VIDEO DISPLAY CORP - Annual Report: 2006 (Form 10-K)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 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 is a well known seasoned issuer, as defined in Rule 405 of the Securities Act.
YES   o   NO   x

Indicate by check mark whether the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
YES   o   NO   x

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   x   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.   x

Indicate by check mark whether the registrant is a large accelerated filer, and accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer   o         Accelerated filer   o         Non-accelerated filer   x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of
1934). YES   o   NO   x

As of August 31, 2005, 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 $56,500,000.

The number of shares outstanding of the registrant’s Common Stock as of May 15, 2006 was 9,622,000.

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 2006 Annual Meeting of Stockholders in Part III.

VIDEO DISPLAY CORPORATION
TABLE OF CONTENTS

 

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 fiscal 2005, the Company added a call center, which was relocated and enlarged during fiscal 2006, and 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. Refer to comments under the caption “Forward looking statements and risk factors” in Item 1A. Risk Factors of this Annual Report on Form 10-K.

Description of Principal Business

The Company generates revenues from four related display oriented businesses (78% of consolidated sales in fiscal 2006) as well as distribution of parts and accessories for consumer products (22% of consolidated sales in fiscal 2006). Substantially all of the Company’s earnings were derived from the display segment of the business in fiscal 2006. Revenues, by category, from the display segment for fiscal 2006 were as follows:

Monitor revenue (76.7%)

Home Entertainment CRT revenue (5.6%)

Data Display CRT (16.6%)

Components (1.1%)

See Note 15. “Segment Information” to the Consolidated Financial Statements.

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 agents located 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. The Company anticipates that 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 $1.3 million in fiscal 2006) in both high resolution projection displays and active matrix liquid crystal display (“AMLCD”) technologies.

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Segment Information

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

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 59.5% of fiscal 2006 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 Company’s acquisition of the ESCP® CRT line of calligraphic projectors from Evans & Sutherland, Inc. in the third quarter of fiscal 2005 allowed the Company to expand into the commercial flight training simulation market. The primary components for the ruggedized product line consist of projection systems, 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 Company’s 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.

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The Company maintains the capability of manufacturing a full range of monochrome CRTs as well as remanufacturing color CRTs from recycled glass. Also, our Teltron and Lexel operations 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 United Laboratories.

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 sell 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 150 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 $221,000, $297,000 and $835,000 for fiscal 2006, 2005 and 2004, respectively.

The remaining operation in the component division, Wintron, located in Howard, Pennsylvania, produces flyback transformers, coils and power transformers. Intercompany sales transactions were $48,000, $287,000 and $105,000 for fiscal 2006, 2005 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 high-definition television

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(“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 anticipated 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 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, and was relocated and significantly enlarged during fiscal 2006. 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 and processes all orders for distribution of the consumer electronic parts.

Patents and Trademarks

The Company is currently in the process of applying for 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 $104,000, $92,000 and $114,000 in fiscal 2006, 2005 and 2004, respectively. The Company believes that its patents and trademarks owned are of value, and 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. 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.

Seasonal Variations in Business

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

Working Capital Practices

The Company has a $27.5 million line of credit with Bank of America, and a $3.5 million secondary line of credit with Bank of America for Fox International. These lines are used primarily for the purchases of inventory and payments of accounts payable. See related comments under the caption “Management’s Discussion of Liquidity and Capital Resources” and “Subsequent Event” in Part II, Item 7. in this Annual Report of Form 10-K.

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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 41%, 37% and 21% of Display segment net sales and 32%, 29% and 16% of consolidated net sales in fiscal 2006, 2005 and 2004, respectively. Sales to foreign customers were 14%, 11% and 14% of consolidated net sales for fiscal 2006, 2005 and 2004, respectively. The Company’s wholesale electronic parts distributor, Fox International, had net sales to one customer, National Parts, Inc., that comprised approximately 25%, 24% and 19% of that subsidiary’s net sales in fiscal 2006, 2005 and 2004, respectively. The Company attempts to minimize credit risk by reviewing 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 $21.7 million at February 28, 2006 and $29.9 million at February 28, 2005. The Company’s Lexel division comprised $7.8 million or 36% and $9.3 million or 31% of the 2006 and 2005 backlog, respectively. It is anticipated that more than 95% of the February 28, 2006 backlog will ship during fiscal 2006.

Government Contracts

The Company, primarily through its Aydin, Teltron, Lexel 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 $26.9 million, $23.8 million and $17.0 million for the fiscal years ended 2006, 2005 and 2004, respectively. The Company’s costs and earnings in excess of billings on these contracts were approximately $1.0 million at February 28, 2006 and $0.7 million at February 28, 2005. The Company had billings in excess of costs and earnings on these contracts of approximately $1.0 million at February 28, 2006 and $0.5 million at February 28, 2005. These contracts are typically less than twelve months in duration and specify a delivery schedule for units ordered. Most of these government contracts specify a designated number of units to be delivered at a specified price, rather than on a cost plus 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

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applications. The Company has funded additional IR research in partnership with the University of Rhode Island. The Company believes that potential future markets for IR include military and security surveillance, target acquisition, fire fighting, and industrial and medical thermography. The Company includes research and development expenditures in the consolidated financial statements as a part of general and administrative costs. Research and development costs were approximately $1.3 million, $0.7 million and $0.2 million in fiscal 2006, 2005 and 2004, respectively.

Employees

As of February 28, 2006, the Company employed a total of 462 persons on a full time basis. Of these, 125 were employed in executive, administrative, and clerical positions, 122 were employed in sales and distribution, and 215 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, and 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 direct view storage tube (“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 and 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 and Display Systems, the Company has become one of the leading suppliers within the specialty display markets, especially in the military and medical imaging industries.

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The Company utilizes flat panel displays in many of its monitor units. These flat panels are purchased from OEMs. The revenue generated in fiscal 2006 from products utilizing flat panel technology was $13.1 million as compared to $8.9 million in Fiscal 2005. 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 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. There is competition in the area of flat panel technology and the Company will strive to rely on its ability to adapt and incorporate designs into its future products so that it may compete in a profitable nature. Currently, 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 1A.        RISK FACTORS.

Forward looking statements and risk factors

All statements other than statements of historical facts included in this report, including, without limitation, those statements contained in Item 1., 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 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.

Our Company operates in technology based markets that involve a number of risks, some of which are beyond our control. The following discussion highlights some risks and uncertainties that investors should consider, in conjunction with all other information in this Annual Report on Form 10-K. Additional risks and uncertainties not presently known to the Company may also impair the Company’s business and operations. If any of the following risks actually occur, the Company’s business, financial condition, cash flows or results of operations could be materially affected.

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Our industry is highly competitive and competitive conditions may adversely affect our business.

Our success depends on our ability to compete in markets that are highly competitive, with rapid technological advances and products that require constant improvement in both price and performance. In most of our markets we are experiencing increased competition, and we expect this trend to continue. This environment may result in changes in relationships with customers or vendors, the ability to develop new relationships or the business failure of customers or vendors, which may negatively impact our business. If our competitors are more successful than we are in developing new technology and products, our business may be adversely affected.

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.

Competitors or third parties may infringe our intellectual property.

The Company holds patents with respect to certain products and services. The Company also sells products under various trademarks and tradenames. Should competitors or third parties infringe these rights, costly legal processes may be required to defend our intellectual property rights, which could adversely affect our business.

Migration to flat panel and other technology may negatively impact our CRT business.

The Company acquires CRT tubes when the 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 may not sell as quickly as other inventories. If the Company is unable to manage CRT inventory levels in coordination with reduced future CRT demand due to the growth of flat panel technology, the marketability of inventory on hand may be affected and the Company may incur significant costs in the disposal of excess inventory.

The Company anticipates that flat panel and other technology products, due to their lower space and power requirements, will eventually become the display of choice in many display applications. In anticipation of long-term trends toward flat panel display usage, the Company has focused its efforts and its acquisition strategy toward flat panel technologies. If the Company is unable to successfully replace any future declines in CRT sales with products based on other technologies, our business may be adversely affected.

Future acquisitions may not provide benefits to the Company.

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.

Changes in government priorities may impact military spending, and our financial condition and results of operations could suffer if their purchases decline.

We currently derive a significant portion of our net sales (41% in fiscal 2006) from direct and indirect sales to the U.S. government. If we are unable to replace expiring contracts, which are typically less then twelve months in duration, with contacts for new business, our sales could decline and have a material adverse effect on our business, financial condition and results of operations. We expect that direct and indirect sales to the U.S. government will continue to account for a substantial portion of our sales in the

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foreseeable future. We have no assurance that these government-related sales will continue to reach or exceed historical levels in future periods.

If we are unable to retain certain key personnel and hire new highly skilled personnel, we may not be able to execute our business plan.

Our future success depends on the skills, experience and efforts of our senior managers. The loss of services of any of these individuals, or our inability to attract and retain qualified individuals for key management positions, could negatively impact our business.

Our business operations could be disrupted if our information technology systems fail to perform adequately.

We depend upon our information technology systems in the conduct of our operations and financial reporting. If our major information systems fail to perform as anticipated, we could experience difficulties in maintaining normal business operations. Such systems related problems could adversely affect product development, sales and profitability.

Changes to accounting rules or regulations may adversely affect our results of operations.

New accounting rules or regulations and varying interpretations of existing accounting rules or regulations have occurred and may occur in the future. Future changes to accounting rules or regulations or the questioning of current accounting practices, may adversely affect our results of operations.

The Company’s stock price may be negatively affected by a variety of factors.

In addition to any impact the Company’s operating performance, potential future Company sales of common stock, the Company’s dividend policies or possible anti-takeover measures available to the Company may have, changes in securities markets caused by general foreign or domestic economic, consumer or business trends, the impact of interest rate policies by the federal reserve board, and other factors outside the Company’s control may negatively affect our stock price.

Changes to estimates related to long term assets, or operating results that are lower than our current estimates, may cause us to incur impairment charges.

We make certain estimates and projections in connection with impairment analyses for goodwill and other long term assets in accordance with Financial Accounting Standards Board (FASB) Statements No. 142 “Goodwill and Other Intangible Assets” and No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets.” These calculations require us to make a number of estimates and projections of long term future results. If these estimates or projections change or prove incorrect, we may be required to record impairment charges. If these impairment charges are significant, our results of operations would be adversely affected.

International factors could negatively affect our business.

A significant portion of our net sales (14% in fiscal 2006) are made to foreign customers. We are subject to the risks inherent in conducting our business across national boundaries, many of which are outside of our control. These risks include the following:

·       Economic downturns;

·       Currency exchange rate and interest rate fluctuations;

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·       Changes in governmental policy, including, among others, those relating to taxation;

·       International military, political, diplomatic and terrorist incidents;

·       Government instability;

·       Nationalization of foreign assets; and

·       Tariffs and governmental trade policies.

We cannot ensure that one or more of these factors will not negatively affect our international customers and, as a result, our business and financial performance.

The cost and management resources required to implement Section 404  of the Sarbanes Oxley Act may adversely affect our results of operations; failure to implement controls timely may adversely affect our stock price.

Management of the Company has identified that as a small public company, we may not have a sufficient number of personnel with clearly delineated and fully documented responsibilities, and with the appropriate level of accounting expertise, under guidelines established by Section 404 of the Sarbanes-Oxley Act of 2002 (“SOX”). In addition, certain of the Company’s information systems which support the Company’s financial reporting may not meet current recommended standards. The SOX guidelines, as implemented based on rules promulgated by the Public Company Accounting Oversight Board (United States), may require the Company to implement significant changes to internal control procedures and incur substantial implementation costs. These costs may have a significant impact on our future results of operations. If the Company is not able to make changes necessary to meet these rules and guidelines in a timely manner, investors could lose confidence in the Company’s financial reporting, which may negatively affect our stock price.

Our level of indebtedness could adversely affect the future operation of our business.

Our level of indebtedness could have important consequences, including:

·       making it more difficult for us to make payments on the debt, as our business may not be able to generate sufficient cash flows from operating activities to meet our debt service obligations;

·       increasing our vulnerability to general economic and industry conditions;

·       requiring a substantial portion of cash flow from operating activities to be dedicated to the payment of our outstanding lines of credit and long-term debt, and as a result reducing our ability to use our cash flow to fund our operations and capital expenditures, capitalize on future business opportunities and expand our business and execute our strategy;

·       exposing us to the risk of increased interest rates as much of our borrowings are at variable rates of interest;

·       causing us to make non-strategic divestitures;

·       limiting our ability to obtain additional financing for working capital, capital expenditures, debt service requirements and other general corporate purposes; and

·       limiting our ability to adjust to changing market conditions and to react to competitive pressure and placing us at a competitive disadvantage compared to our competitors who may have lower debt leverage.

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Our debt agreements contain covenants that limit our flexibility in operating our business.

The agreements governing our indebtedness contain various covenants that limit our ability to engage in specified types of transactions, and which may adversely affect our ability to operate our business. Among other things, these covenants limit our ability to:

·       incur additional indebtedness;

·       make certain investments, loans or advances;

·       transfer and sell certain assets;

·       create or permit liens on assets;

·       consolidate, merge, sell or otherwise dispose of all or substantially all of our assets;

·       engage in any business activity substantially different from our current businesses;

·       make substantial changes in present executive management; and

·       cause, permit or suffer a change greater than 25% in direct or indirect capital ownership by the Company’s chief executive officer.

A breach of any of these covenants could result in default under our debt agreements, which could prompt the lenders to declare all amounts outstanding under the debt agreements to be immediately due and payable and terminate all commitments to extend further credit. If we were unable to repay those amounts, the lenders could proceed against the collateral granted to them to secure that indebtedness. If the lenders under the debt agreements accelerate the repayment of borrowings, we cannot assure you that we will have sufficient assets and funds to repay the borrowings under our debt agreements. See related comments under the caption “Management’s Discussion of Liquidity and Capital Resources” and “Subsequent Event” in Part II, Item 7. in this Annual Report of Form 10-K.

ITEM 1B.       UNRESOLVED STAFF COMMENTS.

None.

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ITEM 2.                PROPERTIES.

The Company leases its corporate headquarters at 1868 Tucker Industrial Road in Tucker, Georgia (within the Atlanta metropolitan area). 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 Part II, Item 13. Certain Relationships and Related Transactions in this Annual Report on Form 10-K. 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 mortgage loans from a bank and the Pennsylvania Industrial Development Authority with combined principal balances of $0.8 million as of February 28, 2006. These mortgage loans bear a blended average interest rate of approximately 5.4%. Monthly principal and interest payments of approximately $7,700 are payable through November 2017 with further payments of $4,900 through October 2021.

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 Annual Report.

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PART II

ITEM 5.                MARKET FOR REGISTRANT’S COMMON STOCK, RELATED STOCK-HOLDER
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, 2004. 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 15, 2006.

The Company paid a cash dividend of $0.04 per share or $392,000 in January 2005 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, 2006 regarding compensation plans (including individual compensation arrangements) under which Common Stock of the Company is authorized for issuance.

 

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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 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 and applicable state securities exemptions, 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.

During the fourth quarter of fiscal 2005, the Company issued 10,000 shares of its common stock in conversion of a $125,000 note payable related to the acquisition of XKD Corporation. During the first quarter of fiscal 2006, another of the $125,000 notes was converted into 10,000 shares of the Company’s common stock. There was no underwriter involved with these transactions. In issuing these shares the Company relied on Section 4(2) of the Securities Act of 1933 and applicable state securities exemptions, based upon the limited offering to four owners of XKD Corporation.

Issuer Purchases of Equity Securities

The Company has a stock repurchase program, pursuant to which it was originally authorized to repurchase up to 462,500 shares of the Company’s common stock in the open market. On January 11, 2006, the Board of Directors of the Company approved a continuation of the stock repurchase program, and authorized the Company to repurchase up to 600,000 additional shares of the Company’s common stock, depending on the market price of the shares. There is no minimum number of shares required to be repurchased under the program. During the fourth quarter of Fiscal 2006, the Company repurchased 85,982 shares at an average price of $9.98 per share. Shares repurchased by the Company in the fourth quarter of fiscal 2006 are held by the Company as treasury shares at February 28, 2006. An additional 25,621 shares of common stock, repurchased at an average price of $12.37 in May 2005, were retired. No shares were repurchased in fiscal 2005. In fiscal 2004 231,000 shares were repurchased for at an average cost of $6.81 per share, and retired. Under this program, an additional 658,618 shares remain authorized to be repurchased by the Company at February 28, 2006.

The following table summarizes repurchases of our stock in the fourth quarter ended February 28, 2006 (in thousands):

 

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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, 2006 are derived from the Consolidated Financial Statements appearing elsewhere in this Report or in previous reports. 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 and the notes thereto included elsewhere in this Annual Report.

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

(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)           See related comments under the caption “Prior Period Restatement” related to corrections in the provision for income taxes and accrual for franchise taxes in Part II, Item 7. in this Annual Report on Form 10-K.

(d)          See comments regarding the refinance of the Company’s $17.6 million in outstanding lines of credit, classified as short-term debt at February 28, 2006, under the caption “Subsequent Event” in Part II, Item 7. in this Annual Report on Form 10-K.

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ITEM 7.                MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION.

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 wide range of CRT, flat panel and projection display systems for use in training and simulation, military, medical and industrial applications.

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

·       Home Entertainment—offers a wide 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 2006 Highlights

·       Monitor division revenue—The Company continues to focus its growth efforts on various niche markets within the defense, medical and projection display industries. Net sales within this division decreased $0.8 million or 1.6% in fiscal 2006 compared to fiscal 2005 primarily due to the fulfillment of a military contract for replacement DVSTs at the Lexel facility earlier in fiscal 2006, which has not been renewed. This decline was partially offset by sales of the Evans & Sutherland product line acquired in November 2004, which was consolidated with the Company’s Display Systems operations in Cape Canaveral, FL.

·       Data Display division revenue—the Company’s Data Display division sales increased $2.3 million or 21.1% in fiscal 2006 compared to fiscal 2005. Sales earlier in fiscal 2006 included a larger concentration of lower priced replacement CRTs compared to the prior year period. Late in fiscal 2006, the Company began distributing projection tubes from its Data Display location in Tucker, GA. These projection units carry a higher sales price per unit than the Company’s normal inventory.

·       Acquisition—during the first quarter of fiscal 2006, the Company acquired the IDS division of Three Five Systems, Inc., consisting of inventory and certain assets. This newly acquired business operates from leased facilities in Marlboro, Massachusetts as a division of the Company’s Aydin Display Systems operations.

·       New credit facility—in April 2005, the Company finalized a new line of credit at Fox International, Ltd (“Fox”) to replace a prior facility. Under the terms of this new facility, the Company paid off the existing line of credit as well as a mortgage securing the land and building of Fox. The maximum amount available for borrowings under this new line is $3.5 million compared to approximately $2.8 million under the prior facility. Proceeds from this line are available for working capital needs of the Company. See related comments under the caption “Management’s Discussion of Liquidity and Capital Resources” and “Subsequent Event” in Part II, Item 7. in this Annual Report of Form 10-K.

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Fiscal 2006 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. The Company’s inventory turnover averages over 175 days, although in many cases the Company would anticipate holding 90 to 100 days of inventory in the normal course of operations. 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 operations 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 or 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. Because of this, the Company’s management monitors the adequacy of its inventory reserves regularly, and at February 28, 2006, believes its reserves to be adequate.

Interest rate exposure—The Company had outstanding debt of approximately $25 million as of February 28, 2006 which is subject to interest rate fluctuations by the Company’s lenders. Higher rates applied by the Federal Reserve Board during fiscal 2006 have negatively affected the Company’s earnings and the potential for continued rate hikes may negatively impact the Company’s future earnings. It is the intent of the Company to continually monitor interest rates and consider converting portions of the Company’s debt from floating rates to fixed rates should conditions be favorable for such interest rate swaps or hedges.

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Prior Period Restatement

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

 

Management has determined that the error was the result of a control deficiency with respect to the Company’s procedures in calculating and reporting its franchise tax and the treatment of foreign losses in the provision for income taxes under FASB Statement No. 109, and the proper reconciliation of those items to related consolidated balance sheet accounts. Management believes that this control deficiency constituted a material weakness. A material weakness is a control deficiency, or a combination of control deficiencies, that results in a more than remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. The Company has recently employed additional experienced financial staff, as reported in its Form 8-K filed December 20, 2005, to address this weakness and has amended its procedures for the preparation and review of recorded income tax amounts included in the Company’s consolidated financial statements.

Management has reviewed the impact of these errors on reported results of operations for the years affected, utilizing criteria set forth in Staff Accounting Bulletin 99, including the qualitative and quantitative elements outlined in that statement. Management has determined that the impact of this adjustment in each of the years affected is not material to reported results of operations on either a qualitative or quantitative basis in the respective years. Based on this determination, the Company does not plan to re-file its Annual Report on Form 10-K for fiscal 2005.

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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 (amounts in thousands):

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

 

Fiscal 2006 Compared to Fiscal 2005

Net Sales

Consolidated net sales increased $1.1 million for fiscal 2006 or 1.3% compared to fiscal 2005 net sales. This includes a Display segment sales increase of $0.6 million or 0.9% and a Wholesale Distribution segment sales increase of $0.5 million or 2.7% for the comparative periods.

The net increase in Display segment sales in fiscal 2006 represents a $0.9 million decline in monitor revenues, a $0.6 million decline in home entertainment CRT revenues and a $0.1 million decline in component Distribution revenues, offset by an increase in data display CRT revenues of $2.2 million compared to fiscal 2005.

Decreases in monitor revenues primarily reflect a reduction in CRT and DVST sales at Lexel, Teltron and XKD of $5.7 million during fiscal 2006 compared to fiscal 2005 as contracts were fulfilled, but have not been replaced. The timing of orders for these contracts, many which are military related, are affected by a number of factors, including competitive bidding, government budgetary issues, the phase-out and replacement of military field units and the life cycle of individual display units. Sales of other CRT products from Lexel are supported by a backlog of $7.8 million at February 28, 2006. (During fiscal 2006, the Teltron and XKD operations were consolidated with the Aydin Displays operation. The Company plans to further consolidate the CRT related portion of Aydin Displays into the Lexel operation during

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fiscal 2007.) This decrease in CRT and DVST sales was partially offset by a net increase in sales of flat panel and projector display units at Display Systems and Aydin Displays of $4.8 million during fiscal 2006, compared to fiscal 2005, through contracts with Boeing Co., Lockheed Martin and various other customers.

Increases in data display revenues are attributed primarily to management’s decision in late fiscal 2004 to begin distributing commercial and military projection tube displays from its Data Display location in Tucker, Georgia. These projection tube displays carry a higher sales price per unit than the units historically distributed from this facility.

The decline in entertainment CRT sales reflects management’s decision in late fiscal 2004 to move the distribution of projection tube displays from the Novatron operation to its Data Display distribution facility, which is a part of the data display division, and reduced sales at the Novatron and Chroma operations due to weaker demand in the television tube replacement market. During fiscal 2005, the Magnaview operation was relocated and merged into the Chroma facility. The Company is the primary supplier of replacement television CRTs to the domestic entertainment market. A significant portion of the entertainment division’s sales (39%) 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 recent prior 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.

The decline in component parts sales reflects weaker demand for electron gun and stem sales at the Southwest Vacuum and Wintron operations. 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 continuing its transition, focusing growth efforts on the distribution of two newer camera technologies, which is expected to reduce dependence on sales of components for CRTs. 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.

The modest increase in anticipated Wholesale Distribution segment sales are attributed to growth in call center sales. The call center operations of Fox International were relocated and expanded during fiscal 2006 to provide the capacity to seek additional call center business in future periods.

Gross Margins

Consolidated gross profit margins declined from 32.6% for the year ended February 28, 2005 to 29.2% for the fiscal year ended February 28, 2006. Display segment margins decreased from 29.3% in fiscal 2005 to 22.7% in fiscal 2006. The Wholesale Distribution segment margins (before call center expenses) improved from 44.4% for the year ended February 28, 2005 to 51.9% for the year ended February 28, 2006.

Within the Display segment, monitor gross margins decreased from 30.4% for fiscal 2005 to 25.4% for fiscal 2006. This decrease is primarily attributed to higher than anticipated costs to complete certain product contracts acquired in the Three-Five Acquisition, costs to relocate and combine the XKD operation into Aydin Displays, and lower margins generated and lower absorption of fixed overhead costs in the Lexel and Teltron operations at their reduced level of sales. Data display gross margins decreased from 16.2% for fiscal 2005 to 8.2% for fiscal 2006, due to price competition and reduced demand for non-projection CRT tubes and an increase in the provision for obsolete inventory over the prior year. Gross margins in home entertainment CRTs decreased from 36.7% for fiscal 2005 to 34.7% for fiscal 2006 due to lower absorption of fixed overhead costs at their reduced level of sales. Gross margins from component

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parts sold also decreased from 56.1% for fiscal 2005 to (8.3%) for fiscal 2006 due to the impact of lower sales volume and charges for inventory obsolescence.

Operating Expenses

Consolidated operating expenses as a percentage of net sales increased from 24.6% for fiscal 2005 to 26.7% for fiscal 2006.

Display segment operating expenses increased $0.7 million or 5.7% during fiscal 2006 compared to fiscal 2005, while operating expenses for the Wholesale Distribution segment increased $1.3 million or 16.3% for the comparable periods. Within the Display segment, which includes the majority of corporate level expenses for the consolidated group, the increase is primarily due to increased accounting and legal fees associated with financial/regulatory reporting and work on potential acquisition projects, which have subsequently been abandoned. Wholesale distribution segment operating expenses increased due to added labor and overhead costs associated with the expansion of the call center in the second half of fiscal 2006. Sales growth for services provided by the expanded call center was slower than anticipated, consequently staffing was reduced near the end of fiscal 2006 to correspond with projected near term call center needs and reduce operating costs.

Interest Expense

Interest expense increased $0.4 million or 36.4% for fiscal 2006 as compared to fiscal 2005, due to a higher level of average outstanding borrowings and higher market interest rates. The Company maintains various debt agreements with variable interest rates, most of which are based on LIBOR or the prime rate.

Income Taxes

The effective tax rate for fiscal 2006 was 40.7% compared to 39.2% for fiscal 2005, reflecting the impact of permanent differences in taxable income at the lower level of earnings.

Fiscal 2005 Compared to Fiscal 2004

Net Sales

Consolidated net sales increased $6.2 million for fiscal 2005 or 8.0% compared to fiscal 2004 net sales. The Display segment increased $4.0 million or 6.6% while the Wholesale Distribution segment increased $2.1 million 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 $4.9 million, as well as increases within the data display revenues of $0.8 million compared to the prior fiscal year. There were offsetting declines within the home entertainment and component parts revenues of $1.3 million and $0.3 million, 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 $5.4 million and $3.1 million, respectively, compared to fiscal 2004. There were offsetting declines of $3.5 million 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 $9.3 million at February 28, 2005.

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.

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Within the entertainment division, sales declined $1.3 million compared to fiscal 2004. There were declines of $0.2 million 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 $0.1 million 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 $0.9 million 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 prior 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 $0.3 million compared to the fiscal year ended February 29, 2004. Sales of these parts declined over the prior 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 $3.2 million in new sales for the fiscal year, which was offset by declines in other areas of that segment’s business of $1.0 million.

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% for the fiscal year ended February 29, 2004 to 16.2% for the fiscal year ended 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 $1.3 million 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 $4.9 million. 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 $0.3 million for the comparable periods.

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Operating Expenses

Consolidated operating expenses as a percentage of sales remained flat at approximately 24.6% for the year ended February 28, 2005 as compared to the year ended February 29, 2004.

Display segment operating expenses increased $0.4 million, while operating expenses for the consumer parts distribution segment increased $1.2 million. 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 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 $122,000 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 39.2% compared to 37.6% for fiscal 2004 largely due to state taxes.

Management’s Discussion of Liquidity and Capital Resources

At February 28, 2006 and February 28, 2005, the Company had total cash and cash equivalents of $1.6 million and $1.5 million, respectively. The Company’s working capital was $16.3 million and $37.2 million at February 28, 2006 and February 28, 2005, respectively. See comments regarding the refinance of the Company’s $17.6 million in outstanding lines of credit, classified as short-term debt at February 28, 2006, under the caption “Subsequent Event” in this Item 7. In recent years, the Company has financed its growth and cash needs primarily through income from operations, borrowings under revolving credit facilities, borrowings from its CEO 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.

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 May 2005, the Company acquired the assets of the IDS Division of Three-Five Systems, Inc. (“Three-Five Systems”) for cash of $1.4 million. In the first quarter of fiscal 2005, the Company acquired 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 paid to the seller for a total purchase price of $0.6 million. In November 2004, the Company purchased inventories, fixed assets and intangible assets of Evans & Sutherland for $5.3 million cash.

Cash provided by operations was $2.9 million in fiscal 2006, $2.4 million in fiscal 2005 and $7.1 million in fiscal 2004. Net working capital, excluding acquisitions, decreased $20.9 million in fiscal 2006, due to a $3.7 million increase in inventory and an increase of $1.2 million in refundable income taxes, a decline of

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$2.2 million in accounts receivable and an increase in short term lines of credit of $17.6 million. See comments regarding the refinance of the Company’s $17.6 million in outstanding lines of credit, classified as short-term debt at February 28, 2006, under the caption “Subsequent Event” in Part II, Item 7. in this Annual Report on Form 10-K. The increase in inventory primarily related to increased inventory in the Wholesale distribution segment and increased projection tube inventory in the monitor operations. The average days outstanding for accounts receivable decreased from 53 days in fiscal 2005 to 44 days in fiscal 2006, reflecting improved collections over this period. Net working capital, excluding acquisitions, increased $3.5 million in fiscal 2005 due primarily to greater investments in inventory within the Company’s monitor operations related to contracts begun in fiscal 2004. Working capital decreased $1.0 million in fiscal 2004 due primarily to improved inventory management resulting in a $1.0 million 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.

Investing activities used cash of $3.2 million, $6.2 million and $0.7 million in fiscal 2006, fiscal 2005 and fiscal 2004, respectively. In fiscal 2006, the Company acquired the IDS division of Three Five Systems, Inc. in exchange for cash of $1.4 million. In fiscal 2005, the primary use of cash was related to the acquisition of inventories and related assets of Evans & Sutherland’s ESCP® CRT projector product line. This asset acquisition of $5.3 million was integrated into the Company’s Cape Canaveral, Florida facility. Capital expenditures exclusive of acquisitions were $1.9 million, $0.8 million and $0.7 million in fiscal 2006, fiscal 2005 and fiscal 2004, respectively. In fiscal 2006, capital expenditures primarily related to manufacturing equipment purchased at the Phelps, New York facility and expansion of the call center at Fox International, Inc. Capital expenditures in fiscal 2005 and fiscal 2004 were primarily for building improvements and computer hardware. The Company does not anticipate significant investments in capital assets for fiscal 2007 beyond normal maintenance requirements.

Financing activities provided cash of $0.6 million in fiscal 2006 and $2.3 million in fiscal 2005 and used cash of $5.9 million in fiscal 2004. During fiscal 2006, the Company used cash to repay loans from related parties of $1.2 million and for the repurchase of common stock of $1.2 million. Primarily near the end of fiscal 2006, the Company received cash proceeds of $7.9 million from related parties. During 2005, the Company used cash of $14.4 million 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 $5.3 million was also used to fund the purchase of assets of Evans and Sutherland, Inc. The Company also paid a cash dividend during 2005 of $0.4 million or $0.04 per share. During fiscal 2005, the Company used cash of $0.6 million to retire debt, with a substantial portion of this reduction provided by the conversion of a $2.8 million bank line of credit at Fox International to a new $3.5 million line with another bank. During fiscal 2004, the Company used cash of $0.6 million to retire long term debt. The Company paid a cash dividend in fiscal 2004 of $245,000 or $0.05 per share.

The Company maintains a $27.5 million credit facility with a bank, collateralized by equipment, inventories and accounts receivable of the Company. The interest rate on this line is a floating LIBOR rate based on a ratio of debt to EBITDA, as defined in the loan documents. As of February 28, 2006, the outstanding balance of this line of credit was $14.1 million and the available amount for borrowing was $13.0 million, including the impact of $400,000 in outstanding letters of credit. The line of credit agreement contains covenants, including requirements related to tangible cash flow, ratio of debt to cash flow and asset coverage. Additionally, the bank requires that any contemplated acquisitions be accretive. The Company was not in compliance with the consolidated Fixed Charge Coverage Ratio and the consolidated Senior Funded Debt to EBITDA ratio covenants at February 28, 2006. To provide additional flexibility in funding for working capital requirements, and to cure the covenant violations existing under this line, on June 9, 2006 the Company negotiated a new line of credit with a syndication of two banks as discussed below under the caption Subsequent Event.

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Additionally, in April 2005, the Company converted a $2.8 million line of credit (collateralized by assets of Fox International, Inc.) with a bank to a $3.5 million line of credit with another bank. As part of the new financing, the lender paid off the balance of the previous line as well as a mortgage secured by the land and building of Fox International, Inc. The interest rate on this line is a floating LIBOR rated based on a ratio of debt to EBITDA, as defined in the loan documents. As of February 28, 2006, the outstanding balance of this line of credit was $3.5 million with no remaining borrowing availability. The line of credit agreement contains covenants, including requirements related to tangible cash flow, ratio of debt to cash flow and asset coverage. Additionally, the bank requires that any contemplated acquisitions be accretive. The Company was not in compliance with the consolidated Fixed Charge Coverage Ratio and the consolidated Senior Funded Debt to EBITDA ratio covenants at February 28, 2006. To provide additional flexibility in funding for working capital requirements, and to cure the covenant violations existing under this line, on June 9, 2006 the Company negotiated a new line of credit with a syndication of two banks as discussed below under the caption Subsequent Event.

The Company has a stock repurchase program, pursuant to which it was originally authorized to repurchase up to 462,500 shares of the Company’s common stock in the open market. On January 11, 2006, the Board of Directors of the Company approved a continuation of the stock repurchase program, and authorized the repurchase of up to 600,000 additional shares of the Company’s common stock, depending on the market price of the shares. There is no minimum number of shares required to be repurchased under the program. During the fourth quarter of fiscal 2006, the Company repurchased 85,982 shares at an average cost of $9.98 per share. These shares are held by the Company as treasury shares at February 28, 2006. An additional 25,621 shares of common stock, repurchased at an average cost of $12.37 in May 2005, were retired. No shares were repurchased in fiscal 2005. In fiscal 2004 231,000 shares were repurchased at an average cost of $6.81 per share, and retired. Under this program, an additional 658,618 shares remain authorized to be repurchased by the Company at February 28, 2006.

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.

Transactions with Related Parties, Contractual Obligations and Commitments

On February 27, 2006 the Company’s Chief Executive Officer loaned the Company $6.8 million under a note agreement providing for interest at the higher of six percent or the prime rate plus ¼ of one percent, paid monthly. Principal payments are due in a series of monthly payments, with a final payment of $1.0 million due October 1, 2006. The note is secured by a general lien on all assets of the Company, subordinate to the lien held by Bank of America. See related comments in under the caption “Subsequent Event” in Part II Item 7. of this Annual Report on Form 10-K.

In August 2005, the Company’s Chief Executive Officer loaned the Company $1.0 million on a non-interest bearing and due on demand basis, which was repaid in September 2005.

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

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$240,000 was borrowed during the fiscal year, resulting in a balance of $195,000 at February 28, 2005. Principal payments of $218,000 were made in fiscal 2006, while an additional $171,000 was borrowed during the fiscal year, resulting in a balance of $148,000 at February 28, 2006. These borrowings bear interest at 6%.

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 effective rate on outstanding debt as of February 28, 2006.

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 Financial Condition and Results of Operations 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 years, at which time the Company’s replacement market develops. Management reviews inventory levels on a quarterly basis. Such reviews

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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 2006 and 2005; however, the Company cannot guarantee the accuracy of future forecasts since these estimates are subject to change based on market conditions.

During fiscal 2006, fiscal 2005 and fiscal 2004, the Company deducted inventory against the reserve for obsolescence in the amount of $1.0 million, $0.8 million and $1.4 million, respectively. The reserve for inventory obsolescence was approximately $4.0 million and $3.1 million at February 28, 2006 and February 28, 2005, 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 Emerging Issues Task Force (EITF) issue 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 for the delivery of product to customers 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 issue 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 of Financial Accounting Standards Statement (“Statement No.”) 123 (R) (revised 2004) Share-Based Payment, which is a revision of FASB Statement No. 123, Accounting for Stock-Based Compensation. Statement No. 123 (R) supersedes Accounting Principles Board Opinion (APB) No. 25, Accounting for Stock Issued to Employees, and amends FASB Statement No. 95, Statement of Cash Flows. Generally, the approach to accounting in Statement No. 123 (R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements 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 No. 123 (R) is effective for the Company beginning March 1, 2006. The Statement offers several alternatives for implementation. Management is currently in the process of making the detailed calculations necessary to determine which of the alternatives the Company will use; however, management does not anticipate that the adoption of this statement will have a material impact on the consolidated financial statements.

In November 2004, the FASB issued Statement No. 151, Inventory Costs, an amendment of APB No. 43, Chapter 4. The amendments made by Statement 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. Statement No. 151 is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. Management does not anticipate that the adoption of this statement will have a material impact on the consolidated financial statements.

In December 2004, the FASB issued Statement No. 153, “Exchanges of Nonmonetary Assets”. This statement explains that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged. This statement is effective for fiscal years beginning after June 15, 2005. Management does not anticipate that the adoption of this statement will have a material impact on the consolidated financial statements.

In June 2005, the FASB issued Statement No. 154, “Accounting Changes and Error Corrections”. This statement revises the reporting requirements related to changes in accounting principles or adoption of new accounting pronouncements. This statement is effective for fiscal years beginning after December 15, 2005. Management does not anticipate that the adoption of this statement will have a material impact on the consolidated financial statements.

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In February 2006, the FASB issued Statement No. 155, “Accounting for Certain Hybrid Financial Instruments—an amendment of FASB Statements No. 133 and 140.” Statement No. 155 permits fair value measurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation. This statement is effective for all financial instruments acquired or issued after the beginning of an entity’s fiscal year that begins after September 15, 2006. Management does not anticipate that the adoption of this statement will have a material impact on the consolidated financial statements.

Impact of Inflation

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

Subsequent Event

On June 9, 2006, the Company secured a commitment from a syndicate including RBC Centura Bank and Regions Bank to provide a $17 million line of credit to the Company and a $3.5 million line of credit to the Company’s subsidiary Fox International, Inc., both with a maturity of 24 months from closing. These new lines of credit replace two lines of credit outstanding with Bank of America. In addition, the agreement provides for an equipment term loan of $3.0 million with payments amortized over 60 months. The interest rate on these loans is a floating LIBOR rated based on a fixed charge coverage ratio, as defined in the loan documents. Also as a part of this agreement, the CEO of the Company will provide a $6.0 million term note with an amortization of 15 years, and a maturity of 60 months. The remaining balance of the note provided by the CEO on February 27, 2006 will be repaid effective with the issue of the new note. The Company expects to execute a closing on these new loan facilities effective on or before June 28, 2006.

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 $24.9 million of outstanding debt at February 28, 2006 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 $250,000 in pre-tax net income assuming no further changes in the amount of borrowings subject to variable rate interest from amounts outstanding at February 28, 2006. 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 affect the Company’s financial position.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

Video Display Corporation and Subsidiaries

Index to Consolidated Financial Statements

 

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Report of Independent Registered Public Accounting Firm

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

We have audited the accompanying consolidated balance sheet of Video Display Corporation and subsidiaries (the “Company”) as of February 28, 2006, and the related consolidated statements of operations, shareholders’ equity and comprehensive income and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.

We conducted our audit 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 audit included 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 of 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 audit provides 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, 2006 and the results of their operations and their cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.

/s/  Tauber & Balser, P.C.
Atlanta, Georgia
May 26, 2006, except for Note 21, as
to which the date is June 9, 2006

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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 the related consolidated statements of operations, shareholders’ equity and comprehensive income (loss) and cash flows for each of the two 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 the results of their operations and their cash flows for each of the two years in the period ended February 28, 2005, in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note 2 to the accompanying consolidated financial statements, the Company has restated its 2004 and 2005 financial statements.

Atlanta, Georgia		/s/ BDO Seidman, LLP
June 14, 2005, except as to Note 2,
which is as of June 8, 2006

 

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Video Display Corporation and Subsidiaries
Consolidated Balance Sheets
(in thousands)

 

The accompanying notes are an integral part of these statements.

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Video Display Corporation and Subsidiaries
Consolidated Balance Sheets (Continued)
(in thousands)

 

The accompanying notes are an integral part of these statements.

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Video Display Corporation and Subsidiaries
Consolidated Statements of Operations
(in thousands, except per share data)

 

The accompanying notes are an integral part of these statements.

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