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Video Display Corporation and Subsidiaries Index to Consolidated Financial Statements
Video Display Corporation and Subsidiaries Index to Consolidated Financial Statements Schedule
PART IV
TABLE OF CONTENTS

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

FORM 10-K

Commission file number 0-13394

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

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

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

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

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

        Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ý

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

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

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

DOCUMENTS INCORPORATED BY REFERENCE

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

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

TABLE OF CONTENTS

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PART I

ITEM 1. BUSINESS

General

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

Description of Principal Business

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

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

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

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

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

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

Segment Information

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

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Principal Products

Monitor Displays

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

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

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

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

Cathode Ray Tubes ("CRTs")

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

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

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

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

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

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

Electron Guns and Components

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

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

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

Flat Panel and Other Technology

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

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

Electronic Parts

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

Patents and Trademarks

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

Seasonal Variations in Business

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

Working Capital Practices

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

Concentration of Customers

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

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

Backlog

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

Government Contracts

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

Environmental Matters

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

Research and Development

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

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Employees

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

Competition

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

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

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

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

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

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

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

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

ITEM 2. PROPERTIES

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

(a)

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

(b)

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

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

ITEM 3. LEGAL PROCEEDINGS

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

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

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

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PART II

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

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

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

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

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

Securities Authorized for Issuance Under Equity Compensation Plans

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

Recent Sales of Unregistered Securities

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

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

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

Issuer Purchases of Equity Securities

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

ITEM 6. SELECTED FINANCIAL DATA

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

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

(a)

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

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(b)

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

(c)

Includes the impact of the Lexel acquisition in 2001.

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

Overview

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

•

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



•

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



•

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



•

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

Fiscal 2005 Highlights

•

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



•

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



•

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



•

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

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

Fiscal 2005 Challenges

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

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

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

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

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Operations

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

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

Fiscal 2005 Compared to Fiscal 2004

Net Sales

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

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

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

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

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

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

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

Gross Margins

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

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

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Operating Expenses

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

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