VIDEO DISPLAY CORP - Annual Report: 2005 (Form 10-K)

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PART IV
TABLE OF CONTENTS

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549

FORM 10-K

Commission file number 0-13394

VIDEO DISPLAY CORPORATION
(Exact name of registrant as specified in its charter)

Registrant's telephone number, including area code: (770) 938-2080

Securities Registered Pursuant to Section 12(b) of the Act:

        Securities Registered Pursuant to Section 12(g) of the Act: Common stock (no par value)

        Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ý

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

        As of August 31, 2004, the aggregate market value of the voting and non-voting common equity held by non-affiliates based upon the closing sales price for the Registrant's common stock as reported in the NASDAQ National Market System was $73,753,948.

        The number of shares outstanding of the registrant's Common Stock as of May 31, 2005 was 9,707,000.

DOCUMENTS INCORPORATED BY REFERENCE

        The following documents (or parts thereof) are incorporated by reference into the following parts of this Form 10-K:

        Portions of the Definitive Proxy statement related to the 2005 Annual Meeting of Stockholders in Part III.

TABLE OF CONTENTS

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PART I

ITEM 1. BUSINESS

General

        Video Display Corporation (the "Company") is a leading designer, manufacturer and supplier of a wide range of display devices and component parts for military, medical, industrial and consumer display applications. The Company's product line encompasses both cathode ray tube displays and flat panel displays with major emphasis on high-end niche market displays for specialty applications. The Company also acts as a facilitator and wholesale distributor of parts and accessories for various original equipment manufacturers ("OEMs") of consumer products. In addition, in fiscal 2005, the Company added a call center which acts as a consumer and dealer support center for in-warranty and out-of-warranty household products, appliances, parts and accessories for various electronics manufacturers. This call center also acts as a technical support center for the same manufacturers. The Company markets its products worldwide primarily from facilities located in the United States and one subsidiary operation in the United Kingdom.

Description of Principal Business

        The Company generates revenues from four related display oriented businesses (78% of consolidated sales in fiscal 2005) as well as distribution of parts and accessories for consumer products (22% of consolidated sales in fiscal 2005). Virtually all of the Company's earnings were derived from the display segment of the business in fiscal 2005. Revenues, by category, from the display segment for fiscal 2005 were as follows:

Monitor revenue (78.9%)
Home Entertainment CRT revenue (6.6%)
Data Display CRT (13.2%)
Components (1.3%)

        (See also Note 15 to Consolidated Financial Statements. Segment Information)

        Manufacturing and distribution facilities are located in Georgia, Florida, Louisiana, Pennsylvania, New York, Kentucky and Lye, U.K., in addition to several sales and service locations worldwide.

        The consumer parts and accessories distribution business is operated under the Fox International name, headquartered in Bedford Heights, Ohio with one additional distribution center in Richardson, Texas.

        The Company continues to explore opportunities to expand its product offerings in the display industry. This expansion will be achieved by adding new products or by acquiring existing companies that would enhance the Company's position in the display industry. Management continually evaluates product trends in the industry and divisions in which the Company operates. Overall trends are discussed herein under "Flat Panel and Other Technology". Research and development prior to 2003 consisted primarily of establishing the interchangeability of products from various manufacturers and, when advantageous, manufacturing products to replace original electronic parts. Subsequent to that period, the Company has expended significant research and development funds (approximately $652,000 in fiscal 2005) in both high resolution projection displays and AMLCD technologies.

Segment Information

        This information is provided in Note 15 to the Consolidated Financial Statements.

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Principal Products

Monitor Displays

        The Company's monitor operations are conducted at Phelps, New York (Z-Axis); Birdsboro, Pennsylvania (Teltron and Aydin); Cape Canaveral, Florida (Display Systems); and Lexington, Kentucky (Lexel).

        This portion of the Company's operations involves the design, engineer and manufacture of complete monochrome and color monitor and projector display units using new CRTs or flat panel displays. The Company will customize these units for specific applications, including ruggedization for military uses or size reduction due to space limitations in industrial and medical applications. Because of the Company's flexible and cost efficient manufacturing, it is able to handle low volume orders that generate higher margins. In its efforts to solidify its position in the display industry, while reducing its dependence on CRT replacement markets, the Company has developed this high end display during the past five years from a zero revenue base to represent approximately 61.4% of fiscal 2005 consolidated net revenues.

        This portion of the Company's operations targets niche markets where competition from major multinational electronics companies tends not to be a significant factor. The prime customers for this product include defense, security, training and simulation areas of the U.S. and foreign militaries as well as the major defense contractors such as the Boeing Co., L-3 Communications, Lockheed Martin and others. These defense contractors utilize the Company's products for ruggedized mission critical applications such as shipboard and nuclear submarines. Flight simulator displays are also produced to provide a full range of flight training simulations for military applications. The acquisition of Evans & Sutherland, Inc. in the third quarter of fiscal 2005 allowed the Company to expand into the commercial flight training simulation market, as well. The primary components for the ruggedized product line consist of CRT and flat panel displays, circuit boards and machine parts.

        Although most monitors are customized to meet a customer's specifications, all monitors sold include the following general components: CRT or flat panel displays, circuit boards, and machine parts. Most of the Company's monitors are then ruggedized, which allows them to better withstand adverse conditions, such as extreme temperature, depth, altitude and vibration.

Cathode Ray Tubes ("CRTs")

        Since its organization in 1975, Video Display Corporation has been engaged in the distribution and manufacture of CRTs using new and recycled CRT glass bulbs, primarily in the replacement market, for use in data display screens, including computer terminal monitors, medical monitoring equipment and various other data display applications and in television sets. The Company currently markets CRTs in over 3,000 types and sizes.

        The Company's CRT manufacturing operations of new and recycled CRTs are conducted at facilities located in White Mills, Pennsylvania (Chroma); Bossier City, Louisiana (Novatron); Lexington, Kentucky (Lexel); and Birdsboro, Pennsylvania (Teltron). With the closure of the Mexico manufacturing facility in fiscal 2003, the Tucker, Georgia location now acts as the Company's sole distribution point of data display CRTs purchased from outside sources. The Lye, U.K. location is a sales and distribution facility for the Tucker, GA products.

        The Company maintains the capability of manufacturing a full range of monochrome CRTs as well as remanufacturing color CRTs from recycled glass. Its Teltron and Lexel operations additionally manufacture a wide range of radar, infrared, camera and direct-view storage tubes for military and security applications. All CRTs manufactured by the Company are tested for quality in accordance with standards approved by UL.

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        The Company also distributes new CRTs and other electronic tubes purchased from original manufacturers, both domestic and international. The Company forecasts its inventory requirements for six months to one year. Occasionally, manufacturers offer large quantities of overstocked original manufactured tubes at significant price reductions. The Company acquires these tubes when the existing replacement market appears to demonstrate adequate future demand and the purchase price allows a reasonable profit for the risk. Due to the extended time frame for the replacement market to develop (five to seven years), these purchased inventories sometimes do not turn as quickly as other inventories. Bulk CRT purchases have declined over the past few years as the Company is managing current inventory levels against the anticipated reduction in future CRT demand due to the growth of flat panel technology.

        The Company maintains an internal sales organization to sell directly to OEMs and their service organizations and markets its products through approximately 200 independent wholesale electronics distributors located throughout the U.S. The Company also supplies, under private-brand labeling, many of the replacement tubes marketed by several national brand name television manufacturers.

        In addition to factors affecting the overall market for such products, the Company's sales volume in the CRT replacement markets is dependent upon the Company's ability to provide prompt response to customers' orders, while maintaining quality control and competitive pricing. The Company's manufacturing activities are scheduled primarily around orders received.

Electron Guns and Components

        The Company, through its Tucker, GA based electron gun manufacturing subsidiary, Southwest Vacuum, manufactures electron gun assemblies comprised of small metal, glass and ceramic parts. The assembly process is highly labor intensive. While the particular electron guns being sold are of the Company's own design, most are replacements for electron guns previously designed for original equipment CRTs used in television sets and computer monitors. Raw materials consist of glass and metal stamped parts.

        Although Southwest Vacuum markets its products to independent customers, the majority of electron guns produced by the Company are consumed internally among the Company's own CRT manufacturing facilities. Sales to these related divisions, which have been eliminated in the consolidated financial statements, amounted to approximately $297,000, $835,000 and $910,000 for fiscal 2005, 2004 and 2003, respectively.

        The remaining operation in the component division, Wintron, located in Howard, Pennsylvania, produces flyback transformers, coils and power transformers. Intercompany sales transactions were $287,000, $105,000 and $221,000 for fiscal 2005, 2004 and 2004, respectively.

Flat Panel and Other Technology

        The Company anticipates that AMLCD and Plasma Display products, due to their lower space and power requirements, will eventually become the display of choice in many display applications. The significance of this continuing trend has had an effect on the Display divisions of the Company. In anticipation of long-term trends toward flat panel display usage, the Company has focused its efforts as well as its acquisition strategy toward flat panel technologies for niche market applications in the medical, simulation, training and military markets. Other types of technology, including HDTV, have not had a significant impact on the Company's business. HDTV utilizes both CRT and flat panel technology and, therefore, has potential positive effects on the Company due to higher margin CRT replacements. There may be long-term negative effects should the HDTV market move toward greater flat panel utilization, but HDTV is expected to have a positive impact on the Company's CRT business in the near term, although there can be no assurance that this will be the case. The Company will

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continue to monitor these trends and make adjustments to its CRT inventory levels and operating facilities to reflect changes in demand.

Electronic Parts

        Fox International distributes consumer electronic parts of most major consumer electronics manufacturers, both foreign and domestic. This subsidiary resells these products to major electronic distributors, retail electronic repair facilities, third-party contractual repair shops, and directly to consumers. In its relationship with consumer electronic manufacturers, Fox International receives the right, often exclusively, to ship parts to authorized dealers. Many of the manufacturers also direct inquiries for replacement parts to Fox International. Manufacturers require a distributor to stock their most popular parts and monitor the order fill ratio to ensure that their customers have access to sufficient replacement parts. Fox International attempts to maintain high fill ratios in order to secure favored distributor status from the manufacturers, requiring a significant investment in inventories. Fox International added a call center that was fully operational in the fourth quarter of fiscal 2005. This call center is a consumer and dealer support center for both in-warranty and out-of-warranty household products, appliances, parts and electronics for Black & Decker, Delonghi, Norelco, Coby, and numerous other manufacturers. This call center also performs as a technical support center for the same manufacturers.

Patents and Trademarks

        The Company is currently in the process of applying for several patents on newly developed products and technology and holds patents with respect to certain products and services. The Company also sells products under various trademarks and tradenames. Additionally, the Company licenses certain electronic technology to other manufacturing companies, which generated royalty revenues of approximately $92,000, $114,000 and $63,000 in fiscal 2005, 2004 and 2003, respectively. Although the Company believes that its patents and trademarks owned are of value, the Company believes that success in its industry primarily will be dependent upon incorporating emerging technology into new product line introductions, frequent product enhancements, and customer support and service. However, the Company intends to protect its rights when, in its view, these rights are infringed upon. The Company's key patents expire in 2014. The Company had several patents that had no significant value that were allowed to expire in 2004.

Seasonal Variations in Business

        Historically, there has not been seasonal variability in the Company's Display segment.

Working Capital Practices

        The Company has a $27,500,000 line of credit with Bank of America, as well as a $2,750,000 secondary line of credit with Fifth Third Bank for Fox International, which has been replaced subsequent to year end by a new $3,500,000 revolver, also with Bank of America. These lines are used primarily for the purchases of inventory as well as payments of accounts payable.

Concentration of Customers

        The Company sells to a variety of domestic and international customers on an open-unsecured account basis. These customers principally operate in the medical, military, television and avionics industries. The Company's Display segment had direct and indirect net sales to the U.S. government, primarily the Department of Defense for training and simulation programs, that comprised approximately 37%, 21% and 25% of Display segment net sales and 29%, 16% and 20% of consolidated net sales in fiscal 2005, 2004 and 2003, respectively. Sales to foreign customers were 11%,

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14% and 14% of consolidated net sales for fiscal 2005, 2004 and 2003, respectively. The Company's wholesale electronic parts distributor, Fox International, had net sales to one customer, National Parts, Inc., that comprised approximately 24%, 19% and 18% of that subsidiary's net sales in fiscal 2005, 2004 and 2003, respectively. The Company attempts to minimize credit risk by reviewing all customers' credit history before extending credit, and by monitoring customers' credit exposure on a daily basis. The Company establishes an allowance for doubtful accounts receivable based upon factors surrounding the credit risk of specific customers, historical trends and other information.

Backlog

        The Company's backlog is comprised of undelivered, firm customer orders, which are scheduled to ship within eighteen months. The Company's backlog was approximately $29,901,000 at February 28, 2005 and $23,206,000 at February 29, 2004. The Company's Lexel division comprised $9,291,000 or 31% and $9,203,000 or 40% of the 2005 and 2004 backlog, respectively. It is anticipated that more than 95% of the February 28, 2005 backlog will ship during fiscal 2006.

Government Contracts

        The Company, primarily through its Aydin, Teltron, Lexel, XKD and Display Systems subsidiaries, had contracts with the U.S. government (principally the Department of Defense and Department of Defense subcontractors) which generated revenues of approximately $23,761,000, $16,975,000 and $15,083,000 for the fiscal years ended 2005, 2004 and 2003, respectively. The Company's costs and earnings in excess of billings on these contracts were approximately $284,000 at February 28, 2005 and $411,000 at February 29, 2004. The Company had no billings in excess of costs and earnings on these contracts at February 28, 2005 and February 29, 2004. These contracts are typically less than twelve months in duration and specify a set number of units to be shipped based on a set delivery schedule. Most of these government contracts are on a per unit basis. These contracts are subject to government audit to ensure conformity with design specifications.

Environmental Matters

        The Company's operations are subject to federal, state and local laws and regulations relating to the generation, storage, handling, emission, transportation and discharge of materials into the environment. The costs of complying with environmental protection laws and regulations have not had a material adverse impact on the Company's financial condition or results of operations in the past and are not expected to have a material adverse impact in the foreseeable future.

Research and Development

        The objectives of the Company's research and development activities are to increase efficiency and quality in its manufacturing and assembly operations and to enhance its existing product line by developing alternative product applications to existing cathode ray and electron optic technology. The Company continues its research and development in advanced infrared imaging ("IR") for commercial and military applications. The Company has funded additional IR research in partnership with the University of Rhode Island. Potential future markets for IR include military and security surveillance, target acquisition, fire fighting, and industrial and medical thermography. Although during fiscal 2005 the Company has incurred increasingly higher costs for basic research or new product development (increasing by nearly $500,000 over fiscal 2004), it has not segregated these costs as a separate item but has included such costs in the consolidated financial statements as a part of general and administrative costs. Research and development costs amounted to approximately $652,000, $162,000 and $285,000 in fiscal 2005, 2004 and 2003, respectively.

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Employees

        As of February 28, 2005, the Company employed a total of 473 persons on a full time basis. Of these, 134 were employed in executive, administrative, and clerical positions, 100 were employed in sales and distribution, and 239 were employed in manufacturing operations. A union represents 2 employees at the Wintron location in Howard, Pennsylvania. The Company believes its employee relations to be satisfactory.

Competition

        Although the Company believes that it is the largest domestic recycler and distributor of recycled television CRTs in the United States CRT replacement market, it competes with other CRT manufacturers, as well as OEMs, many of which have greater financial resources than the Company. The Company believes it is the only company that offers complete service in replacement markets with its manufacturing and recycling capabilities. As a wholesale distributor of original equipment CRTs purchased from other manufacturers, the Company also competes with numerous other distributors, as well as the manufacturers' own distribution centers, many of which are larger and have substantially greater financial resources than the Company. The Company's ability to compete effectively in this market is dependent upon its continued ability to respond promptly to customer orders and to offer competitive pricing. The Company expects that competition may increase, especially in the computer and other display replacement markets, should domestic and foreign competitors expand their presence in the domestic replacement markets.

        Compared to domestic manufacturing prices on new CRTs, the Company's prices are competitive due to lower manufacturing costs associated with recycling the glass portion of previously used tubes, which the Company obtains at a fraction of the cost of new glass. The Company has to date been able to maintain competitive pricing with respect to imported CRTs because, generally, the CRT replacement market is characterized by customers requiring a variety of types of CRTs in quantities not large enough to absorb the additional transportation costs incurred by foreign CRT manufacturers.

        The Company believes it has a competitive advantage and is a sole source in providing many of its CRTs to the customer base of its Teltron and Lexel subsidiaries as these operations have been providing reliable products and services to these customers for more than 30 years. Lexel manufactures a broad range of CRT and DVST solutions used in military, industrial and commercial applications, including Avionics, Projection, Medical and general purpose displays. Teltron offers a wide range of high performance imaging devices and high resolution CRTs for medical, X-ray, infrared, military and aerospace applications.

        The Company believes that it has a competitive advantage in the monitor industry due to its ability to handle lower volume orders as well as its ability to provide internally produced component parts. As a result, the Company can offer more customization in the design and engineering of new products.

        With the operations of Lexel, Display Systems and XKD Corp., the Company has become one of the leading suppliers within the specialty display markets, especially in the military and medical imaging industries.

        The Company utilizes flat panel displays in many of its monitor units. These flat panels are purchased from OEMs. The revenue generated in fiscal 2005 from products utilizing flat panel technology was $8,910,000 as compared to $6,329,000 a year ago. Being in the replacement market, the Company has the opportunity to see trends in OEM sales, and while the growth in flat panel products is outpacing growth in CRT products, on a percentage basis, the CRT market remains more dominant. Because of this, the Company still considers the replacement CRT market to be a viable market for its products. As trends continue to define themselves, and replacement of these products occur in five to seven years, the Company foresees a bigger impact and utilization of flat panel products in its business.

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There is competition in the area of flat panel technology and the Company will rely on its ability to adapt and incorporate designs into its future products so that it may compete in a profitable nature. The flat panel market is made up of many competitors of various sizes, none holding a dominant position in the flat panel marketplace.

        The Company's competition in the consumer electronics parts segment comes primarily from other parts distributors. Many of these distributors are smaller than Fox International but a few are of equal or greater revenue size. Prices for major manufacturers' products can be directly affected by the manufacturers' suggested resale price. The Company believes that its service to customers and warehousing and shipping network give it a competitive advantage. Fox International sells a wide variety of electronic parts and accessories, including semiconductors, resistors, audio/video parts and batteries. In addition, Fox International operates a call center that serves as both a consumer and dealer support center for household products, parts and accessories, as well as serving as a technical support center for these products.

ITEM 2. PROPERTIES

        The Company leases its corporate headquarters at 1868 Tucker Industrial Drive in Tucker, Georgia (within the Atlanta metropolitan area) and its headquarters occupy approximately 10,000 square feet of the total 59,000 square feet at this location. The remainder is utilized as warehouse and assembly facilities. This location, as well as one other, is leased from a related party at current market rates. See "Item 13—Certain Relationships and Related Transactions". Management believes the facilities to be adequate for its needs. The following table details manufacturing, warehouse, and administrative facilities:

(a)

The Birdsboro, Pennsylvania property secures a mortgage loan from a bank with a principal balance of $557,000 as of February 28, 2005. The mortgage loan bears interest at a variable rate, currently 7.35%. Monthly principal and interest payments of $5,000 are payable through October 2021.

(b)

At fiscal year end, the Bedford Heights, Ohio property secured a mortgage to a bank with a principal balance of $479,000 and bearing interest at a variable rate, at 6.0%. Monthly principal

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and interest payments of $6,000 are payable through December 2008 with a final payment of $350,000 due in December 2008. Subsequent to fiscal year end February 28, 2005, this mortgage note was repaid with proceeds from a lower rate revolver loan from Bank of America.

ITEM 3. LEGAL PROCEEDINGS

        The Company is involved in various legal proceedings relating to claims arising in the ordinary course of business. There are no material proceedings to which the Company is a party and management is unaware of any significant contemplated actions against the Company.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

        No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this Report.

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PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

        The Company's common stock is traded on the National Association of Securities Dealers Automated Quotation System ("NASDAQ") national market system under the symbol VIDE.

        The following table shows the range of prices for the Company's common stock as reported (and as adjusted for the stock dividend discussed below) by NASDAQ for each quarterly period beginning on March 1, 2003. The prices reflect inter-dealer prices, without mark-up, mark-down, or commission, and may not necessarily represent actual transactions. These prices have been adjusted to reflect the 100% stock dividend paid in November 2004.

        There were approximately 2,000 holders of record of the Company's common stock as of May 16, 2005.

        The Company paid a cash dividend of $0.04 per share or $392,000 in December 2004 and $0.025 per share or $245,000 in January 2004. Payment of cash dividends in the future will be dependent upon the earnings and financial condition of the Company and other factors which the Board of Directors may deem appropriate. The Company is restricted by certain loan agreements regarding the payout of cash dividends.

Securities Authorized for Issuance Under Equity Compensation Plans

        The following table provides information as of February 28, 2005 regarding compensation plans (including individual compensation arrangements) under which Common Stock of the Company is authorized for issuance.

Recent Sales of Unregistered Securities

        In August 2003, the Company sold 8,000 shares of its common stock for $51,000 in cash to three individuals in an arm's length transaction. There was no underwriter involved with this transaction. In issuing these shares the Company relied on Section 4(2) of the Securities Act of 1933, based upon the

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limited offering to three individuals, one of whom was an officer of the Company. The common stock issued is not convertible into any other form of securities.

        In October 2003, the Company issued 240,000 shares of its common stock upon the surrender of $1,000,000 in principal amount of its convertible debentures. There was no underwriter involved with this transaction. In issuing these shares the Company relied on Section 4(2) of the Securities Act of 1933, based upon the limited offering to three individuals, one of whom was an officer of the Company. The common stock issued is not convertible into any other form of securities.

Issuer Purchases of Equity Securities

        The Company did not repurchase any of its equity securities during the fourth quarter of the fiscal year covered by this Report.

ITEM 6. SELECTED FINANCIAL DATA

        The following table sets forth certain selected financial data with respect to the Company's last five fiscal years.

        Data relating to the five fiscal years ended February 28, 2005 are derived from the Consolidated Financial Statements appearing elsewhere in this Report or in previous reports, which have been audited by BDO Seidman, LLP, independent registered public accounting firm. The selected consolidated financial data should be read in conjunction with, and is qualified in its entirety by reference to, Management's Discussion and Analysis, the consolidated financial statements of the Company, the notes thereto and the report thereon included elsewhere in this Report.

(a)

Includes the effects of a 20% stock dividend declared in March 2001 and issued on April 16, 2001 for all periods presented, as well as the effects of a 2 for 1 stock split effected in the form of a 100% stock dividend in November 2004.

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(b)

In connection with the winding up of its manufacturing operations in Mexico and three domestic facilities, the Company recorded impairment charges of $7,163,000, including the write off of its related foreign currency cumulative translation account balance of $1,296,000.

(c)

Includes the impact of the Lexel acquisition in 2001.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

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

•

Monitors—offers a complete range of CRT, flat panel and projection display systems for use in training and simulation, military, medical and industrial applications.



•

Data Display—offers a complete range of CRTs for use in data display screens, including computer terminal monitors and medical monitoring equipment.



•

Home Entertainment—offers a complete range of CRTs and projection tubes for television and home theater equipment.



•

Components—provides replacement electron guns and other components for CRTs primarily for servicing the Company's internal needs.

Fiscal 2005 Highlights

•

Monitor revenue—the Company's monitor continued a strong growth trend. The Company continues to compete in various niche markets within the defense, medical and projection display industries. Net sales in monitors increased in fiscal 2005 by $4,906,000 or 10.7% compared to fiscal 2004. Management attributes this to increased demand within the defense sector, as well as its third quarter acquisition of certain assets of Evans & Sutherland, Inc. which now gives the Company the ability to compete in the commercial flight training and simulation market.



•

Data Display revenue—the Company's data display revenues increased $708,000 or 9.1% in fiscal 2005 compared to fiscal 2004. These increases reflect the Company's sales of projection tubes from its Data Display location in Tucker, GA, which carry a higher unit price than its' normal inventory.



•

Purchase of assets—in October 2004, the Company finalized the purchase of certain inventories, fixed assets, and various other intangible assets of Evans & Sutherland, Inc. Following that agreement, the Company consolidated all manufacturing, sales and support with its established Marquee™ projector operations in Cape Canaveral, Florida. This consolidation process was complete by the end of the fourth fiscal quarter.



•

New credit facility—in November, 2004, the Company finalized a new line of credit to replace its prior credit facility. Under the terms of this new facility, the bank paid off the existing line of credit, as well as the term note collateralized by the assets of Aydin, Inc., a note due to an officer of the Company and the loan from the Chief Executive Officer used to finance the purchase of the Evans & Sutherland, Inc. assets. The maximum amount available for borrowings

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under this new line is $27,500,000 compared to $12,000,000 under the prior facility. Proceeds from this line are available for working capital needs of the Company and are subject to various covenants. As of February 28, 2005, the Company was in compliance with all loan covenants.

Fiscal 2005 Challenges

        Inventory management—the Company continually monitors historical sales trends as well as projected future needs to ensure adequate on hand supplies of inventory and to ensure against overstocking of slower moving, obsolete items.

        Certain of the Company's divisions maintain significant inventories of CRTs and component parts in an effort to ensure its customers a reliable source of supply. This level of inventory is higher than some of the Company's competitors due to the fact that it sells a number of products representing older, or trailing edge, technology that may not be available from other sources. The market for these trailing edge technology products is declining and, as manufacturers for these products discontinue production or exit the business, the Company may make last time buys. In the monitor portion of the Company's business, the market for its products is characterized by fairly rapid change as a result of the development of new technologies, particularly in the flat panel display area. If the Company fails to anticipate the changing needs of its customers and accurately forecast their requirements, it may accumulate inventories of products which its customers no longer need and which the Company will be unable to sell or return to its vendors.

        The wholesale distribution segment also maintains in inventory a broad range of products (which contributes to a higher total inventory) in order to be able to promptly provide those customers who are buying products, or obtaining warranty replacements, for electronic part components.

        In fiscal 2005 and 2004, the Company recorded consolidated provisions of approximately $1.4 million and $1.5 million, respectively, for obsolescence and overstock.

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Operations

        The following table sets forth, for the fiscal years indicated, the percentages which selected items in the Company's consolidated statements of operations bear to total revenues:

        (See Item 1. Business—Description of Principal Business and Principal Products for discussion about the Company's Products and Divisions. See also Note 15 to the Consolidated Financial Statements—Segment Information)

Fiscal 2005 Compared to Fiscal 2004

Net Sales

        Consolidated net sales increased $6,148,000 for fiscal 2005 or 8.0% compared to fiscal 2004 net sales. The Display segment increased $4,013,000 or 6.6% while the wholesale parts segment increased $2,135,000 or 13.2% for the comparative periods.

        The net increase in Display segment sales in fiscal 2005 is attributed to continued growth in monitor revenues of $4,906,000, as well as increases within the data display revenues of $708,000 compared to the prior fiscal year. There were offsetting declines within the home entertainment and component parts revenues of $1,292,000 and $309,000, respectively.

        Increases in monitor revenues reflect new contracts with Boeing Co., Lockheed Martin, and others, which began in fiscal 2004. Specifically, Display Systems and Aydin Displays posted increases of $5,364,000 and $3,134,000, respectively compared to fiscal 2004. There were offsetting declines of $3,524,000 at Lexel during the year due to the fact that Lexel completed one of its major contracts during fiscal 2004. Lexel's other product lines, however, maintained backlogs of $9,291,000 at February 28, 2005.

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        Increases in data display revenues are attributed primarily to Management's decision in late fiscal 2004 to distribute commercial and military projection tube displays from its Data Display location in Tucker, Georgia. These projection tube displays carry a higher price per unit than its' normal inventory.

        Within the entertainment division, sales declined $1,292,000 compared to fiscal 2004. There were declines of $247,000 at the Novatron location, which is a result of management's decision in late fiscal 2004 to distribute projection tube displays from its Data Display location, which is a part of the data display division. The Magnaview location showed decreases of $142,000 compared to last fiscal year. Management closed this location in January 2005 and merged its operations with its Chroma location in White Mills, PA as of February 1, 2005. The Chroma location showed decreases of $905,000 compared to fiscal 2004, which is a result of weaker demand in the television tube replacement market. The Company is the primary supplier of replacement television CRTs to the domestic entertainment market. A majority of the entertainment division's sales (37%) are to major television retailers as replacements for products sold under manufacturer and extended warranties. Due to continued lower retail sales prices for mid-size television sets (25" to 30"), fewer extended warranties were sold by retailers, a trend consistent with the past two fiscal years. The Company remains the primary supplier of product to meet manufacturers' standard warranties. Growth in this division will be negatively impacted by the decreasing number of extended warranties sold for the larger, more expensive sets.

        Sales of component parts declined $309,000 compared to the fiscal year ended February 29, 2005. Sales of these parts have declined over the past two fiscal years due to weaker demand for electron gun and stem sales. Electron gun sales have historically been dependent upon the demand by domestic and foreign television CRT remanufacturers. These sales have declined over the past few years as consumers move towards purchasing new technology as opposed to repairing existing sets. The Company's Wintron location is in the process of transitioning to two newer camera technologies. One such technology will assist border guards with under car inspections and another will assist correctional facilities with the supervision of inmates. If successful, the Company believes these new technologies will have a positive impact on the component division sales.

        Within the wholesale parts segments, sales were positively impacted by the addition of a new call center in fiscal 2005. This call center added approximately $3,153,000 in new sales for the fiscal year, which was offset by declines in other areas of that segment's business of $1,018,000.

Gross Margins

        Consolidated gross profit margins remained unchanged at 32.6% for the year ended February 28, 2005 as compared to the fiscal year ended February 29, 2004. Display margins decreased slightly to 29.3% from 29.6% and the wholesale electronic parts margins remained relatively unchanged at 44.4% for the year ended February 28, 2005 as compared to 44.0% at February 29, 2004.

        Within the Display segment, data display gross margins decreased from 19.1% at February 29, 2004 to 16.2% at February 28, 2005. During the fourth quarter of fiscal 2005, management decided to increase its reserve for inventory obsolescence within this division. Excluding the effects of this adjustment, gross margins for data display would've been 20.9% for the year ended February 28, 2005, which reflects the positive impact of management's decision to distribute higher margin projection tubes from its Data Display location in Tucker, GA. Gross margins in home entertainment CRTs decreased from 42.6% at February 29, 2004 to 36.7% at February 28, 2005. This reflects lower sales volume for the comparable periods. Revenues decreased $1,292,000 for the comparable periods. In monitors/projectors, gross margins increased from 29.1% to 30.4% for the comparable periods. This increase is attributable to increases in revenues of $4,906,000. Revenues increased without a corresponding increase in costs by improving production efficiency as fixed costs were absorbed by greater production. Gross margins from component parts sold decreased from 58.4% to 56.1% for the comparable periods. This decrease was due to decreases in sales within this division of $309,000 for the comparable periods.

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Operating Expenses

        Consolidated operating expenses as a percentage of sales remained flat at 24.4% for the year ended February 28, 2005 as compared to the year ended February 29, 2004.

        Display segment operating expenses increased $359,000, while operating expenses for the consumer parts distribution segment increased $1,154,000. Within the Display segment, most of this increase was posted within the monitor operations as increased growth has required additional administrative support. The Company's Cape Canaveral operations have added 20 people during the fiscal year ended February 28, 2005. Within the consumer parts distribution segment, these increases reflect additional labor and overhead associated with its new call center that was opened in fiscal 2005.

Interest Expense

        Interest expense decreased $47,000 for the year ended February 28, 2005 as compared to the year ended February 29, 2004. The Company maintains various debt agreements with different interest rates, most of which are based on the prime rate or LIBOR. LIBOR and prime rates were slightly lower during the comparable periods.

Income Taxes

        The effective tax rate for fiscal 2005 was 36.9% compared to 37.6% for fiscal 2004.

Fiscal 2004 Compared to Fiscal 2003

Net Sales

        Consolidated net sales increased $10,000 for fiscal 2004 or less than 1% over fiscal 2003 net sales. The Display segment increased $838,000 or 1.4% while the wholesale parts segment sales decreased $828,000 or 4.9% for the comparative periods.

        The net increase in Display segment sales in fiscal 2004 is attributed to growth in revenues from monitors and projectors sales of $3,483,000. This increase is attributed in large part to stronger demand from military and defense contractors. Offsetting declines occurred in net sales of the data display, entertainment, and component parts divisions of $1,604,000, $649,000 and $392,000, respectively.

        The net gain in monitor and projector sales includes increases from Display Systems of $4,367,000, Aydin Displays of $1,903,000 and XKD of $467,000 (cockpit displays). These increases reflect revenues from new contract orders received from the Boeing Co., Lockheed Martin and others during fiscal 2004. There were offsetting declines during the fiscal year of $941,000 at the Lexel operation. One of its major contracts was completed during fiscal 2004, though Lexel's other product lines, including direct view storage tubes, maintained backlogs of $9,203,000 at February 29, 2004. The other offsetting declines were the result of the Company's decision to close two locations, MegaScan and Wolcott, in fiscal 2003. These two locations provided net sales of $270,000 and $868,000 during the 2003 fiscal year. Management attributes the overall increase within this segment to increased demand within the defense sector. Revenue on new government orders was $9,865,000 for the 2004 fiscal year.

        Declines in the data display revenues of $1,604,000 for fiscal 2004 compared to 2003 continue to reflect the continued sluggish replacement market for CRTs. These declines are due to decreased unit sales in fiscal 2004 and not to the loss of any particular customers. These declines are also a reflection of customer decisions to purchase new monitors with updated products and technologies instead of repairing older monitors. The Company reduced bulk purchases of last time buys of CRTs in an effort to lower the Company's exposure to potential future declines in demand.

        Component parts revenue declined by $392,000 for the fiscal year ended 2004 as compared to a year ago. Electron gun and stem sales were negatively impacted by weaker demand during the fiscal

15

year, while the Company's Wintron location was negatively impacted as they transition to newer technologies. Electron gun sales have historically been dependent upon the demand by domestic and foreign television CRT remanufacturers. These sales have declined as consumers move towards purchasing new technology as opposed to repairing existing sets.

        Net revenues from projection tube CRTs decreased $52,000, while declines in sales of replacement television CRTs totaled $597,000 for the year ended February 29, 2004 as compared to the same period in the previous fiscal year. The Company is the primary supplier of replacement television CRTs to the domestic entertainment market. A majority of the entertainment CRT sales (37%) are to major television retailers as replacements for products sold under manufacturer and extended warranties. Due to continued lower retail sales prices for mid-size television sets (25" to 30"), fewer extended warranties are sold by retailers, a trend consistent with the two previous fiscal years. The Company remains the primary supplier of the manufacturer's standard warranties. Growth in home entertainment CRT sales is expected to be impacted by the timing and number of extended warranties sold for the larger, more expensive sets. Due to the fact that the Company is in the replacement market, it has the ability to track retail sales trends and, accordingly, can attempt to adjust quantities of certain size CRTs carried in stock and reduce the exposure to obsolescence. In fiscal 2004, retail trends continued to indicate increased sales in the mid-to-larger size television sets.

        Flat panel technology has not had a significant impact on the television replacement market. Most of the flat panel units sold within the television market are for commercial usage rather than end user consumer usage. Within the data display and monitor divisions, there has been an impact by flat panel technology. The Company has converted manufacturing of certain subsidiaries within these divisions to produce flat panel products. The Company's XKD and Aydin subsidiaries flat panel sales for fiscal 2004 comprised approximately 50% and 90% of their total net sales, respectively.

        The decrease in the wholesale consumer parts segment net sales of $828,000 is attributed primarily to the declines in sales under the distribution sales agreements of parts and accessories for Applica and Norelco product lines. These declines were attributed primarily to the sluggish market for original consumer electronic parts, which also negatively impacted repair and warranty sales of this segment.

Gross Margins

        Consolidated gross profit margins increased to 32.6% from 25.5% for the year ended February 29, 2004 as compared to the year ended February 28, 2003. Display segment margins increased from 19.6% to 29.6% and the wholesale electronic parts segment margins decreased from 46.0% to 44.0%.

        Display segment margins were impacted by a variety of factors. The Company's monitor sales increased 8.2% while cost of sales increased 2.2%. An increase of high volume orders in 2004 versus 2003 helped keep costs down by improving production efficiency as fixed costs were absorbed by greater throughput. To a lesser extent, Data Display sales experienced higher margins due to the Company's ability to purchase CRTs from cheaper outside sources, as opposed to manufacturing these products at the former Mexico subsidiary. Purchases from these outside sources average approximately $17 per CRT as opposed to $37 per CRT from the former Mexico subsidiary. Fiscal 2003 included write-downs and write-offs of inventories and manufacturing equipment of $4,754,000 related to the closing of operations of Mexico, Wolcott, MegaScan, and Aydin UK locations. Excluding the effects of these adjustments, Display segment margins would have been 27.8% for fiscal 2003. Additionally, several CRT locations with higher volume, particularly Aydin, Display Systems and XKD, were able to achieve these increases without adding comparable fixed overhead and as such their margins were generally improved.

        The decrease in the wholesale consumer parts segment margins is largely attributable to the overall decrease in sales related to the Applica and Norelco distribution agreements. The revenues associated

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with these agreements include primarily handling charges and shipping income, which accounts for an approximately 79% profit margin before the effects of offsetting operating expenses.

Operating Expenses

        Operating expenses as a percentage of sales decreased from 28.9% for the year ended February 28, 2003 to 24.4% for the year ended February 29, 2004.

        Included in operating expenses for fiscal 2003 were write-offs of accounts receivable and other assets in the amount of $572,000 related to the Mexico manufacturing location that was shut down. A non-cash charge of $1,296,000 was also recognized in fiscal 2003 for the cumulative foreign currency translation adjustment to reflect the impairment of the Company's investment in the Mexican subsidiary. Excluding the effects of these adjustments, operating expenses as a percentage of sales would have been 26.5% for fiscal 2003.

        Excluding the above adjustments, Display segment expenses decreased $1,691,000 and Wholesale Parts segment expenses increased $116,000. The closure of the three facilities, relocation of the Aydin facility and other cost cutting programs implemented in late fiscal 2003 resulted in the decreased CRT expense. Specifically, the closure of the Wolcott, MegaScan and Mexico operations resulted in savings of $105,000, $359,000 and $1,295,000 of operating costs, respectively. The savings are due to a reduction of compensation expense caused by the decrease in personnel and a reduction in overhead caused by the closures of these facilities in the prior year. Increases to the Wholesale Parts segment include increases to warehouse rent and labor of approximately $57,000, as well as corporate expenses totaling $41,000 allocated during fiscal 2004 that were not allocated previously.

Interest Expense

        Interest expense decreased $311,000 for the year ended February 29, 2004 as compared to February 28, 2003. The Company maintains various debt agreements with different interest rates, most of which are based on the prime rate or LIBOR. LIBOR and prime rates were slightly lower during the comparable periods. Overall debt decreased during the comparative periods by $5,386,000, which was the primary reason for the decrease in interest expense.

Income Taxes

        The effective tax rate for fiscal 2004 was 37.6% compared to (23.9)% for fiscal 2003. The effective tax rate for 2004 was lower than the Federal statutory rate due to differences between income tax and financial reporting purposes relating primarily to the effect of state income taxes and the non-deductibility of certain expenses for tax purposes.

Management's Discussion of Liquidity and Capital Resources

        At February 28, 2005 and February 29, 2004, the Company had total cash and cash equivalents of $1,471,000 and $3,021,000, respectively. The Company's working capital was $37,220,000 and $31,947,000 at February 28, 2005 and February 29, 2004, respectively. In recent years, the Company has financed its growth and cash needs primarily through income from operations, borrowings under revolving credit facilities and long-term debt.

        The Company specializes in certain products representing trailing-edge technology that may not be available from other sources, and may not be currently manufactured. In many instances, the Company's products are components of larger display systems for which immediate availability is critical for the customer. Accordingly, the Company enjoys higher gross margins, but typically has larger investments in inventories than those of its competitors.

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        The Company continually monitors its cash and financing positions in order to find ways to lower its interest costs and to produce positive operating cash flow. The Company examines possibilities to grow its business as opportunities present themselves, such as new sales contracts or niche acquisitions. There could be an impact on working capital requirements to fund this growth. As in the past, the intent is to finance such projects with operating cash flows or existing bank lines; however, more permanent sources of capital may be required in certain circumstances. In March 2004, the Company signed an agreement in principle to acquire the assets of Colorado based Data-Ray Corporation's CRT monitor operations. The asset purchase included the issuance of the Company's common stock and cash to the seller of $550,000 total consideration. The transaction closed in the first quarter of fiscal 2005. In November 2004, the Company purchased inventories, fixed assets and intangible assets of Evans & Sutherland for $5,250,000 cash.

        Cash provided by operations was $2,350,000 in 2005, $7,148,000 in 2004 and $3,009,000 in 2003. Working capital requirements increased $3,963,000 in 2005 due primarily to greater investments in inventory within the Company's monitor operations related to contracts begun in fiscal 2004. Working capital requirements decreased $908,000 in 2004 due primarily to improved inventory management resulting in a $1,006,000 decrease in inventories, net of reserves. Compared to prior years, inventory turnover has remained flat and the Company has reduced its bulk purchases of last time buys of CRTs as it anticipates future reduced demand for these products in the replacement market. Working capital requirements increased $1,974,000 in 2003 due primarily to purchase requirements within the monitor divisions related to contracts that began in the fourth quarter of that year, $1,754,000, and to reductions in accounts payable and accrued liabilities of $1,722,000 from cash generated from earnings, offset somewhat by reductions in accounts receivable of $943,000 due to better collection efforts within the data display and monitor divisions. The average days outstanding for accounts receivable decreased from 58 days in fiscal 2003 to 53.5 days in fiscal 2004, due to more aggressive collection efforts.

        Investing activities used cash of $6,169,000, $697,000 and $1,106,000 in 2005, 2004 and 2003, respectively. In 2005, the primary use of cash was related to the acquisition of inventories and related assets of Evans & Sutherland, Inc. This asset acquisition of $5,250,000 was integrated into the Company's Cape Canaveral, Florida facility. Capital expenditures were $769,000 in 2005 as compared to $727,000 and $1,137,000 in 2004 and 2003, respectively. Capital expenditures in 2005 and 2004 were primarily for building improvements and computer hardware. Capital expenditures in 2003 primarily related to additions to the facility in Birdsboro, Pennsylvania and fixed assets and trademarks purchased to assist in the integration of the Christie projector product line at the Cape Canaveral, Florida facility. Additions to debt of $463,000 in 2003 were incurred to finance a portion of the building addition costs. The Company does not anticipate any significant investment in capital assets for 2005.

        Financing activities provided cash of $2,318,000 in 2005 and used cash of $5,942,000 and $1,217,000 in 2004 and 2003. During 2005, the Company used cash of $14,358,000 from its new line of credit to pay off its original line of credit, plus a term note and a note to an officer of the Company. Cash of $5,250,000 was also used to fund the purchase of assets of Evans and Sutherland, Inc. The Company also paid a cash dividend during 2005 of $392,000 or $0.04 per share. During 2004 and 2003, the Company used cash of $4,386,000 and $840,000, respectively, towards debt reduction. The Company paid a cash dividend in fiscal 2004 of $245,000 or $0.05 per share. Though the Company's primary objective is to reduce debt and grow through acquisitions, the Board also believed that the benefits of a cash dividend to shareholders under the new tax laws regarding dividends needed to be considered.

        In 2004, the Company signed an agreement with its primary lender to provide for a new two-year revolving line of credit in the amount of $12,000,000 to replace the existing $9,500,000 line. The interest rate on the new revolver is variable based upon the ratio of senior funded debt to EBITDA. At February 29, 2004, the floating rate was 3.6% but can increase or decrease in a range of 1.75% to 2.50% spread over LIBOR rates. Also in 2004, the Company entered into an agreement with another

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of its lenders to replace its $2,500,000 term note with a secured one-year line of credit in the amount of $2,750,000. The interest rate on the new line is prime plus one percent and is limited to available borrowings based on receivables and inventories.

        In November 2004, the Company finalized a new line of credit to replace its' prior credit facility. Under the terms of this new facility, the bank paid off the existing line of credit, as well as the term note collateralized by the assets of Aydin, Inc., a note due to an officer of the company and the loan from the Chief Executive Officer used to finance the purchase of the Evans & Sutherland, Inc. assets. The maximum amount available for borrowings under this new line is $27,500,000 compared to $12,000,000 under the prior facility. Proceeds from this line are available for working capital needs of the Company and are subject to various covenants. As of February 28, 2005, the Company was in compliance with all covenants.

        The Company's debt agreements with financial institutions contain affirmative and negative covenants, including requirements related to tangible net worth and debt service coverage and new loans. Additionally, dividend payments, capital expenditures and acquisitions have certain restrictions. Substantially all of the 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 the Company's common stock in the open market. In 2004 and 2003, 231,000 shares and 61,000 shares were repurchased for $1,574,000 and $414,000, respectively. No shares were repurchased in fiscal 2002. Under this program, an additional 170,500 shares remain authorized to be repurchased by the Company.

        In 2004, the Company redeemed $100,000 of common stock previously issued for the purchase of inventory. Issuances of common stock, primarily through stock option exercises, provided cash of $363,000 in 2004. Dividend payments in 2004 amounted to $245,000, which were the first dividends declared and paid by the Company in its history. The policy regarding future payments of dividends will be reviewed periodically by the Board of Directors and will be based on the earnings and financial position of the Company and other factors which the Board of Directors deems appropriate.

        Subsequent to year end, the Company finalized and agreement with Bank of America to replace its secondary line of credit with Fifth Third Bank with a new $3,500,000 credit facility. As part of the agreement, the Company paid off the balance of the prior facility as well as a mortgage held with Fifth Third bank.

Transactions with Related Parties, Contractual Obligations and Commitments

        At February 29, 2004, the Company had outstanding borrowings from its CEO in the amount of $8,216,000, with principal due in 2006 and monthly interest due at the higher rate of 6% or prime (4.25% at February 29, 2004) plus 1%. During November 2004, the Company negotiated a credit facility with a new lender. As part of the new agreement, the bank agreed to pay off the amount due to the Company's CEO, and accordingly, at February 28, 2005, the balance due to him was $0.

        During fiscal 2004, the Company repaid $80,000 to an Officer and Director, resulting in a balance of $75,000 at February 29, 2004. Principal payments of $120,000 were made in fiscal 2005, while an additional $240,000 was borrowed during the fiscal year, resulting in a balance of $195,000 at February 28, 2005. These borrowings bear interest at 6%.

        The Company issued $2,000,000 in face value, 8% five-year convertible subordinated debentures in payment of the acquisition of the stock of Z-Axis in 1997. The debentures were issued to the former owners of Z-Axis, of which the Company's CEO was a majority shareholder. The debentures were convertible at the holder's option into the Company's common shares based upon a conversion rate of $4.17 per share, as adjusted for the April 2001 stock dividend. During 2002, $775,000 of debentures plus accrued interest was converted into 186,068 common shares. In 2004, the Company's CEO, in

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accordance with the provisions of his subordinated debt agreement, converted his remaining $1,000,000 debentures into 240,000 common shares.

Contractual Obligations

        Future maturities of long-term debt and future contractual obligations due under operating leases are as follows (in thousands):

(a)

This line item was calculated by utilizing the weighted average rate on outstanding long-term debt as of February 28, 2005.

Off-Balance Sheet Arrangements

        Except for operating leases, the Company historically has not relied upon off-balance sheet arrangements (such as sale-leasebacks), transactions or relationships that would materially affect liquidity or the availability of, or requirements for, capital resources.

Critical Accounting Policies

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

Reserves on inventories

        Reserves on inventories result in a charge to operations when the estimated net realizable value declines below cost. Management regularly reviews the Company's investment in inventories for declines in value and establishes reserves when it is apparent that the expected net realizable value of the inventory falls below its carrying amount. Management attempts to determine by historical usage analysis and interchangeability of CRT types along with repair contracts currently maintained by its customers, as well as numerous other market factors, the projected demand for CRTs in this estimate of net realizable value. Management is able to identify consumer buying trends, such as size and application, well in advance of supplying replacement CRTs. Thus, the Company is able to adjust inventory-stocking levels according to the projected demand. The average life of a CRT is five to seven

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years, at which time the Company's replacement market develops. Management reviews inventory levels on a quarterly basis. Such reviews include observations of product development trends of the OEM's, new products being marketed, and technological advances relative to the product capabilities of the Company's existing inventories. There have been no significant changes in management's estimates in fiscal 2005 and 2004; however, the Company cannot guarantee the accuracy of future forecasts since these estimates are subject to change based on market conditions.

        In fiscal 2005, the Company wrote off approximately $835,000 of inventory. The Company wrote off approximately $1,373,000 of inventory in fiscal 2004 related to changing market conditions affecting primarily its Southwest Vacuum and Fox International businesses. The reserve for inventory obsolescence was approximately $3,057,000 and $2,506,000 at February 28, 2005 and February 29, 2004, respectively. Amounts written off in 2005, 2004 and 2003 were $835,000, $1,373,000 and $4,254,000, respectively.

Revenue Recognition

        Revenue is recognized on the sale of products when the products are shipped, all significant contractual obligations have been satisfied, and the collection of the resulting receivable is reasonably assured. The Company's delivery term typically is F.O.B. shipping point.

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

        A portion of the Company's revenue is derived from contracts to manufacture CRTs to a buyers' specification. These contracts are accounted for under the provisions of the American Institute of Certified Public Accountants' Statement of Position No. 81-1, "Accounting for Performance of Construction-Type and Certain Production-Type Contracts". These contracts are fixed-price and cost-plus contracts and are recorded on the percentage of completion basis using the ratio of costs incurred to estimated total costs at completion as the measurement basis for progress toward completion and revenue recognition. Any losses identified on contracts are recognized immediately. Contract accounting requires significant judgment relative to assessing risks, estimating contract costs and making related assumptions for schedule and technical issues. With respect to contract change orders, claims or similar items, judgment must be used in estimating related amounts and assessing the potential for realization. These amounts are only included in contract value when they can be reliably estimated and realization is probable.

        The Wholesale Parts segment has several distribution agreements that it accounts for using the gross revenue basis as prescribed by EITF 99-19. The Company uses the gross method because the Company has general inventory risk, physical loss inventory risk and credit risk. The call center service revenue is recognized based on written pricing agreements with each manufacturer, on a per call, per email or per standard mail basis.

Allowance for bad debts

        The allowance for bad debts is determined by reviewing all accounts receivable and applying historical credit loss experience to the current receivable portfolio with consideration given to the current condition of the economy, assessment of the financial position of the creditors as well as past payment history and overall trends in past due accounts compared to established thresholds. The Company monitors credit exposure and assesses the adequacy of the allowance for bad debts on a regular basis. Historically, the Company's allowance has been sufficient for any customer write-offs. Although the Company cannot guarantee future results, management believes its policies and procedures relating to customer exposure are adequate.

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Warranty reserves

        The warranty reserve is determined by recording a specific reserve for known warranty issues and a general reserve based on historical claims experience. The Company considers actual warranty claims compared to net sales, then adjusts its reserve liability accordingly. Actual claims incurred could differ from the original estimates, requiring adjustments to the reserve. Management feels that historically its procedures have been adequate and does not anticipate that its assumptions are reasonably likely to change in the future.

Other Accounting Policies

        Other loss contingencies are recorded as liabilities when it is probable that a liability has been incurred and the amount of the loss is reasonably estimable. Disclosure is required when there is a reasonable possibility that the ultimate loss will exceed the recorded provision. Contingent liabilities are often resolved over long time periods. Estimating probable losses requires analysis of multiple factors that often depend on judgments about potential actions by third parties.

Recent Accounting Pronouncements

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

        In November 2004, the FASB issued Statement of Financial Accounting Standards No. 151 ("SFAS No. 151"), Inventory Costs, an amendment of APB No. 43, Chapter 4. The amendments made by SFAS No. 151 will improve financial reporting by requiring that abnormal amounts of idle facility expense, freight, handling costs, and wasted materials (spoilage) be recognized as current-period charges and by requiring the allocation of fixed production overheads to inventory based on the normal capacity of production facilities. SFAS No. 151 is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. Earlier application is permitted for inventory costs incurred during fiscal years beginning after November 24, 2004. The Company is currently evaluating the impact that adoption of SFAS No. 151 will have on its financial position and results of operations.

Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995

        Except for the historical information contained herein, the matters discussed in this Annual Report on Form 10-K are forward-looking statements relating to future events which involve certain risks and uncertainties. Further, there can be no assurance that the trends reflected in historical information will continue in the future.

        Investors should consider carefully the following risk factors, in addition to the other information included and incorporated by reference in this annual report on Form 10-K. All statements other than statements of historical facts included in this report are statements that constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934. The words "expect", "estimate", "anticipate", "predict", "believe" and similar expressions and variations thereof are intended to identify forward-looking statements. Such statements

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appear in a number of places in this report and include statements regarding the intent, belief or current expectations of the Company, its directors or its officers with respect to, among other things: (i) trends affecting the Company's financial condition or results of operations; (ii) the Company's financing plans; (iii) the Company's business and growth strategies, including potential acquisitions; and (iv) other plans and objectives for future operations. Investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties and that actual results may differ materially from those predicted in the forward-looking statements or which may be anticipated from historical results or trends. In addition to the information contained in the Company's other filings with the Securities and Exchange Commission, factors which could affect future performance include, among others, the following:

•

General economic or business conditions, domestic and foreign, may be less favorable than expected, resulting in lower sales or lower profit margins than expected and contrary to historical trends.



•

Competitive pressures may increase or change through industry consolidation, entry of new competitors, marketing changes or otherwise. There can be no assurance that the Company will be able to continue to compete effectively with existing or potential competitors.



•

Technological changes may affect the marketability of inventory on hand.



•

Changes in relationships with customers or vendors, the ability to develop new relationships or the business failure of several customers or vendors may affect sales or profitability.



•

Political, legislative or regulatory changes may adversely affect the businesses in which the Company operates.



•

Changes in securities markets, interest rates or foreign exchange rates may adversely affect the Company's performance or stock price.



•

The failure to obtain or retain key executive or technical personnel could affect future performance.



•

The Company's growth strategy includes expansion through acquisitions. There can be no assurance that the Company will be able to successfully complete further acquisitions or that past or future acquisitions will not have an adverse impact on the Company's operations.



•

The potential future sale of Common Stock shares, possible anti-takeover measures available to the Company, and dividend policies may affect the stock price.



•

The continued availability of financing on favorable terms cannot be assured.

Impact of Inflation

        Inflation has not had a material effect on the Company's results of operations to date.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

        The Company's primary market risks include fluctuations in interest rates and variability in interest rate spread relationships, such as prime to LIBOR spreads. Approximately $23,604,000 of outstanding debt at February 28, 2005 related to long-term indebtedness under variable rate debt. Interest on the outstanding balance of this debt will be charged based on a variable rate related to the prime rate or the LIBOR rate. Both rate bases are incremented for margins specified in their agreements. Thus, the Company's interest rate is subject to market risk in the form of fluctuations in interest rates. The effect of a hypothetical one percentage point increase across all maturities of variable rate debt would result in a decrease of approximately $236,000 in pre-tax net income assuming no further changes in the

23

amount of borrowings subject to variable rate interest from amounts outstanding at February 28, 2005. The Company does not trade in derivative financial instruments.

        The Company has a subsidiary in the U.K., which is not material, but uses the British pound as its functional currency. Due to its limited operations outside of the U.S., the Company's exposure to changes in foreign currency exchange rates between the U.S. dollar and foreign currencies or to weakening economic conditions in foreign markets is not expected to significantly effect the Company's financial position.

        Beginning January 1, 1997, the Company reported its former Mexican subsidiary on the basis of the functional currency being the U.S. dollar as over 90% of the subsidiary's sales and purchases were with the parent with accounts receivable and accounts payable settled in U.S. dollars. Due to the closure of the Mexican subsidiary in fiscal 2003, cumulative foreign currency translation losses of $1,296,000 previously included as a separate component of shareholders' equity were recognized in operating expense. These translation losses accumulated prior to January 1, 1997, when the functional currency of this subsidiary was the Mexican peso.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

        The financial statements listed on page F-1 of this Report are filed as part of this Report on the pages indicated.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES

        None.

ITEM 9A. CONTROLS AND PROCEDURES

Evaluation of disclosure controls and procedures.

        Based on their evaluation as of February 28,2005, our Chief Executive Officer and Chief Financial Officer, have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) were not sufficiently effective to ensure that the information required to be disclosed by us in this Annual Report on Form 10-K was recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and Form 10-K. The areas of the internal controls that are deemed by Management to contain material weakness surround the failure to retain financial reporting personnel necessary to properly identify and record in a timely fashion, non-routine transactions and to prepare financial statements and related disclosures timely; and the failure of Management to routinely review and approve on a monthly basis all repetitive and non-repetitive journal entries made at divisional levels, to ensure that all entries were made and calculated properly, which could effect the reported results for the accounting period.

Changes in internal controls.

        The control weakness stated in the above Evaluation of Procedures requires the Company to make changes in internal controls over financial reporting. The Company is actively seeking additional financial reporting personnel with the requisite skills; a change in controls to require that Corporate Management review and approve the accounting for all non-routine transactions entered into; and a change in controls to require that Company divisional accounting personnel be required to submit all non-repetitive monthly, or other period, journal entries to Corporate Management for review and approval prior to entry into divisional or corporate records. Management believes that these changes in

24

review procedures and the addition of financial reporting personnel will ensure that the disclosed weakness in reporting procedures no longer should have a material effect on financial reporting.

Limitations on the effectiveness of controls.

        Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within Video Display Corp. have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, control may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

ITEM 9B. OTHER INFORMATION

        None.

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PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

        The information contained in Video Display Corporation's Proxy Statement to be filed within 120 days of the Company's 2005 fiscal year end (the "2005 Proxy Statement"), with respect to directors and executive officers of the Company under the headings "Election of Directors" and "Executive Officers", is incorporated herein by reference in response to this item; provided, however, that the information contained in the 2005 Proxy Statement under the heading "Compensation and Stock Option Committee Report" or under the heading "Performance Graph" shall not be incorporated herein by reference.

ITEM 11. EXECUTIVE COMPENSATION

        The information contained in Video Display Corporation's Proxy Statement to be filed within 120 days of the Company's 2005 fiscal year end under the heading, "Executive Compensation and Other Benefits", with respect to executive compensation, is incorporated herein by reference in response to this item.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

        The information contained in the 2005 Proxy Statement under the headings "Common Stock Ownership" and "Executive Compensation and Other Benefits", is incorporated herein by reference in response to this item.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

        The information contained in the 2005 Proxy Statement under the heading, "Transactions with Affiliates", is incorporated herein by reference in response to this item.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

        The information contained in the 2005 Proxy Statement under the heading, "Audit Fees and All Other Fees" is incorporated herein by reference in response to this item.

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PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

*

Incorporated by reference to other documents on file with the Securities and Exchange Commission which were previously filed.

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SIGNATURES

        Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

POWER OF ATTORNEY

        Know all men by these presents, that each person whose signature appears below constitutes and appoints Ronald D. Ordway as attorney-in-fact, with power of substitution, for him in any and all capacity, to sign any amendments to this Report on Form 10-K, and to file the same, with exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that said attorney-in-fact may do or cause to be done by virtue hereof.

        Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

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Video Display Corporation and Subsidiaries

Index to Consolidated Financial Statements

F-1

Report of Independent Registered Public Accounting Firm

Board of Directors and Shareholders of
Video Display Corporation
Tucker, Georgia

        We have audited the accompanying consolidated balance sheets of Video Display Corporation and subsidiaries as of February 28, 2005 and February 29, 2004, and the related consolidated statements of operations, shareholders' equity and comprehensive income (loss) and cash flows for each of the three years in the period ended February 28, 2005. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

        We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of their internal control over financial reporting. Our audits include consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness on the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

        In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Video Display Corporation and subsidiaries as of February 28, 2005 and February 29, 2004, and the results of their operations and their cash flows for each of the three years in the period ended February 28, 2005, in conformity with accounting principles generally accepted in the United States of America.

F-2

Video Display Corporation and Subsidiaries

Consolidated Balance Sheets

See accompanying notes to consolidated financial statements.

F-3

Video Display Corporation and Subsidiaries

Consolidated Balance Sheets

See accompanying notes to consolidated financial statements.

F-4

Video Display Corporation and Subsidiaries

Consolidated Statements of Operations

See accompanying notes to consolidated financial statements.

F-5

Video Display Corporation and Subsidiaries

Consolidated Statements of Shareholders' Equity and Comprehensive Income (Loss)