,682,000  |       | $          | 6,875,000  |           | $          | 92,000            |       | $            |       | $                 | 22,031,000 |   |   |   |
|                                                   |            |            |            |            |            |                |            |                   |            |              |            |                   |            |  |  |  |  |  |

 

Theaccompanying notes are an integral part of these statements.

 

6

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**Video Display Corporation andSubsidiaries**

**Consolidated Statements of CashFlows (unaudited)**

 
| ** **                                                                          | ** ** | **Nine Months Ended  November 30,** | ** **    |
|-------------------------------------------------------------------------------------|------------|-------------------------------------|---------------|
| ** **                                                                          | ** ** | **2004**                            | ** **    | **2003** | ** ** |
|                                                                                |       |                                |          |   |   |
| **Operating  Activities**                                                           |       |                                |          |   |   |
| Net income                                                                          | ** ** | **$**                               | **3,343,000** | ** ** | $ | 2,156,000 |   |
| **Adjustments  to reconcile net income (loss) to net cash provided by operations:** |       |                                | ** **    |   |   |
| Depreciation and  amortization                                                      | ** ** | **894,000**                         | ** **    | 892,000 |   |
| Provision for  inventory reserves and write-downs                                   | ** ** | **375,000**                         | ** **    | 780,000 |   |
| Provision for  bad debts                                                            | ** ** | **91,000**                          | ** **    | 145,000 |   |
| Loss on sale of  marketable equity securities                                       | ** ** | **—**                          | ** **    | 126,000 |   |
| Deferred income  taxes                                                              | ** ** | **(31,000**                         | **)**         | — |   |
| **Changes  in working capital:**                                                    |       |                                | ** **    |   |   |
| Accounts  receivable                                                                | ** ** | **(120,000**                        | **)**         | 1,079,000 |   |
| Inventories                                                                         | ** ** | **(3,117,000**                      | **)**         | 826,000 |   |
| Prepaid expenses  and other assets                                                  | ** ** | **(679,000**                        | **)**         | (158,000 | ) |
| Accounts payable  and accrued liabilities                                           | ** ** | **1,011,000**                       | ** **    | 152,000 |   |
| Net cash  provided by operating activities                                          | ** ** | **1,767,000**                       | ** **    | 5,998,000 |   |
|                                                                                |       |                                | ** **    |   |   |
| **Investing  activities**                                                           |       |                                | ** **    |   |   |
| Capital  expenditures                                                               | ** ** | **(530,000**                        | **)**         | (588,000 | ) |
| Cash paid for  acquisition                                                          | ** ** | **(150,000**                        | **)**         | — |   |
| Cash paid for  product acquisition and other assets                                 | ** ** | **$**                               | **5,250,000** | ** ** | — |   |
| Proceeds from  sale of marketable equity securities                                 | ** ** | **—**                          | ** **    | 30,000 |   |
| Net cash used in  provided by investing activities                                  | ** ** | **(5,930,000**                      | **)**         | (558,000 | ) |
|                                                                                |       |                                | ** **    |   |   |
| **Financing  activities**                                                           |       |                                | ** **    |   |   |
| Proceeds from  long-term debt and lines of credit                                   | ** ** | **46,107,000**                      | ** **    | 13,903,000 |   |
| Payments on  long-term debt and lines of credit                                     | ** ** | **(41,022,000**                     | **)**         | (18,739,000 | ) |
| Proceeds from  exercise of stock options                                            | ** ** | **157,000**                         | ** **    | 125,000 |   |
| Purchase of  common stock under repurchase program                                  | ** ** | **—**                          | ** **    | (1,573,000 | ) |
| Redemption of  redeemable common stock                                              | ** ** | **—**                          | ** **    | (100,000 | ) |
| Proceeds from  issuance of common stock                                             | ** ** | **—**                          | ** **    | 51,000 |   |
| Net cash  provided by (used) in financing activities                                | ** ** | **5,242,000**                       | ** **    | (6,333,000 | ) |
|                                                                                |       |                                | ** **    |   |   |
| Effect of  exchange rate changes on cash                                            | ** ** | **20,000**                          | ** **    | (46,000 | ) |
|                                                                                |       |                                | ** **    |   |   |
| Net change in  cash                                                                 | ** ** | **1,099,000**                       | ** **    | (939,000 | ) |
|                                                                                |       |                                | ** **    |   |   |
| Cash, beginning  of period                                                          | ** ** | **3,021,000**                       | ** **    | 2,392,000 |   |
|                                                                                |       |                                | ** **    |   |   |
| Cash, end of  period                                                                | ** ** | **$**                               | **4,120,000** | ** ** | $ | 1,453,000 |   |

 

The accompanying notes are an integral part of these statements.

 

7

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**Video Display Corporation andSubsidiaries**

**Notes to Consolidated FinancialStatements (unaudited)**

 

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

As contemplated by the Securities and Exchange Commission(the “Commission”) instructions to Form 10-Q, the following footnotes have beencondensed and, therefore, do not contain all disclosures required in connectionwith annual financial statements. Reference should be made to the Company’s year-end financial statementsand notes thereto contained in its Annual Report on Form 10-K for the fiscalyear ended February 29, 2004, as filed with the Commission.

 

The financial information included in this report has beenprepared by the Company, without audit. In the opinion of management, the financial information included in thisreport contains all adjustments (all of which are normal and recurring)necessary for a fair presentation 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 29, 2004 consolidatedbalance sheet data was derived from audited financial statements, but does notinclude all disclosures required by accounting principles generally accepted inthe United States.

 

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

 

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

 

NOTE B – NEW ACCOUNTING PRONOUNCEMENTS

 

In December 2004, the FinancialAccounting Standards Board (FASB) issued Statement No. 123 (revised 2004) *Share-Based payment*, which is a revision of FASB StatementNo. 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 ofCash Flows*.  Generally, theapproach to accounting in Statement 123 (R) requires all share-based paymentsto employees, including grants of employee stock options, to be recognized inthe financial statements as based on their fair values.  Currently the Company accounts for thesepayments under the intrinsic value provisions of APB No. 25 with no expenserecognition in the financial statements. Statement 123 (R) is effective for the Company beginning September 1,2005.  The Statement offers severalalternatives for implementation.  At thistime, management has not made a decision as to the alternative it may select.

 

In November 2004, the FASB issuedStatement of Financial Accounting Standards No. 151 (“SFAS No. 151”), *Inventory**Costs*, anamendment 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 production facilities.SFAS No. 151 is effective for inventory costs incurred during fiscal yearsbeginning after June 15, 2005. Earlier application is permitted for inventorycosts incurred during fiscal years beginning after November 24, 2004. TheCompany is currently evaluating the impact of that adoption of SFAS No. 151will have on its financial position and results of operations.

 

8

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NOTE C - INVENTORIES

 

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

 

Inventories consisted of the following:

 
| ** **                         | ** ** | **November 30,** | ** **     | **February 29,** | ** ** |
|------------------------------------|------------|------------------|----------------|------------------|------------|
| ** **                         | ** ** | **2004**         | ** **     | **2004**         | ** ** |
|                               |       |             |           |             |       |
| Raw materials  and work-in-process | ** ** | **$**            | **10,025,000** | ** **       | $          | 11,937,000 |   |
| Finished goods                     | ** ** | **24,433,000**   | ** **     | 16,844,000       |       |
|                               |       | **34,458,000**   | ** **     | 28,781,000       |       |
| Reserves for  obsolescence         | ** ** | **(2,917,000**   | **)**          | (2,506,000       | )          |
|                               |       | **$**            | **31,541,000** | ** **       | $          | 26,275,000 |   |

 

NOTE D - LONG-TERM DEBT

 

Long-term debt consisted of the following:

 
| ** **                                                                                                                                                                                                                                                                                      | ** ** | **November 30,** | ** **  | **February 29,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------|-------------|------------------|------------|
| ** **                                                                                                                                                                                                                                                                                      | ** ** | **2004**         | ** **  | **2004**         | ** ** |
| Term loan  facility, floating interest rate based on an adjusted LIBOR rate, quarterly  principal payments commenced November 1999 and maturing November 2005;  collateralized by assets of Aydin Display, Inc., paid in full.                                                                  | ** ** | **$**            | **—**  | ** **       | $          | 1,875,000 |   |
|                                                                                                                                                                                                                                                                                            |       |             | ** **  |             |       |
| Note payable to  bank; interest rate of prime plus 1.5%; collateralized by assets of XKD  Corporation, paid in full.                                                                                                                                                                            | ** ** | **—**       | ** **  | 542,000          |       |
|                                                                                                                                                                                                                                                                                            |       |             | ** **  |             |       |
| Mortgage payable  to bank; variable interest rate (6.41% as of November 30, 2004); monthly  principal and interest payments of $6,000 payable until December 2008 with a  final principal payment of $350,000 in December 2008, collateralized by land  and building of Fox International, Inc. | ** ** | **489,000**      | ** **  | 526,000          |       |
|                                                                                                                                                                                                                                                                                            |       |             | ** **  |             |       |
| Mortgage payable  to bank; interest rate at FHLB plus 1.95% (7.35% as of November 30, 2004);  monthly principal and interest payments of $5,000 payable through October  2021; collateralized by land and building of Teltron Technologies, Inc.                                                | ** ** | **561,000**      | ** **  | 573,000          |       |
|                                                                                                                                                                                                                                                                                            |       |             | ** **  |             |       |
| Other                                                                                                                                                                                                                                                                                           | ** ** | **405,000**      | ** **  | 461,000          |       |
|                                                                                                                                                                                                                                                                                            |       | **1,455,000**    | ** **  | 3,977,000        |       |
| Less current  portion                                                                                                                                                                                                                                                                           | ** ** | **(597,000**     | **)**       | (1,959,000       | )          |
|                                                                                                                                                                                                                                                                                            |       | **$**            | **858,000** | ** **       | $          | 2,018,000 |   |

 

NOTE E - LINES OF CREDIT

 

Until November 2004, the Company had a $12,000,000 credit facility witha bank.  The interest rate on the line ofcredit was a floating LIBOR rate based on a ratio of debt to EBITDA, asdefined.  The weighted average interestrate during the nine months ended November 30, 2004 and the year ended February29, 2004 was 3.84% and 3.70%.  Theaverage

 

9

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amount and maximum amount outstanding were $8,821,000 and $9,596,000,respectively, during the nine months ended November 30, 2004, and $6,966,000and $8,801,000, respectively, during the nine months ended November 30,2003.  Borrowings under the line ofcredit were limited by eligible accounts receivable, inventory and real estate,as defined, and includes a commitment fee of 0.25% for the unused portion.  This line of credit was paid off in November2004 and replaced with another credit facility from another bank, as describedin the following paragraph.

 

In November 2004, the Company executed a new line of credit to replaceits prior credit facility.  The new lineof credit has a maximum availability for borrowing of $27,500,000, and iscollateralized by equipment, inventories and accounts receivable of theCompany.  The interest rate on this lineis a floating LIBOR rate based on a ratio of debt to EBITDA, as defined.  Interest was first paid on this line inDecember 2004, and accordingly, the Company accrued interest of $10,000 atNovember 30, 2004.  The weighted averageinterest rate as of November 30, 2004 was 3.45%. As part of the new financing,the lender paid off the balance of the prior line of credit, the term loancollateralized by the assets of Aydin, Inc., the balance due to an officer ofthe Company, and loan for the Chief Executive Officer of the Company thatfinanced the acquisition of certain assets of Evans & Sutherland, Inc.  As of November 30, 2004, the outstandingbalance of this line of credit was $21,956,000 and the available amount forborrowing was $5,544,000.  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 November 30, 2004, theCompany was in compliance with all covenants.

 

Additionally, the Company has a $2,750,000 secondary line of credit(collateralized by assets of Fox International, Inc.) with another bank.  Interest on this facility is at the rate ofprime plus 1%.  The line is limited byeligible accounts receivable and inventory. The outstanding balance at November 30, 2004 was $ 2,735,000 and theavailable amount for borrowing was $ 15,000. This line is due to expire on July 31, 2005 and, accordingly, isclassified within current liabilities in the consolidated financial statements.

 

NOTE F – SUPPLEMENTAL CASH FLOW INFORMATION

 
| ** **                                                       | ** ** | **Nine Months  Ended** | ** **    |
|------------------------------------------------------------------|------------|------------------------|---------------|
| ** **                                                       | ** ** | **November 30,**       | ** **    | **November 30,** | ** ** |
| ** **                                                       | ** ** | **2004**               | ** **    | **2003** | ** ** |
| Cash Paid for:                                                   |       |                   |          |   |   |
| Interest                                                         | ** ** | **$**                  | **723,000**   |   | $ | 931,000 |   |
| Income taxes,  net of refunds                                    | ** ** | **$**                  | **1,253,000** |   | $ | 406,000 |   |
|                                                             |       |                   |          |   |   |
| Non-cash  Transactions:                                          |       |                   |          |   |   |
| Conversion of  debentures for common stock                       | ** ** | **$**                  | **—**    |   | $ | 1,000,000 |   |
| Issuance of  common stock for monitor division of Data Ray, Inc. | ** ** | **$**                  | **400,000**   |   | $ | — |   |

 

NOTE G – SHAREHOLDERS’ EQUITY

 

**Earnings Per Share**

 

Basic earnings per share is computed by dividing income available tocommon shareholders by the weighted average number of shares outstanding duringeach period.  Shares issued during theperiod are weighted for the portion of the period that they wereoutstanding.  Diluted earnings per shareis calculated in a manner consistent with that of basic earnings per sharewhile giving effect to all dilutive potential common shares that wereoutstanding during the period.  AtNovember 30, 2004, the Company had no outstanding options that would beconsidered anti-dilutive in calculating earnings per share.

 

10

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On September 8, 2004, the Company announced a two for one stock splitof its common stock, payable as a stock dividend on November 1, 2004, toshareholders of record at the close of business on September 23, 2004.  Shareholders received one share of commonstock for every one share of the Company’s stock held on the record date.  On November 1, 2004, approximately 4,841,000shares of the Company’s common stock were distributed to shareholders as aresult of this dividend.

 

The following table sets forth the computation of basic and dilutedearnings per share for the three and nine-month periods ended November 30, 2004and 2003.  Prior period basic and dilutedearnings per share have been retroactively adjusted to reflect the November2004 stock split, and are in conformity with SFAS 128 disclosures.

 
| ** **                           | ** ** | **Net Income** | ** ** | **Weighted  Average Shares  Outstanding** | ** ** | **Earnings Per  Share** | ** ** |
|--------------------------------------|------------|----------------|------------|-------------------------------------------|------------|-------------------------|------------|
| Quarter ended  November 30, 2004     |       |           |       |                                      |       |                    |       |
| Basic                                |       | $              | 1,077,000  |                                      | 9,686,000  |                    | $          | 0.11 |   |
| Effect of  dilution:                 |       |           |       |                                      |       |                    |       |
| Options                              |       | —         |       | 237,000                                   |       |                    |       |
| Convertible debt                     |       | —         |       | —                                    |       |                    |       |
| Diluted                              |       | $              | 1,077,000  |                                      | 9,923,000  |                    | $          | 0.11 |   |
|                                 |       |           |       |                                      |       |                    |       |
| Quarter ended  November 30, 2003     |       |           |       |                                      |       |                    |       |
| Basic                                |       | $              | 372,000    |                                      | 9,400,000  |                    | $          | 0.04 |   |
| Effect of  dilution:                 |       |           |       |                                      |       |                    |       |
| Options                              |       | —         |       | 214,000                                   |       |                    |       |
| Convertible debt                     |       | —         |       | —                                    |       |                    |       |
| Diluted                              |       | $              | 372,000    |                                      | 9,614,000  |                    | $          | 0.04 |   |
|                                 |       |           |       |                                      |       |                    |       |
| Nine months  ended November 30, 2004 |       |           |       |                                      |       |                    |       |
| Basic                                |       | $              | 3,343,000  |                                      | 9,665,000  |                    | $          | 0.35 |   |
| Effect of  dilution:                 |       |           |       |                                      |       |                    |       |
| Options                              |       | —         |       | 228,000                                   |       |                    |       |
| Convertible debt                     |       | —         |       | —                                    |       |                    |       |
| Diluted                              |       | $              | 3,343,000  |                                      | 9,893,000  |                    | $          | 0.34 |   |
|                                 |       |           |       |                                      |       |                    |       |
| Nine months  ended November 30, 2003 |       |           |       |                                      |       |                    |       |
| Basic                                |       | $              | 2,156,000  |                                      | 9,280,000  |                    | $          | 0.23 |   |
| Effect of  dilution:                 |       |           |       |                                      |       |                    |       |
| Options                              |       | —         |       | 162,000                                   |       |                    |       |
| Convertible debt                     |       | 26,000         |       | 321,000                                   |       |                    |       |
| Diluted                              |       | $              | 2,182,000  |                                      | 9,768,000  |                    | $          | 0.22 |   |

 

**Stock-Based Compensation Plans**

 

The Company has an incentive stock option plan whereby total options topurchase 300,000 common shares may be granted to key employees at a price notless than fair market value at the time the options are granted and areexercisable beginning on the first anniversary of the grant date for a periodnot to exceed ten years.  Statement of

 

11

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Financial Accounting Standards No. 123 encourages, but does not require companies to record compensationcost for stock-based employee compensation plans at fair value.  The Company has chosen to continue to accountfor stock-based compensation using the intrinsic value method prescribed inAccounting Principles Board Opinion No. 25, “Accounting for Stock Issued toEmployees”, and related Interpretations. Accordingly, compensation cost forstock options is measured as the excess, if any, of the quoted market price ofthe Company’s stock at the date of the grant over the amount an employee mustpay to acquire the stock.  The optionprice of all the Company’s stock options is equal to the market value of thestock at the grant date.

 

Had compensation cost beendetermined based upon the fair value at the grant date for awards under thestock option plan consistent with the methodology prescribed under SFAS No.123, the effect on the Company’s pro forma net income (loss) and net income(loss) per share would have been as follows:

 
| ** **                                                                               | ** ** | **Three Months Ended** | ** **    | **Nine Months Ended**  | ** ** |
|------------------------------------------------------------------------------------------|------------|------------------------|---------------|------------------------|------------|
| ** **                                                                               | ** ** | **November 30,  2004** | ** **    | **November 30,  2003** | ** ** | **November 30,  2004** | ** ** | **November 30,  2003** | ** ** |
| Net income, as  reported                                                                 | ** ** | **$**                  | **1,077,000** | ** **             | $          | 372,000 |   | **$** | **3,343,000** | ** ** | $ | 2,156,000 |   |
| Stock-based  employee compensation expense, as reported                                  | ** ** | **—**             | ** **    | —                 |       | **—** | ** ** | — |   |
| Stock-based  employee compensation expense determined under fair value basis, net of tax | ** ** | **(14,000**            | **)**         | (15,000                | )          | **(35,000** | **)** | (42,000 | ) |
| Pro forma net  income                                                                    | ** ** | **$**                  | **1,063,000** | ** **             | $          | 357,000 |   | **$** | **3,308,000** | ** ** | $ | 2,114,000 |   |
|                                                                                     |       |                   | ** **    |                   |       |   | ** ** |   |   |
| Net earnings per  share:                                                                 |       |                   | ** **    |                   |       |   | ** ** |   |   |
| Basic – as  reported                                                                | ** ** | **$**                  | **0.11**      | ** **             | $          | 0.04 |   | **$** | **0.35** | ** ** | $ | 0.23 |   |
| Basic – pro  forma                                                                  | ** ** | **$**                  | **0.11**      | ** **             | $          | 0.04 |   | **$** | **0.34** | ** ** | $ | 0.23 |   |
| Diluted – as  reported                                                              | ** ** | **$**                  | **0.11**      | ** **             | $          | 0.04 |   | **$** | **0.34** | ** ** | $ | 0.22 |   |
| Diluted – pro  forma                                                                | ** ** | **$**                  | **0.11**      | ** **             | $          | 0.04 |   | **$** | **0.33** | ** ** | $ | 0.22 |   |

 

The fair value of stockoptions used to compute proforma net income applicable to common shareholdersand earnings per share disclosures is the estimated present value at grant dateusing the Black Scholes option pricing model with the following weightedaverage assumptions for the nine months ended November 30, 2004 and the three andnine months ended 2003, respectively: expected volatility of 25% and 43%; a risk free interest rate of 2.5%and 3.5%; expected lives of 3.0 and 3.0 years; and a dividend yield of 0% forall periods. No options were granted during the three months ended November 30,2004. Compensation expense during this period is the result of the expenseassociated with vesting of prior period grants.

 

**Stock RepurchaseProgram**

 

The Company has a stock repurchase program, pursuant to which it isauthorized to repurchase up to 925,000 shares of the Company’s common stock inthe open market. Through November 30, 2004, the Company has repurchased 584,000shares under this program.  No shareswere repurchased during the first nine months of the current fiscal year.  

 

**Dividends**

 

Subsequent to November30, 2004, the Company announced that it would pay a $0.04 per common share cashdividend to holders of record as of December 15, 2004, payable January 5,2005.  The total dividend paid on January5, 2005 was approximately $392,000.

 

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**NOTE H. ACQUISITION**

 

In March 2004, theCompany 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 has a put feature whereby Data Ray can redeem the stockfor $5.50 per share if the price per share of the Company's stock is below$6.00 after the one year anniversary date of the purchase agreement.

 

**NOTE I. PURCHASE OF ASSETS**

 

In October 2004, theCompany entered into an agreement with Evans & Sutherland, Inc. to purchasecertain assets.  Under this agreement,the Company paid a total of $5,250,000 for the following assets related toEvans & Sutherland’s ESCP® and Targetview CRT projector product lines:  inventory valued at $2,244,000, fixed assetsvalued at $248,000 and intangible assets valued at $2,758,000.  The intangible assets consist of anon-compete agreement valued at $1,000,000 and amortizable over 5 years, and acustomer list valued at $1,758,000 amortizable over a 15 year period.  Amortization expense related to the intangibleassets acquired was $39,000 for the nine months ended November 30, 2004.  The purchase was financed initially by a loanfrom the Chief Executive Officer, which subsequently was refinanced under theCompany’s new line of credit.  Followingthis acquisition, the Company began the process of consolidating all CRTprojector manufacturing, sales and support with its established MarqueeTMprojector operations in Cape Canaveral, Florida.   This consolidation process was substantiallycompleted by the end of December 2004. The Company has a presence in the military flight training and simulationmarket, and with this acquisition will be able to expand into the commercialflight training and simulation market.

 

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

 

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

 

**Overview**

 

The Company is a worldwide leader in themanufacture and distribution of a wide range of display devices, encompassing,among others, entertainment, military, medical and simulation displaysolutions.  The Company is comprised oftwo distinct segments - (1) the manufacture and distribution of monitors,projection systems and CRTs and (2) the wholesale distribution of consumerelectronic parts. The CRT segment is organized into four distinct divisionsthat have been aggregated into one distinct operating segment, pursuant toparagraph 17 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.

 

***Third Quarter and Year to Date2005 Highlights***

 

•                  ***Monitor division revenue*** - the Company’s monitor division continued astrong growth trend.  The Company now hasthe ability to compete in various niche markets within the defense, medical andprojection display industries.  Net saleswithin this segment increased in the third quarter of fiscal 2005 by $2,731,000or 26.1% compared to the third quarter of fiscal 2004.  For the nine months ended November 30, 2004,net revenue increased $5,186,000 or 15.5% compared to the same period a yearago.  This increase reflects new militarycontracts started in fiscal 2004.

 

•                  ***Data Display division revenue****–*the Company’s data display division’srevenues increased $249,000 or 12.7% for the quarter ended November 30, 2004compared to the third quarter of fiscal 2004. For the nine months ended November 30, 2004, net revenue increased$458,000 or 8.1% compared to the same period a year ago.  These increases reflect the Company’s salesof projection tubes from its Data Display location in Tucker, GA, which carry ahigher sales price than its’ normal inventory.

 

•                  ***Purchase of assets*** – in October 2004, the Company finalized thepurchase of certain inventories, fixed assets, and various other intangibleassets of Evans & Sutherland, Inc.  Followingthat agreement, the Company has begun the process of consolidating all CRTprojector manufacturing, sales and support with its established MarqueeTMprojector operations in Cape Canaveral, Florida.

 

•                  ***New line of credit*** – in November, 2004, the Company finalized anew line of credit to replace its’ prior credit facility.  Under the terms of this new facility, thebank paid off the existing line of credit, as well as the term note collateralizedby the assets of Aydin, Inc., a note due to an officer of the company and theloan from the Chief Executive Officer used to finance the purchase of the Evans& Sutherland, Inc. assets.  Themaximum amount available for borrowings under this new line is $27,500,000compared to $12,000,000 under the prior facility.  Proceeds from this line are available forworking capital needs of the Company and are subject to various covenants.  As of November 30, 2004, the Company was incompliance with all covenants.

 

14

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  ***Fiscal2005 Challenges***

 

***Inventory management*** - theCompany continually monitors historical sales trends as well as projectedfuture needs to ensure adequate on hand supplies of inventory and to minimizeoverstocking of slower moving, obsolete items.

 

Certain of the Company’s divisions maintainsignificant inventories of CRT’s and component parts in an effort to ensure itscustomers a reliable source of supply. The Company’s inventory turnover has historically been low due to thehigh inventory requirements inherent in the same-day delivery method ofreplacement parts marketing of cathode ray tubes.  The average inventory turnover at November30, 2004 was 189 days.  The Company’slevel of inventory is higher than some of its competitors due to the fact thatit sells a number of products representing older, or trailing edge, technologythat may not be available from other sources. Approximately $10,901,000 of theCompany’s inventory is represented by this trailing edge technology.  The market for these trailing edge technologyproducts is declining and, as manufacturers for these products discontinueproduction or exit the business, the Company may make last time buys. In themonitor division of the Company’s business, the market for its products ischaracterized by fairly rapid change as a result of the development of newtechnologies, particularly in the flat panel display area. If the Company failsto anticipate the changing needs of its customers and accurately forecast theirrequirements, it may accumulate inventories of products which its customers nolonger need and which the Company will be unable to sell or return to itsvendors.  Because of this, the Company’smanagement monitors the adequacy of its inventory reserves regularly, and atNovember 30, 2004, believes its reserves to be adequate.

 

15

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Results ofOperations

 

The following table setsforth, for the three and nine months ended November 30, 2004 and 2003, thepercentages which selected items in the Statements of Income bear to totalsales:

 
| ** **                        | ** ** | **Three Months  Ended November 30,** | ** ** | **Nine Months  Ended November 30,** | ** ** |
|-----------------------------------|------------|--------------------------------------|------------|-------------------------------------|------------|
| ** **                        | ** ** | **2004**                             | ** ** | **2003**                            | ** ** | **2004** | ** ** | **2003** | ** ** |
| Sales                             |       |                                 |       |                                |       |   |   |   |   |
| CRT  Segment                      |       |                                 |       |                                |       |   |   |   |   |
| Monitors                          |       | 61.5                                 | %          | 57.9                                | %          | 62.2 | % | 59.4 | % |
| Data  Display CRT’s          |       | 10.3                                 |       | 10.9                                |       | 9.9 |   | 10.1 |   |
| Entertainment  CRT’s         |       | 5.0                                  |       | 7.6                                 |       | 5.4 |   | 7.5 |   |
| Electron  Guns and Components     |       | 1.3                                  |       | 2.0                                 |       | 1.1 |   | 1.6 |   |
| Total  CRT Segment                |       | 78.1                                 | %          | 78.4                                | %          | 78.6 | % | 78.6 | % |
| Wholesale  Consumer Parts Segment |       | 21.9                                 |       | 21.6                                |       | 21.4 |   | 21.4 |   |
|                              |       | 100.0                                | %          | 100.0                               | %          | 100.0 | % | 100.0 | % |
| Costs  and expenses               |       |                                 |       |                                |       |   |   |   |   |
| Cost  of goods sold               |       | 66.3                                 | %          | 70.2                                | %          | 66.7 | % | 67.5 | % |
| Selling  and delivery             |       | 8.1                                  |       | 9.1                                 |       | 8.4 |   | 9.1 |   |
| General  and administrative       |       | 16.5                                 |       | 15.3                                |       | 15.3 |   | 15.6 |   |
|                              |       | 90.9                                 | %          | 94.6                                | %          | 90.4 | % | 92.2 | % |
|                              |       |                                 |       |                                |       |   |   |   |   |
| Income  (loss) from Operations    |       | 9.1                                  | %          | 5.4                                 | %          | 9.6 | % | 7.8 | % |
|                              |       |                                 |       |                                |       |   |   |   |   |
| Interest  expense                 |       | (1.1                                 | )%         | (1.6                                | )%         | (1.2 | )% | (1.7 | )% |
| Other  income (expense)           |       | 0.1                                  |       | (0.5                                | )          | 0.3 |   | — |   |
| Income  before income taxes       |       | 8.1                                  | %          | 3.3                                 | %          | 8.7 | % | 6.1 | % |
| Provision  for income taxes       |       | 3.1                                  |       | 1.2                                 |       | 3.3 |   | 2.3 |   |
| Net  Income                       |       | 5.0                                  | %          | 2.1                                 | %          | 5.4 | % | 3.8 | % |

 

Net sales

 

Consolidated net salesincreased $3,369,000 and $5,808,000 for the three and nine month periods endedNovember 30, 2004 as compared to the same period ended November 30, 2003.  CRT segment sales increased $2,590,000 and$4,536,000 for the three and nine-month comparative periods ended November 30,2004.  The wholesale consumer parts segmentsales increased $779,000 for the three-month comparative period and $1,272,000for the nine-month comparative periods ended November 30, 2004.

 

The net increase in CRTsegment sales is attributed to growth within the monitor division of $2,731,000for the three months ended November 30, 2004 and $5,186,000 for the nine monthsended November 30, 2004.  This increaseis due in large part to stronger demand from military and defensecontractors.  The data display divisionshowed an increase of $249,000 for the three month period and $458,000 for thenine month comparative period.  Theentertainment division showed decreases of $292,000 and $895,000 for the threeand nine month periods, while the components division showed decreases of$97,000 and $214,000 for the three and nine month periods.

 

The net gain in monitordivision sales for the nine months ended November 30, 2004 includes increasesfrom Display Systems of $4,648,000 and Aydin Displays of $3,423,000.  These increases reflect revenues from newcontract orders received from the Boeing Co., Lockheed Martin and others duringthe latter part of fiscal 2004.  Therewere offsetting

 

16

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declines of $3,053,000 atthe Lexel operation.  One of its majorcontracts was completed during fiscal 2004, though Lexel’s other product lines,including direct view storage tubes, maintained significant backlogs atNovember 30, 2004.

 

The data display divisionshowed an increase in sales of $458,000 compared to the nine month period endedNovember 30, 2003.  Management attributesthis primarily to its decision in late fiscal 2004 to distribute commercial andmilitary projection tube displays from its Data Display location in Tucker,Georgia instead of its Novatron location, which is a part of the entertainmentdivision.

 

Within the entertainmentdivision, sales declined $292,000 and $895,000 for the three and nine monthcomparative periods.  The Company is theprimary supplier of replacement television CRT’s to the domestic entertainmentmarket.  A majority of the entertainment division’ssales (37%) are to major television retailers as replacements for products soldunder manufacturer and extended warranties. Due to continued lower retail sales prices for mid-size television sets(25” to 30”), fewer extended warranties were sold by retailers, a trendconsistent with the past two fiscal years. The Company remains the primary supplier of product to meetmanufacturers’ standard warranties. Growth in this division will be impacted by the timing and number ofextended warranties sold for the larger, more expensive sets.  Because the Company is in the replacementmarket, it has the ability to track retail sales trends and, accordingly, canattempt to adjust quantities of certain size CRT’s carried in stock and reduceexposure to obsolescence.

 

Sales within thecomponent parts division declined $97,000 and $214,000 for the three and ninemonth comparative periods.  Sales in thisdivision have declined over the past two fiscal years due to weaker demand forelectron gun and stem sales.  Electrongun sales have historically been dependent upon the demand by domestic andforeign television CRT remanufacturers. These sales have declined over the past few years as consumers movetowards purchasing new technology as opposed to repairing existing sets.  The Company’s Wintron location is in theprocess of transitioning to two newer camera technologies.  One such technology will assist border guardswith under car inspections and another will assist correctional facilities withthe supervision of inmates.  Ifsuccessful, the Company believes these new technologies will have a positiveimpact on the component division sales.

 

###### Gross margins

 

Consolidated grossmargins increased from 29.8% to 33.7% for the quarter and from 32.5% to 33.3%for the nine months ended November 30, 2004 as compared to November 30,2003.  CRT segment margins increased from25.1% to 28.3% and 28.9% to 30.4% for the three and nine month comparativeperiods.  The wholesale parts segmentmargins increased from 41.7% to 47.3% and decreased from 45.3% to 43.9% for thesame comparative periods.

 

CRT margins werepositively impacted by the continued growth within the monitor segment as wellas growth within the data display segment. The Company has been able to increase sales volume while controllingcosts within the monitor segment.  Withinthe data display segment, the Company has begun to distribute projection CRT’sfrom its Tucker, GA office, which carry higher profit margins than its otherCRT’s.  Within the wholesale partssegment, these increases are attributable to the opening of a new call centerin September 2004 that the Company did not have to incur a correspondingincrease in expense, as well as lower than normal volume for the period endedNovember 30, 2004.

 

##### Operating expenses

 

Operating expenses as apercentage of sales remained relatively flat increasing from 24.3% to 24.5% forthe quarter ended November 30, 2004 as compared to November 30, 2003 anddecreased from 24.7% to 23.7% for the same nine month comparative period.  CRT segment operating expenses increased $504,000for the nine month period while wholesale parts segment operating expensesincreased $481,000.  CRT segmentincreases reflect higher expenses within the monitor division of $867,000,which in turn reflect the continued growth and need for support personnelwithin this division.  The data display divisionposted offsetting decreases of $354,000 which reflect lower payroll costsachieved through the reduction of personnel. Wholesale parts increases reflect increased expenses associated withgrowth over the

 

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past nine months, as wellas expenses associated with starting a new call center that opened in the thirdquarter of fiscal 2005.

 

###### Interest expense

 

Interest expensedecreased $46,000 and $199,000, respectively, for the three and nine monthsended November 30, 2004 as compared to the same period a year ago.  The Company maintains various debt agreementswith different interest rates, most of which are based on the prime rate orLIBOR.   Although overall debt increased$5,535,000 compared to the same period a year ago, most of this was due to theOctober acquisition of Evans & Sutherland. Excluding the effects of the Evans & Sutherland purchase, the Companydecreased its debt $773,000 compared to November 30, 2003, resulting in lowerinterest expense for the comparative periods.

 

###### Income taxes

 

The effective tax ratefor the nine months ended November 30, 2004 was 38.0%, unchanged from the sameperiod a year ago.  These rates aregreater than the Federal statutory rate primarily due to the effect of statetaxes and the permanent non-deductibility of certain expenses for tax purposes.

 

##### Foreigncurrency translation

 

Gains or losses resultingfrom the transactions with the Company’s UK subsidiary are reported in currentoperations while currency translation adjustments are recognized in a separatecomponent of shareholders’ equity.  Therewere no significant gains or losses recognized in either period related to theUK subsidiary.

 

Liquidity andcapital resources

 

As of November 30, 2004,the Company had total cash and cash equivalents of $4,120,000.  The Company’s working capital was $39,839,000and $31,947,000 at November 30, 2004 and February 29, 2004.  In recent years, the Company has financed itsgrowth and cash needs primarily through income from operations, borrowingsunder revolving credit facilities and long-term debt.  Liquidity provided by operating activities ofthe Company is reduced by working capital requirements, consisting largely ofinventories and accounts receivable, debt service, capital expenditures,product line additions and, in fiscal 2004, dividends.

 

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

 

TheCompany continues to monitor its cash and financing positions seeking to findways to lower its interest costs and to produce positive operating cashflow.  The Company examines possibilitiesto grow its business as opportunities present themselves, such as new salescontracts or niche acquisitions. There could be an impact on working capitalrequirements to fund this growth.  As inthe past, the intent is to finance such projects with operating cash flows orexisting bank lines; however, more permanent sources of capital may be requiredin certain circumstances.  In March 2004,the Company acquired the assets of Colorado based Data-Ray Corporation’s CRTmonitor operations.  Consideration for thepurchase included the issuance of $400,000 of the Company’s common stock and$150,000 cash to the seller.  In November2004, the Company purchased inventories, fixed assets and intangible assets ofEvans & Sutherland for $5,250,000 cash.

 

Cash provided byoperations for the nine months ended November 30, 2004 was $1,767,000 ascompared to $5,998,000 for the same period a year ago.   Net income for the nine months endedNovember 30, 2004 adjusted for non-cash items provided cash of $4,672,000.  Increases in accounts receivable, inventoriesand prepaid expenses and other assets used

 

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cash of $3,916,000 forthe nine months ended November 30, 2004. Decreases in accounts payable and accrued liabilities provided cash of$1,011,000 during the same period. During the nine months ended November 30, 2003, operating cash flowswere provided primarily by net income adjusted for non-cash items of$4,099,000.  Decreases in accountsreceivable and inventories, and increases in accounts payable and accruedliabilities provided cash of $2,057,000 for the nine months ended November 30,2003.  Decreases in prepaid expenses usedcash of $158,000.

 

The increase in inventoryof $3,117,000 was primarily increases within the monitor segment required tofill open backlog orders. The increase in accounts payable and accruedliabilities primarily reflect the increase in purchases within the data displayand monitors segments to support new business.

 

Investing activities used$5,930,000 in the first nine months of fiscal 2005, compared to $558,000 forthe same period a year ago.  Capitalexpenditures were $530,000 for the period ended November 30, 2004 as comparedto $588,000 for the period ended November 30, 2003.  Capital expenditures in fiscal 2005 were primarily for buildingimprovements 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 fiscal 2006.  In November2004, the Company completed the purchase of certain inventories, fixed assetsand various other assets of Evans & Sutherland for $5,250,000 cash.

 

Financing activitiesprovided cash of $5,242,000 for the nine months ended November 30, 2004 andused cash of $6,333,000 for the nine months ended November 30, 2003.  During the nine months ended November 30,2004, cash provided from the Company’s primary line of credit was used tofinance working capital requirements as well as pay off the balance of the notecollateralized by the assets of Aydin, Inc., as well as the balance of the noteowed to the Company’s CEO.

 

TheCompany has a stock repurchase program, pursuant to which it is authorized torepurchase up to 925,000 shares of the Company’s common stock in the openmarket. In the first quarter of fiscal 2004, 250,000 shares were repurchasedfor $812,000. No shares have been repurchased in fiscal 2005.  Under this program, 341,000 shares remainauthorized to be repurchased by the Company.

 

Inthe first quarter of fiscal 2004, the Company redeemed $100,000 of common stockpreviously issued for the purchase of inventory.  The Company paid a cash dividend of $245,000in the fourth quarter of fiscal 2004, which were the first dividends declaredand paid by the Company in its history. In the fourth quarter of fiscal 2005,the company paid a cash dividend of $392,000. 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 on inventories,revenue recognition, the allowance for bad debts and warranty reserves.  The Company uses the following methods andassumptions in determining its estimates:

 

*Reserves oninventories*

 

Reserves on inventoriesresult in a charge to operations when the estimated net realizable value declinesbelow cost.  Management regularly reviewsthe Company’s investment in inventories for declines in value and establishesreserves

 

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when it is apparent thatthe expected net realizable value of the inventory falls below in carryingamount. Managment considers the projected demand for CRTs in this estimate ofnet realizable value. Management is able to identify consumer buying trends,such as size and application, well in advance of supplying replacement CRTs.Thus, the Company is able to adjust inventory-stocking levels according to theprojected demand. The average life of a CRT is five to seven years, at whichtime the Company’s replacement market develops. Management reviews inventorylevels on a quarterly basis. Such reviews include observations of product developmenttrends of the OEM's, new products being marketed, and technological advancesrelative to the product capabilities of the Company's existing inventories. Therehave been no significant changes in management's estimates in fiscal 2005 and2004; however, the Company cannot guarantee the accuracy of future forecastssince these estimates 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 EITF00-10, shipping and handling fees billed to customers are classified in netsales in the consolidated statements of operations.  Shipping and handling costs incurred areclassified in selling and delivery in the consolidated statements of operations.

 

A portion of theCompany’s revenue 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 for Performanceof 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, estimatingcontract costs and making related assumptions for schedule and technicalissues.  With respect to contract changeorders, claims or similar items, judgment must be used in estimating relatedamounts 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.

 

*Allowance for bad debts*

 

The allowance for baddebts is determined by reviewing all accounts receivable and applyinghistorical credit loss experience to the current receivable portfolio withconsideration given to the current condition of the economy, assessment of thefinancial position of the creditors as well as past payment history and overalltrends in past due accounts compared to established thresholds.  The Company monitors credit exposure andassesses the adequacy of the allowance for bad debts on a regular basis.  Historically, the Company’s allowance hasbeen sufficient for any customer write-offs. Although the Company cannot guarantee future results, management feelsits policies and procedures relating to customer exposure are adequate.

 

*Warranty reserves*

 

The warranty reserveis determined by recording a specific reserve for known warranty issues and ageneral reserve based on historical claims experience. The Company considersactual warranty claims compared to net sales, then adjusts its reserveliability accordingly.  Actual claimsincurred could differ from the original estimates, requiring adjustments to the

 

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reserve.  Management feels that historically itsprocedures have been adequate and does not anticipate that its assumptions arereasonably likely to change in the future.

 

*Other Accounting Policies*

 

Other losscontingencies are recorded as liabilities when it is probable that a liabilityhas been incurred and the amount of the loss is reasonably estimable.  Disclosure is required when there is areasonable possibility that the ultimate loss will exceed the recordedprovision.  Contingent liabilities areoften resolved over long time periods. Estimating probable losses requires analysis of multiple factors thatoften depend on judgments about potential actions by third 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 the following:  business conditions, rapid or unexpectedtechnological changes, product development, inventory risks due to shifts inproduct demand, competition, domestic and foreign government relations,fluctuations in foreign exchange rates, rising costs for components orunavailability 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’s primarymarket risks include fluctuations in interest rates and variability in interestrate spread relationships, such as prime to LIBOR spreads.  Approximately $26,162,000 of outstanding debtat November 30, 2004 related to long-term indebtedness under variable ratedebt.  Interest on the outstandingbalance of this debt will be charged based on a variable rate related to theprime rate or the LIBOR rate.  Both ratebases are incremented for margins specified in their agreements.  Thus, the Company’s interest rate is subjectto market risk in the form of fluctuations in interest rates. The effect of ahypothetical one percentage point increase across all maturities of variablerate debt would result in an decrease of approximately $262,000 in pre-tax netincome assuming no further changes in the amount of borrowings subject tovariable rate interest from amounts outstanding at November 30, 2004. 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, under supervision ofthe Chief Executive Officer and Chief Financial Officer, is responsible forestablishing and maintaining disclosure controls and procedures for the Companyand its subsidiaries. As of the end of the period covered by this quarterlyreport, with the participation of the Chief Executive Officer and the ChiefFinancial Officer, management completed an evaluation of the Company’sdisclosure controls and procedures. Based upon this evaluation, the ChiefExecutive 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 decisions regardingrequired disclosures.

 

There were no changes in the Company’s internal control over financialreporting during the most recent fiscal quarter that have materially affected,or are reasonably likely to materially affect, the internal control over financialreporting.

 

In the fourth quarter offiscal 2003, the Company’s management identified discrepancies involvingintercompany transactions between its Data Display operations and UK operationsthat began during fiscal 2003.  Thesediscrepancies, which amounted to approximately $238,000 were the result ofinsufficient reconciliation procedures and were first identified by the Company’sController and Chief Financial Officer. After reviewing these transactions and the ways in which they werereported and accounted for, management determined that such discrepancies couldbe prevented in the future by establishing and implementing more thoroughreview and reconciliation procedures.  Inthe third quarter of fiscal 2004, the Company implemented regular monthlytransaction reconciliation and review processes in order to enhance itscontrols and procedures over intercompany transactions.  The implementation of these new controls andprocedures was substantially completed by the end of fiscal 2004.  Since that time, internal controls andprocedures related to the Company’s intercompany transactions have beeneffective.

 

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PART II

 

 

Item 1.                                     Legal Proceedings

 

No new material legalproceedings or material changes in existing litigation occurred during thequarter ended November 30, 2004.

 

Item 2.                                     Unregistered Sales of Equity Securitiesand Use of Proceeds

 

The Company made no salesof unregistered equity securities, nor did the Company repurchase any shares ofits equity securities, during the quarter ended November 30, 2004.

 

Item 3.                                     Defaults upon Senior Securities

 

None.

 

Item 4.                                     Submission of Matters to a Vote ofSecurity Holders

 

None

 

Item 5.                                     Other information

 

None

 

Item 6.                                     Exhibits

 
| **Exhibit  Number** | ** ** | **Exhibit Description**                                                |
|---------------------|------------|------------------------------------------------------------------------|
|                |       |                                                                   |
| 31.1                |       | Section 302  Certification                                             |
| 31.2                |       | Section 302  Certification                                             |
| 32.1                |       | Section 906  Certifications                                            |
| 99.1                |       | SAS 100 Report of  Independent Registered Public Accounting  Firm |

 

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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 thereuntoduly authorized.

 

 
|             |   | VIDEO DISPLAY  CORPORATION             |
|------------------|--------|----------------------------------------|
|             |   |                                   |
|             |   |                                   |
| January 19, 2005 | By:    | /s/ Ronald D. Ordway                   |   |
|             |   | Ronald D. Ordway                       |
|             |   | Chief Executive Officer                |
|             |   |                                   |
|             |   |                                   |
| January 19, 2005 | By:    | /s/ Gregory A. Kittle                  |   |
|             |   | Gregory A. Kittle                      |
|             |   | Chief Financial Officer  and Secretary |

 

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