**UNITED STATES**

**SECURITIES ANDEXCHANGE COMMISSION**

**WASHINGTON, DC 20549**

 

**FORM 10-Q**

 

| **ý** | **Quarterly  Report Pursuant to Section 13 or 15(d) of the Securities Exchange  Act of 1934**                                                                                                                                                                                                                                                                                                           |
|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** ** | **For the  Quarterly Period Ended November 30, 2005.**                                                                                                                                                                                                                                                                                                                                                       |
| ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                        |
| **or**     |
| ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                        |
| **o**      | **Transition  Report Pursuant to Section 13 or 15(d) of the Securities Exchange  Act of 1934**                                                                                                                                                                                                                                                                                                          |
| ** ** | **For the  Transition Period  From                                to                               ** |

 

**Commission File Number 0-13394**

 

**VIDEO DISPLAY CORPORATION**

(Exact name of registrant as specified on its charter)

 

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

 

**1868 TUCKER INDUSTRIAL ROAD, TUCKER,GEORGIA 30084**

(Address of principal executive offices)

 

**770-938-2080**

(Registrant’s telephone number including area code)

 

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days.  Yes   ý        No    o

 

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

 

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act). Yes    o          No    ý

 

As of January 23, 2006,the registrant had 9,689,000 shares of Common Stock outstanding.

 

 

----

 

Video Display Corporation and SubsidiariesIndex

 
| PART I.  | FINANCIAL  INFORMATION |                                                                     |
|---------------|------------------------|--------------------------------------------------------------------------|
|          |                   |                                                                     |
|          | Item 1                 | Financial Statements                                                     |   |
|          |                   |                                                                     |   |
|          |                   | Consolidated Balance Sheets  –                                      |   |
|          |                   | November 30, 2005  (unaudited) and February 28, 2005           |   |
|          |                   |                                                                     |   |
|          |                   | Consolidated Statements of  Income -                                     |   |
|          |                   | Three and nine months ended November 30,  2005 and 2004 (unaudited) |   |
|          |                   |                                                                     |   |
|          |                   | Consolidated Statement of  Shareholders’ Equity -                   |   |
|          |                   | For the nine months ended November 30,  2005 (unaudited)            |   |
|          |                   |                                                                     |   |
|          |                   | Consolidated Statements of  Cash Flows –                            |   |
|          |                   | Nine months ended November 30,  2005 and 2004 (unaudited)           |   |
|          |                   |                                                                     |   |
|          |                   | Notes to consolidated  financial statements -                            |   |
|          |                   | November 30, 2005  (unaudited)                                      |   |
|          |                   |                                                                     |   |
|          | Item 2.           | Management’s Discussion and  Analysis of Financial                  |   |
|          |                   | Condition and Results of  Operations                                     |   |
|          |                   |                                                                     |   |
|          | Item 3.                | Quantitative and Qualitative  Disclosure About Market Risk               |   |
|          |                   |                                                                     |   |
|          | Item 4                 | Controls and Procedures                                                  |   |
|          |                   |                                                                     |
| PART II. | OTHER INFORMATION      |                                                                     |
|          |                   |                                                                     |
|          | Item 1.                | Legal Proceedings                                                        |   |
|          |                   |                                                                     |   |
|          | Item 2.                | Unregistered Sales of Equity Securities and Use of  Proceeds             |   |
|          |                   |                                                                     |   |
|          | Item 3.                | Defaults upon Senior Securities                                          |   |
|          |                   |                                                                     |   |
|          | Item 4.                | Submission of Matters to a Vote of Security Holders                      |   |
|          |                   |                                                                     |   |
|          | Item 5.                | Other Information                                                        |   |
|          |                   |                                                                     |   |
|          | Item 6.           | Exhibits                                                                 |   |
|          |                   |                                                                     |
|          | SIGNATURES             |                                                                     |
|               |                        |                                                                          |  |  |

 

2

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**ITEM 1. FINANCIAL STATEMENTS**

 

**VideoDisplay Corporation and Subsidiaries**

**Consolidated Balance Sheets(in thousands)**

 
| ** **                                                                  | ** ** | **November 30,  2005** | ** ** | **February 28,  2005** | ** ** |
|-----------------------------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **                                                                  |       | **(unaudited)**             |       | **(restated, Note K)** |       |
| **Assets**                                                                  |       |                        |       |                        |       |
| Current Assets                                                              |       |                        |       |                        |       |
| Cash                                                                        | ** ** | **$**                       | **1,819**  |                        | $          | 1,471 |   |
| Accounts receivable, less allowance for possible  losses of $323 and $339   | ** ** | **10,408**                  |       | 11,929                      |       |
| Inventories, net                                                            | ** ** | **35,928**                  |       | 32,105                      |       |
| Cost and estimated earnings in excess of billings on  uncompleted contracts | ** ** | **1,064**                   |       | 738                         |       |
| Deferred income taxes                                                       | ** ** | **3,145**                   |       | 2,855                       |       |
| Prepaid expenses and other                                                  | ** ** | **1,180**                   |       | 460                         |       |
| Total current assets                                                        | ** ** | **53,544**                  |       | 49,558                      |       |
|                                                                        |       |                        |       |                        |       |
| Property, plant and equipment:                                              |       |                        |       |                        |       |
| Land                                                                        | ** ** | **540**                     |       | 540                         |       |
| Buildings                                                                   | ** ** | **7,498**                   |       | 7,155                       |       |
| Machinery and equipment                                                     | ** ** | **20,996**                  |       | 19,485                      |       |
|                                                                        |       | **29,034**                  |       | 27,180                      |       |
| Accumulated depreciation and amortization                                   | ** ** | **(20,355**                 | **)**      | (19,543                     | )          |
| Net property, plant, and equipment                                          | ** ** | **8,679**                   |       | 7,637                       |       |
|                                                                        | ** ** | ** **                  |       |                        |       |
| Goodwill                                                                    | ** ** | **1,318**                   |       | 1,318                       |       |
| Other assets                                                                | ** ** | **3,832**                   |       | 3,671                       |       |
|                                                                        |       |                        |       |                        |       |
| Total assets                                                                | ** ** | **$**                       | **67,373** |                        | $          | 62,184 |   |

 

The accompanyingnotes are an integral part of these statements.

 

3

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| ** **                                                                                          | ** ** | **November 30,  2005** | ** ** | **February 28,  2005** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **                                                                                          | ** ** | **(unaudited)**             | ** ** | **(restated, Note K)**      |       |
| **Liabilities  and Shareholders’ Equity**                                                      |       |                        |       |                        |       |
| Current liabilities                                                                                 |       |                        |       |                        |       |
| Accounts payable                                                                                    | ** ** | **$**                       | **5,638**  |                        | $          | 5,190 |   |
| Accrued liabilities                                                                                 | ** ** | **3,146**                   |       | 3,425                       |       |
| Billings in excess of cost and estimated earnings on  uncompleted contracts                         | ** ** | **1,740**                   |       | 454                         |       |
| Line of credit                                                                                      | ** ** | **—**                  |       | 2,688                       |       |
| Notes payable to officers and directors                                                             | ** ** | **42**                      |       | 49                          |       |
| Current maturities of long-term debt and financing  lease obligations                               | ** ** | **139**                     |       | 577                         |       |
| Total current liabilities                                                                           | ** ** | **10,705**                  |       | 12,383                      |       |
|                                                                                                |       |                        |       |                        |       |
| Lines of credit                                                                                     | ** ** | **24,084**                  |       | 19,296                      |       |
| Long-term debt, less current maturities                                                             | ** ** | **818**                     |       | 848                         |       |
| Financing lease obligations, less current maturities                                                | ** ** | **353**                     |       | —                      |       |
| Notes payable to officers and directors, less  current maturities                                   | ** ** | **125**                     |       | 146                         |       |
| Convertible notes payable, net of discount of of $44  and $94                                       | ** ** | **206**                     |       | 281                         |       |
| Deferred income taxes                                                                               | ** ** | **465**                     |       | 434                         |       |
| Total liabilities                                                                                   | ** ** | **36,756**                  |       | 33,388                      |       |
|                                                                                                |       |                        |       |                        |       |
| **Minority  Interests**                                                                             | ** ** | **123**                     |       | 123                         |       |
| **Commitments  and Contingencies**                                                                  | ** ** | **—**                  |       | —                      |       |
| ** **                                                                                          |       |                        |       |                        |       |
| **Shareholders’  Equity**                                                                      |       |                        |       |                        |       |
| Preferred stock, no par value – 10,000 shares authorized;  none issued and outstanding         | ** ** | **—**                  |       | —                      |       |
| Common stock, no par value – 50,000 shares authorized;  9,694 and 9,704 issued and outstanding | ** ** | **6,856**                   |       | 7,026                       |       |
| Additional paid-in capital                                                                          | ** ** | **92**                      |       | 92                          |       |
| Retained earnings                                                                                   | ** ** | **23,601**                  |       | 21,624                      |       |
| Accumulated other comprehensive loss                                                                | ** ** | **(55**                     | **)**      | (69                         | )          |
| Total shareholders’ equity                                                                     | ** ** | **30,494**                  |       | 28,673                      |       |
| Total liabilities and shareholders’ equity                                                     | ** ** | **$**                       | **67,373** |                        | $          | 62,184 |   |

 

The accompanyingnotes are an integral part of these statements.

 

4

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**VideoDisplay Corporation and Subsidiaries**

**Consolidated Statements of Income(unaudited)(in thousands, except per share data)**

 
| ** **                                   | ** ** | **Three Months Ended  November 30,** | ** ** | **Nine Months Ended  November 30,** | ** ** |
|----------------------------------------------|------------|-------------------------------------------|------------|------------------------------------------|------------|
| ** **                                   | ** ** | **2005**                                  | ** ** | **2004**                                 | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                         |       |                                      |       | **(restated,  Note K)**                  |       |   |   | **(restated,  Note K)** | ** ** |
| Net sales                                    | ** ** | **$**                                     | **19,676** | ** **                               | $          | 21,434 |   | **$** | **63,450** | ** ** | $ | 62,001 |   |
|                                         |       | ** **                                | ** ** |                                     |       | ** ** | ** ** |   |   |
| Cost of goods  sold                          | ** ** | **13,231**                                | ** ** | 14,214                                   |       | **42,865** | ** ** | 41,360 |   |
|                                         |       | ** **                                | ** ** |                                     |       | ** ** | ** ** |   |   |
| Gross profit                                 | ** ** | **6,445**                                 | ** ** | 7,220                                    |       | **20,585** | ** ** | 20,641 |   |
|                                         |       | ** **                                | ** ** |                                     |       | ** ** | ** ** |   |   |
| Operating  expenses                          |       | ** **                                | ** ** |                                     |       | ** ** | ** ** |   |   |
| Selling and delivery                         | ** ** | **1,929**                                 | ** ** | 1,729                                    |       | **5,526** | ** ** | 5,237 |   |
| General and administrative                   | ** ** | **3,733**                                 | ** ** | 3,561                                    |       | **10,905** | ** ** | 9,552 |   |
|                                         |       | **5,662**                                 | ** ** | 5,290                                    |       | **16,431** | ** ** | 14,789 |   |
|                                         |       | ** **                                | ** ** |                                     |       | ** ** | ** ** |   |   |
| Operating profit                             | ** ** | **783**                                   | ** ** | 1,930                                    |       | **4,154** | ** ** | 5,852 |   |
|                                         |       | ** **                                | ** ** |                                     |       | ** ** | ** ** |   |   |
| Other income  (expense)                      |       | ** **                                | ** ** |                                     |       | ** ** | ** ** |   |   |
| Interest expense                             | ** ** | **(353**                                  | **)**      | (244                                     | )          | **(1,028** | **)** | (732 | ) |
| Other, net                                   | ** ** | **6**                                     | ** ** | 26                                       |       | **86** | ** ** | 188 |   |
|                                         |       | **(347**                                  | **)**      | (218                                     | )          | **(942** | **)** | (544 | ) |
|                                         |       | ** **                                | ** ** |                                     |       | ** ** | ** ** |   |   |
| Income before income taxes                   | ** ** | **436**                                   | ** ** | 1,712                                    |       | **3,212** | ** ** | 5,308 |   |
|                                         |       | ** **                                | ** ** |                                     |       | ** ** | ** ** |   |   |
| Income tax  expense                          | ** ** | **181**                                   | ** ** | 657                                      |       | **1,235** | ** ** | 2,030 |   |
|                                         |       | ** **                                | ** ** |                                     |       | ** ** | ** ** |   |   |
| Net income                                   | ** ** | **$**                                     | **255**    | ** **                               | $          | 1,055 |   | **$** | **1,977** | ** ** | $ | 3,278 |   |
|                                         |       | ** **                                | ** ** |                                     |       | ** ** | ** ** |   |   |
| Basic earnings per share of common stock     | ** ** | **$**                                     | **.03**    | ** **                               | $          | .11 |   | **$** | **.20** | ** ** | $ | .34 |   |
|                                         |       | ** **                                | ** ** |                                     |       | ** ** | ** ** |   |   |
| Diluted earnings  per share of common stock  | ** ** | **$**                                     | **.03**    | ** **                               | $          | .11 |   | **$** | **.20** | ** ** | $ | .33 |   |
|                                         |       | ** **                                | ** ** |                                     |       | ** ** | ** ** |   |   |
| Basic weighted  average shares outstanding   | ** ** | **9,687**                                 | ** ** | 9,686                                    |       | **9,699** | ** ** | 9,665 |   |
|                                         |       | ** **                                | ** ** |                                     |       | ** ** | ** ** |   |   |
| Diluted weighted  average shares outstanding | ** ** | **9,967**                                 | ** ** | 9,923                                    |       | **9,977** | ** ** | 9,893 |   |
|                                              |            |                                           |            |                                          |            |  |  |  |  |  |  |  |  |  |  |

 

The accompanying notes are an integral part of thesestatements.

 

5

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**Video Display Corporation and Subsidiaries**

**Consolidated Statements ofShareholders’ Equity**

**For the Nine Months Ended November 30, 2005(unaudited)(in thousands)**

 
| ** **                              | ** ** | **Common  Shares** | ** ** | **Share  Amount** | ** ** | **Additional  Paid In  Capital** | ** ** | **(restated,  Note K)  Retained  Earnings** | ** ** | **Accumulated  Other  Comprehensive  Income (Loss)** | ** ** |
|-----------------------------------------|------------|--------------------|------------|-------------------|------------|----------------------------------|------------|---------------------------------------------|------------|------------------------------------------------------|------------|
|                                    |       |               |       |              |       |                             |       |                                        |       |                                                 |       |
| Balance at February 28,  2005      |       | 9,704              |       | $                 | 7,026      |                             | $          | 92                                          |       | $                                                    | 21,624     |   | $ | (69 | ) |
| Net income for the period               |       | —             |       | —            |       | —                           |       | 1,977                                       |       | —                                               |       |
| Foreign currency translation adjustment |       | —             |       | —            |       | —                           |       | —                                      |       | 14                                                   |       |
| Repurchase of common stock              |       | (26                | )          | (317              | )          | —                           |       | —                                      |       | —                                               |       |
| Exercise of stock options               |       | 6                  |       | 22                |       | —                           |       | —                                      |       | —                                               |       |
| Conversion of debt to common stock      |       | 10                 |       | 125               |       | —                           |       | —                                      |       | —                                               |       |
|                                    |       |               |       |              |       |                             |       |                                        |       |                                                 |       |
| **Balance  at November 30, 2005**  | ** ** | **9,694**          | ** ** | **$**             | **6,856**  | ** **                       | **$**      | **92**                                      | ** ** | **$**                                                | **23,601** | ** ** | **$** | **(55** | **)** |

 

The accompanying notes are an integral part of thesestatements.

 

6

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**Video Display Corporation and Subsidiaries**

**Consolidated Statements of CashFlows (unaudited)(in thousands)**

 
| ** **                                                                             | ** ** | **Nine Months Ended  November 30,** | ** ** |
|----------------------------------------------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                                             | ** ** | **2005**                                 | ** ** | **2004** | ** ** |
| ** **                                                                             | ** ** | ** **                               | ** ** | **(restated,  Note K)** | ** ** |
| **Operating  Activities**                                                              |       |                                     |       | ** ** |   |
| Net income                                                                             | ** ** | **$**                                    | **1,977**  | ** ** | $ | 3,278 |   |
| **Adjustments  to reconcile net income to net cash provided by operating activities:** |       |                                     | ** ** |   |   |
| Depreciation and amortization                                                          | ** ** | **1,304**                                | ** ** | 894 |   |
| Provision for bad debts                                                                | ** ** | **(16**                                  | **)**      | 91 |   |
| Provision for inventory reserve                                                        | ** ** | **720**                                  | ** ** | 375 |   |
| Deferred income taxes                                                                  | ** ** | **(260**                                 | **)**      | (416 | ) |
| **Changes  in working capital, net of effects from acquisitions:**                     |       |                                     | ** ** |   |   |
| Accounts receivable                                                                    | ** ** | **1,537**                                | ** ** | (120 | ) |
| Inventories                                                                            | ** ** | **(3,769**                               | **)**      | (3,117 | ) |
| Prepaid expenses and other assets                                                      | ** ** | **246**                                  | ** ** | (679 | ) |
| Accounts payable and accrued liabilities                                               | ** ** | **169**                                  | ** ** | 1,461 |   |
| Net cash provided by operating activities                                              | ** ** | **1,908**                                | ** ** | 1,767 |   |
|                                                                                   |       |                                     | ** ** |   |   |
| **Investing  Activities**                                                              |       |                                     | ** ** |   |   |
| Capital expenditures                                                                   | ** ** | **(1,427**                               | **)**      | (530 | ) |
| Cash paid for acquisition                                                              | ** ** | **(1,377**                               | **)**      | (150 | ) |
| Cash paid for product acquisition and other assets                                     |       | —                                   | ** ** | (5,250 | ) |
| Net cash used in investing activities                                                  | ** ** | **(2,804**                               | **)**      | (5,930 | ) |
|                                                                                   |       |                                     | ** ** |   |   |
| **Financing  Activities**                                                              |       |                                     | ** ** |   |   |
| Proceeds from long-term debt, lines of credit and  financing lease obligations         | ** ** | **23,999**                               | ** ** | 43,107 |   |
| Payments on long-term debt, lines of credit and  financing lease obligations           | ** ** | **(22,447**                              | **)**      | (29,740 | ) |
| Proceeds from loans from related parties                                               | ** ** | **1,000**                                | ** ** | 3,000 |   |
| Repayments of loans from related parties                                               | ** ** | **(1,028**                               | **)**      | (11,282 | ) |
| Repurchase of common stock                                                             | ** ** | **(317**                                 | **)**      | — |   |
| Proceeds from exercise of stock options                                                | ** ** | **22**                                   | ** ** | 157 |   |
| Net cash provided by financing activities                                              | ** ** | **1,229**                                | ** ** | 5,242 |   |
|                                                                                   |       |                                     | ** ** |   |   |
| Effect of  exchange rate changes on cash                                               | ** ** | **15**                                   | ** ** | 20 |   |
|                                                                                   |       |                                     | ** ** |   |   |
| Net increase in  cash                                                                  | ** ** | **348**                                  | ** ** | 1,099 |   |
|                                                                                   |       |                                     | ** ** |   |   |
| Cash, beginning  of period                                                             | ** ** | **1,471**                                | ** ** | 3,021 |   |
|                                                                                   |       |                                     | ** ** |   |   |
| Cash, end of  period                                                                   | ** ** | **$**                                    | **1,819**  | ** ** | $ | 4,120 |   |

 

The accompanying notesare an integral part of these statements.

 

7

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**Video Display Corporation and Subsidiaries**

**Notes to Consolidated FinancialStatements (unaudited)**

**November 30, 2005**

 

NOTE A - SUMMARY OFSIGNIFICANT ACCOUNTING POLICIES

 

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

 

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

 

The consolidatedfinancial statements include the accounts of the Company and its majority ownedsubsidiaries after elimination of all significant intercompany accounts andtransactions. Certain prior period balances have been reclassified to conformto the current period presentation.

 

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

 

NOTE B -NEW ACCOUNTING PRONOUNCEMENTS

 

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

 

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

 

8

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In December 2004, the FASB issued SFAS 153, “*Exchanges of Nonmonetary Assets*”*.*  This statement explains that exchanges ofnonmonetary assets should be measured based on the fair value of the assetsexchanged.  This statement is effectivefor fiscal years beginning after June 15, 2005.  The Company does not anticipate thispronouncement to have a material impact on the consolidated financialstatements.

 

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

 

NOTEC - BUSINESS ACQUISITION

 

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

 

Theaggregate purchase price has been allocated based on fair values as of the dateof the completion of the acquisition as follows (in thousands):

 

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

 

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

 

Thefollowing table presents the total purchase price of the acquisition (inthousands):

 

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

 

9

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Theaggregate purchase price has been allocated based on fair values as of the dateof the completion of the acquisition as follows (in thousands):

 

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

 

NOTED - PURCHASE OF ASSETS

 

In October 2004, theCompany entered into an agreement with Evans & Sutherland, Inc.to purchase certain assets.  Under thisagreement, the Company paid a total of $5,250,000 for the following assetsrelated to Evans & Sutherland’s ESCP® and Targetview CRT projectorproduct lines:  inventory valued at$2,244,000, fixed assets valued at $248,000 and intangible assets valued at$2,758,000.  The intangible assetsconsist of a non-compete agreement valued at $1,000,000 and amortizable over 5years, and a customer list valued at $1,758,000 amortizable over a 15 yearperiod.  The purchase was financedinitially by a loan from the Chief Executive Officer, which subsequently wasrefinanced under the Company’s new line of credit.  Following this acquisition, the Company beganthe process of consolidating all CRT projector manufacturing, sales and supportwith its established MarqueeTM projector operations in Cape Canaveral,Florida.  This consolidation process wassubstantially completed by the end of December 2004.  The Company has a presence in the militaryflight training and simulation market, and with this acquisition will be ableto expand into the commercial flight training and simulation market.

 

NOTE E - INVENTORIES

 

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

 

Inventories consisted ofthe following (in thousands):

 

| ** **                 | ** ** | **November 30,  2005** | ** ** | **February 28,  2005** | ** ** |
|----------------------------|------------|-----------------------------|------------|-----------------------------|------------|
|                       |
|                       |       |                        |       |                        |       |
| Raw materials              | ** ** | **$**                       | **16,612** | ** **                  | $          | 14,529 |   |
| Work-in-process            | ** ** | **3,194**                   | ** ** | 3,800                       |       |
| Finished goods             | ** ** | **19,899**                  | ** ** | 16,833                      |       |
|                       |       | **39,705**                  | ** ** | 35,162                      |       |
| Reserves for  obsolescence | ** ** | **(3,777**                  | **)**      | (3,057                      | )          |
|                       |       | **$**                       | **35,928** | ** **                  | $          | 32,105 |   |

 

10

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NOTEF – COSTS AND ESTIMATED EARNINGS RELATED TO BILLINGS ON UNCOMPLETED CONTRACTS

 

Informationrelative to contracts in progress consisted of the following:

 

| ** **                                                         | ** ** | **November 30,  2005** | ** ** | **February 28,  2005** | ** ** |
|--------------------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
|                                                               |       | ** **                  | ** ** |                        |       |
| Costs incurred  to date on uncompleted contracts                   | ** ** | **$**                       | **6,531**  | ** **                  | $          | 1,006 |   |
| Estimated  earnings recognized to date on these contracts          | ** ** | **3,381**                   | ** ** | 220                         |       |
| ** **                                                         |       | **9,912**                   | ** ** | 1,226                       |       |
| Billings to date                                                   | ** ** | **(10,588**                 | **)**      | (942                        | )          |
| Costs and estimated earnings in excess (deficit) of  billings, net | ** ** | **$**                       | **(676**   | **)**                       | $          | 284 |   |
|                                                               |       | ** **                  | ** ** |                        |       |
| Costs and  estimated earnings in excess of billings                | ** ** | **$**                       | **1,064**  | ** **                  | $          | 738 |   |
| Billings in  excess of costs and estimated earnings                | ** ** | **(1,740**                  | **)**      | (454                        | )          |
| ** **                                                         |       | **$**                       | **(676**   | **)**                       | $          | 284 |   |

 

Costs and estimated earnings in excess of billings are theresults of contracts in progress (jobs) in completing orders to customers’specifications on contracts accounted for under SOP 81-1 “Accounting forPerformance of Construction-Type and Certain Production-Type Contracts”.  Costs included are material, labor andoverhead.  These jobs require design andengineering effort for a specific customer purchasing a unique product.  The Company records revenue on thesefixed-price and cost-plus contracts on the percentage of completion basis usingthe ratio of costs incurred to estimated total costs at completion as themeasurement basis for progress toward completion and revenue recognition.  Any losses identified on contracts arerecognized immediately.  Contractaccounting requires significant judgment relative to assessing risks,estimating contract costs and making related assumptions for schedule andtechnical issues.  With respect tocontract change orders, claims or similar items, judgment must be used inestimating related amounts and assessing the potential for realization.  These amounts are only included in contractvalue when they can be reliably estimated and realization is probable.  Billings are generated based on specificcontract terms, which might be a progress payment schedule, specific shipments,etc.  None of the above contractsin progress contain post-shipment obligations.

 

As ofNovember 30, 2005 and February 28, 2005, there were no productioncosts which exceeded the aggregate estimated cost of all in process anddelivered units relating to long-term contracts.  Additionally, there were no claimsoutstanding that would affect the ultimate realization of full contractvalues.  As of November 30, 2005 andFebruary 28, 2005, there were no progress payments that had been nettedagainst inventory.

 

11

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NOTE G - LONG-TERM DEBTAND FINANCING LEASE OBLIGATIONS

 

Long-termdebt consisted of the following (in thousands):

 
| ** **                                                                                                                                                                                                                                                                                                       | ** ** | **November 30,  2005** | ** ** | **February 28,  2005** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| Mortgage payable to bank; variable interest rate;  monthly principal and interest payments of $6,000 payable until December 2008  with a final principal payment of $350,000 in December 2008,  collateralized by land and building of Fox International, Inc.; paid in  full in April 2005. | ** ** | **$**                       | **—** | ** **                  | $          | 479 |   |
|                                                                                                                                                                                                                                                                                                             |       |                        | ** ** |                        |       |
| Mortgage payable to bank; interest rate at Federal  Home Loan Bank Board Index rate plus 1.95% (7.35% as of November 30,  2005); monthly principal and interest payments of $5,000 payable through October 2021;  collateralized by land and building of Teltron Technologies, Inc.               | ** ** | **544**                     | ** ** | 557                         |       |
|                                                                                                                                                                                                                                                                                                             |       |                        | ** ** |                        |       |
| Other                                                                                                                                                                                                                                                                                                            | ** ** | **333**                     | ** ** | 389                         |       |
|                                                                                                                                                                                                                                                                                                             |       | **877**                     | ** ** | 1,425                       |       |
| Financing lease obligations                                                                                                                                                                                                                                                                                      | ** ** | **433**                     | ** ** | —                      |       |
|                                                                                                                                                                                                                                                                                                             |       | **1,310**                   | ** ** | 1,425                       |       |
| Less current maturities                                                                                                                                                                                                                                                                                          | ** ** | **(139**                    | **)**      | (577                        | )          |
| ** **                                                                                                                                                                                                                                                                                                       |       | **$**                       | **1,171**  | ** **                  | $          | 848 |   |

 

NOTE H - LINES OF CREDIT

 

At November 30,2005, the Company had a $27.5 million credit facility with a bank,collateralized 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 in theloan documents.  As of November 30,2005, the outstanding balance of this line of credit was $20.6 million and theavailable amount for borrowing was $6.9 million.  The line of credit agreement containscovenants, including requirements related to tangible cash flow, ratio of debtto cash flow and asset coverage. Additionally, the bank requires that any contemplated acquisitions beaccretive.  The Company was not in compliance with theconsolidated Senior Funded Debt to EBITDA ratio covenant at November 30,2005. On January 17, 2006, the Company obtained a waiver of this defaultfrom the lender. The Company expects to be in compliance with the financialcovenants over the next twelve months based on current financial projectionsand the availability of subordinated advances from the Company’s ChiefExecutive Officer, if required. This line of credit agreement, asamended on January 6, 2006, expires in March 2007, and accordingly,is classified under long-term liabilities on the Company’s balance sheet.

 

Additionally, in April 2005, the Companyconverted a $2.8 million line of credit (collateralized by assets of FoxInternational, Inc.) with another bank to a $3.5 million line of creditwith a bank.  As part of the newfinancing, the lender paid off the balance of the previous line as well as amortgage secured by the land and building of Fox International, Inc.  The interest rate on this line is a floatingLIBOR rated based on a ratio of debt to EBITDA, as defined in the loandocuments.  As of November 30, 2005,the outstanding balance of this line of credit was $3.5 million with noremaining borrowing availability.  Theline of credit agreement contains covenants, including requirements related totangible cash

 

12

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flow, ratio of debt to cash flow and assetcoverage.  The Company was not in compliance with theconsolidated Senior Funded Debt to EBITDA ratio covenant at November 30,2005. On January 17, 2006, the Company obtained a waiver from the lenderof this default. The Company expects to be in compliance with the financialcovenants over the next twelve months based on current financial projectionsand the availability of subordinated advances from the Company’s ChiefExecutive Officer, if required.  This line of credit agreement, as amended on January 6,2006, expires in March 2007, and accordingly, is classified under long-termliabilities on the Company’s balance sheet.

 

NOTE I – SEGMENT INFORMATION

 

Condensed segment information is as follows (inthousands):

 
| ** **                     | ** ** | **Three Months  Ended November 30,** | ** ** | **Nine Months  Ended November 30,** | ** ** |
|--------------------------------|------------|-------------------------------------------|------------|------------------------------------------|------------|
| ** **                     | ** ** | **2005**                                  | ** ** | **2004**                                 | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                     | ** ** | ** **                                | ** ** | **(restated,  Note K)**                  | ** ** | ** ** | ** ** | **(restated,  Note K)** | ** ** |
| Net Sales                      |       |                                      |       |                                     |       |   |   |   |   |
| Display Segment                | ** ** | **$**                                     | **15,010** |                                     | $          | 16,738 | ** ** | **$** | **49,111** |   | $ | 48,703 |   |
| Wholesale Distribution Segment | ** ** | **4,666**                                 |       | 4,696                                    | ** ** | **14,339** |   | 13,298 |   |
| ** **                     |       | **$**                                     | **19,676** |                                     | $          | 21,434 | ** ** | **$** | **63,450** |   | $ | 62,001 |   |
|                           |       |                                      |       |                                     |       |   |   |   |   |
| Operating profit               |       |                                      |       |                                     |       |   |   |   |   |
| Display Segment                | ** ** | **$**                                     | **586**    |                                     | $          | 1,852 | ** ** | **$** | **3,448** |   | $ | 5,703 |   |
| Wholesale Distribution Segment | ** ** | **197**                                   |       | 78                                       | ** ** | **706** |   | 149 |   |
| Income from  Operations        | ** ** | **783**                                   |       | 1,930                                    | ** ** | **4,154** |   | 5,852 |   |
|                           |       |                                      |       |                                     |       |   |   |   |   |
| Interest expense               | ** ** | **(353**                                  | **)**      | (244                                     | )          | **(1,028** | **)** | (732 | ) |
| Other income, net              | ** ** | **6**                                     |       | 26                                       | ** ** | **86** |   | 188 |   |
| Income before income taxes     | ** ** | **$**                                     | **436**    |                                     | $          | 1,712 | ** ** | **$** | **3,212** |   | $ | 5,308 |   |
|                                |            |                                           |            |                                          |            |  |  |  |  |  |  |  |  |  |  |  |

 

13

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NOTE J — SUPPLEMENTAL CASH FLOW INFORMATION

 
| ** **                                                            | ** ** | **Nine Months Ended  (in thousands)** | ** ** |
|-----------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                            |       | **November 30,  2005**           |       | **November 30,  2004** |   |
| Cash Paid for:                                                        |       |                                  |       |   |   |
| Interest                                                              | ** ** | **$**                                 | **978**    |   | $ | 723 |   |
| Income taxes, net of refunds                                          | ** ** | **$**                                 | **3,250**  |   | $ | 1,253 |   |
|                                                                  |       |                                  |       |   |   |
| Non-cash  Transactions:                                               |       |                                  |       |   |   |
| Leased capital equipment                                              | ** ** | **$**                                 | **433**    |   | $ | — |   |
| Conversion of note payable to common stock                            | ** ** | **$**                                 | **125**    |   | $ | — |   |
| Issuance of common stock for monitor division of  Data Ray, Inc. | ** ** | **$**                                 | **—** |   | $ | 400 |   |

 

14

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NOTE K — PRIOR PERIOD RESTATEMENT

 

Certainprior year amounts have been restated to correct errors discovered by the Companyduring preparation of the 3rd quarter Fiscal 2006 financialstatements. See related comments under the caption “Prior Period Restatement” inPart I, Item 2. in this quarterly report on Form 10-Q. The Companydiscovered errors in its accounting for the treatment of foreign subsidiarylosses for income tax purposes in fiscal 2005 and in certain non-incometax-based franchise taxes in fiscal 2005 and prior fiscal years. These errorsresulted primarily from clerical mathematical error, as well as the improperrecording of non-income based franchise taxes against an accrual rather than asan expense on the consolidated statements of income.

 

Thefollowing tables summarize the impact of the restatements on the affected itemsas originally reported on the consolidated balance sheet at February 28,2005 and as originally reported on the consolidated statements of income forthe three and nine month periods ended November 30, 2004 (in thousandsexcept per share data).

 
| ** **                                                | ** ** | **November 30, 2004**   | ** ** |
|-----------------------------------------------------------|------------|------------------------------|------------|
| ** **                                                | ** ** | **Three Months Ended**       | ** ** | **Nine Months Ended** | ** ** |
| ** **                                                | ** ** | **As  Previously  Reported** | ** ** | **As  Restated** | ** ** | **As  Previously  Reported** | ** ** | **As  Restated** | ** ** |
| ** **                                                | ** ** | ** **                   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Selected Consolidated Statements of Operations  items** |       |                         |       |   |   |   |   |   |   |
| General and administrative expenses                       |       | $                            | 3,529      |   | $ | 3,561 |   | $ | 9,457 |   | $ | 9,552 |   |
| Operating profit                                          |       | 1,962                        |       | 1,930 |   | 5,947 |   | 5,852 |   |
| Income before income taxes                                |       | 1,744                        |       | 1,712 |   | 5,403 |   | 5,308 |   |
| Provision for income taxes                                |       | 667                          |       | 657 |   | 2,060 |   | 2,030 |   |
| Net income                                                |       | 1,077                        |       | 1,055 |   | 3,343 |   | 3,278 |   |
|                                                      |       |                         |       |   |   |   |   |   |   |
| Basic earnings  per share of common stock                 |       | $                            | .11        |   | $ | .11 |   | $ | .35 |   | $ | .34 |   |
|                                                      |       |                         |       |   |   |   |   |   |   |
| Diluted earnings  per share of common stock               |       | $                            | .11        |   | $ | .11 |   | $ | .34 |   | $ | .33 |   |
|                                                           |            |                              |            |  |  |  |  |  |  |  |  |  |  |  |  |

 
| ** **                                     | ** ** | **February 28, 2005**   | ** ** |
|------------------------------------------------|------------|------------------------------|------------|
| ** **                                     | ** ** | **As  Previously  Reported** | ** ** | **As  Restated** | ** ** |
| **Selected  Consolidated Balance Sheet items** |       |                         |       |   |   |
| Deferred income taxes                          |       | $                            | 2,555      |   | $ | 2,855 |   |
| Other assets                                   |       | 4,020                        |       | 3,671 |   |
| Accrued liabilities                            |       | 3,080                        |       | 3,425 |   |
| Retained earnings                              |       | 22,018                       |       | 21,624 |   |
| Total shareholders equity                      |       | 29,067                       |       | 28,673 |   |
|                                                |            |                              |            |  |  |  |  |

 

15

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NOTE L – SHAREHOLDERS’EQUITY

 

**EarningsPer Share**

 

Basic earnings per shareis computed by dividing income available to common shareholders by the weightedaverage number of common shares outstanding during each period.  Shares issued during the period are weightedfor the portion of the period that they were outstanding.  Diluted earnings per share is calculated in amanner consistent with that of basic earnings per share while giving effect toall dilutive potential common shares that were outstanding during the period.  The following table sets forth thecomputation of basic and diluted earnings per share for the three andnine-month periods ended November 30, 2005 and 2004 (in thousands, exceptper share data):

 
| ** **                               | ** ** | **Net Income** | ** ** | **Weighted  Average  Common Shares  Outstanding** | ** ** | **Earnings Per  Share** | ** ** |
|------------------------------------------|------------|----------------|------------|---------------------------------------------------|------------|-------------------------|------------|
| Quarter ended November 30,  2005    |       |           |       |                                              |       |                    |       |
| Basic                                    |       | $              | 255        |                                              | 9,687      |                    | $          | 0.03 |   |
| Effect of dilution:                      |       |           |       |                                              |       |                    |       |
| Options                                  |       | —         |       | 280                                               |       |                    |       |
| Diluted                                  |       | $              | 255        |                                              | 9,967      |                    | $          | 0.03 |   |
|                                     |       |           |       |                                              |       |                    |       |
| Quarter ended November 30, 2004     |       |           |       |                                              |       |                    |       |
| Basic                                    |       | $              | 1,055      |                                              | 9,686      |                    | $          | 0.11 |   |
| Effect of dilution:                      |       |           |       |                                              |       |                    |       |
| Options                                  |       | —         |       | 237                                               |       |                    |       |
| Diluted                                  |       | $              | 1,055      |                                              | 9,923      |                    | $          | 0.11 |   |
|                                     |       |           |       |                                              |       |                    |       |
| Nine months ended November 30, 2005 |       |           |       |                                              |       |                    |       |
| Basic                                    |       | $              | 1,977      |                                              | 9,699      |                    | $          | 0.20 |   |
| Effect of dilution:                      |       |           |       |                                              |       |                    |       |
| Options                                  |       | —         |       | 278                                               |       |                    |       |
| Diluted                                  |       | $              | 1,977      |                                              | 9,977      |                    | $          | 0.20 |   |
|                                     |       |           |       |                                              |       |                    |       |
| Nine months ended November 30, 2004 |       |           |       |                                              |       |                    |       |
| Basic                                    |       | $              | 3,378      |                                              | 9,665      |                    | $          | 0.34 |   |
| Effect of dilution:                      |       |           |       |                                              |       |                    |       |
| Options                                  |       | —         |       | 228                                               |       |                    |       |
| Diluted                                  |       | $              | 3,278      |                                              | 9,893      |                    | $          | 0.33 |   |

 

Prior year earnings pershare data have been adjusted to include the effect of a 2 for 1 stock spliteffected in the form of a 100% stock dividend in November 2004.

 

16

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**Stock-BasedCompensation Plans**

 

The Company has anincentive stock option plan whereby options may be granted to key employees ata price not less than fair market value at the time the options are granted andare exercisable beginning on the first anniversary of the grant date for aperiod not to exceed ten years.  Statement of Financial Accounting Standards No. 123 encourages, but doesnot require, companies to record compensation cost for stock-based employeecompensation plans at fair value.  TheCompany has chosen to continue to account for stock-based compensation usingthe intrinsic value method prescribed in Accounting Principles Board Opinion No. 25,“Accounting for Stock Issued to Employees”, and related Interpretations.Accordingly, compensation cost for stock options is measured as the excess, ifany, of the quoted market price of the Company’s stock at the date of the grantover the amount an employee must pay to acquire the stock.  The option price of all the Company’s stockoptions is equal to the market value of the stock at the grant date.  The Company granted 9,000 stock optionsduring each of the three quarters ended November 30, 2005 and 2004.

 

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

 
| ** **                                                                               | ** ** | **Three Months Ended**      | ** ** | **Nine Months Ended**       | ** ** |
|------------------------------------------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **                                                                               | ** ** | **November 30,  2005** | ** ** | **November 30,  2004** | ** ** | **November 30,  2005** | ** ** | **November 30,  2004** | ** ** |
| ** **                                                                               | ** ** | ** **                  | ** ** | **(restated,  Note K)**     | ** ** | ** ** | ** ** | **(restated,  Note K)** | ** ** |
| Net income, as  reported                                                                 | ** ** | **$**                       | **255**    |                        | $          | 1,055 | ** ** | **$** | **1,977** |   | $ | 3,278 |   |
| Stock-based employee compensation expense, as  reported                                  | ** ** | **—**                  |       | —                      | ** ** | **—** |   | — |   |
| Stock-based employee compensation expense determined  under fair value basis, net of tax | ** ** | **(24**                     | **)**      | (14                         | )          | **(39** | **)** | (35 | ) |
| Pro forma net  income                                                                    | ** ** | **$**                       | **231**    |                        | $          | 1,041 | ** ** | **$** | **1,938** |   | $ | 3,243 |   |
|                                                                                     |       |                        |       |                        |       |   |   |   |   |
| Net earnings per  share:                                                                 |       |                        |       |                        |       |   |   |   |   |
| Basic – as reported                                                                 | ** ** | **$**                       | **0.03**   |                        | $          | 0.11 | ** ** | **$** | **0.20** |   | $ | 0.34 |   |
| Basic – pro forma                                                                   | ** ** | **$**                       | **0.02**   |                        | $          | 0.11 | ** ** | **$** | **0.20** |   | $ | 0.34 |   |
| Diluted – as reported                                                               | ** ** | **$**                       | **0.03**   |                        | $          | 0.11 | ** ** | **$** | **0.20** |   | $ | 0.33 |   |
| Diluted – pro forma                                                                 | ** ** | **$**                       | **0.02**   |                        | $          | 0.10 | ** ** | **$** | **0.19** |   | $ | 0.33 |   |

 

**Stock Repurchase Program**

 

TheCompany has a stock repurchase program, pursuant to which it is authorized torepurchase up to 462,500 shares of the Company’s common stock in the openmarket.  The Company repurchased 25,621 shares in May 2005.  No shares were repurchased in fiscal2005.  Under this program, an additional144,900 shares remain authorized to be repurchased by the Company at November 30,2005.

 

17

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On January 11, 2006, the Board of Directors ofthe Company approved a continuation of the stock repurchase program, andauthorized the repurchase of up to 600,000 additional shares of the Company’scommon stock, depending on the market price of the shares. There is no minimum ormaximum number of shares required to be repurchased under the program.

 

NOTEM – COMPREHENSIVE INCOME

 

Statementof Financial Accounting Standards No. 130 “Reporting Comprehensive Income”establishes standards for reporting and display of non-owner changes inshareholders’ equity.  For the Company,total non-owner changes in shareholders’ equity include net income and thechange in the cumulative foreign exchange translation adjustment component ofshareholders’ equity.  During the threemonths ended November 30, 2005 and 2004, total comprehensive income was $97,000and $1.1 million, respectively.  Duringthe nine months ended November 30, 2005 and 2004, total comprehensiveincome was $2.0 million and $3.3 million, respectively.

 

NOTEN – RELATED PARTY TRANSACTIONS

 

In August 2005, the Company’s Chief ExecutiveOfficer loaned the Company $1,000,000 on a non-interest bearing and due ondemand basis, which was repaid in September 2005.

 

18

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**Video Display Corporation and Subsidiaries**

**November 30, 2005**

 

**ITEM2.  MANAGEMENT’S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

Thefollowing discussion should be read in conjunction with the attached interimconsolidated financial statements and with the Company’s 2005 Annual Report toShareholders, which included audited financial statements and notes thereto forthe fiscal year ended February 28, 2005, as well as Management’sDiscussion and Analysis of Financial Condition and Results of Operations.

 

**Overview**

 

TheCompany is a worldwide leader in the manufacture and distribution of a widerange of display devices, encompassing, among others, entertainment, military,medical and simulation display solutions. The Company is comprised of two segments - (1) the manufacture anddistribution of monitors, projection systems and CRT displays and (2) thewholesale distribution of consumer electronic parts. The display segment isorganized into four interrelated operations aggregated into one operatingsegment pursuant to the aggregation criteria of SFAS 131:

 

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

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

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

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

 

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

 

***•******                 ******Monitor division revenue*** - The Company continues to focus its growthefforts on various niche markets within the defense, medical and projectiondisplay industries.  Net sales withinthis division decreased in the third quarter of fiscal 2006 by $1.0 millioncompared to the third quarter of fiscal 2005 due to the fulfillment of amilitary contract for replacement CRTs earlier in fiscal 2006, which has notbeen renewed. For the nine months ended November 30, 2005, net revenue decreased$0.1 million or 0.3% compared to the same period a year ago.  On a year to date basis, the decline inreplacement military CRT sales was largely offset by the Evans &Sutherland product line acquired in November 2004, which was consolidatedwith the Company’s Display Systems operations in Cape Canaveral, FL.

***•******                 ******Data Display division revenue****–*the Company’s Data Display division sales decreased$0.5 million for the three months ended November 30, 2005, as compared tothe same period a year ago, due to a larger concentration of lower pricedreplacement CRTs in the current quarter’s sales mix compared to the prior yearperiod. Sales in this division increased $1.1 million for the nine months endedNovember 30, 2005 as compared to the same period a year ago.  These increases reflect the Company’sdecision to distribute projection tubes from its Data Display location inTucker, GA.  These projection units carrya higher sales price per unit than the Company’s normal inventory.

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

•                  ***New credit facility*** – in April 2005, the Company finalizeda new line of credit to replace a prior facility.  Under the terms of this new facility, theCompany paid off the existing line of credit as well as a mortgage securing the

 

19

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land and building of FoxInternational, Ltd.  The maximum amountavailable for borrowings under this new line is $3.5 million compared to approximately$2.8 million under the prior facility. Proceeds from this line are available for working capital needs of theCompany.

 

***Fiscal 2006 Challenges***

 

***Inventory management*** - the Company continually monitors historicalsales trends as well as projected future needs to ensure adequate on handsupplies of inventory and to ensure against overstocking of slower moving,obsolete items.

 

Certainof the Company’s divisions maintain significant inventories of CRTs and componentparts in an effort to ensure its customers a reliable source of supply.  The Company’s inventory turnover averages over175 days, although in many cases the Company would anticipate holding 90 to 100days of inventory in the normal course of operations.  This level of inventory is higher than someof the Company’s competitors due to the fact that it sells a number of productsrepresenting older, or trailing edge, technology that may not be available fromother sources. The market for these trailing edge technology products isdeclining and, as manufacturers for these products discontinue production orexit the business, the Company may make last time buys. In the monitoroperations of the Company’s business, the market for its products ischaracterized by fairly rapid change as a result of the development of newtechnologies, particularly in the flat panel display area. If the Company failsto anticipate the changing needs of its customers and accurately forecast theirrequirements, it may accumulate inventories of products which its customers nolonger need and which the Company will be unable to sell or return to itsvendors.  Because of this, the Company’smanagement monitors the adequacy of its inventory reserves regularly, and at November 30,2005, believes its reserves to be adequate.

 

***Interest rate exposure*** – The Company had outstanding bank debt inexcess of $24.0 million as of November 30, 2005, all of which is subjectto interest rate fluctuations by the Company’s lenders.  Higher rates applied by the Federal ReserveBoard over the past four fiscal quarters and potential continued rate hikeshave negatively affected the Company’s earnings and will continue to negativelyimpact the Company’s earnings.  It is theintent of the Company to continually monitor interest rates and considerconverting portions of the Company’s debt from floating rates to fixed ratesshould conditions be favorable for such interest rate swaps or hedges.

 

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**Prior Period Restatement**

 

Duringpreparation of the 3rd quarter Fiscal 2006 financial statements, theCompany discovered an error in its accounting for the treatment of foreignsubsidiary losses for income tax purposes in the fiscal year ended February 28,2005 and certain non-income tax-based franchise taxes in the fiscal year ended February 28,2005 and several prior fiscal years. A clerical error in the calculation of thetax effects of foreign losses resulted in an understatement of the Company’sfiscal 2005 consolidated provision for income taxes by approximately $129,000.In addition, for several years, the Company has applied the payment ofnon-income based franchise taxes against income taxes payable. Due to improperincome taxes payable account reconciliation procedures, this error was notdetected. The Company did not recognize general and administrative expense whenthe franchise taxes were paid. Proper recognition of these franchise taxes ingeneral and administrative expenses reduces reported net income by approximately$86,000 in fiscal 2005, $53,000 in fiscal 2004, $47,000 in fiscal 2003, $26,000in fiscal 2002 and approximately $53,000 in fiscal 2001 and years prior. Theseadjustments did not have a material impact on reported cash flows. The effectof these errors on reported net income is summarized as follows (in thousands):

 
| ** **                                                       | ** ** | **Fiscal Year** | ** ** |
|------------------------------------------------------------------|------------|-----------------|------------|
| ** **                                                       | ** ** | **2005**        | ** ** | **2004** | ** ** | **Prior** | ** ** |
|                                                             |       |            |       |   |   |   |   |
| Net income,  previously reported                                 |       | $               | 3,722      |   | $ | 3,165 |   |   |   |
|                                                             |       |            |       |   |   |   |   |
| General and Administrative expense, net of income  taxes         |       | (86             | )          | (53 | ) | $ | (126 | ) |
| Provision for income taxes                                       |       | (129            | )          | — |   | — |   |
|   Net effect of adjustments                            |       | (215            | )          | (53 | ) | $ | (126 | ) |
|                                                             |       |            |       |   |   |   |   |
| Net income, as  restated                                         |       | $               | 3,507      |   | $ | 3,112 |   |   |   |
|                                                             |       |            |       |   |   |   |   |
| Diluted earnings per share of common stock,  previously reported |       | $               | .38        |   | $ | .33 |   |   |   |
|                                                             |       |            |       |   |   |   |   |
| Diluted earnings per share of common stock, as  restated         |       | $               | .35        |   | $ | .32 |   |   |   |

 

Managementhas determined that the error was the result of a control deficiency withrespect to the Company’s procedures in calculating and reporting its franchisetax and the treatment of foreign losses in the provision for income taxes underSFAS 109, and the proper reconciliation of those items to related consolidatedbalance sheet accounts. Management believes that this control deficiencyconstituted a material weakness. A material weakness is a control deficiency,or a combination of control deficiencies, that results in a more than remotelikelihood that a material misstatement of the annual or interim financialstatements will not be prevented or detected. The Company has recently employedadditional experienced financial staff, as reported in its Form 8-K filed December 20,2005, to address this weakness and has amended its procedures for thepreparation and review of recorded income tax amounts included in the Company’sconsolidated financial statements.

 

Management has reviewed the impact of these errorson reported results of operations for the years affected, utilizing criteriaset forth in Staff Accounting Bulletin 99, including the qualitative and quantitativeelements outlined in that statement. Management has determined that the impactof this adjustment in each of the years affected is not material to

 

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reported results of operations on either a qualitativeor quantitative basis in the respective years. Based on this determination, theCompany does not plan to re-file its Annual Report on Form 10-K for fiscal2005.

 

**Results of Operations**

 

Thefollowing table sets forth, for the three and nine months ended November 30,2005 and 2004, the percentages which selected items in the Statements of Incomebear to total sales:

 
| ** **                     | ** ** | **Three Months  Ended November 30,** | ** ** | **Nine Months  Ended November 30,** | ** ** |
|--------------------------------|------------|-------------------------------------------|------------|------------------------------------------|------------|
| ** **                     |       | **2005**                                  | ** ** | **2004**                                 | ** ** | **2005** | ** ** | **2004** |   |
| Sales                          |       |                                      |       |                                     |       |   |   |   |   |
| Display Segment                |       |                                      |       |                                     |       |   |   |   |   |
| Monitors                       | ** ** | **62.0**                                  | **%**      | 61.5                                     | %          | **60.6** | **%** | 62.2 | % |
| Data Display CRTs              | ** ** | **8.9**                                   | ** ** | 10.3                                     |       | **11.3** | ** ** | 9.9 |   |
| Entertainment CRTs             | ** ** | **4.5**                                   | ** ** | 5.0                                      |       | **4.6** | ** ** | 5.4 |   |
| Electron Guns and Components   | ** ** | **0.9**                                   | ** ** | 1.3                                      |       | **0.9** | ** ** | 1.1 |   |
| Total Display Segment          | ** ** | **76.3**                                  | **%**      | 78.1                                     | %          | **77.4** | **%** | 78.6 | % |
| Wholesale Distribution Segment | ** ** | **23.7**                                  | ** ** | 21.9                                     |       | **22.6** | ** ** | 21.4 |   |
| ** **                     |       | **100.0**                                 | **%**      | 100.0                                    | %          | **100.0** | **%** | 100.0 | % |
| Costs and  expenses            |       |                                      | ** ** |                                     |       |   | ** ** |   |   |
| Cost of goods sold             | ** ** | **67.2**                                  | **%**      | 66.3                                     | %          | **67.6** | **%** | 66.7 | % |
| Selling and delivery           | ** ** | **9.8**                                   | ** ** | 8.1                                      |       | **8.7** | ** ** | 8.5 |   |
| General and administrative     | ** ** | **19.0**                                  | ** ** | 16.6                                     |       | **17.2** | ** ** | 15.4 |   |
| ** **                     |       | **96.0**                                  | **%**      | 91.0                                     | %          | **93.5** | **%** | 90.6 | % |
|                           |       |                                      | ** ** |                                     |       |   | ** ** |   |   |
| Income from  Operations        | ** ** | **4.0**                                   | **%**      | 9.0                                      | %          | **6.5** | **%** | 9.4 | % |
|                           |       |                                      | ** ** |                                     |       |   | ** ** |   |   |
| Interest expense               | ** ** | **(1.8**                                  | **)%**     | (1.1                                     | )%         | **(1.6** | **)%** | (1.2 | )% |
| Other income, net              | ** ** | **0.0**                                   | ** ** | 0.1                                      |       | **0.1** | ** ** | 0.4 |   |
| Income before  income taxes    | ** ** | **2.2**                                   | **%**      | 8.0                                      | %          | **5.0** | **%** | 8.5 | % |
| Provision for  income taxes    | ** ** | **0.9**                                   | ** ** | 3.1                                      |       | **1.9** | ** ** | 3.3 |   |
| Net Income                     | ** ** | **1.3**                                   | **%**      | 4.9                                      | %          | **3.1** | **%** | 5.3 | % |

 

Net sales

 

Consolidated net sales decreased $1.8 million for the three monthsended November 30, 2005 and increased $1.4 million for the nine monthsended November 30, 2005, as compared to the same periods ended November 30,2004. Display segment sales decreased $1.7 million for the three-monthcomparative period and increased $0.4 million for the nine-month comparativeperiod. Sales within the Wholesale Distribution segment were flat for thethree-month comparative period and increased $1.0 million for the nine-monthcomparative period.

 

Thenet decrease in Display Segment sales for the three months ended November 30,2005 is primarily attributed to declines within the Monitor and Data DisplayCRTs divisions, as compared to the same periods ended November 30,2004.  The Monitor division’s salesdeclined $1.0 million over the three-month period due to the fulfillment of amilitary contract for replacement CRTs earlier in fiscal 2006, which has notbeen renewed. The Data Display CRTs division sales declined $0.5 million overthe three-month period due to a larger concentration of lower pricedreplacement CRTs in the current quarter’s

 

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salesmix compared to the prior year period. Sales of the Entertainment CRTs andElectron Gun and Components divisions declined $0.2 million and $0.1 million,respectively over the comparable three-month period.

 

DisplaySegment net sales increased $0.4 million for the nine months ended November 30,2005 as compared to the same period a year ago. This increase is the result of a $1.1 million increase in the DataDisplay CRTs division’s sales due to improved sales of projection tubes, whichcarry a higher selling price than replacement CRTs, in the first two quartersof fiscal 2006, partially offset by a $0.4 million decline in the EntertainmentCRTs divisions sales. The Monitors division and the Electron Gun and Componentsdivision sales reflected slight declines of $0.1 million each for thecomparative periods.

 

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

 

Sales in the Electron Gunand Components division have declined during recent fiscal years due to weakerdemand for electron gun and stem sales. Electron gun sales have historically been dependent upon the demand bydomestic and foreign television CRT remanufacturers.  These sales have declined over the past fewyears as consumers move towards purchasing new technology as opposed torepairing existing sets.  The Company’sWintron location is in the process of transitioning to two newer cameratechnologies.  One such technology willassist border guards with under car inspections and another will assistcorrectional facilities with the supervision of inmates.  If this transition is successful, the Companybelieves these new technologies will have a positive impact on the componentdivision sales.

 

Wholesale Distribution segmentnet sales were flat for the three-month period, and increased $1.0 million forthe nine- month period, ended November 30, 2005 compared to the sameperiods a year ago.  Management attributesthe fiscal year to date increase to opening a new call center in the secondhalf of fiscal 2005.  This call centeracts as a consumer and dealer support center for both in-warranty andout-of-warranty household products, appliances, parts and accessories for Black &Decker, Delonghi, Norelco, Coby and various other manufacturers.  This call center also acts as a technicalsupport center for these same manufacturers. Other increases within this segment reflect increased volume of sales toBest Buy and Applica for the comparative periods.

 

Gross margins

 

Consolidatedgross margins decreased from 33.7% to 32.8% for the third quarter and from33.3% to 32.4% for the nine months ended November 30, 2005 as compared tothe same periods ended November 30, 2004.

 

Displaysegment margins decreased from 29.9% to 25.9% and from 30.4% to 26.4% for thecomparative three and nine month periods. Gross margins within the Monitordivision decreased to 26.3% for the nine months ended November 30, 2005compared to 31.1% for the same period a year ago and from 30.0% to 26.6% forthe three months ended November 30, 2005 compared to the prior year.  These decreases are primarily attributable todecreased sales volume at the Company’s Aydin, Teltron and Lexel locations,costs associated with the integration of the Three Five Systems operation,higher than expected design costs on certain products, as well as management’sdecision to close the XKD location at the end of fiscal 2005.

 

TheWholesale Distribution segment margins increased from 47.3% to 54.9% and from43.9% to 53.3% for the three and nine months ended November 30, 2005 ascompared to the same periods ended November 30, 2004. These increases are

 

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primarilydue to additional revenue generated from its new call center.  Expenses for the call center are classifiedas operating expenses.

 

##### Operating expenses

 

Operatingexpenses as a percentage of sales increased from 24.7% to 28.8% for the quarterended November 30, 2005 compared to the quarter ended November 30,2004 and increased from 23.9% to 25.9% for the nine-month comparative period.

 

Displaysegment operating expenses increased $0.2 million for the three-month period,and increased $0.5 million for the nine-month period, ended November 30,2005, as compared to the comparable prior year periods.  Management attributes the majority of theseincreases to corporate expenses, such as increased professional fees.

 

WholesaleDistribution segment operating expenses increased $0.2 million and $1.2 millioncompared to the three and nine month periods a year ago, primarily due toadditional expenses associated with the new call center opened in late fiscal2005.  These expenses (primarily payrolland telephone) are classified in general and administrative expense in theconsolidated financial statements.

 

###### Interest expense

 

Interestexpense increased $0.1 million and $0.3 million for the three and nine monthsended November 30, 2005 as compared to the same periods a year ago.  The Company maintains various debt agreementswith different interest rates, most of which are based on the prime rate orLIBOR.  These increases in interestexpense primarily reflect higher market interest rates in effect during Fiscal2006 compared Fiscal 2005.

 

###### Income taxes

 

The effective taxrate for the nine months ended November 30, 2005 and November 30,2004 was 38.5% and 38.2%, respectively. These rates are greater than the Federal statutory rate primarily due tothe effect of state taxes and the permanent non-deductibility of certainexpenses for tax purposes.

 

##### Foreign currency 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 and Capital Resources**

 

As of November 30,2005, the Company had total cash of $1.8 million.  The Company’s working capital was $42.8million and $37.2 million at November 30, 2005 and February 28, 2005,respectively.  In recent years, theCompany has financed its growth and cash needs primarily through income fromoperations, borrowings under revolving credit facilities and long-termdebt.  Liquidity provided by operatingactivities of the Company is reduced by working capital requirements, largelyinventories and accounts receivable, debt service, capital expenditures,product line additions and dividends.

 

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

 

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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 or existingbank lines; however, more permanent sources of capital may be required incertain circumstances.  In May 2005,the Company acquired the IDS division of Three Five Systems, Inc.  The acquisition consisted of cash to theseller of approximately $1.4 million total consideration.

 

Cash provided byoperations for the nine months ended November 30, 2005 was $1.9 million ascompared to cash provided of $1.8 million for the nine months ended November 30,2004. This slight increase is attributable to improved collections ofreceivables as compared to the same period a year ago and the impact of reducedsales in the comparable third quarters, partially offset by increases in inventoryover the comparable periods.

 

Investing activities usedcash of $2.8 million in the first nine months of fiscal 2006, compared to $5.9million for fiscal 2005. Thisdecrease primarily reflects cash of approximately $1.4 million used to acquirethe IDS division of Three Five Systems, Inc. during fiscal 2006 comparedto cash of approximately $5.3 million used to acquire certain assets of Evansand Sutherland, Inc. during fiscal 2005. Capital expenditures increased $1.3million for the comparable periods. These expenditures relate primarily to investments in new computerequipment within the Company’s monitors division and upgrades to the callcenter in the Wholesale Distribution segment.

 

Financing activitiesprovided cash of $1.2 million for the nine months ended November 30, 2005,compared to cash provided of $5.2 million for the same period a year ago.  The Company executed a new line of credit in November 2004,which provided a higher borrowing availability in conjunction with itsacquisition activities.  The increase inborrowings was partially offset by the Company’s decision to repurchase$317,000 of its common stock in fiscal 2006. No shares were repurchased in fiscal 2005.

 

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

 

TheCompany was not in compliance with the consolidated Senior Funded Debt toEBITDA ratio covenant under the Line of Credit agreements at November 30,2005. On January 17, 2006, the Company obtained a waiver of this defaultfrom the lender. The Company expects to be in compliance with the financialcovenants over the next twelve months based on current financial projectionsand the availability of subordinated advances from the Company’s ChiefExecutive Officer, if required.

 

TheCompany has a stock repurchase program, approved by the Board of Directors ofthe Company in increments starting in fiscal 1998, pursuant to which it isauthorized to repurchase up to 462,500 shares of the Company’s common stock inthe open market.  The Company repurchased 25,621 shares in May 2005.  No shares were repurchased in fiscal 2005.  Under this program, an additional 144,900shares remain authorized to be repurchased by the Company at November 30,2005.

 

OnJanuary 11, 2006, the Board of Directors of the Company approved acontinuation of the stock repurchase program, and authorized the repurchase ofup to 600,000 additional shares of the Company’s common stock, depending on themarket price of the shares. There is no minimum or maximum number of sharesrequired to be repurchased under the program.

 

TheCompany paid a cash dividend of $0.4 million in the fourth quarter of fiscal2005. The policy regarding future payments of dividends will be reviewedperiodically by the Board of Directors and will be based on the earnings andfinancial position of the Company and other factors which the Board ofDirectors deems appropriate.

 

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##### **Critical Accounting Policies**

 

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

 

*Reserves on inventories*

 

Reserves on inventoriesresult in a charge to operations when the estimated net realizable valuedeclines below cost.  Managementregularly reviews the Company’s investment in inventories for declines in valueand establishes reserves when it is apparent that the expected net realizablevalue of the inventory falls below its carrying amount. Management considers theprojected demand for CRTs in this estimate of net realizable value. Managementis able to identify consumer buying trends, such as size and application, wellin advance of supplying replacement CRTs. Thus, the Company is able to adjustinventory-stocking levels according to the projected demand. The average lifeof a CRT is five to seven years, at which time the Company’s replacement marketdevelops. Management reviews inventory levels on a quarterly basis.  Such reviews include observations of productdevelopment trends of the OEMs, new products being marketed, and technologicaladvances relative to the product capabilities of the Company’s existinginventories.  There have been nosignificant changes in management’s estimates in fiscal 2006 and 2005; however,the Company cannot guarantee the accuracy of future forecasts since theseestimates are subject to change based on market conditions.

 

*RevenueRecognition*

 

Revenue is recognized onthe sale of products when the products are shipped, all significant contractualobligations have been satisfied, and the collection of the resulting receivableis reasonably assured.  The Company’sdelivery term typically is F.O.B. shipping point.

 

In accordance with EmergingIssues Task Force (EITF) issue 00-10, shipping and handling fees billed to customersare classified in net sales in the consolidated statements of income.  Shipping and handling costs incurred areclassified in selling and delivery in the consolidated statements of income.

 

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

 

The Wholesale Distributionsegment has several distribution agreements that it accounts for using the grossrevenue basis as prescribed by EITF issue 99-19.  The Company uses the gross method because theCompany has general inventory risk,

 

26

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physical loss inventoryrisk and credit risk. The call center service revenue is recognized based onwritten pricing agreements with each manufacturer, on a per call, per email orper standard mail basis.

 

*Allowancefor bad debts*

 

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

 

*Warranty reserves*

 

Thewarranty reserve is determined by recording a specific reserve for knownwarranty issues and a general reserve based on historical claims experience. TheCompany considers actual warranty claims compared to net sales, then adjustsits reserve liability accordingly.  Actualclaims incurred could differ from the original estimates, requiring adjustmentsto the reserve.  Management believes thathistorically its procedures have been adequate and does not anticipate that itsassumptions are reasonably likely to change in the future.

 

*Other Accounting Policies*

 

Otherloss contingencies are recorded as liabilities when it is probable that aliability has been incurred and the amount of the loss is 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 thefollowing:  business conditions, rapid orunexpected technological changes, product development, inventory risks due toshifts in product demand, competition, domestic and foreign governmentrelations, fluctuations in foreign exchange rates, rising costs for componentsor unavailability of components, the timing of orders booked, lenderrelationships, and the risk factors listed from time to time in the Company’sreports filed with the Commission.

 

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**ITEM3.  QUANTITATIVE AND QUALITATIVEDISCLOSURE ABOUT MARKET RISK**

 

The Company’sprimary market risks include fluctuations in interest rates and variability ininterest rate spread relationships, such as prime to LIBOR spreads.  Approximately $24.9 million of outstandingdebt at November 30, 2005 related to long-term indebtedness under variablerate debt.  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 a decrease of approximately $0.3 million in pre-taxnet income assuming no further changes in the amount of borrowings subject tovariable rate interest from amounts outstanding at November 30, 2005. TheCompany does not trade in derivative financial instruments.

 

TheCompany has a subsidiary in the U.K., which is not material, but uses theBritish pound as its functional currency. Due to its limited operations outsideof the U.S., the Company’s exposure to changes in foreign currency exchangerates between the U.S. dollar and foreign currencies or to weakening economicconditions in foreign markets is not expected to significantly impact theCompany’s financial position.

 

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**ITEM 4.  CONTROLS AND PROCEDURES**

 

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

 

Duringpreparation of the 3rd quarter Fiscal 2006 financial statements, theCompany discovered an error in its accounting for the treatment of foreignsubsidiary losses for income tax purposes in the fiscal year ended February 28,2005 and certain non-income tax-based franchise taxes in the fiscal year ended February 28,2005 and several prior fiscal years. Management has determined that the errorwas the result of a control deficiency with respect to the Company’s proceduresin correctly calculating and reporting its franchise tax and the treatment offoreign losses in the provision for income taxes under SFAS 109, and the properreconciliation of those items to related consolidated balance sheet accounts.Management believes that this control deficiency constituted a materialweakness. A material weakness is a control deficiency, or a combination ofcontrol deficiencies, that results in a more than remote likelihood that amaterial misstatement of the annual or interim financial statements will not beprevented or detected. The Company has recently employed additional experiencedfinancial staff, as reported in its Form 8-K filed December 20, 2005,to address this weakness and has amended its procedures for the preparation andreview of recorded income tax amounts, including the preparation of the Company’sNovember 30, 2005 consolidated financial statements.

 

Ourchief executive officer and chief financial officer have conducted anevaluation of the effectiveness of our disclosure controls and procedures as ofNovember 30, 2005. We perform this evaluation on a quarterly basis so thatthe conclusions concerning the effectiveness of our disclosure controls andprocedures can be reported in our annual report on Form 10-K and quarterlyreports on Form 10-Q. Based on this evaluation, our chief executiveofficer and chief financial officer have concluded that our disclosure controlsand procedures were effective as of November 30, 2005.

 

**Changes in Internal Controls**

 

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

 

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**PART II**

 
| Item 1. |   | Legal  Proceedings                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|---------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|    |   | No new material  legal proceedings or material changes in existing litigation occurred during  the quarter ended November 30, 2005.                                                                                                                                                                                                                                                                                                                                                                              |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| Item 2. |   | Unregistered  Sales of Equity Securities and Use of Proceeds                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|    |   | None.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| Item 3. |   | Defaults upon  Senior Securities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|    |   | The Company was not in compliance with the consolidated Senior Funded  Debt to EBITDA ratio covenant under the Line of Credit agreements at November 30,  2005. On January 17, 2006, the Company obtained a waiver of this default  from the lender. The Company expects to be in compliance with the financial  covenants over the next twelve months based on current financial projections  and the availability of subordinated advances from the Company’s Chief  Executive Officer, if required. |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| Item 4. |   | Submission of  Matters to a Vote of Security Holders                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|    |   | None.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| Item 5. |   | Other  information                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|    |   | None.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| Item 6. |   | Exhibits                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |

 
| **Exhibit Number** | ** ** | **Exhibit Description**                                                                                                                                                                 |
|-------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                    |       |                                                                                                                                                                                         |
| 31.1                    |       | Certification of Chief  Executive Officer, pursuant to Rule 13a – 14(a), as adopted pursuant to Section 302  of the Sarbanes-Oxley Act of 2002.                               |
| 31.2                    |       | Certification of Chief  Financial Officer, pursuant to Rule 13a – 14(a), as adopted pursuant to Section 302  of the Sarbanes-Oxley Act of 2002.                               |
| 32.1                    |       | Certifications of Chief  Executive Officer and Chief Financial Officer, pursuant to 18 U.S.C. Section 1350,  as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |

 

30

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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 30,  2006 |                                  | By: | /s/ Ronald D.  Ordway |
|                   |                                  |   | Ronald D. Ordway |
|                   |                                  |   | Chief Executive  Officer |
|                   |                                  |   |
|                   |                                  |   |
| January 30,  2006 |                                  | By: | /s/ Michael D.  Boyd |
|                   |                                  |   | Michael D. Boyd |
|                   |                                  |   | Chief Financial  Officer |
|                        |                                       |  |  |  |  |  |

 

31

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