VIDEO DISPLAY CORP - Quarter Report: 2010 November (Form 10-Q)

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

þ		Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

o		Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission File Number 0-13394

VIDEO DISPLAY CORPORATION

(Exact name of registrant as specified on its charter)

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

1868 TUCKER INDUSTRIAL ROAD, TUCKER, GEORGIA 30084
(Address of principal executive offices)

770-938-2080

     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 þ No o

     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 o		Smaller reporting company þ
				(Do not check if a smaller reporting company)

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

          As of November 30, 2010, the registrant had 8,387,009 shares of Common Stock outstanding.

 

 

Video Display Corporation and Subsidiaries
Index

		Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets — November 30, 2010 (unaudited) and February 28, 2010			3
Condensed Consolidated Statements of Operations — Three months and nine months ended November 30, 2010 and 2009 (unaudited)			5
Condensed Consolidated Statement of Shareholders’ Equity — Nine months ended November 30, 2010 (unaudited)			6
Condensed Consolidated Statements of Cash Flows — Nine months ended November 30, 2010 and 2009 (unaudited)			7
Notes to Condensed Consolidated Financial Statements — November 30, 2010 (unaudited)			9
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			19
Item 3. Quantitative and Qualitative Disclosure About Market Risk			28
Item 4. Controls and Procedures			28
PART II. OTHER INFORMATION
Item 1. Legal Proceedings			29
Item 1A. Risk Factors			29
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			29
Item 3. Defaults upon Senior Securities			29
Item 4. Submission of Matters to a Vote of Security Holders			29
Item 5. Other Information			29
Item 6. Exhibits			30
SIGNATURES			31
31.1 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32    Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
EX-31.1
EX-31.2
EX-32

ITEM 1. FINANCIAL STATEMENTS

Video Display Corporation and Subsidiaries

Condensed Consolidated Balance Sheets
(in thousands)

		November 30,				February 28,
		2010				2010
		(unaudited)
Assets
Current assets
Cash		$	2,012			$	465
Accounts receivable, less allowance for doubtful accounts of $206 and $160			9,575				11,673
Inventories, net			35,919				37,997
Cost and estimated earnings in excess of billings on uncompleted contracts			2,775				4,089
Deferred income taxes			2,961				2,879
Income taxes refundable			415				162
Outside investments			60				78
Prepaid expenses and other			652				520
Total current assets			54,369				57,863
Property, plant, and equipment:
Land			585				585
Buildings			8,351				8,292
Machinery and equipment			22,669				22,174
			31,605				31,051
Accumulated depreciation and amortization			(26,245	)			(25,322	)
Net property, plant, and equipment			5,360				5,729
Goodwill			1,376				1,376
Intangible assets, net			1,585				1,843
Deferred income taxes			756				760
Other assets			28				32
Total assets		$	63,474			$	67,603

The accompanying notes are an integral part of these condensed consolidated statements.

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

		November 30,				February 28,
		2010				2010
		(unaudited)
Liabilities and Shareholders’ Equity
Current liabilities
Accounts payable		$	4,525			$	9,232
Accrued liabilities			4,917				4,475
Billings in excess of cost and estimated earnings on uncompleted contracts			1,358				880
Current maturities of notes payable to officers and directors			678				511
Line of credit			19,558				20,143
Current maturities of long-term debt and financing lease obligations			936				825
Total current liabilities			31,972				36,066
Long-term debt, less current maturities			383				957
Financing lease obligations, less current maturities			231				221
Notes payable to officers and directors, less current maturities			1,473				2,447
Other long term liabilities			296				415
Total liabilities			34,355				40,106
Commitments and Contingencies
Shareholders’ Equity
Preferred stock, no par value – 10,000 shares authorized; none issued and outstanding			—				—
Common stock, no par value – 50,000 shares authorized; 9,732 issued and 8,387 outstanding at November 30, 2010 and 9,732 issued and 8,365 outstanding at February 28, 2010			7,293				7,293
Additional paid-in capital			193				193
Retained earnings			28,903				27,401
Treasury stock, 1,346 shares at cost at November 30, 2010 and and 1,368 shares at cost at February 28, 2010			(7,270	)			(7,390	)
Total shareholders’ equity			29,119				27,497
Total liabilities and shareholders’ equity		$	63,474			$	67,603

The accompanying notes are an integral part of these condensed consolidated statements.

Video Display Corporation and Subsidiaries

Condensed Consolidated Statements of Operations (unaudited)
(in thousands, except per share data)

		Three Months Ended								Nine Months Ended
		November 30,								November 30,
		2010				2009				2010				2009
Net sales		$	16,922			$	17,513			$	59,373			$	50,704
Cost of goods sold			12,009				12,328				40,613				33,713
Gross profit			4,913				5,185				18,760				16,991
Operating expenses
Selling and delivery			1,868				1,711				5,690				5,234
General and administrative			3,435				3,202				10,185				11,084
			5,303				4,913				15,875				16,318
Operating profit (loss)			(390	)			272				2,885				673
Other income (expense)
Interest expense			(243	)			(308	)			(832	)			(811	)
Other, net			62				80				251				413
			(181	)			(228	)			(581	)			(398	)
Income (loss) before income tax
Expense			(571	)			44				2,304				275
Income tax expense (benefit)			(152	)			(26	)			802				27
Net income (loss)		$	(419	)		$	70			$	1,502			$	248
Net income (loss) per share — basic		$	(.05	)		$	.01			$	.18			$	.03
Net income (loss) per share — diluted		$	(.05	)		$	.01			$	.17			$	.03
Average shares outstanding – basic			8,365				8,372				8,365				8,445
Average shares outstanding — diluted			8,700				8,706				8,693				8,756

     The accompanying notes are an integral part of these condensed consolidated statements.

Video Display Corporation and Subsidiaries

Condensed Consolidated Statement of Shareholders’ Equity
Nine Months Ended November 30, 2010 (unaudited)
(in thousands)

		Common				Share				Additional Paid-in				Retained				Treasury
		Shares				Amount				Capital				Earnings				Stock
Balance, February 28, 2010			8,365			$	7,293			$	193			$	27,401			$	(7,390	)
Net income			—				—				—				1,502				—
Stock options			—				—				—								—
Stock awards			22				—				(28	)			—				120
Share based compensation			—				—				28				—				—
Balance, November 30, 2010			8,387			$	7,293			$	193			$	28,903			$	(7,270	)

The accompanying notes are an integral part of these condensed consolidated statements.

Video Display Corporation and Subsidiaries

Condensed Consolidated Statements of Cash Flows (unaudited)
(in thousands)

		Nine Months Ended
		November 30,
		2010				2009
Operating Activities
Net income		$	1,502			$	248
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			1,198				1,720
Provision for doubtful accounts			161				157
Provision for inventory reserve			1,227				1,236
Non-cash charge for share based compensation			120				18
Deferred income taxes			(78	)			(654	)
Net unrealized loss on equity securities			18				—
Changes in other assets and liabilities			(119	)			4
Gain on sale of equipment			(13	)			—
Changes in working capital, net of effects from acquisitions:
Accounts receivable			1,937				1,208
Inventories			852				(3,086	)
Prepaid expenses and other current assets			(132	)			112
Accounts payable and accrued liabilities			(4,265	)			772
Cost, estimated earnings and billings, net, on uncompleted contracts			1,792				(2,537	)
Income taxes refundable/payable			(253	)			1,524
Net cash provided by operating activities			3,947				722
Investing Activities
Capital expenditures			(456	)			(227	)
Net investments in equity securities			—				255
Proceeds on sale of equipment			101				—
License Agreement			—				(500	)
Net cash used in investing activities			(355	)			(472	)

Video Display Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows (unaudited)
(in thousands)

		Nine Months Ended
		November 30,
		2010				2009
Financing Activities
Proceeds from long-term debt, lines of credit and financing lease obligations			12,794				10,388
Payments on long-term debt, lines of credit and financing lease obligations			(14,031	)			(10,785	)
Proceeds from notes payable to officers and directors			650				916
Repayments of notes payable to officers and directors			(1,458	)			(367	)
Purchases and re-issues of treasury stock			—				(344	)
Net cash used in financing activities			(2,045	)			(192	)
Net increase in cash			1,547				58
Cash, beginning of period			465				662
Cash, end of period		$	2,012			$	720

The accompanying notes are an integral part of these condensed consolidated statements.

Video Display Corporation and Subsidiaries
November 30, 2010

Note 1. — Summary of Significant Accounting Policies

     The condensed consolidated financial statements include the accounts of the Company and its majority-owned subsidiaries after elimination of all significant intercompany accounts and transactions.

     As contemplated by the Securities and Exchange Commission (the “SEC” or “Commission”) instructions to Form 10-Q, the following footnotes have been condensed and, therefore, do not contain all the disclosures required in connection with annual consolidated financial statements. Reference should be made to the Company’s year-end consolidated financial statements and notes thereto, including a description of the accounting policies followed by the Company, contained in its Annual Report on Form 10-K for the fiscal year ended February 28, 2010, as filed with the Commission. There are no material changes in accounting policy during the nine months ended November 30, 2010.

     The financial information included in this report has been prepared by the Company, without audit. In the opinion of management, the financial information included in this report contains all adjustments (all of which are normal and recurring) necessary for a fair presentation of the results for the interim periods. Nevertheless, the results shown for interim periods are not necessarily indicative of results to be expected for the full year. The February 28, 2010 consolidated balance sheet data was derived from the audited consolidated financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America.

Note 2. — Liquidity

     On December 23, 2010, the Company and its subsidiaries executed a new Credit Agreement with RBC Bank and Community and Southern Bank to provide new financing to the Company to replace the existing credit agreement with RBC Bank which terminated in conjunction with this Agreement. The new Agreement provides for a line of credit of up to $17.5 million and two term loans of $3.5 million and $3.0 million. The outstanding balance at November 30, 2010 of the prior lines of credit was $19.6 million and the balance of the prior term loan was $0.7 million. These previous credit lines had been extended to December 31, 2010, and accordingly are classified under short-term liabilities on the Company’s balance sheet as of November 30, 2010. A copy of the new Credit Agreement was filed on an 8-K document with the Securities and Exchange Commission on December 30, 2010. These loans are secured by all assets and personal property of the Company and a limited guarantee of the Chief Executive Officer of $3,000,000. The agreement contains covenants, including requirements related to tangible cash flow, ratio of debt to cash flow and asset coverage. The agreement also includes restrictions on the incurrence of additional debt or liens, investments (including Company stock), divestitures and certain other changes in the business. The Agreement does not expressly quantify these restrictions in terms of dollar amounts: however, in general the Company cannot take such actions other than to a limited extent in the ordinary course of business. The Agreement expires on December 1, 2013. The interest rate on these loans is a floating LIBOR rate based on a fixed charge coverage ratio, minimum 4.0%, as defined in the loan documents. The restructure of the debt classification due to this agreement will be reflected in the Company’s fourth quarter.

Note 3. — Recent Accounting Pronouncements

     In June 2009, the Financial Accounting Standards Board (FASB) issued new guidance effective for financial statements issued for periods ending after September 15, 2009. “The FASB Accounting Standards Codification” (FASB ASC) establishes the source of authoritative accounting standards generally accepted in the United States of America (GAAP) recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. On the effective date, the FASB ASC superseded all then-existing non-SEC accounting and reporting standards. All other non-grandfathered non-SEC accounting literature not included in the ASC became non-authoritative. The FASB updates or modifies the FASB ASC through FASB Accounting Standards Updates (“FASB ASU” or “Update”). Our adoption of this guidance did not have a material impact on our condensed consolidated financial statements.

Video Display Corporation and Subsidiaries
November 30, 2010

     In June 2009, the FASB issued revised guidance to improve financial reporting by enterprises involved with variable interest entities and to provide more relevant and reliable information to users of financial statements. These revisions to FASB ASC Topic 810, “Consolidation,” are effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter. Earlier application is prohibited. The adoption of this guidance did not have a material impact on our consolidated financial statements.

     In December 2009, the FASB issued revised guidance FASB ASU 2009-17, “Consolidations” (Topic 810) — Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities,” which codifies FASB Statement No. 167, “Amendments to FASB Interpretation No. 46(R)”. FASB ASU 2009-17 represents a revision to former FASB Interpretation No. 46 (Revised December 2003), “Consolidation of Variable Interest Entities”, to require an enterprise to qualitatively assess the determination of the primary beneficiary of a variable interest entity (VIE) based on whether the entity (1) has the power to direct the activities of a VIE that most significantly impact the entity’s economic performance and (2) has the obligation to absorb losses of the entity or the right to receive benefits from the entity that could potentially be significant to the VIE. In addition, FASB ASU 2009-17 requires an ongoing reconsideration of the primary beneficiary, and amends the events that trigger a reassessment of whether an entity is a VIE. Enhanced disclosures are also required to provide information about an enterprise’s involvement in a VIE. FASB ASU 2009-17 is effective for interim and annual reporting periods ending after November 15, 2009. The adoption of this guidance did not have a material impact on our consolidated financial statements.

     In January 2010, the FASB issued revised guidance FASB ASU 2010-06, “Fair Value Measurements and Disclosures — Overall Subtopic” (Subtopic 820-10) to improve disclosure requirements for Fair Value Measurements. The new disclosures and clarifications of existing disclosures are effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The adoption of this guidance did not have a material impact on our consolidated financial statements.

     In February 2010, the FASB issued revised guidance FASB ASU 2010-09, “Subsequent Events” (Topic 855) to amend Subtopic 855-10. Among the provisions of the amendments is the removal for public companies of the requirement to disclose the date through which subsequent events were evaluated. All of the amendments in this Update are effective upon issuance of the final Update for most filers. The adoption of this guidance did not have a material impact on our consolidated financial statements.

Video Display Corporation and Subsidiaries
November 30, 2010

Note 4. — Inventories

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

     Inventories consisted of the following (in thousands):

		November 30,				February 28,
		2010				2010
Raw materials		$	20,656			$	20,464
Work-in-process			7,746				8,396
Finished goods			12,937				13,789
			41,339				42,649
Reserves for obsolescence			(5,420	)			(4,652	)
		$	35,919			$	37,997

Note 5. — Costs and Estimated Earnings Related to Billings on Uncompleted Contracts

Information relative to contracts in progress consisted of the following:

		November 30,				February 28,
		2010				2010
Costs incurred to date on uncompleted contracts		$	7,162			$	5,476
Estimated earnings recognized to date on these contracts			2,653				2,934
			9,815				8,410
Billings to date			(8,398	)			(5,201	)
Costs and estimated earnings in excess of billings, net		$	1,417			$	3,209
Costs and estimated earnings in excess of billings		$	2,775			$	4,089
Billings in excess of costs and estimated earnings			(1,358	)			(880	)
		$	1,417			$	3,209

     Costs and estimated earnings in excess of billings are the results of contracts in progress (jobs) in completing orders to customers’ specifications on contracts accounted for under FASB ASC 605-35, “Revenue Recognition: Construction-Type and Production-Type Contracts.” Costs included are material, labor, and overhead. These jobs require design and engineering effort for a specific customer purchasing a unique product. The Company records revenue on these fixed-price and cost-plus contracts 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. Billings are generated based on

Video Display Corporation and Subsidiaries
November 30, 2010

specific contract terms, which might be a progress payment schedule, specific shipments, etc. None of the above contracts in progress contain post-shipment obligations.

     Changes in job performance, manufacturing efficiency, final contract settlements, and other factors affecting estimated profitability may result in revisions to costs and income and are recognized in the period in which the revisions are determined.

     As of November 30, 2010 and February 28, 2010, there were no production costs that exceeded the aggregate estimated cost of all in process and delivered units relating to long-term contracts. Additionally, there were no claims outstanding that would affect the ultimate realization of full contract values. As of November 30, 2010 and February 28, 2010, there were no progress payments that had been netted against inventory.

Note 6. — Intangible Assets

     Intangible assets consist primarily of the unamortized value of purchased patents, customer lists, non-compete agreements and other intangible assets. Intangible assets are amortized over the period of their expected lives, generally ranging from 5 to 15 years. Amortization expense related to intangible assets was $258,000 and $622,000 for the nine months ended November 30, 2010 and 2009, respectively.

     The cost and accumulated amortization of intangible assets was as follows (in thousands):

		November 30, 2010								February 28, 2010
						Accumulated								Accumulated
		Cost				Amortization				Cost				Amortization
Customer lists		$	3,611			$	2,554			$	3,611			$	2,466
Non-compete agreements			1,245				1,245				1,245				1,234
Patents			777				600				777				516
Other intangibles			649				298				649				223
		$	6,282			$	4,697			$	6,282			$	4,439

Video Display Corporation and Subsidiaries
November 30, 2010

Note 7. — Long-term Debt and Financing Lease Obligations

     Long-term debt and financing lease obligations consisted of the following (in thousands):

		November 30,				February 28,
		2010				2010
Note payable to RBC Bank; interest rate at LIBOR plus applicable margin as defined per the loan agreement, minimum 4.00% (2.51% combined rate as of November 30, 2010); monthly principal payments of $50 plus accrued interest, payable through July 2011; collateralized by all assets of the Company. Refinanced as of December 23, 2010 (see Note 8)		$	678			$	1,128
Mortgage payable to bank; interest rate at Federal Home Loan Bank Board Index rate plus 1.95% (7.25% as of November 30, 2010); monthly principal and interest payments of $5 payable through October 2021; collateralized by land and building of Teltron Technologies, Inc			426				454
			1,104				1,582
Financing lease obligations			446				421
			1,550				2,003
Less current maturities			(936	)			(825	)
		$	614			$	1,178

Note 8. — Lines of Credit

     On December 23, 2010, the Company and its subsidiaries executed a new Credit Agreement with RBC Bank and Community and Southern Bank to provide new financing to the Company to replace the existing credit agreement with RBC Bank which terminated in conjunction with this Agreement. The new Agreement provides for a line of credit of up to $17.5 million and two term loans of $3.5 million and $3.0 million. The outstanding balance at November 30, 2010 of the prior lines of credit was $19.6 million and the balance of the prior term loan was $0.7 million, respectively. These previous credit lines had been extended to December 31, 2010, and accordingly are classified under short-term liabilities on the Company’s balance sheet as of November 30, 2010. A copy of the new Credit Agreement was filed on an 8-K document with the Securities and Exchange Commission on December 30, 2010. These loans are secured by all assets and personal property of the Company and a limited guarantee of the Chief Executive Officer of $3,000,000. The agreement contains covenants, including requirements related to tangible cash flow, ratio of debt to cash flow and asset coverage. The agreement also includes restrictions on the incurrence of additional debt or liens, investments (including Company stock), divestitures and certain other changes in the business. The Agreement does not expressly quantify these restrictions in terms of dollar amounts: however, in general the Company cannot take such actions other than to a limited extent in the ordinary course of business. The Agreement expires on December 1, 2013. The interest rate on these loans is a floating LIBOR rate based on a fixed charge coverage ratio, minimum 4.0%, as defined in the loan documents. The restructure of the debt classification due to this agreement will be reflected in the Company’s fourth quarter.

Video Display Corporation and Subsidiaries
November 30, 2010

Note 9. — Segment Information

     Condensed segment information is as follows (in thousands):

		Three Months								Nine Months
		Ended November 30,								Ended November 30,
		2010				2009				2010				2009
Net Sales
Display Segment		$	13,121			$	12,552			$	44,528			$	35,989
Wholesale Distribution Segment			3,801				4,961				14,845				14,715
		$	16,922			$	17,513			$	59,373			$	50,704
Operating profit
Display Segment		$	445			$	174			$	3,708			$	509
Wholesale Distribution Segment			(835	)			98				(823	)			164
Income (loss)from Operations			(390	)			272				2,885				673
Interest expense			(243	)			(308	)			(832	)			(811	)
Other income, net			62				80				251				413
Income (loss)before income taxes		$	(571	)		$	44			$	2,304			$	275

Note 10. — Supplemental Cash Flow Information

     Supplemental cash flow information is as follows (in thousands):

		Nine Months
		Ended November 30,
		2010				2009
Cash Paid for:
Interest		$	860			$	780
Income taxes, net of refunds		$	1,133			$	(843	)
Noncash Investing and Financing Transactions:
Capital lease obligation		$	199			$	86

Video Display Corporation and Subsidiaries
November 30, 2010

Note 11. — Shareholder’s Equity

Earnings Per Share

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

          The following table sets forth the computation of basic and diluted net income per share for the three and nine month periods ended November 30, 2010 and 2009 (in thousands, except per share data):

						Average
		Net Income				Shares				Net Income
		(loss)				Outstanding				Per Share
Three months ended November 30, 2010
Basic		$	(419	)			8,365			$	(.05	)
Effect of dilution:
Options			—				335
Diluted		$	(419	)			8,700			$	(.05	)
Three months ended November 30, 2009
Basic		$	70				8,372			$	0.01
Effect of dilution:
Options			—				334
Diluted		$	70				8,706			$	0.01
Nine months ended November 30, 2010
Basic		$	1,502				8,365			$	0.18
Effect of dilution:
Options			—				328
Diluted		$	1,502				8,693			$	0.17
Nine months ended November 30, 2009
Basic		$	248				8,445			$	0.03
Effect of dilution:
Options			—				311
Diluted		$	248				8,756			$	0.03

Stock-Based Compensation Plans

          For the nine-month period ended November 30, 2010 and 2009, the Company recognized general and administrative expenses of $27,903 and $17,271, respectively, related to share-based compensation. The liability for the share-based compensation recognized is presented in the consolidated balance sheet as part of additional paid in capital.

Video Display Corporation and Subsidiaries
November 30, 2010

As of November 30, 2010, total unrecognized compensation costs related to stock options granted was $42,678. The unrecognized stock option compensation cost is expected to be recognized over a period of approximately 2 years.

          The Company estimates the fair value of stock options granted using the Black-Scholes option-pricing model, which requires the Company to estimate the expected term of the stock option grants and expected future stock price volatility over the term. The term represents the expected period of time the Company believes the options will remain outstanding based on historical information. Estimates of expected future stock price volatility are based on the historic volatility of the Company’s common stock, which represents the standard deviation of the differences in the weekly stock closing price, adjusted for dividends and stock splits.

          Three members of the board of directors were each granted 3,000 stock options during the nine month period ended November 30, 2010 and two members of the board of directors were each granted 3,000 stock options in the nine months ended November 30, 2009.

          On September 3, 2010 the Company awarded employees restricted stock in recognition of their willingness to forego a portion of their salary during the past year. The restricted stock vests 25% at the end of each quarter and will be fully vested at the end of one year. The Company recognized general and administrative expenses of $92,168 for the three month and nine month period ending November 30, 2010.

Stock Repurchase Program

          The Company has a stock repurchase program, pursuant to which it was originally authorized to repurchase up to 1,632,500 shares of the Company’s common stock in the open market. On July 8, 2009, the Board of Directors of the Company approved a one time continuation of the stock repurchase program, and authorized the Company to repurchase up to 1,000,000 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. Under the Company’s stock repurchase program, an additional 816,418 shares remain authorized to be repurchased by the Company at November 30, 2010. The Credit Agreement executed by the Company on December 23, 2010 includes restrictions on investments that restrict further repurchases of stock under this program. For the nine months ended November 30, 2010, no treasury shares were repurchased, and during the nine months ended November 30, 2009, the Company repurchased 229,037 shares at an average price of $1.50 per share, which have been added to treasury shares on the consolidated balance sheet.

Note 12. — Income Taxes

          The effective tax rate for the nine months ended November 30, 2010 and 2009 was 34.8% and 9.8%, respectively. These rates differ from the Federal statutory rate primarily due to the effect of state taxes, the permanent non-deductibility of certain expenses for tax purposes, and research and experimentation credits.

Note 13. — Related Party Transactions

     In conjunction with an agreement involving re-financing of the Company’s lines of credit and Loan and Security Agreement, on June 29, 2006 the Company’s CEO provided a $6.0 million subordinated term note to the Company with monthly principal payments of $33,333 plus interest through July 2021. The interest rate on this note is equal to the prime rate plus one percent. The note is secured by a general lien on all assets of the Company, subordinate to the lien held by RBC Bank and Community and Southern Bank. (See Note 15) The balance outstanding under this loan agreement was approximately $1.9 million at November 30, 2010 and $2.8 million at February 28, 2010. Interest paid during the quarter ended November 30, 2010 and 2009 on this note was $51,004 and $50,574, respectively, and interest paid for the nine months ending November 30, 2010 and November 30, 2009 was $167,315 and $139,632, respectively.

Video Display Corporation and Subsidiaries
November 30, 2010

          The Company has a new demand note outstanding from another officer, bearing interest at 8%. The balance on the note as of the quarter ending November 30, 2010 is $282,009. The Company had a demand note from the same officer which was paid in full in August 2010. Interest paid on the demand note for the nine months ended November 30, 2010 and 2009 was $3,641 and $10,878, respectively.

Note 14. — Legal Proceedings

          During 2007, the Company acquired the Cathode Ray Tube Manufacturing and Distribution Business and certain other assets of Clinton Electronics Corp. (“Clinton”), including inventory, fixed assets, for a total purchase price of $2,550,000, pursuant to an Asset Purchase Agreement between the parties (the “APA”). The form of consideration for the assets acquired included: (i) a $1.0 million face value Convertible Note; (ii) an agreement to deliver a stock certificate representing Company Common Shares having a $1,125,000 in market value of the Company’s common stock in January of 2008; and (iii) an agreement to deliver a stock certificate representing Company Common Shares having a $500,000 in market value of the Company’s common stock in January of 2009. The Company has paid the $1.0 million Note Payable. The Company is disputing certain representations made by Clinton in the APA including but not limited to representations concerning revenue, expenses, and inventory. As a result of this dispute, the Company has not issued the stock certificates scheduled for delivery January of 2008 and January of 2009. As such, the Company has accrued a potential liability of $1,625,000 and this accrued liability is reflected in the Company’s current Balance Schedule.

          Pursuant to the terms of the APA, the Company and Clinton have agreed to arbitrate the dispute in Atlanta, Georgia. An arbitration claim has not yet been filed, nor has a time been set for arbitration. Based on information currently available, the ultimate outcome of this disputed matter is not expected to have a material adverse effect on the Company’s business, financial condition, or results of operations. However, the ultimate outcome cannot be predicted with certainty, and there can be no assurance that the Company’s failure to prevail would not have a material adverse effect on the Company’s business, financial condition or results of operations.

Note 15. — Subsequent Events

          On December 23, 2010, the Company and its subsidiaries executed a new Credit Agreement with RBC Bank and Community and Southern Bank to provide new financing to the Company to replace the existing credit agreement with RBC Bank which terminated in conjunction with this Agreement. The new Agreement provides for a line of credit of up to $17.5 million and two term loans of $3.5 million and $3.0 million. The outstanding balance at November 30, 2010 of the prior lines of credit was $19.6 million and the balance of the prior term loan was $0.7 million, respectively. These previous credit lines had been extended to December 31, 2010, and accordingly are classified under short-term liabilities on the Company’s balance sheet as of November 30, 2010. A copy of the new Credit Agreement was filed on an 8-K document with the Securities and Exchange Commission on December 30, 2010. These loans are secured by all assets and personal property of the Company and a limited guarantee of the Chief Executive Officer of $3,000,000. The agreement contains covenants, including requirements related to tangible cash flow, ratio of debt to cash flow and asset coverage. The agreement also includes restrictions on the incurrence of additional debt or liens, investments (including Company stock), divestitures and certain other changes in the business. The Agreement does not expressly quantify these restrictions in terms of dollar amounts: however, in general the Company cannot take such actions other than to a limited extent in the ordinary course of business. The Agreement expires on December 1, 2013. The interest rate on these loans is a floating LIBOR rate based on a fixed charge coverage ratio, minimum 4.0%, as defined in the loan documents. The restructure of the debt classification due to this agreement will be reflected in the Company’s fourth quarter.

          On January 10, 2010, the Company issued a press release announcing its plan to sell its wholly- owned subsidiary, Fox International Ltd., Inc., a wholesale distribution business, in a sealed bid auction sale to the highest bidder. The Company retains the absolute and complete right to accept or reject any bid. Additionally, all bids will be subject to a right by management of Fox to place a bid higher than any bid entered by a third party. VDC management believes that VDC shareholder value will be greatly enhanced by focusing its resources on its primary display business. Interested potential bidders will be given a thirty (30)-day due diligence review period beginning January 15, 2011. All sealed bids will be submitted to the Company on February 22, 2011.

Video Display Corporation and Subsidiaries
November 30, 2010

          The carrying amounts of the major classes of assets and liabilities (in thousands) are as follows:

		November 30,
		2010
		(unaudited)
Assets
Current assets			6,133
Net Property, plant, and equipment			1,222
Other assets			23
Liabilities
Current Liabilities			7,693
Long-term Liabilities			231

Video Display Corporation and Subsidiaries
November 30, 2010

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

          The following discussion should be read in conjunction with the attached interim condensed consolidated financial statements and with the Company’s 2010 Annual Report to Shareholders, which included audited consolidated financial statements and notes thereto for the fiscal year ended February 28, 2010, as well as Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Overview

          The Company is a worldwide leader in the manufacture and distribution of a wide range of display devices, encompassing, among others, industrial, 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 (“Display Segment”) and (2) the wholesale distribution of consumer electronic parts from foreign and domestic manufacturers (“Wholesale Distribution Segment”).

          The Display Segment is organized into four interrelated operations aggregated into one reportable segment pursuant to the aggregation criteria of FASB ASC Topic 280 “Segment Reporting”:

	•		Monitors — offers a complete range of CRT, flat panel and projection display systems for use in training and simulation, military, medical, and industrial applications.
	•		Data Display CRT— offers a wide range of CRTs for use in data display screens, including computer terminal monitors and medical monitoring equipment.
	•		Entertainment CRT — offers a wide range of CRTs and projection tubes for television and home theater equipment.
	•		Component Parts — provides replacement electron guns and other components for CRTs primarily for servicing the Company’s internal needs.

          The Wholesale Distribution Segment is made up of parts distribution for electronic parts manufacturers and a call center for small appliance manufacturers.

          During fiscal 2011, management of the Company is focusing key resources on strategic efforts to dispose of unprofitable operations, seek opportunities that enhance the profitability and sales growth of the Company’s more profitable product lines and to secure a long term financing package to support the Companies goals. In addition, the Company plans to seek new products through acquisitions and internal development that complement existing profitable product lines. Challenges facing the Company during these efforts include:

          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 mitigate the risk of overstocking slower moving, obsolete items. The Company’s inventories decreased particularly in the Display division due to several last time sales made this year.

          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 245 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 because 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

Video Display Corporation and Subsidiaries
November 30, 2010

display area. If the Company fails to anticipate the changing needs of its customers and accurately forecast their requirements, it may accumulate inventories of products which its customers no longer need and which the Company will be unable to sell or return to its vendors. Because of this, the Company’s management monitors the adequacy of its inventory reserves regularly, and at November 30, 2010 and February 28, 2010, believes its reserves to be adequate.

          Interest rate exposure — The Company had outstanding debt of $22.8 million as of November 30, 2010, all of which is subject to interest rate fluctuations by the Company’s lenders. Higher rates applied by the Federal Reserve Board could have a negative affect on the Company’s 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.

          Liquidity - On December 23, 2010, the Company and its subsidiaries executed a new Credit Agreement with RBC Bank and Community and Southern Bank to provide new financing to the Company to replace the existing credit agreement with RBC Bank which terminated in conjunction with this Agreement. The new Agreement provides for a line of credit of up to $17.5 million and two term loans of $3.5 million and $3.0 million. The outstanding balance at November 30, 2010 of the prior lines of credit was $19.6 million and the balance of the prior term loan was $0.7 million. These previous credit lines had been extended to December 31, 2010, and accordingly are classified under short-term liabilities on the Company’s balance sheet as of November 30, 2010. A copy of the new Credit Agreement was filed on an 8-K document with the Securities and Exchange Commission on December 30, 2010. These loans are secured by all assets and personal property of the Company and a limited guarantee of the Chief Executive Officer of $3,000,000. The agreement contains covenants, including requirements related to tangible cash flow, ratio of debt to cash flow and asset coverage. The agreement also includes restrictions on the incurrence of additional debt or liens, investments (including Company stock), divestitures and certain other changes in the business. The Agreement does not expressly quantify these restrictions in terms of dollar amounts: however, in general the Company cannot take such actions other than to a limited extent in the ordinary course of business. The Agreement expires on December 1, 2013. The interest rate on these loans is a floating LIBOR rate based on a fixed charge coverage ratio, minimum 4.0%, as defined in the loan documents. The restructure of the debt classification due to this agreement will be reflected in the Company’s fourth quarter.

          Government Contracts - The Company, primarily through its Aydin, Lexel, and Display Systems subsidiaries, had contracts with the U.S. government (principally the Department of Defense and Department of Defense subcontractors) which generated net sales of approximately $15.2 million and $7.7 million for the nine months ending November 30, 2010 and November 30, 2009, respectively. If we are unable to replace expiring contracts, which are typically less then twelve months in duration, with contracts for new business, our sales could decline, which would 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 foreseeable future, but we have no assurance that these government-related sales will continue to reach or exceed historical levels in future periods.

Video Display Corporation and Subsidiaries
November 30, 2010

Results of Operations

     The following table sets forth, for the three and nine months ended November 30, 2010 and 2009, the percentages that selected items in the Statements of Operations bear to total sales:

		Three Months								Nine Months
		Ended November 30,								Ended November 30,
		2010				2009				2010				2009
Sales
Display Segment
Monitors			67.8	%			62.2	%			65.8	%			58.7	%
Data Display CRTs			8.6				8.6				8.5				11.1
Entertainment CRTs			0.6				0.5				0.5				0.9
Components Parts			0.5				0.4				0.2				0.3
Total Display Segment			77.5	%			71.7	%			75.0	%			71.0	%
Wholesale Distribution Segment			22.5				28.3				25.0				29.0
			100.0	%			100.0	%			100.0	%			100.0	%
Costs and expenses
Cost of goods sold			71.0	%			70.4	%			68.4	%			66.5	%
Selling and delivery			11.0				9.7				9.6				10.3
General and administrative			20.3				18.3				17.2				21.9
			102.3	%			98.4	%			95.2	%			98.7	%
Income (loss)from operations			(2.3)	%			1.6	%			4.8	%			1.3	%
Interest expense			(1.4)	%			(1.8)	%			(1.4)	%			(1.6)	%
Other income, net			0.3				0.5				0.4				0.8
Income (loss)before income taxes			(3.4)	%			0.3	%			3.8	%			0.5	%
(Provision) benefit for income taxes			(0.9	)			(0.1	)			1.3				0.0
Net income (loss)			(2.5)	%			0.4	%			2.5	%			0.5	%

Net sales

     Consolidated net sales decreased $0.6 million for the three months ended November 30, 2010 and increased $8.7 million for the nine months ended November 30, 2010 as compared to the three and nine months ended November 30, 2009, respectively. Display segment sales increased $0.5 million for the three month comparative period and increased $8.5 million for the nine-month comparative period. Sales within the Wholesale Distribution segment decreased $1.2 million for the three month comparative period primarily due to procurement issues with one of their primary suppliers and increased $0.1 million for the nine-month comparative period. The issues with the supplier have been resolved and shipments are now flowing regularly.

     The net increase in Display Segment sales for the three months ended November 30, 2010 is primarily attributed to the monitor and display divisions, as compared to the same period ended November 30, 2009. The Monitor revenues increased $0.6 million for the three month comparable period and increased $9.3 million over the nine-month period primarily due to the fulfillment of orders against long term contracts and new business. The display revenues decreased

Video Display Corporation and Subsidiaries
November 30, 2010

$0.1 million for the comparable three month period and decreased $0.6 million to the comparable nine-month period primarily due to the sluggish CRT orders in the flight simulation segment of the business. The entertainment revenues were flat for the three month period and decreased $0.2 million for the nine month period.

Gross margins

     Consolidated gross profits decreased by 5.3% for the three months ended November 30, 2010 over the three months ended November 30, 2009. The consolidated gross profits increased by 10.4% for the nine months ended November 30, 2010 over the nine months ended November 30, 2009 due to the increased sales while gross profit margins declined 5.7% from 33.5% to 31.6%.

     Display segment gross profits increased by 2.5% for the three month period ended November 30, 2010 over the comparable three month period ended November 30, 2009 and increased by 23.8% for the nine month period ended November 30, 2010 over the comparative nine month period ended November 30, 2009 due to the increased sales volume. The major growth came from the Company’s Monitor division, which saw its gross margin dollars increase by 39.5% for the nine months ended November 30, 2010 and its gross margin percentage increase from 26.1% to 27.8%. For the three months ended November 30, 2010 the Monitor division’s gross margin dollars increased by 6.6% compared to the three months ended November 30, 2009 while its gross margin percentage was flat. The Monitor division’s increases are attributable to the increased shipments on a number of long term contracts. Data Display division gross margin dollars decreased by 34.8% for the three month comparable period ended November 30, 2010, and decreased by 22.3% for the nine months ended November 30, 2010 compared to the nine months ended November 30, 2009, due to the impact of the decreased margins and sales at the both of the Company’s display facilities. The gross margins in home entertainment CRTs and the Component Parts were negligible as both divisions sales continue to decline and are not material to the results of the Company. The Company has reduced the net book value of the Entertainment division in anticipation of its closure and does not anticipate a material loss when the division is closed.

     The Wholesale Distribution segment margin dollars decreased by 17.4% for the comparable three month period ended November 30, 2010 and decreased by 7.2% for the comparable nine month period ended November 30, 2010. The gross margin percentages increased from 40.8% to 44.0% for the three month comparable period ended November 30, 2010 and decreased from 49.8% to 45.8% for the comparable nine month period ended November 30, 2010 due to the changes in customer and product mix and difficulty receiving product from a major supplier. The issues at the supplier have improved and the delays in receiving products have dissipated.

Operating expenses

     Operating expenses as a percentage of sales increased from 28.1% to 31.3% for the three month comparable period ended November 30, 2010 but decreased from 32.2% for the nine months ended November 30, 2009 to 26.7% for the nine months ended November 30, 2010. The increase for the quarter was primarily due to increases at the wholesale distribution segment of the business. Actual operating expenses decreased by 2.7% from the prior year for the nine month period ended November 30, 2010. This decrease was primarily due to lower legal fees, research and development fees, and lower amortization costs of intangibles. The Company was also able to control other fixed costs, such as rent and other administrative costs on increased sales volume. The Company expects to continue to contain costs while increasing revenue.

     Display segment operating expenses increased slightly from 20.9% to 21.3% of net sales for the three month comparable period ended November 30, 2010, but decreased from 24.4% to 18.5% for the nine month period as compared to the comparable prior year period. The reductions of expenses discussed above primarily occurred in the display segment of the business.

Video Display Corporation and Subsidiaries
November 30, 2010

     Wholesale Distribution segment operating expenses increased from 46.2% to 66.0% of net sales for the three month comparable period ended November 30, 2010 and increased slightly from 51.2% to 51.4% for the nine month period a year ago, primarily due to a decrease in sales with no cost reductions.

Interest expense

     Interest expense decreased 21.1% for the three month comparable period ended November 30, 2010 due to decreased borrowings as business conditions improved and increased by 2.6% for the nine months ended November 30, 2010 as compared to the same period a year ago due to increased borrowings for inventory primarily in the first quarter of 2010. The Company maintains various debt agreements with different interest rates, most of which are based on the prime rate or LIBOR. The interest expense reflects higher average borrowings outstanding and higher average interest rates for the nine months.

Income taxes

     The effective tax rate for the three months ended November 30, 2010 and November 30, 2009 was (26.6%) and (59.1%), respectively, and for the nine months ended November 30, 2010 and November 30, 2009 was 34.8% and 9.8%, respectively. These rates differ from the Federal statutory rate primarily due to the effect of state taxes, the permanent non-deductibility of certain expenses for tax purposes and research and experimentation tax credits.

Liquidity and Capital Resources

     As of November 30, 2010, the Company had total cash of $2.0 million. The Company’s working capital was $22.4 million and $21.8 million at November 30, 2010 and February 28, 2010, respectively. In recent years, the Company has financed its growth and cash needs primarily through income from operations, borrowings under revolving credit facilities, advances from the Company’s Chief Executive Officer and long-term debt. Liquidity provided by operating activities of the Company is reduced by working capital requirements, largely inventories and accounts receivable, debt service, capital expenditures, product line additions and dividends.

     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 on certain products, but typically has larger investments in inventories than those of its competitors.

     On December 23, 2010, the Company and subsidiaries executed a Credit Agreement with RBC Bank and Community and Southern Bank to provide new financing to the Company to replace the existing credit agreement with RBC Bank. The new agreement provides for a line of credit of up to $17.5 million and two term loans of $3.5 million and $3.0 million. The agreement expires on December 1, 2013. The interest rate on these loans is a floating LIBOR rate based on a fixed charge coverage ratio, minimum 4%, as defined in the loan documents.

     The Company continues to monitor its cash and financing positions, seeking 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.

     Cash provided by operations for the nine months ended November 30, 2010 was $3.9 million as compared to cash provided by operations of $0.7 million for the nine months ended November 30, 2009. This net increase in cash provided

Video Display Corporation and Subsidiaries
November 30, 2010

is primarily the result of an increase in profitability from $0.2 million for the nine months ended November 30, 2009 to $1.5 million for the nine months ended November 30, 2010, along with changes in other working capital components.

     Investing activities used cash of $0.3 million primarily for purchases of equipment during the nine months ended November 30, 2010, compared to cash used of $0.4 million during the nine months ended November 30, 2009, primarily related to a license agreement.

     Financing activities used cash of $2.0 million for the nine months ended November 30, 2010, due to net repayments against the line of credit and to the Company’s officers, compared to cash used of $0.2 million for the nine months ended November 30, 2009, reflecting borrowings on the line of credit and the purchase of treasury stock offset by additional borrowing from the Company’s Chief Executive Officer.

     The Company’s debt agreements with financial institutions contain affirmative and negative covenants, including requirements related to tangible net worth and debt service coverage and new loans. Additionally, dividend payments, capital expenditures, and acquisitions have certain restrictions. Substantially all of the Company’s retained earnings are restricted based upon these covenants.

The Company has a stock repurchase program, pursuant to which it was originally authorized to repurchase up to 1,632,500 shares of the Company’s common stock in the open market. On July 8, 2009, the Board of Directors of the Company approved a one time continuation of the stock repurchase program, and authorized the Company to repurchase up to 1,000,000 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. Under the Company’s stock repurchase program, an additional 816,418 shares remain authorized to be repurchased by the Company at November 30, 2010. The Credit Agreement executed by the Company on December 23, 2010 includes restrictions on investments that restrict further repurchases of stock under this program. For the nine months ended November 30, 2010, no treasury shares were repurchased, and during the nine months ended November 30, 2009, the Company repurchased 229,037 shares at an average price of $1.50 per share, which have been added to treasury shares on the consolidated balance sheet.

Critical Accounting Estimates

     Management’s Discussion and Analysis of Financial Condition and Results of Operations are based upon the Company’s condensed consolidated financial statements. These condensed consolidated 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 condensed consolidated financial statements and related notes. The accounting policies that may involve a higher degree of judgments, estimates, and complexity include reserves on inventories, revenue recognition, the allowance for bad debts and warranty reserves. The Company uses the following methods and assumptions 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 considers 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 include observations of product development trends of the OEMs, new products being marketed, and technological advances relative to the product capabilities of the Company’s existing inventories. There

Video Display Corporation and Subsidiaries
November 30, 2010

were no significant changes in management’s estimates in fiscal 2011 and 2010; however, the Company cannot guarantee the accuracy of future forecasts since these estimates are subject to change based on market conditions.

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 FASB ASC Topic 605-45 “Revenue Recognition: Principal Agent Considerations”, shipping and handling fees billed to customers are classified in net sales in the consolidated statements of operations. Shipping and handling costs incurred are classified in selling and delivery in the consolidated statements of operations.

     A portion of the Company’s revenue is derived from contracts to manufacture flat panel and CRTs to a buyers’ specification. These contracts are accounted for under the provisions of FASB ASC Topic 605-35 “Revenue Recognition: Construction-Type and 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 Distribution Segment has several distribution agreements that it accounts for using the gross revenue basis and one agreement that uses the net revenue basis as prescribed by FASB ASC Topic 605-45 “Revenue Recognition: Principal Agent Considerations”. The Company uses the gross method because the Company has general inventory risk, physical loss inventory risk and credit risk on the majority of its agreements but uses the net method on the one agreement because it does not have those same risks for that agreement. 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 doubtful accounts

     The allowance for doubtful accounts 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 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 doubtful accounts 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.

Warranty reserves

     The warranty reserve is determined by recording a specific reserve for known warranty issues and a general reserve based on 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 believes that its procedures historically have been adequate and does not anticipate that its assumptions are reasonably likely to change in the future.

Video Display Corporation and Subsidiaries
November 30, 2010

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 June 2009, the Financial Accounting Standards Board (FASB) issued new guidance effective for financial statements issued for periods ending after September 15, 2009. “The FASB Accounting Standards Codification” (FASB ASC) establishes the source of authoritative accounting standards generally accepted in the United States of America (GAAP) recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. On the effective date, the FASB ASC superseded all then-existing non-SEC accounting and reporting standards. All other non-grandfathered non-SEC accounting literature not included in the ASC became non-authoritative. The FASB updates or modifies the FASB ASC through FASB Accounting Standards Updates (“FASB ASU” or “Update”). Our adoption of this guidance did not have a material impact on our condensed consolidated financial statements.

     In June 2009, the FASB issued revised guidance to improve financial reporting by enterprises involved with variable interest entities and to provide more relevant and reliable information to users of financial statements. These revisions to FASB ASC Topic 810, “Consolidation,” are effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter. Earlier application is prohibited. The adoption of this guidance did not have a material impact on our consolidated financial statements.

     In December 2009, the FASB issued revised guidance FASB ASU 2009-17, “Consolidations” (Topic 810) — Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities,” which codifies FASB Statement No. 167, “Amendments to FASB Interpretation No. 46(R)”. FASB ASU 2009-17 represents a revision to former FASB Interpretation No. 46 (Revised December 2003), “Consolidation of Variable Interest Entities”, to require an enterprise to qualitatively assess the determination of the primary beneficiary of a variable interest entity (VIE) based on whether the entity (1) has the power to direct the activities of a VIE that most significantly impact the entity’s economic performance and (2) has the obligation to absorb losses of the entity or the right to receive benefits from the entity that could potentially be significant to the VIE. In addition, FASB ASU 2009-17 requires an ongoing reconsideration of the primary beneficiary, and amends the events that trigger a reassessment of whether an entity is a VIE. Enhanced disclosures are also required to provide information about an enterprise’s involvement in a VIE. FASB ASU 2009-17 is effective for interim and annual reporting periods ending after November 15, 2009. The adoption of this guidance did not have a material impact on our consolidated financial statements.

     In January 2010, the FASB issued revised guidance FASB ASU 2010-06, “Fair Value Measurements and Disclosures — Overall Subtopic” (Subtopic 820-10) to improve disclosure requirements for Fair Value Measurements. The new disclosures and clarifications of existing disclosures are effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The adoption of this guidance did not have a material impact on our consolidated financial statements.

     In February 2010, the FASB issued revised guidance FASB ASU 2010-09, “Subsequent Events” (Topic 855) to amend Subtopic 855-10. Among the provisions of the amendments is the removal for public companies of the requirement to disclose the date through which subsequent events were evaluated. All of the amendments in this Update are effective upon issuance of the final Update for most filers. The adoption of this guidance did not have a material impact on our consolidated financial statements.

Video Display Corporation and Subsidiaries
November 30, 2010

Forward-Looking Information and Risk Factors

     This report contains forward-looking statements and information that is based on management’s beliefs, as well as assumptions made by, and information currently available to management. When used in this document, the words “anticipate,” “believe,” “estimate,” “intends,” “will,” and “expect” and similar expressions are intended to identify forward-looking statements. Such statements involve a number of risks and uncertainties. These risks and uncertainties, which are included under Part I, Item 1A. Risk Factors in the Company’s Annual Report of Form 10-K for the year ended February 28, 2010 could cause actual results to differ materially.

Video Display Corporation and Subsidiaries
November 30, 2010

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE 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 $22.8 million of outstanding debt at November 30, 2010 related to 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 $0.2 million in pre-tax net income assuming no further changes in the amount of borrowings subject to variable rate interest from amounts outstanding at November 30, 2010. The Company does not trade in derivative financial instruments.

ITEM 4. CONTROLS AND PROCEDURES

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

     Our chief executive officer and chief financial officer have conducted an evaluation of the effectiveness of our disclosure controls and procedures as of November 30, 2010. We perform this evaluation on a quarterly basis so that the conclusions concerning the effectiveness of our disclosure controls and procedures can be reported in our annual report on Form 10-K and quarterly reports on Form 10-Q. Based on this evaluation, our chief executive officer and chief financial officer have concluded that our disclosure controls and procedures were effective to provide such reasonable assurance as of November 30, 2010.

Changes in Internal Controls

     There have not been any changes in our internal controls over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

Video Display Corporation and Subsidiaries
November 30, 2010

PART II

Item 1. Legal Proceedings

     During 2007, the Company acquired the Cathode Ray Tube Manufacturing and Distribution Business and certain other assets of Clinton Electronics Corp. (“Clinton”), including inventory, fixed assets, for a total purchase price of $2,550,000, pursuant to an Asset Purchase Agreement between the parties (the “APA”). The form of consideration for the assets acquired included: (i) a $1.0 million face value Convertible Note; (ii) an agreement to deliver a stock certificate representing Company Common Shares having a $1,125,000 in market value of the Company’s common stock in January of 2008; and (iii) an agreement to deliver a stock certificate representing Company Common Shares having a $500,000 in market value of the Company’s common stock in January of 2009. The Company has paid the $1.0 million Note Payable. The Company is disputing certain representations made by Clinton in the APA including but not limited to representations concerning revenue, expenses, and inventory. As a result of this dispute, the Company has not issued the stock certificates scheduled for delivery January of 2008 and January of 2009. As such, the Company has accrued a potential liability of $1,625,000 and this accrued liability is reflected in the Company’s current Balance Schedule.

     Pursuant to the terms of the APA, the Company and Clinton have agreed to arbitrate the dispute in Atlanta, Georgia. An arbitration claim has not yet been filed, nor has a time been set for arbitration. Based on information currently available, the ultimate outcome of this disputed matter is not expected to have a material adverse effect on the Company’s business, financial condition, or results of operations. However, the ultimate outcome cannot be predicted with certainty, and there can be no assurance that the Company’s failure to prevail would not have a material adverse effect on the Company’s business, financial condition or results of operations.

Item 1A. Risk Factors

Information regarding risk factors appears under the caption Forward-Looking Statements and Risk Factors in Part I, Item 2 of this Form 10-Q and in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended February 28, 2010. There have been no material changes from the risk factors previously disclosed in our Annual Report on Form 10-K.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults upon Senior Securities

None.

Item 4. Submission of Matters to a Vote of Security Holders

None.

Item 5. Other information

None.

Video Display Corporation and Subsidiaries
November 30, 2010

Item 6. Exhibits

Exhibit
Number		Exhibit Description
3(a)		Articles of Incorporation of the Company (incorporated by reference to Exhibit 3A to the Company’s Registration Statement on Form S-18 filed January 15, 1985).
3(b)		By-Laws of the Company (incorporated by reference to Exhibit 3B to the Company’s Registration Statement on Form S-18 filed January 15, 1985).
10(b)		Lease dated June 1, 2008 by and between Registrant (Lessee) and Ronald D. Ordway (Lessor) with respect to premises located at 4601 Lewis Road, Stone Mountain, Georgia. (incorporated by reference to Exhibit 10(b) to the Company’s 2009 Annual Report on Form 10-K)
10(c)		Lease dated November 1, 2008 by and between Registrant (Lessee) and Ronald D. Ordway (Lessor) with respect to premises located at 1868 Tucker Industrial Road, Tucker, Georgia. (incorporated by reference to Exhibit 10(c) to the Company’s 2009 Annual Report on Form 10-K)
10(h)		Loan and Security Agreement and related documents, dated December 23, 2010, among Video Display Corporation and Subsidiaries and RBC Bank and Community and Southern Bank as lenders and RBC Bank as administrative agent (incorporated by reference to Exhibit 10(h) to the Company’s Report on Form 8-K dated December 30, 2010).
10(i)		$6,000,000 Subordinated Note, dated June 29, 2006, between Video Display Corporation and Ronald D. Ordway (holder) (incorporated by reference to Exhibit 10(i) to the Company’s Current Report on Form 8-K dated June 29, 2006).
10(j)		Video Display Corporation 2006 Stock Incentive Plan. (incorporated by reference to Appendix A to the Company’s 2006 Proxy Statement on Schedule 14A)
31.1		Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.		Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

SIGNATURES

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