**SECURITIESAND EXCHANGE COMMISSION**

 

**WASHINGTON, DC 20549**

 

**FORM 10-Q**

 

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

 

**ForQuarterly Period Ended May 31, 2004**

 

**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  incorporation or organization) |   | (I.R.S.Employer  Identification No.) |
|                                                            |   |                                 |
| **1868 TUCKER INDUSTRIAL DRIVE, TUCKER, GEORGIA  30084**   |
| (Address of principal executive offices and zip code)           |
|                                                            |
| **770-938-2080**                                                |
| (Registrant’s telephone number,  including area code)      |

 

Indicate by check mark whetherthe registrant (1) has filed all reports required to be filed by section 13 or15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (orfor such shorter period that the registrant was required to file such reports),and (2) has been subject to such filing requirements for the past 90 days.  Yes ý  No  o

 

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

Yes  o  No  ý

 

Shares outstanding of each ofthe registrant’s classes of common stock at May 31, 2004:

 

| **Class**                  |   | **Number of Shares** |
|----------------------------|--------|----------------------|
| Common Stock, No Par Value |   | 4,826,000            |

 

 

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**Video Display Corporation and Subsidiaries**

**Index**

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

 

2

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**Video Display Corporation and Subsidiaries**

**Consolidated Balance Sheets**

 
|                                                                              |   | **May 31,  2004**    |           | **February  29,  2004** |   |
|-----------------------------------------------------------------------------------|--------|----------------------|----------------|-------------------------|--------|
|                                                                              |   | **(unaudited)**      |           | **(Note A)**            |   |
| **Assets**                                                                        |   |                 | ** **     |                    |   |
| Current Assets                                                                    |   |                 | ** **     |                    |   |
| Cash and cash equivalents                                                         |   | **$**                | **2,748,000**  | ** **              | $      | 3,021,000 |   |
| Accounts receivable, less allowance for  possible losses of $280,000 and $251,000 |   | **10,399,000**       | ** **     | 10,910,000              |   |
| Inventories (Note D)                                                              |   | **28,044,000 ** | ** **     | 26,275,000         |   |
| Deferred income taxes                                                             |   | **2,299,000**        |           | 2,299,000               |   |
| Prepaid expenses and other                                                        |   | **1,073,000**        | ** **     | 1,639,000               |   |
| Total current assets                                                              |   | **44,563,000**       | ** **     | 44,144,000              |   |
|                                                                              |   |                 | ** **     |                    |   |
| Property, plant and equipment:                                                    |   |                 | ** **     |                    |   |
| Land                                                                              |   | **540,000**          | ** **     | 540,000                 |   |
| Buildings                                                                         |   | **7,047,000**        | ** **     | 7,016,000               |   |
| Machinery and equipment                                                           |   | **18,660,000**       | ** **     | 18,564,000              |   |
|                                                                              |   | **26,247,000**       |           | 26,120,000              |   |
| Accumulated depreciation and amortization                                         |   | **(18,624,000**      | **)**          | (18,384,000             | )      |
| Net property, plant, and equipment                                                |   | **7,623,000**        | ** **     | 7,736,000               |   |
|                                                                              |   |                 | ** **     |                    |   |
| Goodwill                                                                          |   | **1,318,000**        | ** **     | 1,227,000               |   |
| Other assets                                                                      |   | **1,505,000**        | ** **     | 1,444,000               |   |
|                                                                              |   |                 | ** **     |                    |   |
| Total assets                                                                      |   | **$**                | **55,009,000** | ** **              | $      | 54,551,000 |   |

 

The accompanying notes are anintegral part of these statements.

 

3

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|                                                                                                            |   | **May 31,  2004** |           | **February  29,  2004** |   |
|-----------------------------------------------------------------------------------------------------------------|--------|-------------------|----------------|-------------------------|--------|
|                                                                                                            |   | **(unaudited)**   |           | **(Note A)**            |   |
| **Liabilities and Shareholders’ Equity**                                                                   |   |              |           |                    |   |
| Current liabilities                                                                                             |   |              |           |                    |   |
| Accounts payable                                                                                                |   | **$**             | **4,602,000**  |                    | $      | 4,103,000 |   |
| Accrued liabilities                                                                                             |   | **3,442,000**     |           | 3,506,000               |   |
| Lines of credit (Note F)                                                                                        |   | **2,610,000**     |           | 2,610,000               |   |
| Notes payable to shareholders                                                                                   |   | **17,000**        |           | 19,000                  |   |
| Current maturities of long-term debt (Note  E)                                                                  |   | **1,871,000**     |           | 1,959,000               |   |
| Total current liabilities                                                                                       |   | **12,542,000**    |           | 12,197,000              |   |
|                                                                                                            |   |              |           |                    |   |
| Lines of credit (Note F)                                                                                        |   | **8,813,000**     |           | 6,199,000               |   |
| Long-term debt, less current maturities  (Note E)                                                               |   | **1,212,000**     |           | 2,018,000               |   |
| Notes payable to shareholders, less current  maturities                                                         |   | **5,050,000**     |           | 8,272,000               |   |
| Deferred income taxes                                                                                           |   | **664,000**       |           | 664,000                 |   |
| Total liabilities                                                                                               |   | **28,281,000**    |           | 29,350,000              |   |
|                                                                                                            |   |              |           |                    |   |
| **Minority Interests**                                                                                          |   | **123,000**       |           | 123,000                 |   |
|                                                                                                            |   |              |           |                    |   |
| **Commitments**                                                                                                 |   | **—**        |           | —                  |   |
|                                                                                                            |   |              |           |                    |   |
| **Shareholders’ Equity**(Note C and H)                                                                     |   |              |           |                    |   |
| Preferred stock, no par value – 2,000,000  shares authorized; none issued and outstanding                  |   | **—**        |           | —                  |   |
| Common stock, no par value – 10,000,000  shares authorized; 4,826,000 and 4,792,000 issued and outstanding |   | **6,723,000**     |           | 6,318,000               |   |
| Additional paid in capital                                                                                      |   | **92,000**        | ** **     | 92,000                  |   |
| Retained earnings                                                                                               |   | **19,803,000**    | ** **     | 18,688,000              |   |
| Accumulated other comprehensive loss                                                                            |   | **(13,000**       | **)**          | (20,000                 | )      |
| Total shareholders’ equity                                                                                 |   | **26,605,000**    | ** **     | 25,078,000              |   |
| Total liabilities and shareholders’ equity                                                                 |   | **$**             | **55,009,000** |                    | $      | 54,551,000 |   |

 

The accompanying notes are anintegral part of these statements.

 

4

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**Video Display Corporation and Subsidiaries**

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

 
|                                                 |   | **Three  Months Ended  May 31,** |           |
|------------------------------------------------------|--------|----------------------------------|----------------|
|                                                 |   | **2004**                         |           | **2003** |   |
|                                                 |   |                             |           |   |   |
| Net sales                                            |   | **$**                            | **19,900,000** | ** ** | $ | 19,013,000 |   |
|                                                 |   |                             | ** **     |   |   |
| Cost of goods sold                                   |   | **13,314,000**                   | ** **     | 12,782,000 |   |
|                                                 |   |                             | ** **     |   |   |
| Gross profit                                         |   | **6,586,000**                    | ** **     | 6,231,000 |   |
|                                                 |   |                             | ** **     |   |   |
| Operating expenses                                   |   |                             | ** **     |   |   |
| Selling and delivery                                 |   | **1,748,000**                    | ** **     | 1,779,000 |   |
| General and administrative                           |   | **2,911,000**                    | ** **     | 2,917,000 |   |
|                                                 |   | **4,659,000**                    |           | 4,696,000 | ** ** |
|                                                 |   |                             | ** **     |   |   |
| Operating profit                                     |   | **1,927,000**                    | ** **     | 1,535,000 |   |
|                                                 |   |                             | ** **     |   |   |
| Other income (expense)                               |   |                             | ** **     |   |   |
| Interest expense                                     |   | **(257,000**                     | **)**          | (319,000 | ) |
| Other, net                                           |   | **127,000**                      | ** **     | 44,000 |   |
|                                                 |   | **(130,000**                     | **)**          | (275,000 | ) |
|                                                 |   |                             | ** **     |   |   |
| Income before income taxes                           |   | **1,797,000**                    | ** **     | 1,260,000 |   |
|                                                 |   |                             | ** **     |   |   |
| Income tax expense                                   |   | **682,000**                      | ** **     | 479,000 |   |
|                                                 |   |                             | ** **     |   |   |
| Net income                                           |   | **$**                            | **1,115,000**  | ** ** | $ | 781,000 |   |
|                                                 |   |                             | ** **     |   |   |
| Basic earnings per share of common stock  (Note H)   |   | **$**                            | **0.23**       | ** ** | $ | 0.17 |   |
|                                                 |   |                             | ** **     |   |   |
| Diluted earnings per share of common stock  (Note H) |   | **$**                            | **0.23**       | ** ** | $ | 0.16 |   |
|                                                 |   |                             | ** **     |   |   |
| Basic weighted average shares outstanding            |   | **4,835,000**                    | ** **     | 4,640,000 |   |
|                                                 |   |                             | ** **     |   |   |
| Diluted weighted average shares outstanding          |   | **4,945,000**                    | ** **     | 4,968,000 |   |

 

The accompanying notes are an integral part of these statements.

 

5

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**Video Display Corporation and Subsidiaries**

**Consolidated Statements of Shareholders’Equity****andComprehensive Income**

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

**the Three Months Ended May 31, 2004(unaudited)**

 
|                                                                                |   | **Common  Shares** |   | **Share  Amount** |      | **Additional  Paid In  Capital** |   | **Accumulated  Other  Comprehensive  Loss** |   | **Retained  Earnings** |     | **Current  Period  Comprehensive  Income** |      |
|-------------------------------------------------------------------------------------|--------|--------------------|--------|-------------------|-----------|----------------------------------|--------|---------------------------------------------|--------|------------------------|----------|--------------------------------------------|-----------|
|                                                                                |   |               |   |              |      |                             |   |                                        |   |                   |     |                                       |      |
| Balance at February 28, 2003                                                        |   | 4,700,000          |   | $                 | 5,293,000 |                             | $      | 92,000                                      |   | $                      | (233,000 | )                                          | $         | 17,004,000 |   |   |   |
|                                                                                |   |               |   |              |      |                             |   |                                        |   |                   |     |                                       |      |
| Net income for the year                                                             |   | —             |   | —            |      | —                           |   | —                                      |   | 3,165,000              |     | $                                          | 3,165,000 |   |
| Unrealized gain on marketable equity securities                                     |   | —             |   | —            |      | —                           |   | 25,000                                      |   | —                 |     | 25,000                                     |      |
| Foreign currency translation adjustment                                             |   | —             |   | —            |      | —                           |   | 62,000                                      |   | —                 |     | 62,000                                     |      |
| Reclassification adjustment on the sale of marketable equity  securities for a loss |   | —             |   | —            |      | —                           |   | 126,000                                     |   | —                 |     | 126,000                                    |      |
| Total comprehensive income                                                          |   |               |   |              |      |                             |   |                                        |   |                   |     | $                                          | 3,378,000 |   |
| Issuance of common stock under stock option plan                                    |   | 75,000             |   | 312,000           |      | —                           |   | —                                      |   | —                 |     |                                       |      |
| Conversion of convertible debentures                                                |   | 240,000            |   | 1,000,000         |      | —                           |   | —                                      |   | —                 |     |                                       |      |
| Issuance of common stock                                                            |   | 8,000              |   | 51,000            |      | —                           |   | —                                      |   | —                 |     |                                       |      |
| Repurchase of common stock                                                          |   | (231,000           | )      | (338,000          | )         | —                           |   | —                                      |   | (1,236,000             | )        |                                       |      |
| Dividend paid on common stock                                                       |   | —             |   | —            |      | —                           |   | —                                      |   | (245,000               | )        |                                       |      |
|                                                                                |   |               |   |              |      |                             |   |                                        |   |                   |     |                                       |      |
| Balance at February 29, 2004                                                        |   | 4,792,000          |   | 6,318,000         |      | 92,000                           |   | (20,000                                     | )      | 18,688,000             |     |                                       |      |
|                                                                                |   |               |   |              |      |                             |   |                                        |   |                   |     |                                       |      |
| Net income for the period                                                           |   | —             |   | —            |      | —                           |   | —                                      |   | 1,115,000              |     | $                                          | 1,115,000 |   |
| Issuance of common stock under stock option plan                                    |   | 1,000              |   | 5,000             |      | —                           |   | —                                      |   | —                 |     |                                       |      |
| Foreign currency translation adjustment                                             |   | —             |   | —            |      | —                           |   | 7,000                                       |   | —                 |     | 7,000                                      |      |
| Total comprehensive income                                                          |   |               |   |              |      |                             |   |                                        |   |                   |     | $                                          | 1,122,000 |   |
| Issuance of common stock                                                            |   | 33,000             |   | 400,000           |      |                             |   |                                        |   |                   |     |                                       |      |
|                                                                                |   |               |   |              |      |                             |   |                                        |   |                   |     |                                       |      |
| Balance at May 31, 2004                                                             |   | 4,826,000          |   | $                 | 6,723,000 |                             | $      | 92,000                                      |   | $                      | (13,000  | )                                          | $         | 19,803,000 |   |   |   |

 

The accompanying notes are an integral part of these statements.

 

6

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**Video Display Corporation and SubsidiariesConsolidated Statements of Cash Flows (unaudited)**

 
|                                                                                   |   | **Three  Months Ended  May 31,** |          |
|----------------------------------------------------------------------------------------|--------|----------------------------------|---------------|
|                                                                                   |   | **2004**                         |          | **2003** |   |
|                                                                                   |   |                             |          |   |   |
| **Operating Activities**                                                               |   |                             | ** **    |   |   |
| Net income                                                                             |   | **$**                            | **1,115,000** | ** ** | $ | 781,000 |   |
| **Adjustments to  reconcile net income to net cash provided by (used in) operations:** |   |                             | ** **    |   |   |
| Depreciation and amortization                                                          |   | **242,000**                      | ** **    | 291,000 |   |
| Provision for bad debts                                                                |   | **29,000**                       | ** **    | 63,000 |   |
| **Changes in working  capital, net of effects from acquisitions:**                     |   |                             | ** **    |   |   |
| Accounts receivable                                                                    |   | **482,000**                      | ** **    | 563,000 |   |
| Inventories                                                                            |   | **(1,490,000**                   | **)**         | 105,000 |   |
| Prepaid expenses                                                                       |   | **602,000**                      | ** **    | 250,000 |   |
| Accounts payable and accrued liabilities                                               |   | **435,000**                      | ** **    | (41,000 | ) |
| Net cash provided by operating activities                                              |   | **1,415,000**                    | ** **    | 2,012,000 |   |
|                                                                                   |   |                             | ** **    |   |   |
| **Investing  activities**                                                              |   |                             | ** **    |   |   |
| Capital expenditures                                                                   |   | **(47,000**                      | **)**         | (112,000 | ) |
| Cash paid for acquisition                                                              |   | **(150,000**                     | **)**         | — |   |
| Other investing activities                                                             |   | **—**                       | ** **    | 4,000 |   |
| Net cash used in investing activities                                                  |   | **(197,000**                     | **)**         | (108,000 | ) |
|                                                                                   |   |                             | ** **    |   |   |
| **Financing activities**                                                               |   |                             | ** **    |   |   |
| Proceeds from long-term debt and line of  credit                                       |   | **8,975,000**                    | ** **    | 6,472,000 |   |
| Proceeds from exercise of stock option                                                 |   | **5,000**                        | ** **    | — |   |
| Purchase of common stock under repurchase  program                                     |   | **—**                       | ** **    | (812,000 | ) |
| Redemption of common stock                                                             |   | **—**                       | ** **    | (100,000 | ) |
| Payments on long-term debt and lines of  credit                                        |   | **(10,478,000**                  | **)**         | (7,271,000 | ) |
| Net cash used in financing activities                                                  |   | **(1,498,000**                   | **)**         | (1,711,000 | ) |
|                                                                                   |   |                             | ** **    |   |   |
| Effect of exchange rates on cash                                                       |   | **7,000**                        | ** **    | (26,000 | ) |
|                                                                                   |   |                             | ** **    |   |   |
| Net change in cash                                                                     |   | **(273,000**                     | **)**         | 167,000 |   |
|                                                                                   |   |                             | ** **    |   |   |
| Cash, beginning of period                                                              |   | **3,021,000**                    | ** **    | 2,392,000 |   |
|                                                                                   |   |                             | ** **    |   |   |
| Cash, end of period                                                                    |   | **$**                            | **2,748,000** | ** ** | $ | 2,559,000 |   |

 

The accompanying notes are an integral partof these statements.

 

7

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**Video Display Corporation and Subsidiaries**

**Notes to Consolidated****Financial Statements (unaudited)**

 

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

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

 

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

 

Assets and liabilities of foreign subsidiaries are translated using theexchange rate in effect at the end of the period.  Revenues and expenses are translated using the average of theexchange rates in effect during the period. Translation adjustments and transaction gains and losses related tolong-term intercompany transactions are accumulated as a separate component ofshareholders’ equity. The Company has a subsidiary in the U.K., which is notmaterial, and uses the British pound as its functional currency.

 

NOTE B – ADOPTION OF RECENT ACCOUNTING PRONOUNCEMENTS

 

In January 2003, the FASB issued Financial Accounting StandardsBoard Interpretation No. 46 (FIN 46), Consolidation of Variable InterestEntities, which was revised in December 2003 (FIN 46 R).  FIN 46 R requires an investor with amajority of the variable interests (primary beneficiary) in a variable interestentity (VIE) to consolidate the entity and also requires majority andsignificant variable interest investors to provide certain disclosures.  A VIE is an entity in which the votingequity investors do not have a controlling financial interest or the equityinvestment at risk is insufficient to finance the entity’s activities withoutreceiving additional subordinated financial support from the otherparties.  The provisions of FIN 46 Rwere effective immediately for all arrangements entered into with new VIEscreated after January 31, 2003. For arrangements entered into with VIEs created before January 31,2003, the provisions of FIN 46 R were effective at the end of the firstreporting period ending after March 15, 2004.  The Company has not identified any VIEs and, therefore, theadoption of this standard did not have a material impact on the Company’sfinancial position or results of operations.

 

In December 2003, the Staff of the Securities and ExchangeCommission (SEC or the Staff) issued Staff Accounting Bulletin No. 104 (SAB104), Revenue Recognition, which supercedes SAB 101, Revenue Recognition inFinancial Statements.  While the wordingof SAB 104 has changed to reflect the issuance of EITF 00-21, the revenuerecognition principles of SAB 101 remain largely unchanged by the issuance ofSAB 104.  EITF 00-21 was effective forrevenue arrangements entered into in fiscal periods beginning afterJune 15, 2003.  The adoption ofthis standard did not have a material impact on the Company’s financialcondition or results of operations.

 

NOTE C – BUSINESS ACQUISITION

 

In March 2004, the Company acquired the monitor operations ofColorado based Data Ray, Inc.  TheCompany acquired inventory, fixed assets and various other assets of $459,000in exchange for cash of $150,000 and $400,000 of the Company’s common stock,resulting in goodwill of approximately $91,000.  These operations are consolidated into the Company’s Z-Axis, Inc.operations located in Phelps, NY, since the date of acquisition, which wasMarch 5, 2004.  The 

 

8

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$400,000 of common stock was issued at $12 dollars per share, themarket value of the stock at the date of purchase.  The common stock has a put feature whereby Data Ray can redeemthe stock for $11 per share if the price of the stock is below $12.00 after theone year anniversary date of the purchase agreement but before one year and tendays.

 

NOTE D - INVENTORIES

 

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

 

Inventories consisted of the following:

 
|                              |   | **May 31,  2004** |           | **February 29,  2004** |   |
|-----------------------------------|--------|-------------------|----------------|-----------------------------|--------|
|                              |   |              | ** **     |                        |   |
| Raw materials and work-in-process |   | **$**             | **13,782,000** | ** **                  | $      | 11,937,000 |   |
| Finished goods                    |   | **16,732,000**    | ** **     | 16,844,000                  |   |
|                              |   | **30,514,000**    |           | 28,781,000                  |   |
| Reserves for obsolescence         |   | **(2,470,000**    | **)**          | (2,506,000                  | )      |
|                              |   | **$**             | **28,044,000** |                        | $      | 26,275,000 |   |

 

NOTE E - LONG-TERM DEBT

 

Long-term debt consisted of the following:

 
|                                                                                                                                                                                                                                                                                                 |   | **May 31,  2004** |          | **February 29,  2004** |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------|---------------|-----------------------------|--------|
| Term loan facility, floating interest rate  based on an adjusted LIBOR rate (4.00% as of May 31, 2004), quarterly  principal payments of $313,000 through November 2005; collateralized by  assets of Aydin Display, Inc.                                                                       |   | **$**             | **1,562,000** | ** **                  | $      | 1,875,000 |   |
|                                                                                                                                                                                                                                                                                                 |   |              | ** **    |                        |   |
| Note payable to bank; interest rate of  prime plus 1.5%; collateralized by assets of XKD Corporation; repaid.                                                                                                                                                                                        |   | **—**        | ** **    | 542,000                     |   |
|                                                                                                                                                                                                                                                                                                 |   |              | ** **    |                        |   |
| Mortgage payable to bank; variable interest  rate (6.43% as of May 31, 2004); monthly principal and interest payments of  $6,000 payable  until December 2008 with a final principal payment of $350,000 in December 2008,  collateralized by land and building of Fox International, Inc. |   | **512,000**       | ** **    | 526,000                     |   |
|                                                                                                                                                                                                                                                                                                 |   |              | ** **    |                        |   |
| Mortgage payable to bank; interest rate at  FHLB plus 1.95% ( % as of May 31, 2004); monthly principal and interest  payments of $5,000 payable through October 2021; collateralized by land  and building of Teltron Technologies, Inc.                                                        |   | **569,000**       | ** **    | 573,000                     |   |
|                                                                                                                                                                                                                                                                                                 |   |              | ** **    |                        |   |
| Other                                                                                                                                                                                                                                                                                                |   | **440,000**       | ** **    | 461,000                     |   |
|                                                                                                                                                                                                                                                                                                 |   | **3,083,000**     |          | 3,977,000                   |   |
| Less current maturities                                                                                                                                                                                                                                                                              |   | **(1,871,000**    | **)**         | (1,959,000                  | )      |
|                                                                                                                                                                                                                                                                                                 |   | **$**             | **1,212,000** |                        | $      | 2,018,000 |   |

 

9

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NOTE F - LINE OF CREDIT

 

At May 31, 2004, the Company had a $12,000,000 credit facility with abank.  The interest rate on the line ofcredit is a floating LIBOR rate (3.60% at May 31, 2004) based on a ratio ofdebt to EBITDA, as defined.  Theweighted average interest rate during the quarter ended May 31, 2004 and theyear ended February 29, 2004 was 3.6% and 3.7%. The average amount andmaximum amount outstanding were $7,154,000 and $8,813,000, respectively, duringthe quarter ended May 31, 2004, and $6,754,000 and $8,801,000, respectively,during fiscal year 2004.  The line ofcredit expires in September 2005 and is classified as a long termliability in the accompanying consolidated balance sheet.  Borrowings under the line of credit arelimited by eligible accounts receivable, inventory and real estate, as defined,and includes a commitment fee of 0.25% for the unused portion.  As of May 31, 2004, the outstanding balanceon the line of credit was $8,813,000 and the available amount for borrowing was$3,187,000.

 

The line of credit agreement contains affirmative and negativecovenants, including requirements related to tangible net worth and debtservice coverage.  Additionally,dividend payments, capital expenditures and acquisitions have certainrestrictions. Substantially all of the Company’s retained earnings arerestricted based upon these covenants.    As of May 31, 2004, the Company was in compliance with its loancovenants.

 

Additionally, the Company converted a $2,750,000 term loan facility(collateralized by assets of Fox International, Inc.) with another bank to ashort-term revolving note due July 31, 2004.  Interest on this facility is at the rate of prime plus 1%.  The line is limited by eligible accountsreceivable and inventory.  Theoutstanding balance at May 31, 2004 was $2,610,000 and the available amount forborrowing was $140,000.

 

NOTE G – SUPPLEMENTAL CASH FLOW INFORMATION

 
|                                                             |   | **Three  Months  Ended** |        |
|------------------------------------------------------------------|--------|--------------------------|-------------|
|                                                             |   | **May 31,  2003**        |        | **May 31,  2003** | ** ** |
| Cash Paid for:                                                   |   |                     |        |   |   |
| Interest                                                         |   | **$**                    | **257,000** |   | $ | 319,000 |   |
| Income taxes, net of refunds                                     |   | **$**                    | **178,000** |   | $ | 200,000 |   |
|                                                             |   |                     |        |   |   |
| Non-cash Transactions:                                           |   |                     |        |   |   |
| Issuance of redeemable common stock for  purchase of inventory   |   | **$**                    | **—**  |   | $ | 100,000 |   |
| Issuance of common stock for monitor  division of Data Ray, Inc. |   | **$**                    | **400,000** |   | $ | — |   |

 

10

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NOTE H – SHAREHOLDERS’ EQUITY

 

**Earnings Per Share**

 

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

 

The following is a reconciliation from basic earnings per share todiluted earnings per share for each of the periods presented.

 
|                       |   | **Net Income** |       | **Weighted  Average Shares  Outstanding** |       | **Earnings  Per Share** |       |
|----------------------------|--------|----------------|------------|-------------------------------------------|------------|-------------------------|------------|
| Quarter ended May 31, 2004 |   |           |       |                                      |       |                    |       |
| Basic                      |   | $              | 1,115,000  |                                      | 4,835,000  |                    | $          | 0.23 |   |
| Effect of dilution:        |   |           | ** ** |                                      | ** ** |                    | ** ** |
| Options                    |   | —         |       | 110,000                                   | ** ** |                    | ** ** |
| Diluted                    |   | $              | 1,115,000  |                                      | 4,945,000  |                    | $          | 0.23 |   |
|                       |   |           |       |                                      |       |                    |       |
| Quarter ended May 31, 2003 |   |           |       |                                      |       |                    |       |
| Basic                      |   | $              | 781,000    |                                      | 4,640,000  |                    | $          | 0.17 |   |
| Effect of dilution:        |   |           | ** ** |                                      | ** ** |                    | ** ** |
| Options                    |   | —         |       | 84,000                                    | ** ** |                    | ** ** |
| Convertible debt           |   | 13,000         |       | 244,000                                   | ** ** |                    | ** ** |
| Diluted                    |   | $              | 794,000    |                                      | 4,968,000  |                    | $          | 0.16 |   |

 

**Stock-BasedCompensation Plans**

 

The Company has an incentive stock option plan whereby total options topurchase 150,000 shares may be granted to key employees at a price not less thanfair market value at the time the options are granted and are exercisablebeginning on the first anniversary of the grant date for a period not to exceedten years.  Statement of FinancialAccounting Standards No. 123 encourages, but does not require companies to recordcompensation cost for stock-based employee compensation plans at fairvalue.  The Company has chosen tocontinue to account for stock-based compensation using the intrinsic valuemethod prescribed in Accounting Principles Board Opinion No. 25, “Accountingfor Stock Issued to Employees”, and related Interpretations. Accordingly,compensation cost for stock options is measured as the excess, if any, of thequoted market price of the Company’s stock at the date of the grant over theamount an employee must pay to acquire the stock.  The option price of all the Company’s stock options is equal tothe market value of the stock at the grant date. No stock options were grantedduring the quarters ended May 31, 2004 and 2003, respectively, and, as such, norelated compensation expense is recorded in the accompanying consolidatedfinancial statements.

 

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

 

11

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|                                                                                     |   | **Three  Months  Ended** |          |
|------------------------------------------------------------------------------------------|--------|--------------------------|---------------|
|                                                                                     |   | **May 31,2004**          |          | **May 31,  2003** |   |
| Net income, as reported                                                                  |   | **$**                    | **1,115,000** | ** ** | $ | 781,000 |   |
| Stock-based  employee compensation expense determined under fair value basis, net of tax |   | **(9,000**               | **)**         | (8,000 | ) |
| Pro forma net income                                                                     |   | **$**                    | **1,106,000** | ** ** | $ | 773,000 |   |
|                                                                                     |   |                     | ** **    |   |   |
| Net (loss) earnings per share:                                                           |   |                     | ** **    |   |   |
| Basic - as reported                                                                      |   | **$**                    | **0.23**      | ** ** | $ | 0.17 |   |
| Basic - pro forma                                                                        |   | **$**                    | **0.23**      | ** ** | $ | 0.17 |   |
| Diluted - as reported                                                                    |   | **$**                    | **0.23**      | ** ** | $ | 0.16 |   |
| Diluted - pro forma                                                                      |   | **$**                    | **0.22**      | ** ** | $ | 0.16 |   |

 

**StockRepurchase Program**

 

The Company has a stockrepurchase program, pursuant to which it is authorized to repurchase up to462,500 shares of the Company’s common stock in the open market. As part ofthis program, the Company repurchased 125,000 shares of common stock for$812,000 during the quarter ended May 31, 2003. No shares were repurchased inthe first quarter of the current fiscal year.

 

12

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**Video Display Corporation and Subsidiaries**

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTSOF OPERATIONS

 

The following discussion shouldbe read in conjunction with the attached interim consolidated financialstatements and with the Company’s 2004 Annual Report to Stockholders, whichincluded audited financial statements and notes thereto for the fiscal yearended February 29, 2004, as well as Management’s Discussion and Analysis ofFinancial Condition and Results of Operations.

 

**Overview**

 

The Company is a worldwide leader in themanufacture and distribution of a wide range of display devices, encompassing,among others, entertainment, military, medical and simulation displaysolutions.  The Company is comprised oftwo distinct segments - (1) the manufacture and distribution of monitors,projection systems and CRTs and (2) the wholesale distribution of consumerelectronic parts. The monitor and CRT segment is organized into four distinctsubsegments or divisions:

 

•                  **Monitors** –offers a complete range of CRTs, flat panel displays and projection systems foruse in training and simulation, military, medical and industrial applications.

•                  **Data Display**– offers a complete range of CRTs for use in data display screen, includingcomputer terminal monitors and medical monitoring equipment.

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

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

 

***First Quarter2005 Highlights***

 

•                  ***Monitordivision revenue*** - theCompany’s monitor division continued a strong growth trend.  The Company now has the ability to competein various niche markets within the defense, medical and projection displayindustries.  Net sales within this segmentincreased in the first quarter of fiscal 2005 by $1,141,000 or 10.3% comparedto the first quarter of fiscal 2004. This increase reflects new contracts started in fiscal 2004.

•                  ***Monitordivision gross profit****–*the Company’s monitor division salesincreased 10.3%, while cost of sales increased 3.7%.  The Company did more high volume contract work during the firstquarter of fiscal 2005 as compared to the first quarter of fiscal 2004, andmanagement believes it was able to contain costs on orders of higher volume.

•                  ***Reductionof debt*** – when comparedto the first quarter of fiscal 2004, the Company’s total debt was reduced by$6,090,000 compared to the first quarter of fiscal 2004, which contributed to a$62,000 decrease in interest expense for the first quarter of fiscal 2005.

•                  ***Acquisition*** – during the first quarter of fiscal 2005,the Company acquired the monitor division of Data Ray, Inc., consisting ofinventory and certain assets.  Thisproduct line is being consolidated into the operations of the Company’s Z-Axissubsidiary in Phelps, NY, and is expected to positively impact Z-Axis’ revenuesby approximately $50,000 per month.

 

***Fiscal 2005Challenges***

 

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

 

13

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Certain of the Company’s divisions maintainsignificant inventories of CRT’s and component parts in an effort to ensure itscustomers a reliable source of supply. The Company’s inventory turnover averages 184 days, although in manycases the Company would anticipate holding 90 to 100 days of inventory in thenormal course of operations.  This levelof inventory is higher than some of the Company’s competitors due to the factthat it sells a number of products representing older, or trailing edge,technology that may not be available from other sources. The market for thesetrailing edge technology products is declining and, as manufacturers for theseproducts discontinue production or exit the business, the Company may make lasttime buys. In the monitor subsegment of the Company’s business, the market forits products is characterized by fairly rapid change as a result of thedevelopment of new technologies, particularly in the flat panel display area.If the Company fails to anticipate the changing needs of its customers andaccurately forecast their requirements, it may accumulate inventories ofproducts which its customers no longer need and which the Company will beunable to sell or return to its vendors. Because of this, the Company monitors the adequacy of its inventoryreserves regularly, and at May 31, 2004, feels its reserves to be adequate.

 

The Company’s shipments were negativelyimpacted during the quarter by certain raw material shortages which reducedtargeted shipments in the May 31, 2004 quarter between four and fivepercent.  Parts availability problemsare expected to be resolved during July and August, which should allow theCompany to resume normal shipping schedules during the second quarter.

 

The wholesale distribution segment alsomaintains a broad range of products (which contributes to a higher totalinventory) to be able to promptly provide those customers who are buyingproducts, or obtaining warranty replacements, for electronic part components.At May 31, 2004, the Company had reserved $2,470,000 for inventoryobsolescence.

 

Results ofOperations

 

The following table sets forth, for the three monthsended May 31, 2004 and 2003, the percentages which selected items in theStatements of Income bear to total sales:

 

|                             |   | **Three  Months Ended  May 31,** |   |
|----------------------------------|--------|----------------------------------|--------|
|                             |   | **2004**                         |   | **2003** |   |
| Sales                            |   |                             |   |   |   |
| CRT Segment                      |   |                             |   |   |   |
| Monitors                         |   | 61.6                             | %      | 58.4 | % |
| Data Display CRT’s          |   | 11.1                             |   | 9.9 |   |
| Entertainment CRT’s         |   | 5.8                              |   | 8.0 |   |
| Electron Guns and Components     |   | 1.1                              |   | 2.1 |   |
|                             |   | 79.7                             |   | 78.4 |   |
| Wholesale Consumer Parts Segment |   | 20.3                             |   | 21.6 |   |
|                             |   | 100.0                            | %      | 100.0 | % |
|                             |   |                             |   |   |   |
| Costs and  expenses              |   |                             |   |   |   |
| Cost of goods sold               |   | 66.9                             | %      | 67.2 | % |
| Selling and delivery             |   | 8.8                              |   | 9.4 |   |
| General and administrative       |   | 14.6                             |   | 15.3 |   |
|                             |   | 90.3                             |   | 91.9 |   |
|                             |   |                             |   |   |   |
| Income from  Operations          |   | 9.7                              |   | 8.1 |   |
|                             |   |                             |   |   |   |
| Interest  expense                |   | (1.3                             | )      | (1.7 | ) |
| Other income                     |   | 0.6                              |   | 0.2 |   |
| Income  before income taxes      |   | 9.0                              |   | 6.6 |   |
| Provision  for income taxes      |   | (3.4                             | )      | (2.5 | ) |
|                             |   |                             |   |   |   |
| Net income                       |   | 5.6                              | %      | 4.1 | % |

 

14

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Net sales

 

Consolidated net salesincreased $887,000 for the quarter ended May 31, 2004 as compared to thequarter ended May 31, 2003.  CRTdivision sales increased $943,000 while wholesale division sales remainedrelatively flat for the comparative periods.

 

The net increase in CRT segmentsales is attributed to growth within the monitor sub-segment of$1,141,000.  This increase is attributedin large part to stronger demand from military and defense contractors. Thedata display segment also showed an increase of $326,000.  Offsetting declines occurred in net sales ofthe entertainment, and component parts sub-segments of $355,000 and $169,000,respectively.

 

The net gain in monitor divisionsales includes increases from Display Systems of $1,878,000 and Aydin Displaysof $1,600,000.  These increases reflectrevenues from new contract orders received from the Boeing Co., Lockheed Martinand others during the latter part of fiscal 2004.  There were offsetting declines during the first quarter of$1,864,000 at the Lexel operation.  Oneof its major contracts was completed during fiscal 2004, though Lexel’s otherproduct lines, including direct view storage tubes, maintained significant backlogsat May 31, 2004.  Z-Axis sales decreased$222,000 compared to the first quarter of fiscal 2004, though managementexpects the recent acquisition of the Data Ray, Inc. monitor business topositively impact Z-Axis’ sales during fiscal 2005.

 

The data display divisionshowed an increase in sales of $326,000 compared to the first quarter of fiscal2004.  Management attributes thisprimarily to its decision in late fiscal 2004 to distribute projection tubedisplays from its Data Display location in Tucker, GA instead of its Novatronlocation, which is a part of the entertainment division.

 

Within the entertainmentdivision, sales of television CRTs decreased $111,000, while declines in salesof replacement television CRTs totaled $244,000 for the quarter ended May 31,2004 as compared to the same period a year ago.  The Company is the primary supplier of replacement televisionCRTs to the domestic entertainment market. A majority of the entertainment segment’s sales (37%) are to majortelevision retailers as replacements for products sold under manufacturer andextended warranties.  Due to continuedlower retail sales prices for mid-size television sets (25” to 30”), fewerextended warranties were sold by retailers, a trend consistent with the pasttwo fiscal years.  The Company remainsthe primary supplier of product to meet manufacturers’ standardwarranties.  Growth in this divisionwill be impacted by the timing and number of extended warranties sold for thelarger, more expensive sets.  Due to thefact that the Company is in the replacement market, it has the ability to trackretail sales trends and, accordingly, can attempt to adjust quantities ofcertain size CRTs carried in stock and reduce the exposure to obsolescence.

 

The component parts division recordeddeclines of $169,000 for the quarter ended May 31, 2004 as compared to the sameperiod a year ago.  Electron gun andstem sales were negatively impacted by weaker demand during the quarter, whilethe Company’s Wintron location was negatively impacted as it transitions tonewer technologies.  Wintron ismarketing two new camera technologies. One will assist border guards with under car inspections, another willassist correctional facilities in supervision of inmates.  Electron gun sales have historically beendependent upon the demand by domestic and foreign television CRTremanufacturers.  These sales havedeclined as consumers move towards purchasing new technology as opposed torepairing existing sets.

 

15

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###### Grossmargins

 

Consolidated gross profitmargins increased slightly to 33.1% from 32.8% for the quarter ended May 31,2004 as compared to May 31, 2003.  CRTsegment margins increased from 28.4% to 30.1% while the wholesale consumerparts segment decreased to 44.8% from 48.4% for the comparable periods.

 

CRT segment margins were impacted by a variety offactors.  The Company’s monitor divisionsales increased 10.3% while cost of sales increased 3.7%.  An increase of high volume orders in thefirst quarter of fiscal 2005 versus 2004 helped keep costs down by improvingproduction efficiency as fixed costs were absorbed by greater throughput.  To a lesser extent, the Data Displaydivision experienced higher margins due to the Company’s ability to purchaseCRTs from cheaper outside sources, as opposed to manufacturing these productsat the former Mexico subsidiary. Purchases from these outside sources average approximately $17 per CRTas opposed to $37 per CRT from the former Mexico subsidiary.  Additionally, several CRT locations withhigher volume, particularly Aydin and Display Systems, were able to achievethese increases without adding comparable fixed overhead and as such theirmargins were generally improved.

 

Gross margins forthe wholesale consumer parts segment decreased slightly for the quarter endedMay 31, 2004 as compared to the same quarter a year ago.  This decrease is primarily due to slightlyhigher sales to two customers, National Parts and Best Buy, which carry lowermargins.

 

##### Operating expenses

 

Operating expenses as apercentage of sales decreased to 23.4% for the quarter ended May 31, 2004 ascompared to 24.7% for the quarter ended May 31, 2003.  CRT segment operating expenses increased $19,000 and the wholesalesegment expenses decreased $56,000 from the comparative period a year ago.

 

CRT expense increases includedincreases within the monitor segment of $175,000, reflecting the continuedgrowth and need for support personnel within this division.  These increases were offset by declineswithin the data display segment of $122,000 and within the components segmentof $26,000.  These decreases reflectlower payroll costs achieved through the reduction of personnel within thesesegments as compared to the first quarter of fiscal 2004.

 

Wholesale segment expensesdecreased $56,000 compared to the first quarter of fiscal 2004, primarily dueto decreases in commissions paid during the first quarter of fiscal 2005.

 

###### Interestexpense

 

Interest expense decreased$62,000 in the first quarter of fiscal 2005 as compared to the first quarter offiscal 2004.  The Company maintainsvarious debt agreements with different interest rates, most of which are basedon the prime rate or LIBOR.  Overalldebt decreased during the comparative periods by $6,090,000, which was theprimary reason for the decrease in interest expense.

 

###### Incometaxes

 

The effective tax rate for the quarter ended May 31,2004 is 38.0% as compared to 38.0% a year ago. 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.

 

16

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##### Foreign currency translation

 

Gains or losses resulting from thetransactions with its UK subsidiary are reported in current operations whilecurrency translation adjustments are recognized in a separate component ofshareholders’ equity. There were no significant gains or losses recognized ineither period related to the UK subsidiary.

 

Liquidity and capital resources

 

As of May 31, 2004, the Company had totalcash and cash equivalents of $2,748,000. The Company’s working capital was $32,020,000 and $31,947,000 at May 31,2004 and February 29, 2004.  In recent years, the Company has financed itsgrowth and cash needs primarily through income from operations, borrowingsunder revolving credit facilities and long-term debt. Liquidity provided byoperating activities of the Company is reduced by working capital requirements,largely inventories and accounts receivables, debt service, capitalexpenditures, product line additions and, in fiscal 2004, dividends.

 

The Company specializes in certain productsrepresenting trailing-edge technology that may not be available from othersources, and may not be currently manufactured. In many instances, theCompany’s products are components of larger display systems for which immediateavailability is critical for the customer. Accordingly, the Company enjoyshigher gross margins, but typically has larger investments in inventories thanthose of its competitors.

 

The Company continues to monitor its cash andfinancing positions seeking to find ways to lower its interest costs and toproduce positive operating cash flow. The Company examines possibilities to grow its business as opportunitiespresent themselves, such as new sales contracts or niche acquisitions. Therecould be an impact on working capital requirements to fund this growth.  As in the past, the intent is to financesuch projects with operating cash flows or existing bank lines; however, morepermanent sources of capital may be required in certain circumstances.  In March 2004, the Company signed anagreement in principle to acquire the assets of Colorado based Data-RayCorporation’s CRT monitor operations. The asset purchase included the issuance of the Company’s common stockand cash to the seller of $550,000 total consideration.  The transaction closed in the first quarterof fiscal 2005.

 

Cash provided by operations for the period ended May31, 2004 was $1,415,000 as compared to $2,012,000 in the same period a yearago.  Net income for the first quarterended May 31, 2004 adjusted for non-cash items provided cash of $1,386,000.  Working capital requirementsdecreased $29,000 in the first quarter of fiscal 2005 due primarily to improvedcollections of receivables which provided cash of $482,000. Increases inaccounts payable and accrued liabilities also provided cash of $436,000, whiledecreases in prepaid expenses provided cash of $601,000.  Inventory increased $1,490,000 in the firstquarter of fiscal 2005 due primarily to purchase requirements within themonitor segment required to fill open backlog orders.  In the first quarter of fiscal 2004, working capital requirementsdecreased primarily from more aggressive collection efforts of receivables,which provided cash of $563,000, a decrease in purchase requirements ofinventories necessary, which provided cash of $105,000 and decreases in prepaidexpenses, which provided cash of $250,000. Working capital requirements increased $41,000 to reduce overallaccounts payable and accrued liabilities.

 

Investing activities used cash of $197,000and $108,000 in the first quarter fiscal 2005 and 2004, respectively.  Capital expenditures were $47,000 in the firstquarter of fiscal 2005 as compared to $112,000 for the same period a year ago.Capital expenditures in 2005 were primarily for building improvements andcomputer hardware.  Capital expenditureswere primarily within the monitor segment to support the growth within thissegment.  The Company does notanticipate any significant investments in capital assets for 2005.

 

Financing activities used cash of $1,498,000in the first quarter of fiscal 2005 and used cash of $1,711,000 in the firstquarter of fiscal 2004.  During thefirst quarter of fiscal 2005, the Company used cash of $8,975,000 from lines ofcredit primarily to finance working capital needs and also to repay $3,216,000against outstanding borrowings from the CEO, reducing the balance of his noteto $5,000,000.  Cash of $10,478,000 wasused to reduce overall debt by $1,500,000

 

17

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during the quarter.  During the first quarter of fiscal 2004, the Company used cash of$799,000, primarily for debt reduction.

 

The Company’s debt agreements with financialinstitutions contain affirmative and negative covenants, including requirementsrelated to tangible net worth and debt service coverage and new loans.  Additionally, dividend payments, capitalexpenditures and acquisitions have certain restrictions. Substantially all ofthe Company’s retained earnings are restricted based upon these covenants.

 

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

 

In the first quarter of fiscal 2004, theCompany redeemed $100,000 of common stock previously issued for the purchase ofinventory.  The Company paid a cashdividend of $245,000 in the fourth quarter of fiscal 2004, which were the firstdividends declared and paid by the Company in its history. The policy regardingfuture payments of dividends will be reviewed periodically by the Board ofDirectors and will be based on the earnings and financial position of theCompany and other factors which the Board of Directors deems appropriate.

 

##### Critical AccountingPolicies

 

Management’s Discussion andAnalysis of Results of Operations and Financial Condition are based upon theCompany’s consolidated financial statements. These financial statements have been prepared in accordance withaccounting principles generally accepted in the United States of America.  These principles require the use ofestimates and assumptions that affect amounts reported and disclosed in thefinancial statements and related notes. The accounting policies that may involve a higher degree of judgments,estimates, and complexity include reserves on inventories, revenue recognition,the allowance for bad debts and warranty reserves.  The Company uses the following methods and assumptions indetermining its estimates:

 

*Reserves on inventories*

 

Reserves on inventories resultin a charge to operations when the estimated net realizable value declinesbelow cost.  Management regularlyreviews the Company’s investment in inventories for declines in value andestablishes reserves when it is apparent that the expected realizable value ofthe inventory falls below its original cost. The age of the inventory is not assignificant as is the projected demand for CRTs. Management is able to identifyconsumer buying trends, such as size and application, well in advance ofsupplying 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. These reviews include observations of product development trends ofthe OEM’s, new products being marketed, and technological advances relative tothe product capabilities of the Company’s existing inventories.

 

*Revenue Recognition*

 

Revenue fromproduct sales is recognized when goods are shipped.  The Company does not offer rights of return to customers;however, it does offer one and two-year limited warranties on certain products.

 

Revenue fromcontracts that are long-term in nature is recognized by the percentage ofcompletion method.  Profit estimates arerevised periodically based upon actual costs incurred.  Any expected losses identified on contractsare recognized immediately.  Revenuerelated to short-term contracts is recognized upon shipment of product, whichis typically mandated by set delivery dates in the related contract.

 

18

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*Allowance for bad debts*

 

The allowance forbad debts is determined by reviewing known customer exposures and applyinghistorical credit loss experience to the current receivable portfolio withconsideration given to the current condition of the economy, assessment of thefinancial position of the creditors and overall trends in past due accountscompared to established thresholds.  Thecompany monitors credit exposure and assesses the adequacy of the allowance forbad debts on a regular basis.

 

*Warranty reserves*

 

The warrantyreserve is determined by recording a specific reserve for known warranty issuesand a general reserve based on historical claims experience.  Actual claims incurred could differ from theoriginal estimates, requiring adjustments to the reserve.

 

*Other Accounting Policies*

 

Other loss contingenciesare recorded as liabilities when it is probable that a liability has beenincurred 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. Among the factors that could cause actual results to differ materiallyare the following:  business conditions,rapid or unexpected technological changes, product development, inventory risksdue to shifts in product demand, competition, domestic and foreign governmentrelations, fluctuations in foreign exchange rates, rising costs for componentsor unavailability of components, the timing of orders booked, lenderrelationships, and the risk factors listed from time to time in the Company’sreports filed with the Commission.

 

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ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSUREABOUT MARKET RISK

 

The Company’s primary market risks includefluctuations in interest rates and variability in interest rate spreadrelationships, such as prime to LIBOR spreads. Approximately $19,574,000 of outstanding debt at May 31, 2004 related tolong-term indebtedness under variable rate debt.  Interest on the outstanding balance of this debt will be chargedbased on a variable rate related to the prime rate or the LIBOR rate.  Both rate bases are incremented for marginsspecified in their agreements.  Thus,the Company’s interest rate is subject to market risk in the form offluctuations in interest rates. The effect of a hypothetical one percentagepoint increase across all maturities of variable rate debt would result in andecrease of approximately $196,000 in pre-tax net income assuming no furtherchanges in the amount of borrowings subject to variable rate interest fromamounts outstanding at May 31, 2004. The Company does not trade in derivativefinancial instruments.

 

The Companyhas a subsidiary in the U.K., which is not material, but uses the British poundas its functional currency. Due to its limited operations outside of the U.S.,the Company’s exposure to changes in foreign currency exchange rates betweenthe U.S. dollar and foreign currencies or to weakening economic conditions inforeign markets is not expected to significantly impact the Company’s financialposition.

 

ITEM 4.  CONTROLS AND PROCEDURES

 

a)              Evaluation of disclosure controls andprocedures.  Our chief executive officerand our chief financial officer, after evaluating the effectiveness of our“disclosure controls and procedures” (as defined in the Securities Exchange Actof 1934 Rules 13a-14(c) and 15d-14(c)) as of a date (the “Evaluation Date”)within 90 days before the filing date of this annual report, have concludedthat, as of the Evaluation Date, our disclosure controls and procedures wereadequate with regards to the domestic operations of the Company and designed toensure that material information relating to us and our consolidatedsubsidiaries would be made known to our chief executive officer and our chieffinancial officer by others within those entities.  Due to the restatement of the fiscal 2003 third quarter fortransactions affecting the international operations, the Company determinedthat a review of those internal controls were necessary in order to preventsimilar future situations.

 

b)             Changes in internal controls. There werechanges to internal controls to provide for more timely review and accuratereconciliations of intercompany transactions. There were no other significant changes in our internal controls or inother factors that could significantly affect our internal controls andprocedures subsequent to the Evaluation Date.

 

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PART II

 
| Item 1. |   | Legal Proceedings                                                                                                                            |
|---------|--------|----------------------------------------------------------------------------------------------------------------------------------------------|
|    |   |                                                                                                                                         |
|    |   | No new legal  proceedings or material changes in existing litigation occurred during the  quarter ended May 31, 2004.                        |
|    |   |                                                                                                                                         |
| Item 2. |   | Changes in Securities  and Use of Proceeds                                                                                                   |
|    |   |                                                                                                                                         |
|    |   | None.                                                                                                                                        |
|    |   |                                                                                                                                         |
| Item 3. |   | Defaults upon Senior  Securities                                                                                                             |
|    |   |                                                                                                                                         |
|    |   | None.                                                                                                                                        |
|    |   |                                                                                                                                         |
| Item 4. |   | Submission of Matters  to a Vote of Security Holders                                                                                         |
|    |   |                                                                                                                                         |
|    |   | None                                                                                                                                         |
|    |   |                                                                                                                                         |
| Item 5. |   | Other information                                                                                                                            |
|    |   |                                                                                                                                         |
|    |   | None                                                                                                                                         |
|    |   |                                                                                                                                         |
| Item 6. |   | Exhibits and Reports  on Form 8-K                                                                                                            |
|    |   |                                                                                                                                         |
|    |   | The Company  filed one report on Form 8-K dated June 1, 2004, pertaining to its fourth  quarter and annual earnings release for fiscal 2004. |

 

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SIGNATURES

 

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

 

 
|           |   |   | VIDEO  DISPLAY CORPORATION |   |
|----------------|--------|--------|----------------------------|--------|
|           |   |   |                       |   |
|           |   |   |                       |   |
| July 14,  2004 |   | By:    | /s/ Ronald  D. Ordway      |   |
|           |   |   | Ronald D. Ordway           |   |
|           |   |   | Chief  Executive Officer   |   |
|           |   |   |                       |   |
|           |   |   |                       |   |
|           |   | By:    | /s/ Gregory  A. Kittle     |   |
|           |   |   | Gregory A.  Kittle         |   |
|           |   |   | Chief  Financial Officer   |   |

 

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