10-K405 1 0001.txt FORM 10-K FOR FISCAL YEAR ENDED 02-29-2000 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20552 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended Commission file number February 29, 2000 0-13394 VIDEO DISPLAY CORPORATION (Exact name of registrant as specified in its charter) Georgia 58-1217564 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1868 Tucker Industrial Drive, Tucker, Georgia 30084 (address of principal executive offices and zip code) Registrant's telephone number, including area code: (770) 938-2080 Securities Registered Pursuant to Section 12(b) of the Act: NONE Securities Registered Pursuant to Section 12(g) of the Act: Name of each exchange Title of each class of which registered Common stock (no par value) NASDAQ/NMS 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, and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the voting stock held by non-affiliates of the registrant at May 19, 2000 is $13,342,371. The number of shares outstanding of the registrant's Common Stock as of May 19, 2000 is 3,789,567. DOCUMENTS INCORPORATED BY REFERENCE HEREIN Certain exhibits which were filed with the Securities and Exchange Commission as part of the registrant's Registration Statement on Form S-18 (Commission File No. 2-94626-A) are incorporated by reference into Part IV. Portions of the proxy statement for the annual 2000 shareholders meeting are incorporated by reference into Part III. PART I ITEM 1. BUSINESS General Video Display Corporation (the "Company") is a leading supplier of a complete range of Display Products and component parts for the Display industry. Its product line consists of a wide variety of electron optic parts for original equipment manufacturers ("OEMs"), cathode ray tube ("CRTs") and monitor manufacturers. The Company manufactures monochrome and color CRTs for medical, military, industrial and television applications and high and low-end monochrome and color CRT and AMLCD monitor displays for specialty high performance and ruggedized requirements. The Company also acts as a wholesale distributor of electronic parts and CRTs purchased from domestic and foreign manufacturers. The Company's operations are principally located in the U.S.; however, the Company does have subsidiary operations located in Mexico, the U.K. and the Netherlands. Description of Principal Business Video Display Corporation was incorporated in the State of Connecticut in 1975, and through a tax-free reorganization became a Georgia corporation in 1984. The Company began its operations as a single recycling plant in Stone Mountain, Georgia providing replacement CRTs for color and black/white television sets. Beginning in 1983, with the growth of the computer industry, the Company expanded to meet the needs of the replacement market for computer monitors and other data display screens. To accomplish this objective, the Company acquired production equipment and customers from other smaller CRT remanufacturers. In fiscal 1993, the Company, through its Mexican subsidiary Video Electronics S.A. de C.V. ("Video Electronics"), obtained the CSA (Canadian Standards Association) and UL (Underwriters Laboratory) safety approvals for its recycled products. The Company and its plants in Louisiana, Pennsylvania, Georgia, Texas, New York, Connecticut, Florida, Massachusetts, Mexico, the U.K. and the Netherlands combine to form an international CRT-OEM manufacturing and distribution network with recycling capabilities and years of OEM production experience. During fiscal 2000, in order to support the data display segment, the Company opened offices in Wolcott, Connecticut and in Cape Canaveral, Florida. The Florida location (Display Systems) will provide custom CRT solutions for training rooms, board rooms, teleconferencing, flight training simulators, command and control centers, air traffic control, ship simulators, process status displays and integrated home theater. The Wolcott, Connecticut location (VDC Wolcott) offers high-resolution monochrome displays for use in medical and military applications. In late February 1999, the Company purchased the net assets of MegaScan Corporation ("MegaScan") which offers a complete line of high-resolution monochrome CRT monitors to the medical display industry. In November 1998, the Company acquired the assets and assumed certain liabilities of the U.S. and U.K. Display Divisions of Aydin Corporation ("Aydin"). Aydin offers a complete line of high-resolution commercial and ruggedized CRT monitors, AMLCD flat panel displays and monitors used by the public and private sector industries including medical diagnostic or treatment centers, utility and financial companies, and the military industry. In September 1998, the Company opened an office in the Netherlands, Video Display Europe, B.V. ("VDC Europe"). This was done to more efficiently service customers in mainland Europe. 1 During June 1998, the Company acquired 100% of the outstanding common stock of Mengel Industries, Inc. ("MII") located in Sanatoga, Pennsylvania. MII supplies independent, OEM and hospital service personnel with CRTs, camera tubes and other components for medical imaging within the healthcare industry. In March 1998, the Company acquired the net assets of Wintron, Inc. ("Wintron"). Wintron manufactures high quality custom designed deflection components, high voltage power supplies, coils and flyback transformers and other CRT drive circuitry for airborne, commercial and military applications. In fiscal 1996, the Company acquired the assets and assumed certain of the liabilities of Teltron Technologies, Inc. ("Teltron") and the stock of Z-Axis, Inc. ("Z-Axis"). Teltron is involved in the development and production of new and recycled camera and CRTs and special purpose sensors. Teltron's products are used in camera tube applications including nuclear inspection, UV sensing, x-ray and astronomy; military applications including avionics instrument displays, marine radar displays, helmet mounted displays, vehicular displays, and target monitoring image tubes; and in CRT applications including OEM displays, flying spot scanners, photo typesetting and electrostatic deflection tube applications. Z-Axis is involved in the design and production of color and monochrome video display monitors. Z-Axis' monitors are used in industrial control, medical instruments, test equipment, visual aid devices, on-board tracking systems, point-of-sale terminals and naval tactical displays. Subsequent to fiscal year end 2000, the Company has acquired the common stock of Lexel Imaging Systems, Inc. ("Lexel") of Lexington, Kentucky and has reached an agreement to acquire the Electro Optical division of Imaging and Sensing Technology ("IST") in Horseheads, New York. Lexel has developed specialized processes used in manufacturing a wide range of monochrome CRTs for commercial and military programs. The acquisition of the Electro Optical division of IST will be through Lexel, and will provide a product line that includes specialty CRTs used to produce computer generated graphics, high quality photography and medical diagnostic images. Other applications include displays for armored vehicles. The Company, through its acquisitions of Southwest Vacuum Devices, Inc. ("Southwest") located in Atlanta, Georgia and the majority of the outstanding shares of Apex Electronics, Inc. ("Apex") of Passaic, New Jersey, is involved in the manufacturing, marketing and distribution of electron guns and related hardware. The electron gun is the main component of a CRT and these companies give Video Display the ability to supply virtually all of its electron gun requirements. In fiscal 2001, the Company is consolidating the Southwest and Apex locations by relocating the Apex inventory and manufacturing operations to Georgia. In the late 1980's, the Company entered the market of wholesale distribution of consumer electronic parts and consumer products and accessories with the acquisitions of Fox International Ltd., Inc. ("Fox") of Cleveland, Ohio and Vanco International, Inc. ("Vanco") of Chicago, Illinois. Fox later added locations in Chicago, Illinois; Dallas, Texas; Setauket, New York and Orlando, Florida by acquiring assets and existing leases of operating distributors. Upon acquiring these locations, Fox increased the total inventory lines and implemented the Company's operating policies so that all locations of Fox operate on a similar basis. Subsequently, with the investment in the phone and electronic ordering system, Fox has closed the New York, Illinois and Florida locations and handles its customers' requirements from the Ohio and Texas locations. Fox is involved in the wholesale distribution of consumer electronic parts for most major U.S. and foreign electronic manufacturers. In September 1999, the Company sold Vanco in efforts to concentrate its assets within the display products business. Video Display Corporation continues to explore opportunities to expand the products offered in the display industry. This expansion will be achieved by adding new products to its inventory or by 2 acquiring existing companies which enhance the Company's position in the display industry. Research and development primarily consists of establishing the interchangeability of products from various manufacturers and when advantageous, manufacturing products to replace original electronic parts. Industry Segments This information is provided in the notes to consolidated financial statements, Note 11, Page F-19. Products 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 operations are conducted at its facilities near Atlanta, Georgia, and at facilities located in White Mills, Pennsylvania (Chroma); Bossier City, Louisiana (Novatron); Monterrey, Mexico (Video Electronics); Dallas, Texas (Magna View); Warwickshire, England (VDC, Ltd.); and Amsterdam, Netherlands (VDC-Netherlands). At each North American facility, the Company manufactures new or recycles CRTs to meet original specifications. European locations are sales and distribution facilities only. The recycling process for monochrome CRTs involves the cleaning and reconditioning of the glass bulb and the insertion of new electronic components, which are purchased from original equipment manufacturers and the Company's electron gun subsidiaries. The Company's Atlanta and Monterrey, Mexico facilities also assemble monochrome CRTs using new glass bulbs obtained from suppliers in standard sizes where customer requirements warrant the higher cost of new glass. The recycling of color CRTs involves the insertion of new electronic components, while leaving the original display screen intact. All CRTs manufactured by the Company are tested for quality in accordance with standards approved by Underwriter's Laboratories, Inc. and are shipped to customers or warehoused to meet future customer demand. The Company provides one-year limited warranties on its computer and other data display CRTs and two- year limited warranties on its color television components. Management believes that the Company is the largest recycler of CRTs in the domestic replacement markets for both television and data display uses. The Company also distributes new CRTs and other electronic tubes purchased from original manufacturers, both domestic and international. Some of these manufacturers offer large quantities of overstocked original manufactured tubes from time to time at significant price reductions. The Company acquires these tubes when the existing replacement market demonstrates adequate future demand and the purchase price allows a reasonable profit for the risk. However, these purchased inventories sometimes do not turn as quickly as other inventories. In fiscal 2000, distribution of new CRTs purchased from domestic and foreign manufacturers accounted for approximately seventy percent (70%) of the Company's data display CRT sales. The Company markets its products through approximately 250 independent wholesale electronics distributors located throughout the U.S. and sells directly to original equipment manufacturers and their service organizations. The Company also supplies, under private-brand labeling, many of the replacement tubes marketed by several national brand name television set manufacturers. 3 In addition to factors affecting the overall market for such products, the Company's sales volumes in both the color television and the data display CRT replacement markets are dependent upon the Company's ability to provide prompt response to customers' orders, while maintaining quality control and competitive pricing. While the Company's manufacturing activities are scheduled primarily around orders received, it also manufactures a wide variety of CRTs for stock inventory in anticipation of customer demand. With its most recent acquisitions, the Company has begun to position itself to compete in the design and manufacture of complete monitor units for use in the healthcare, military and industrial sectors. The Company's monitor operations are conducted at Phelps, New York (Z-Axis); Birdsboro, Pennsylvania (Teltron); Horsham, Pennsylvania (Aydin); Sanatoga, Pennsylvania (MII); Billerica, Massachusetts (MegaScan); Wolcott, Connecticut (VDC Wolcott); Cape Canaveral, Florida (Display Systems); and subsequent to fiscal year end 2000, Lexington, Kentucky (Lexel). The Company's monitor segment involves the design, engineering and manufacture of a complete monochrome or color monitor unit using new CRTs or flat panel displays. The Company will customize these monitors 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. Electron Guns and Components The Company, through its electron gun manufacturing subsidiaries Southwest and Apex, manufacture electron gun assemblies comprised of small metal and ceramic parts in a glass housing. 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. Therefore, the total amount of research and development expense is not significant and is not segregated in the consolidated financial statements, but is instead included in cost of sales. Raw materials consist of glass and metal stamped parts. The electron gun division markets electron gun component parts to OEMs who manufacture high resolution and specialty tubes for unique applications. The majority of electron guns produced by this division is 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 $483,000 for fiscal 2000 and $520,000 for fiscal 1999 and 1998, respectively. Electron gun sales are historically dependent upon the demand by domestic and foreign television CRT remanufacturers. The Company continues to seek alternative, growth-oriented markets to fully utilize its electron gun and component assembly facilities. The Company, through its acquisition of Wintron located in Howard, Pennsylvania, has added another component parts manufacturer to its CRT family of products. Wintron produces flyback transformers, coils and power transformers. Intercompany sales transactions were $14,000 and $20,000 for fiscal 2000 and 1999, respectively; but may become more significant as the Company's monitor segment grows. Electronic Parts Fox distributes consumer electronic parts of most major consumer electronics manufacturers, both foreign and domestic. Fox resells these products to major electronic distributors, retail electronic repair facilities, third party contractual repair shops and directly to consumers. In its relationship with 4 consumer electronic manufacturers, Fox receives the right, frequently exclusive, to ship parts to authorized dealers. Many of the manufacturers also direct inquiries for replacement parts to Fox. Each manufacturer requires a distributor to stock its most popular parts and monitors the order fill ratio to insure that their customers have access to sufficient replacement parts. Fox maintains very high fill ratios in order to secure favored distributor status from the manufacturers, requiring a significant investment in inventories. To a limited extent, Fox has the ability to rotate its stock with certain vendors to mitigate any risk of investment in inventories. The Company also imported, packaged and distributed consumer electronic accessories for mobile and home audio, video, telephone, CB radio and general electronic usage through Vanco of Waukegan, Illinois. In September 1999, the Company sold its subsidiary, Vanco, in efforts to concentrate its assets within the display businesses. 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 products by implementing new developments in cathode ray and electron optic technology. The Company's commercial and military divisions continue their research and development in advanced infrared imaging ("FLIR"). Recently, the Company has funded additional FLIR research in partnership with the University of Rhode Island. Potential future markets for FLIR include military and security surveillance, target acquisition, fire fighting, and industrial and medical thermography. Through fiscal 2000 the Company has not incurred significant costs for basic research or new product development and therefore, has not segregated them as a separate item but are included in the consolidated financial statements as a part of costs of goods sold. As the Company continues to increase its development of new technology, these costs will be monitored and separately categorized, if material. Employees As of February 29, 2000, the Company employed a total of 474 persons on a full time basis. Of these, 103 are employed in executive, administrative, and clerical positions, 39 are employed in sales and distribution, and 332 are employed in manufacturing operations. Of the Company's 474 employees, 115 are employed at the Company's Mexican subsidiary. Fourteen employees are represented by a union. 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 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 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 5 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 sufficiently large enough to absorb the additional transportation costs incurred by foreign CRT manufacturers. The Company believes it has a competitive advantage and is sole source in providing many of its CRTs to the customer base of its Teltron and Lexel (purchased subsequent to February 29, 2000) subsidiaries as these operations have been providing reliable products and services to these customers for more than 30 years. The Company believes that it has a competitive advantage in the monitor industry due to its flexibility 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 Company's acquisition of Lexel and the new operations of Display Systems and VDC Wolcott, the Company has become one of the leading suppliers within the specialty CRT and monitor markets especially in the military and medical imaging industries. The Company's competition in the consumer electronics parts segment comes primarily from other parts distributors. Many of these distributors are smaller than the Company but a few are of equal or greater sales size. Prices for major manufacturers' products can be directly affected by the manufacturers' suggested resale price. The Company feels that its service to customers and warehousing and shipping network give it a competitive advantage. 6 ITEM 2. PROPERTIES The Company leases its corporate headquarters at 1868 Tucker Industrial Drive in Tucker, Georgia (within the Atlanta metropolitan area) and occupies 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 several others, is leased from related parties at current market rates. See "Item 13 - Certain Relationships and Related Transactions". The following table details manufacturing, warehouse, and administrative facilities: Location Square Feet Lease Expires -------- ----------- ------------- CRT and Electron Gun Manufacturing and Warehouse Facilities ---------------------------------- Tucker, Georgia 59,000 October 31, 2003 Stone Mountain, Georgia 51,000 Month to Month Stone Mountain, Georgia 45,000 December 31, 2001 Tucker, Georgia 40,000 January 2, 2006 White Mills, Pennsylvania 110,000 Company Owned Bossier City, Louisiana 26,000 Company Owned Passaic, New Jersey 15,000 Month to Month Dallas, Texas 24,000 January 31, 2001 Monterrey, Mexico 129,000 Month to Month Alcester, England 4,000 March 1, 2005 Lye, England 4,800 February 28, 2003 Herts, England 1,250 September 1, 2001 Phelps, New York 20,000 Month to Month Birdsboro, Pennsylvania 10,000 Company Owned Phelps, New York 32,000 Company Owned Howard, Pennsylvania 19,000 Company Owned Sanatoga, Pennsylvania 4,200 Month to Month Horsham, Pennsylvania 84,000 March 31, 2002 Billerica, Massachusetts 7,900 March 31, 2001 Wolcott, Connecticut 21,000 Month to Month (1) Cape Canaveral, Florida 15,600 January 17, 2003 Wholesale Electronic Parts Distribution --------------------------------------- Solon, Ohio 19,000 November 30, 2001 Bedford Heights, Ohio 60,000 Company Owned Richardson, Texas 10,000 Month to Month (1) Company owned effective March 2000 ITEM 3. LEGAL PROCEEDINGS None. 7 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted to a vote of the Company's security holders during the fiscal year ended February 29, 2000. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS The Company's common stock is traded on the over-the-counter market under the symbol VIDE. The following table shows the range of prices for the Company's common stock as reported by the National Association of Securities Dealers Automated Quotation System ("NASDAQ") for each quarterly period beginning on March 1, 1998.

For Fiscal Years Ended -------------------------------------------------------------------- February 29, 2000 February 28, 1999 -------------------------------------------------------------------- Quarter Ended High Low High Low ------------- May $6.375 $3.938 $12.250 $9.500 August 5.438 4.125 12.250 7.000 November 5.000 3.750 8.750 5.250 February 4.500 3.313 8.500 5.188

There were approximately 1,055 holders of record of the Company's common stock as of May 19, 2000. The Company has issued options to purchase shares of its common stock. For more specific information concerning the outstanding options, see "Item 11 - Executive Compensation" and the notes to the consolidated financial statements. The Company has not paid dividends in the past. Payment of 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 dividends, as further described in the notes to the consolidated financial statements. 8 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 29, 2000 is derived from the Consolidated Financial Statements, which have been audited by BDO Seidman, LLP, independent certified public accountants, appearing elsewhere in this Report or in previous reports. The selected consolidated financial data should be read in conjunction with, and is qualified in its entirety by reference to, the consolidated financial statements of the Company, the notes thereto and the report thereon included elsewhere in this Report.

For Fiscal Years Ended ------------------------------------------------------------------ Feb. 29 Feb. 28, Feb. 28, Feb. 28, Feb. 29, 2000 1999 1998 1997 1996 ------------------------------------------------------------------ (In Thousands, Except Per Share Data) Income Statement Data Net sales $63,838 $58,889 $57,913 $53,865 $48,112 Operating profit 2,713 3,594 6,941 3,970 3,704 Net income 705 1,122 3,541 1,898 1,779 ------------------------------------------------------------------ Net income per share - basic $ 0.18 $ 0.28 $ 0.90 $ 0.49 $ 0.45 Net income per share - diluted $ 0.18 $ 0.27 $ 0.82 $ 0.47 $ 0.45 Average number of shares outstanding - basic 3,923 3,941 3,921 3,907 3,968 Average number of shares outstanding - diluted 4,361 4,448 4,455 4,197 3,969 ------------------------------------------------------------------ Balance Sheet Data (at year end) Total assets (b) $49,657 $51,641 $40,582 $40,887 $34,419 Working capital (b) 21,862 26,564 16,441 13,784 11,996 Long-term obligations (a) (b) 8,477 13,987 2,791 3,962 2,340

(a) Includes convertible debentures of $1,775,000 in fiscal 2000, 1999 and 1998 and $2,000,000 in 1997. (b) Includes the impact of the Vanco disposition in 2000 and the Aydin acquisition in 1999. 9 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Safe Harbor Statement under the Private Securities Litigation Reform Act: Except for the historical information contained herein, the matters discussed herein are forward-looking statements that involve risk and uncertainties, including but not limited to (i) economic, competitive, governmental and technological factors affecting the Company's operations, markets, products, services and prices, and (ii) other factors discussed in the Company's filings with the Securities and Exchange Commission. Results of Operations The following table sets forth, for the fiscal years indicated, the percentages which selected items in the Statements of Income bear to total revenues:

2000 1999 1998 ------------------------ ------------------------ ---------------------- (in thousands, except percentages) Amount % Amount % Amount % Sales: CRT segment Data display CRTs $10,319 16.2 % $11,791 20.0 % $13,716 23.7 % Entertainment CRTs 9,350 14.6 11,651 19.8 11,428 19.7 Electron guns and components 2,029 3.2 2,631 4.5 1,032 1.8 Monitors 25,430 39.8 11,311 19.2 8,126 14.0 Wholesale distribution segment Consumer electronic parts 16,710 26.2 21,505 36.5 23,611 40.8 --------------------- --------------------- --------------------- 63,838 100.0 58,889 100.0 57,913 100.0 --------------------- --------------------- --------------------- Costs and expenses: Cost of goods sold 43,522 68.2 38,897 66.1 35,951 62.1 Selling and delivery 5,058 7.9 4,749 8.1 4,258 7.3 General and administrative 12,545 19.6 11,649 19.7 10,763 18.6 --------------------- --------------------- --------------------- 61,125 95.7 55,295 93.9 50,972 88.0 --------------------- --------------------- --------------------- Operating profit 2,713 4.3 3,594 6.1 6,941 12.0 --------------------- --------------------- --------------------- Interest expense (1,515) (2.4) (1,161) (2.0) (1,222) (2.0) Other income (expense), net (178) (0.3) (143) (0.2) 30 0.0 --------------------- --------------------- --------------------- Income before income taxes 1,020 1.6 2,290 3.9 5,749 10.0 Provision for income taxes 315 0.5 1,168 2.0 2,208 3.8 --------------------- --------------------- --------------------- Net income $ 705 1.1 % $ 1,122 1.9 % $ 3,541 6.2 % ===================== ===================== =====================

Fiscal 2000 Compared to Fiscal 1999 Net Sales Consolidated net sales for fiscal 2000 increased $4,949,000 or 8.4% over fiscal 1999 net sales. CRT division segment sales increased $9,744,000 or 26.1% over fiscal 1999 while the wholesale parts segment declined $4,795,000 or 22.3% 10 Within the CRT segment, data display CRT sales were down $1,472,000 or 12.5%; entertainment CRT sales were down $2,301,000 or 19.7%; the electron gun/component parts segment was down $602,000 or 22.9%; and the monitor division was up $14,119,000 or 125%. The decline in data display CRTs is attributed to several factors. Projection tube rework done for OEM manufacturers in our Monterrey, Mexico facility, involving the cleaning and polishing of bulbs, was down $245,000 from the comparative period. Additionally, a one time sale in fiscal 1999 of $360,000 was not repeated in fiscal 2000. A second factor for data display declines involves customers switching over to high resolution color products where the replacement needs for high resolution color tubes have not yet impacted data display sales. Lastly, several third party customers have withdrawn from the monitor repair business which also contributed to the decline. Entertainment sales declines are directly related to the sales volumes of major television retailers. Their sales as well as the number of extended warranties sold and the size of sets sold directly impact the entertainment division sales. This division continues to seek alternative sales sources including offshore sales for smaller size television CRTs until the domestic market demand increases for larger tubes (32" and up). Fiscal 1999 reflected the completion of backorders for one larger television retailer, Zenith. The later part of 1999 and fiscal 2000 represented a more normal volume for this customer. Electron gun and component part sales declines are attributed to two primary factors. In mid fiscal 1999, the Company began the relocation and consolidation of Apex Electronics into the Southwest Vacuum facility. Sales for the Apex location were down $180,000 during this time. Sales at the Wintron location were down $494,000 during the comparative periods. This location had many customers who stocked up on inventory just prior to the Company's purchase of Wintron's assets because they anticipated that the Wintron location was going out of business. Thus, continuing sales to those customers were negatively impacted. The 125% growth in the monitor division is attributed to a full year's revenue for two acquisitions completed in late fiscal 1999, Aydin and MegaScan. That increase accounts for $13,953,000 (98.8%) of the $14,119,000 reflected above. The remainder of the increase was due to increased volume at the existing locations. The wholesale parts segment decline was impacted by the sale of Vanco in September 1999. Vanco sales in fiscal 2000 were $2,130,000 compared to $4,085,000 reported in fiscal 1999. The balance of the decline is attributed primarily to the decline in sales at Fox to major electronics distributors of $1,875,000 or 8.7% of fiscal 1999 total wholesale parts segment sales. Additionally, this subsidiary continued to see trends of small distribution and consumer shops being absorbed or eliminated by larger discount chains. There also was a decline of end user consumer sales in fiscal 2000. Gross Margins Consolidated gross profit margins percentages decreased 6.2% in 2000 from 33.9% to 31.8%. CRT division margins declined 7.0% from 32.8% in fiscal 1999 to 30.5% in fiscal 2000. Wholesale parts margins remained essentially the same for the comparative periods. The CRT division margin declines are primarily attributed to Aydin. Aydin, acquired in late fiscal 1999, has added $12,261,000 to sales in fiscal 2000 but at a lower margin (22.9%) than the other CRT division segments have historically provided. This decrease in margins was offset somewhat by an approximate $714,000 decrease in inventory provisions from 1999 to 2000. During the last quarter of fiscal 1999, throughout fiscal 2000 and into fiscal 2001 the Company has been realigning several manufacturing locations within the CRT division in efforts to streamline its 11 production, provide for better plant utilization, and to reduce production overhead costs. During this time additional costs have been incurred as materials and equipment have had to be relocated and personnel trained. Order backlog, though reduced by year end 2000, still remains as a result of the manufacturing locations adjusting to volume changes and the expenses related thereto. Operating Expenses Operating expenses are up $1,205,000 in the comparative periods but are essentially unchanged as a percentage of sales. Included in these increases is $3,197,000 related to the Company's recent acquisitions. The wholesale parts division has reduced expenses by $1,676,000 which includes the sale of Vanco and the elimination of two Fox locations as well as reductions of home office personnel. Interest Expense Interest expense has increased $354,000 to $1,515,000 for the comparative fiscal period. The increase can be attributed primarily to the increase of debt in conjunction with the Aydin acquisition, which was completed in November 1999 and, thus, only three and one-half months outstanding during fiscal 1999. The Aydin acquisition note has an interest rate based on LIBOR plus up to 2.5%. This rate increased 1.44% from fiscal 1999 to fiscal 2000. During the second quarter of fiscal 2000, the Company paid off a term note with its primary bank and during the third quarter paid down the line of credit with proceeds received from the sale of its Vanco subsidiary. Both the term note and line of credit had fixed interest rates. Income Taxes The effective tax rate for fiscal 2000 is 30.9% as compared to 51.0% for fiscal 1999. Fiscal 1999 included the effect of certain foreign taxes primarily from the Company's Mexican subsidiary. Excluding those rates, fiscal 1999's effective rate was 40.3%. Fiscal 2000's tax rate includes utilization of a previously reserved capital tax loss carry forward that offset the tax gain realized on the Vanco sale. Fiscal 1999 Compared to Fiscal 1998 Net Sales Consolidated net sales for fiscal 1999 increased $976,000 or 1.7% over fiscal 1998 net sales. Of this increase, the CRT segment sales increased $3,082,000 or 9.0%, which was offset by declines in sales of the wholesale distribution of consumer electronic parts segment of $2,106,000 or 8.9%. Within the CRT segment, data display CRT sales were down $1,925,000 or 14.0%, television CRT sales were up $223,000 or 2.0%, electron gun sales were up $1,599,000 or 155.0% and monitor sales were up $3,185,000 or 39.2%. Data display CRT sales decreased $500,000 due to the completion of the AWACS military contract during fiscal 1999. Additionally, there were reductions of sales in the Company's U.K. facility of $508,000 from 1998 fiscal sales. U.K. sales have been impacted by market demands and a restructuring of the sales and marketing organization. Entertainment CRT sales were up slightly from fiscal 1998. Projection TV sales within this segment were down approximately $270,000. Fiscal 1998 reflected higher television CRT sales due to the increased fill rate of backorders of a new customer, while fiscal 1999 sales to that customer were more in line with normal expectations. 12 Component part sales were up $1.6 million. This is attributable to one of the Company's acquisitions during fiscal 1999, Wintron, which provided $1.8 million to sales in the current year. Excluding this acquisition, sales of the division fell short of last year by $221,000. Monitor segment sales were up for the comparative period by $3.2 million. The Company's 1999 acquisition of Aydin accounted for an increase of $3.9 million. The offsetting decreases are due to completion of certain contracts for orders for military and industrial sectors during fiscal 1999. Additionally, there was a decline in business as a major subsidiary, Z-Axis, was relocating to a newly constructed company-owned facility during the fourth quarter. The wholesale consumer electronic parts segment sales decreased from the prior year by approximately $2.1 million or 8.9%. There was an overall decline in sales to major electronics distributors of $1,009,000 or 4.3%. Additionally, this division continued to see trends of small distribution and consumer shops being absorbed or eliminated by large discount chains. Fox implemented an electronic parts inquiry and order system in fiscal 1999, enabling customers to purchase via the Internet. Gross Margins Consolidated gross profit margin percentages decreased 10.5% in 1999 to 33.9% from 37.9% in 1998. CRT segment profit percentages declined 15.0% to 32.8% and the wholesale consumer electronics parts segment declined 3.0% to 35.3%. During fiscal 1999, inventory was reduced $1.7 million due to changes in estimates of realizability of certain products requiring a write down in value, as well as reserves for obsolescence. These adjustments negatively impacted consolidated margins 2.9% and CRT segment margins 4.5% for fiscal 1999. The decline in wholesale margins continued to be impacted by OEMs dictating margins with set resale prices on in-warranty merchandise as well as overall competition for the high volume accounts. Operating Expenses In fiscal 1999, operating expenses increased $1,377,000 or 9.2% over expenses in fiscal 1998. Included in these expenses is $1,455,000 of operating expenses related to businesses acquired in fiscal 1999. Excluding the acquisitions, selling, general and administrative expenses were relatively flat in both dollar amounts and as a percentage to sales. Interest Expense Interest expense declined $61,000 to $1,161,000 in fiscal 1999 while overall debt increased $9,257,000 from $11,945,000 in fiscal 1998 to $21,202,000 in fiscal 1999. The increase in debt occurred primarily in the fourth quarter of fiscal 1999 due to the acquisition of Aydin and the funding of that new business. In addition, the Company increased debt for the February 1999 acquisition of MegaScan. The Company sought lower interest rates on this new debt and currently pays a variable rate below prime on the new $7,500,000 debt and renegotiated the rate on the line of credit and term note with its primary bank to a fixed 7.25%. The rate on the line of credit with the secondary bank is still prime plus 1/2%. 13 Income Taxes The effective tax rate for fiscal 1999 was 51% compared to 38% in fiscal 1998. Excluding the effect of foreign taxes primarily from the Company's Mexican subsidiary, the effective rate is 40.3%, which is attributable to non-deductible amortization of certain intangible assets. Liquidity and Capital Resources The Company's working capital was $21,862,000 and $26,564,000 at February 29, 2000 and February 28, 1999, respectively. Cash provided by operations for fiscal 2000, 1999, and 1998 were $4,700,000, $660,000, and $6,635,000, respectively. During fiscal 2000 and 1998, these funds were used primarily to repay debt and to finance capital expenditures. Funds from fiscal 1999 were used for business acquisitions and capital expenditures. During fiscal 1999, the Company increased its debt financing by approximately $9.2 million, which was used for business acquisitions and capital expenditures. In fiscal 1998, the Company established a stock repurchase program, pursuant to which it was authorized to repurchase up to 100,000 shares of the Company's common stock in the open market. This authorized amount was increased to 462,500 shares during fiscal 2000. During fiscal 2000, the Company repurchased 180,460 shares under this program, at prices ranging from $3.60 to $4.26 per share. This is compared to the repurchase of 73,700 shares at prices ranging from $5.63 to $9.26 per share in fiscal 1999. In fiscal 1999, the Company renegotiated its interest rate with its primary lender. The Company was successful in negotiating a favorable reduction on its primary line of credit from prime plus 1/2% to a 7 1/4% fixed rate and extended it for two years. New debt incurred for funding the Company's acquisition of Aydin was also obtained at a rate below prime. During May 1999, the Company negotiated with its primary lender to increase the line of credit by $1,000,000. This increase was used primarily to replenish the $861,000 of current operating funds that were utilized for the acquisition of MegaScan in February 1999. Subsequent to fiscal 2000, the Company borrowed an additional $3,000,000 to finance the Lexel acquisition. The note is for 120 days with an interest rate of LIBOR plus 2% and is guaranteed by an officer of the Company. Subsequent to fiscal 2000, the Company purchased the Wolcott, Connecticut facility for approximately $570,000 cash, which was funded by operations. Additional fiscal 2001 anticipated expenditures include an expansion of the Teltron manufacturing facility and a restructuring of the monochrome CRT manufacturing facilities in Georgia and Monterrey, Mexico totaling approximately $900,000. Management expects that current operations and the anticipated restructuring of the Company's line of credit would finance these expenditures. In July 2000, the Company will be negotiating its lines of credit with both the primary and secondary banks. At this time the Company does not anticipate problems with the negotiations. 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. As in prior years, as sales contracts or acquisitions present themselves, there could be an impact to working capital requirements. As in the past, the intent is to finance such projects with existing bank lines; however, longer, more permanent sources of capital may be required in certain circumstances. 14 Foreign Currencies The Company consolidates its Mexican subsidiary on the basis of the functional currency being the U.S. dollar as over 90% of the subsidiary's sales and purchases are with the parent with accounts receivable and accounts payable settled or eliminated in U.S. dollars. Additionally, the subsidiary leases its facilities and incurs rent based upon U.S. dollars. Any exchange gains or losses due to the actual exchange of pesos and U.S. dollars is minimal. The Company also has subsidiaries in the U.K. and the Netherlands, which are not material to consolidated financial position or results. Year 2000 Risks As was the case with other companies using computers in their operations, the Company was faced with the task of addressing the Year 2000 issue in anticipation of the effects of the rollover from calendar year 1999 to 2000. The "Year 2000 Issue" refers to the widespread use of computer programs that rely on two-digit date codes to perform computations or decision-making functions. The Company performed a comprehensive review of it computer software and hardware to identify the systems that would be affected by the Year 2000 issue. The costs incurred by the Company for the upgrades of hardware and software were approximately $500,000, of which $200,000 was incurred in fiscal 1999 and the balance incurred in fiscal 2000. Other internal time incurred for the labor and management of the project were not tracked separately, but were not estimated to be material to the profits for the year. A part of these costs would likely have been incurred regardless of the Year 2000 issue as a part of normal technological enhancements. The Company did not experience any material disruptions in its operations or activities as a result of Year 2000 problems. In addition, the Company does not expect to encounter any such problems in the foreseeable future. Also, the Company is currently unaware of any Year 2000 problems faced by any suppliers or customers which are likely to have a material adverse effect on the Company. Management Estimates The preparation of financial statements in conformity with Generally Accepted Accounting Principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Examples include provisions for returns, bad debts, inventory obsolescence, valuations on deferred tax assets and the length of product life cycles and fixed asset lives. Actual results could vary from these estimates. Forward-Looking Information 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. Among the factors that could cause actual results to differ materially are the following: business conditions, rapid or unexpected technological changes, product development, inventory risks due to shifts in product demand, competition, domestic and foreign government relations, fluctuations in foreign exchange rates, rising costs for components or unavailability of components, the timing of orders booked, lender relationships, and the risk factors listed from time to time in the Company's reports filed with the Commission. 15 Recent Accounting Pronouncements In June 1998, the Financial Accounting Standards Board issued SFAS 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS 133 establishes new accounting and reporting standards for derivative financial instruments and for hedging activities. SFAS 133 requires an entity to measure all derivatives at fair value and to recognize them in the balance sheet as an asset or liability, depending on the entity's rights or obligations under the applicable derivative contract. The Company will designate each derivative as belonging to one of several possible categories, based on the intended use of the derivative. The recognition of changes in fair value of a derivative that affect the income statement will depend on the intended use of the derivative. If the derivative does not qualify as a hedging instrument, the gain or loss on the derivative will be recognized currently in earnings. If the derivative qualifies for special hedge accounting, the gain or loss on the derivative will either (i) be recognized in income along with an offsetting adjustment to the basis of the item being hedged or (ii) be deferred in other comprehensive income and reclassified to earnings in the same period or periods during which the hedged transaction affects. SFAS 137 delayed the effective date of SFAS 133 to fiscal years beginning after June 15, 2000. The adoption of SFAS 133 is anticipated to have no effect on the Company. Impact of Inflation Inflation has not had a material effect on the Company's results of operations to date. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK None. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The response to this Item is submitted in a separate section of this report on pages F-1 through F-27. ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES. None. 16 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information contained in Video Display Corporation's Proxy Statement to be filed within 120 days of the Company's 2000 fiscal year end, with respect to directors and executive officers of the Company, is incorporated herein by reference in response to this item. In no event shall the information contained in Video Display Corporation's Proxy Statement under the heading "Compensation and Stock Option Committee Report" or under the heading "Performance Graph" be incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The information contained in Video Display Corporation's Proxy Statement to be filed within 120 days of the Company's 2000 fiscal year end, with respect to executive compensation and transactions, is incorporated herein by reference in response to this item. In no event shall the information contained in Video Display Corporation's Proxy Statement under the heading "Compensation and Stock Option Committee Report" or under the heading "Performance Graph" be incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information contained in Video Display Corporation's Proxy Statement to be filed within 120 days of the Company's 2000 fiscal year end, with respect to security ownership of certain beneficial owners and management, is incorporated herein by reference in response to this item. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information contained in Video Display Corporation's Proxy Statement to be filed within 120 days of the Company's 2000 fiscal year end, with respect to certain relationships and related transactions, is incorporated herein by reference in response to this item. 17 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this report: 1. Financial Statements: Index to Consolidated Financial Statements. F-1 2. Financial Statement Schedule: Index to Consolidated Financial Statements Schedule. F-25 (b) Reports on Form 8-K: The Company filed a report on Form 8-K on May 17, 2000 regarding the acquisition of Lexel Imaging Systems, Inc. An amended Form 8-K will be filed, which will include audited proforma information, when the applicable financial information is gathered. (c) Exhibits Exhibit Number Exhibit Description -------------------------------------------------------------------------------- *3(a) Articles of Incorporation of the Company. *3(b) By-Laws of the Company. *10(f) Employee Stock Option Plan. ** *10(i) Lease dated January 1, 1992 by and between Registrant (Lessee) and Ronald D. Ordway (Lessor) with respect to premises located at 4601 Lewis Road, Stone Mountain, Georgia. *10(j) Lease dated November 1, 1993 by and between Registrant (Lessee) and Ronald D. Ordway (Lessor) with respect to premises located at 1868 Tucker Industrial Road, Tucker, Georgia. *10(k) Lease dated January 1, 1996 by and between Registrant (Lessee) and Ronald D. Ordway (Lessor) with respect to premises located at 4701 Granite Drive, Tucker, Georgia. 21 Subsidiary companies - see page F-28 herein. * Incorporated by reference to other documents on file with the Securities and Exchange Commission which were previously filed. ** Indicates executive compensation plans and arrangements. 18 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: VIDEO DISPLAY CORPORATION May 25, 2000 By: /s/ Ronald D. Ordway ----------------------------- Ronald D. Ordway Chairman of the Board and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature - Name Capacity Date ---------------- -------- ---- /s/ Ronald D. Ordway Chief Executive May 25, 2000 ------------------------ Ronald D. Ordway Officer & Director /s/ Erv Kuczogi President May 25, 2000 ------------------------ Erv Kuczogi Director /s/ Murray Fox Director May 25, 2000 ------------------------ Murray Fox /s/ Carleton E. Sawyer Director May 25, 2000 ------------------------ Carleton E. Sawyer /s/ Ronald G. Moyer Director May 25, 2000 ------------------------ Ronald G. Moyer /s/ Carol D. Franklin Chief Financial Officer May 25, 2000 ------------------------ Carol D. Franklin 19 Video Display Corporation and Subsidiaries Index to Consolidated Financial Statements

Report of Independent Certified Public Accountants F-2 Consolidated Financial Statements Consolidated Balance Sheets as of February 29, 2000 and February 28, 1999 F-3 Consolidated Statements of Income for the three years ended February 29, 2000 and February 28, 1999 and 1998 F-5 Consolidated Statements of Shareholders' Equity and Comprehensive Income for the three years ended February 29, 2000 and February 28, 1999 and 1998 F-6 Consolidated Statements of Cash Flows for the three years ended February 29, 2000 and February 28, 1999 and 1998 F-7 Notes to Consolidated Financial Statements F-8

F-1 Report of Independent Certified Public Accountants Video Display Corporation Tucker, Georgia We have audited the consolidated balance sheets of Video Display Corporation and subsidiaries as of February 29, 2000 and February 28, 1999, and the related consolidated statements of income, shareholders' equity and comprehensive income and cash flows for each of the three years in the period ended February 29, 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Video Display Corporation and subsidiaries as of February 29, 2000 and February 28, 1999, and the consolidated results of their operations and their cash flows for each of the three years in the period ended February 29, 2000, in conformity with generally accepted accounting principles. BDO Seidman, LLP Atlanta, Georgia May 25, 2000 F-2 Video Display Corporation and Subsidiaries Consolidated Balance Sheets

February 29, February 28, 2000 1999 --------------------- --------------------- Assets (Notes 6 and 7) Current assets: Cash and cash equivalents $ 4,235,000 $ 2,150,000 Accounts receivable, net of allowance of $301,000 and $360,000 (Note 5) 8,947,000 8,022,000 Costs and earnings in excess of billings on contracts (Note 3) 131,000 952,000 Inventories, net of reserve of $1,337,000 and $713,000 (Note 4) 25,622,000 28,467,000 Prepaid expenses and other (Note 10) 1,334,000 1,976,000 --------------------- --------------------- Total current assets 40,269,000 41,567,000 --------------------- --------------------- Property, plant and equipment: Land 540,000 540,000 Buildings 4,889,000 4,696,000 Machinery and equipment 15,347,000 15,453,000 --------------------- --------------------- 20,776,000 20,689,000 Accumulated depreciation and amortization (14,572,000) (14,336,000) --------------------- --------------------- 6,204,000 6,353,000 Goodwill, net of accumulated amortization of $1,734,000 and $1,493,000 (Note 2) 1,627,000 2,193,000 Deferred income taxes (Note 10) 122,000 - Other assets (Note 5) 1,435,000 1,528,000 --------------------- --------------------- Total assets $ 49,657,000 $ 51,641,000 ===================== =====================

See accompanying notes to consolidated financial statements. F-3 Video Display Corporation and Subsidiaries Consolidated Balance Sheets

February 29, February 28, 2000 1999 --------------------- --------------------- Liabilities and Shareholders' Equity Current liabilities: Lines of credit (Note 7) $ 6,010,000 $ 2,970,000 Note payable to shareholder (Note 8) 2,400,000 2,500,000 Accounts payable 5,008,000 4,875,000 Accrued liabilities 3,482,000 2,982,000 Current maturities of long-term debt (Note 6) 1,507,000 1,676,000 --------------------- --------------------- Total current liabilities 18,407,000 15,003,000 Revolving line of credit (Note 7) - 4,500,000 Long-term debt, less current maturities (Note 6) 6,702,000 7,712,000 Convertible subordinated debentures (Note 12) 1,775,000 1,775,000 Deferred income taxes (Note 10) - 102,000 Minority interests 167,000 186,000 --------------------- --------------------- Total liabilities 27,051,000 29,278,000 --------------------- --------------------- Commitments and Contingencies (Notes 13 and 14) Shareholders' equity (Notes 7 and 9): Preferred stock; no par value - 2,000,000 shares authorized, none issued and outstanding - - Common stock; no par value - 10,000,000 shares authorized; 3,790,000 and 3,920,000 shares issued and outstanding 2,994,000 3,591,000 Additional paid-in capital 92,000 92,000 Retained earnings 20,921,000 20,216,000 Accumulated other comprehensive income (1,401,000) (1,536,000) --------------------- --------------------- Total shareholders' equity 22,606,000 22,363,000 --------------------- --------------------- Total liabilities and shareholders' equity $49,657,000 $51,641,000 ===================== =====================

See accompanying notes to consolidated financial statements. F-4 Video Display Corporation and Subsidiaries Consolidated Statements of Income

Fiscal Year Ended ----------------------------------------------------------------- February 29, February 28, February 28, 2000 1999 1998 ------------------- ------------------- ------------------- Net sales (Note 14) $63,838,000 $58,889,000 $57,913,000 Cost of goods sold 43,522,000 38,897,000 35,951,000 ------------------- ------------------- ------------------- Gross profit 20,316,000 19,992,000 21,962,000 ------------------- ------------------- ------------------- Operating expenses: Selling and delivery 5,058,000 4,749,000 4,258,000 General and administrative 12,545,000 11,649,000 10,763,000 ------------------- ------------------- ------------------- 17,603,000 16,398,000 15,021,000 ------------------- ------------------- ------------------- Operating profit 2,713,000 3,594,000 6,941,000 ------------------- ------------------- ------------------- Other income (expense): Interest expense (1,515,000) (1,161,000) (1,222,000) Gain on sale of subsidiary 433,000 - - Loss on investment in equity investee (482,000) - - Loss on sale of long-term investment (93,000) - - Other, net (55,000) (158,000) 35,000 ------------------- ------------------- ------------------- (1,712,000) (1,319,000) (1,187,000) ------------------- ------------------- ------------------- Income before minority interest and income taxes 1,001,000 2,275,000 5,754,000 Attributable to minority interest 19,000 15,000 (5,000) ------------------- ------------------- ------------------- Income before income taxes 1,020,000 2,290,000 5,749,000 Income taxes (Note 10) 315,000 1,168,000 2,208,000 ------------------- ------------------- ------------------- Net income $ 705,000 $ 1,122,000 $ 3,541,000 =================== =================== =================== Net income per share - basic $ 0.18 $ 0.28 $ 0.90 =================== =================== =================== Net income per share - diluted $ 0.18 $ 0.27 $ 0.82 =================== =================== =================== Average shares outstanding - basic 3,923,000 3,941,000 3,921,000 =================== =================== =================== Average shares outstanding - diluted 4,361,000 4,448,000 4,455,000 =================== =================== ===================

See accompanying notes to consolidated financial statements. F-5 Video Display Corporation and Subsidiaries Consolidated Statements of Shareholders' Equity and Comprehensive Income

Accumulated Current Additional Other Year Common Paid-in Retained Comprehensive Comprehensive Stock Capital Earnings Income Income Balance, February 28, 1997 $3,529,000 $92,000 $15,553,000 $(1,431,000) Net income for the year - - 3,541,000 - $3,541,000 Unrealized loss on marketable equity securities - - - (86,000) (86,000) Foreign currency translation Adjustment - - - 12,000 12,000 -------------- Total comprehensive income - $3,467,000 ============== Repurchase of common stock (271,000) - - - Conversion of debt to common stock 150,000 - - - Issuance of common stock under stock option plan 57,000 - - - --------------------------------------------------------------- Balance, February 28, 1998 3,465,000 92,000 19,094,000 (1,505,000) Net income for the year - - 1,122,000 - $1,122,000 Unrealized loss on marketable equity securities - - - (33,000) (33,000) Foreign currency translation Adjustment - - - 2,000 2,000 -------------- Total comprehensive income $1,091,000 ============== Repurchase of common stock (508,000) - - - Issuance of common stock under stock option plan 22,000 - - - Issuance of common stock for business acquisitions 612,000 - - - --------------------------------------------------------------- Balance, February 28, 1999 3,591,000 92,000 20,216,000 (1,536,000) Net income for the year - - 705,000 - $ 705,000 Unrealized gain on marketable equity securities - - - 22,000 22,000 Realized loss on marketable equity securities - - - 100,000 100,000 Foreign currency translation - - Adjustment - 13,000 13,000 -------------- Total comprehensive income $ 840,000 ============== Issuance of common stock under stock option plan 100,000 - - - Repurchase of common stock (697,000) - - - --------------------------------------------------------------- Balance, February 29, 2000 $2,994,000 $92,000 $20,921,000 $(1,401,000) ===============================================================

See accompanying notes to consolidated financial statements. F-6 Video Display Corporation and Subsidiaries Consolidated Statements of Cash Flows

February 29, February 28, February 28, Year ended 2000 1999 1998 ------------------- ------------------- ------------------- Operating Activities Net income $ 705,000 $ 1,122,000 $ 3,541,000 Adjustments to reconcile net income to net cash Provided by operating activities: Depreciation and amortization 1,438,000 1,219,000 1,417,000 Provision for losses on accounts receivable 304,000 254,000 128,000 Provision for inventory reserves 909,000 1,623,000 282,000 Deferred income taxes (355,000) (118,000) (351,000) Net losses in investing activities 143,000 - - Changes in working capital items: Accounts receivable (654,000) 1,047,000 808,000 Inventories 1,040,000 (3,696,000) 761,000 Prepaid expenses and other assets 463,000 (60,000) (76,000) Accounts payable and accrued liabilities 707,000 (731,000) 125,000 ------------------- ------------------- ------------------- Net cash provided by operating activities 4,700,000 660,000 6,635,000 ------------------- ------------------- ------------------- Investing Activities Capital expenditures (1,374,000) (2,037,000) (664,000) Disposal of fixed assets 274,000 - - Purchases of businesses, net of cash acquired - (7,746,000) (469,000) Proceeds from sale of subsidiary 1,784,000 - - Other investing activities 24,000 (20,000) (8,000) ------------------- ------------------- ------------------- Net cash provided (used) by investing activities 708,000 (9,803,000) (1,141,000) ------------------- ------------------- ------------------- Financing Activities Proceeds from long-term debt and lines of Credit 23,493,000 42,518,000 15,834,000 Repayments of long-term debt and lines of Credit (26,232,000) (33,334,000) (19,571,000) Stock option exercises 100,000 22,000 57,000 Purchases and retirements of common stock (697,000) (508,000) (271,000) ------------------- ------------------- ------------------- Net cash provided (used) by financing activities (3,336,000) 8,698,000 (3,951,000) ------------------- ------------------- ------------------- Effect of exchange rates on cash 13,000 (3,000) 12,000 ------------------- ------------------- ------------------- Net change in cash and cash equivalents (Note 15) 2,085,000 (448,000) 1,555,000 Cash and cash equivalents, beginning of year 2,150,000 2,598,000 1,043,000 ------------------- ------------------- ------------------- Cash and cash equivalents, end of year $ 4,235,000 $ 2,150,000 $ 2,598,000 =================== =================== ===================

See accompanying notes to consolidated financial statements. F-7 Video Display Corporation and Subsidiaries Notes to Consolidated Financial Statements Note 1. Summary of Significant Accounting Policies Nature of Business Video Display Corporation (the "Company") principally manufactures and distributes cathode ray tubes ("CRTs") in the worldwide replacement market for use in television sets and data display screens for medical, military and industrial monitoring systems as well as manufacturing and distributing electron optic parts which are significant components in new and recycled CRTs and monitors. The Company also manufactures low and high-end monochrome and color CRT and AMLCD monitor displays for use in specialty high performance and ruggedized applications. The Company also acts as a wholesale distributor of electronic parts and CRTs purchased from domestic and foreign manufacturers. The Company's operations are principally located in the U.S.; however, the Company does have subsidiary operations located in Mexico, the U.K. and the Netherlands. Principles of Consolidation The consolidated financial statements include the accounts of the Company and its majority-owned subsidiaries after elimination of all intercompany accounts and transactions. Property, Plant and Equipment Property, plant and equipment are stated at cost. Depreciation and amortization are computed principally by the straight-line method for financial reporting purposes over the following estimated useful lives: Buildings - ten to twenty- five years; Machinery and Equipment - five to ten years. Depreciation expense totaled approximately $1,056,000, $979,000, and $1,139,000 for the three years ended 2000, 1999, and 1998, respectively. Management reviews and assesses long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In performing the review for recoverability, management estimates the future cash flows expected to result from the use of the asset. If the sum of the undiscounted expected cash flows is less than the carrying amount of the asset, an impairment loss is recognized based upon the estimated fair value of the asset. Inventories Inventories are stated at the lower of cost (first-in, first-out) or market. F-8 Video Display Corporation and Subsidiaries Notes to Consolidated Financial Statements Goodwill Goodwill is the excess of the purchase price over the fair value of net assets acquired in business combinations accounted for as purchases. Goodwill is amortized on a straight-line basis over the periods benefited, principally five to fifteen years. The Company's operational policy for the assessment and measurement of any impairment in goodwill which is other than temporary is to evaluate the recoverability and remaining life and determine whether it should be completely written off or the amortization period accelerated. The Company will recognize an impairment if undiscounted estimated future operating cash flows of the acquired business are determined to be less than the carrying amount. The amount of impairment, if any, is measured based on projected discounted future operating cash flows using a discount rate reflecting the Company's average cost of funds. Foreign Currency Translations Assets and liabilities of foreign subsidiaries are translated using the exchange rate in effect at the end of the year. Revenues and expenses are translated using the average of the exchange rates in effect during the year. Translation adjustments and transaction gains and losses related to long-term intercompany transactions are accumulated as a separate component of shareholders' equity. The Company reports its Mexican subsidiary on the basis of the functional currency being the U.S. dollar as over 90% of the subsidiary's sales and purchases are with the parent with accounts receivable and accounts payable settled or eliminated in U.S. dollars. Additionally, the subsidiary leases its facilities and incurs rent based upon U.S. dollars. Any exchange gains or losses due to the actual exchange of pesos and U.S. dollars is minimal. The Company also has subsidiaries in the U.K. and the Netherlands, which are not material. Earnings Per Share Basic earnings per share is computed by dividing income available to common shareholders by the weighted average number of shares outstanding during each year. Shares issued during the year are weighted for the portion of the year 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 is a reconciliation from basic earnings per share to diluted earnings per share for each of the last three years.

Average Shares Earnings Per Net Income Outstanding Share -------------- --------------- ---------------- 2000 Basic $ 705,000 3,923,000 $ 0.18 Effect of dilution: Options - 27,000 Convertible debt 88,000 411,000 -------------- --------------- ---------------- Diluted $ 793,000 4,361,000 $0.18 ============== =============== ================

F-9 Video Display Corporation and Subsidiaries Notes to Consolidated Financial Statements 1999 Basic $ 1,122,000 3,941,000 $ 0.28 Effect of dilution: Options - 115,000 Convertible debt 88,000 392,000 -------------- --------------- ---------------- Diluted $ 1,210,000 4,448,000 $ 0.27 ============== =============== ================ 1998 Basic $ 3,541,000 3,921,000 $ 0.90 Effect of dilution: Options - 126,000 Convertible debt 94,000 408,000 -------------- --------------- ---------------- Diluted $ 3,635,000 4,455,000 $ 0.82 ============== =============== ================ Revenue Recognition Revenue from product sales are recognized when goods are shipped. The Company does not offer rights of return to customers; however, it does offer one-year and two-year limited warranties on certain products. Warranty expense is not material to the Company's consolidated financial statements. Revenue from contracts that are long-term in nature at the Company's Aydin subsidiary is recognized by the percentage of completion method. Profit estimates are revised periodically based upon changes in facts. Any losses identified on contracts are recognized immediately. Revenue related to all other contracts is recognized upon shipment of product. Financial Instruments Fair values of cash and cash equivalents, short-term investments and short-term debt approximate cost due to the short period of time to maturity. The recorded amounts of long-term debt are considered to approximate fair value due to either rates which fluctuate with the market or are otherwise commensurate with the current market. Fair values of investments are based on quoted market prices or pricing models using current market rates which approximate carrying value. Use of Estimates The preparation of financial statements in conformity with Generally Accepted Accounting Principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Examples include provisions for returns, bad debts, inventory reserves, valuations on deferred tax assets and the length of product life cycles and fixed asset lives. Actual results could vary from these estimates. Cash and Cash Equivalents Cash and cash equivalents include cash on account, demand deposits and certificates of deposit with maturities of less than three months. F-10 Video Display Corporation and Subsidiaries Notes to Consolidated Financial Statements Investments The Company owns certain marketable equity securities which are recorded at fair value based upon quoted market prices and classified as available-for-sale securities under Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities". Changes in fair value of these marketable equity securities are reflected in the statements of shareholders' equity. Investments are included under the caption "Other Assets". Recent Accounting Pronouncements In June 1998, the Financial Accounting Standards Board issued SFAS 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS 133 establishes new accounting and reporting standards for derivative financial instruments and for hedging activities. SFAS 133 requires an entity to measure all derivatives at fair value and to recognize them in the balance sheet as an asset or liability, depending on the entity's rights or obligations under the applicable derivative contract. The Company will designate each derivative as belonging to one of several possible categories, based on the intended use of the derivative. The recognition of changes in fair value of a derivative that affect the income statement will depend on the intended use of the derivative. If the derivative does not qualify as a hedging instrument, the gain or loss on the derivative will be recognized currently in earnings. If the derivative qualifies for special hedge accounting, the gain or loss on the derivative will either (i) be recognized in income along with an offsetting adjustment to the basis of the item being hedged or (ii) be deferred in other comprehensive income and reclassified to earnings in the same period or periods during which the hedged transaction affects. SFAS 137 delayed the effective date of SFAS 133 to fiscal years beginning after June 15, 2000. The adoption of SFAS 133 is anticipated to have no effect on the Company. Fiscal Year All references herein to "2000", "1999" and "1998" mean the fiscal years ended February 29, 2000 and February 28, 1999 and 1998, respectively. Reclassification Certain balances have been reclassified in the 1999 and 1998 consolidated financial statements to conform to the 2000 presentation. F-11 Video Display Corporation and Subsidiaries Notes to Consolidated Financial Statements Note 2. Business Acquisitions In February 1999, the Company acquired the MegaScan medical imaging division ("MegaScan") of ACCESS Radiology Corporation of Lexington, Massachusetts. MegaScan offers a line of ultrahigh resolution grayscale medical imaging CRT monitors. The assets acquired consisted of inventory and fixed assets. The Company assumed product warranties (up to a maximum of $200,000) and operating payables. The Company paid $861,000 in cash as consideration. In November 1998, the Company acquired the assets and assumed certain liabilities of the US and UK Display Divisions of Aydin Corporation, headquartered in Horsham, Pennsylvania. Aydin Displays, Inc. ("Aydin") offers a complete line of high-resolution color CRT monitors and custom designed AMLCD flat panel displays for commercial and military applications. The assets acquired consisted of trade receivables, inventory, fixed assets and prepaid expenses. The Company assumed trade payables and accrued liabilities. The Company paid $6,438,000 in cash at the acquisition date, which was funded through $7.5 million of new debt with the Company's primary lender, as consideration. The Company subsequently received $795,000 in cash in fiscal 2000 as a purchase price adjustment, resulting in a total purchase price of $5,643,000. In June 1998, the Company acquired 100% of the outstanding common stock of Mengel Industries, Inc. ("MII") located in Sanatoga, Pennsylvania. MII supplies independent, OEM and hospital service personnel with CRTs, camera tubes and other components for medical imaging to the healthcare industry. As consideration, the Company issued 44,000 shares of common stock valued at $445,000 and paid $50,000 in cash. The excess of the purchase price over the fair value of the net assets acquired was approximately $446,000 and is being amortized over 15 years. In March 1998, the Company acquired the inventory and equipment of Wintron, Inc. ("Wintron") located in Howard, Pennsylvania. Wintron manufactures custom designed deflection components, high voltage power supplies, coils and flyback transformers and other CRT drive circuitry for airborne, commercial and military applications. The Company paid $400,000 in cash as consideration. All of the above transactions have been accounted for under the purchase method of accounting and the results of operations of the acquired businesses since their acquisition dates have been included in the consolidated financial statements. The following table summarizes the unaudited pro forma consolidated results of operations of the Company for 1999 and 1998, assuming the acquisitions had occurred at the beginning of the fiscal periods. The pro forma financial information is not necessarily indicative of what would have occurred had the acquisitions been made as of those dates, nor is it indicative of future results of operations. F-12 Video Display Corporation and Subsidiaries Notes to Consolidated Financial Statements The pro forma amounts give effect to appropriate adjustments for the fair value of the net assets acquired, amortization of the excess of the purchase price over the net assets acquired, depreciation, interest expense and income taxes.

1999 1998 ------------ ------------ Net sales $ 71,039,000 $ 83,623,000 Net loss (2,929,000) (905,000) Basic and diluted loss per share (0.74) (0.23)

Note 3. Costs and Earnings in Excess of Billings on Contracts Information relative to contracts in progress as of February 29, 2000 and February 28, 1999 is as follows:

2000 1999 ------------ ------------ Costs incurred to date on uncompleted contracts $ 4,392,000 $ 4,516,000 Estimated earnings recognized to date on these contracts 2,320,000 1,954,000 ------------ ------------ 6,712,000 6,470,000 Billings to date (6,581,000) (5,518,000) ------------ ------------ Costs and earnings in excess of billings, net $ 131,000 $ 952,000 ============ ============

Note 4. Inventories Inventories consisted of:

2000 1999 ------------ ------------ Raw materials $ 4,262,000 $ 6,136,000 Finished goods 22,697,000 23,044,000 ------------ ------------ 26,959,000 29,180,000 Reserves for obsolescence (1,337,000) (713,000) ------------ ------------ $ 25,622,000 $ 28,467,000 ============ ============

Note 5. Note Receivable The Company holds an unsecured note receivable as a result of a litigation settlement. The note has a face value of $1,500,000 due in monthly installments of $15,000 over a term of 100 months. The note is non-interest bearing for the first 50 payments and interest bearing, at prime (8.75% at February 29, 2000) plus 1%, over the remaining 50 payments. As of February 29, 2000, the note is recorded at a total of $591,000, net of its discount and allowance, and is included and classified under the captions "Accounts Receivable" and "Other Assets". F-13 Video Display Corporation and Subsidiaries Notes to Consolidated Financial Statements Note 6. Long-Term Debt Long-term debt consisted of the following:

2000 1999 ------------ ------------ Term loan facility; floating interest rate based on an adjusted LIBOR rate (9.0% as of February 29, 2000), quarterly principal payments commencing November 1999 and maturing November 2005; collateralized by assets of Aydin Displays, Inc. $ 6,875,000 $ 7,500,000 Mortgage payable to bank; interest not to exceed 7.50% payable monthly; principal monthly repayments of $13,000, maturing December 2003; collateralized by land and building. 774,000 774,000 Term loan facility with bank; monthly payments of $67,000 including interest at 7.25%, maturing August 1999, collateralized by certain equipment. - 400,000 Other 560,000 714,000 ------------ ------------ 8,209,000 9,388,000 Less current maturities 1,507,000 1,676,000 ------------ ------------ $ 6,702,000 $ 7,712,000 ============ ============

Future maturities of long-term debt are as follows:

Year Amount ---- ------ 2001 $ 1,507,000 2002 3,243,000 2003 1,369,000 2004 131,000 2005 1,299,000 Thereafter 660,000 ------------ $ 8,209,000 ============

F-14 Video Display Corporation and Subsidiaries Notes to Consolidated Financial Statements Note 7. Lines of Credit During early 1998, the Company refinanced its loan agreement ("Agreement") to provide for a $4,500,000 line of credit with its primary bank ("Primary Line") and $3,500,000 with a second bank ("Secondary Line") (together "the Line(s)") secured by substantially all of the assets of the Company. In conjunction with this refinancing, the Company borrowed $2,800,000 from its CEO, as discussed in Note 8, to pay down the original line of credit. The Company amended its Primary Line to extend the termination date to July 1, 2000 and to lower the interest rate to a fixed rate of 7.25% per annum. The commitment fee of 1/2% on the unused portion of the Primary Line was also eliminated. All other terms of the Primary Line remained the same as the original line of credit. The Secondary Line was extended to July 31, 2000 with the interest rate and all other terms remaining the same, including a commitment fee of 1/2% charged on the unused portion. Borrowings under the Lines are limited by eligible accounts receivable and inventory, as defined. As of February 29, 2000, the outstanding balances on the Primary Line and Secondary Line were $3,040,000 and $2,970,000, respectively. Additional amounts were available under the Primary Line and the Secondary Line of $2,460,000 and $59,000 as of February 29, 2000. The Line agreements contain affirmative and negative covenants including requirements related to tangible net worth, indebtedness to tangible net worth and cash flow coverage. Additionally, dividend payments, capital expenditures and acquisitions have certain restrictions. Substantially all of the Company's retained earnings are restricted based upon these covenants. In May 1999, the Company increased the Primary Line by $1,000,000 to $5,500,000. The Company does not anticipate problems renewing the lines of credit with the primary or secondary banks in fiscal 2001. Note 8. Note Payable to Shareholder During 1998, the Company borrowed $2,800,000 from its CEO in conjunction with the bank refinancing as discussed in Note 7. During 1997, the Company borrowed $900,000 from the CEO to purchase the assets of Teltron Technologies, Inc. Both of these borrowings were combined into one note payable due on demand with interest payable monthly at prime plus one percent. The outstanding balance on the note payable was $2,200,000 as of February 29, 2000. The Company repaid $300,000 and $400,000 in 2000 and 1999, respectively. Additionally, during 2000 the Company borrowed $200,000 from an officer of one of its subsidiaries, which is outstanding at February 29, 2000. F-15 Video Display Corporation and Subsidiaries Notes to Consolidated Financial Statements Note 9. Stock Options The Company has an incentive stock option plan whereby total options to purchase 500,000 shares may be granted to key employees at a price not less than fair market value at the time the options are granted and are exercisable beginning on the first anniversary of the grant date for a period not to exceed ten years. Information regarding the option plan is as follows:

Weighted Average Exercise Shares Price ------------ ------------ Outstanding as of February 28, 1997 273,000 $ 3.14 Granted 14,000 8.80 Cancelled (16,000) 3.56 ------------ ------------ Outstanding as of February 28, 1998 271,000 $ 3.61 Granted 7,000 9.95 Exercised (8,000) 2.75 Cancelled (50,000) 2.00 ------------ ------------ Outstanding as of February 28, 1999 220,000 $ 3.95 Granted 5,000 10.13 Exercised (50,000) 2.00 Cancelled (20,000) 4.88 ------------ ------------ Outstanding as of February 29, 2000 155,000 $ 4.65 ============ ============

The weighted average fair value of options, calculated using the Black-Scholes option pricing model, granted during the years 2000, 1999 and 1998 was $0.14, $3.51, and $3.14, respectively. The weighted average remaining life of options outstanding at February 29, 2000 and February 28, 1999 and 1998 was 6.6, 6.8 and 7.7 years, respectively. The range of exercise prices was $2.75 to $10.25. As of February 29, 2000 and February 28, 1999 and 1998, options of 145,000 shares, 207,000 shares and 257,000 shares, respectively, were exercisable. The Company has adopted the disclosure-only provisions of SFAS No. 123, "Accounting for Stock-Based Compensation". Accordingly, no compensation cost has been recognized for stock options granted. Had compensation cost been determined based on the fair value at the grant date for awards in 2000, 1999 and 1998, consistent with the provisions of the Standard, the Company's net earnings and earnings per share would have changed as indicated by the pro forma amounts below: F-16 Video Display Corporation and Subsidiaries Notes to Consolidated Financial Statements

------------------------------------------ Fiscal Year Ended ------------------------------------------ 2000 1999 1998 ------------ ------------ ------------ Net income - as reported $ 705,000 $ 1,122,000 $ 3,541,000 Net income - pro forma 704,000 1,087,000 3,497,000 Basic earnings per common share - as reported $ 0.18 $ 0.28 $ 0.90 Basic earnings per common share - proforma $ 0.18 $ 0.28 $ 0.89 Diluted earning per common share - as reported $ 0.18 $ 0.27 $ 0.82 Diluted earning per common share - proforma $ 0.18 $ 0.26 $ 0.81

The fair value of stock options used to compute pro forma net income applicable to common shareholders and earnings per share disclosures is the estimated present value at grant date using the Black-Scholes option-pricing model with the following weighted average assumptions for 2000, 1999 and 1998, respectively: expected volatility of 35%, 50% and 50%; a risk free interest rate of 5.65%, 5.41% and 5.66%; expected lives of 2.0, 5.0 and 2.5 years; and dividend yield of 0.00% for all years. Note 10. Income Taxes The components of the provision for income taxes are as follows:

------------------------------------------ Fiscal Year Ended ------------------------------------------ 2000 1999 1998 ------------ ------------ ------------ Current: Federal $ 781,000 $ 879,000 $ 2,175,000 State 134,000 162,000 384,000 Foreign (245,000) 245,000 - ------------ ------------ ------------ 670,000 1,286,000 2,559,000 ------------ ------------ ------------ Deferred: Federal (57,000) (100,000) (298,000) State (10,000) (18,000) (53,000) Foreign (288,000) - - ------------ ------------ ------------ (355,000) (118,000) (351,000) ------------ ------------ ------------ Total $ 315,000 $ 1,168,000 $ 2,208,000 ============ ============ ============ Income before taxes consists of the following: 2000 1999 1998 ------------ ------------ ------------ U.S. operations $ 2,153,000 $ 2,206,000 $ 5,637,000 Foreign operations (1,133,000) 84,000 112,000 ------------ ------------ ------------ $ 1,020,000 $ 2,290,000 $ 5,749,000 ============ ============ ============

Deferred income taxes as of February 29, 2000 and February 28, 1999 reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes and certain tax loss carryforwards. F-17 Video Display Corporation and Subsidiaries Notes to Consolidated Financial Statements The sources of the temporary differences and their effect on the net deferred tax asset are as follows:

2000 1999 ------------ ------------ Deferred tax assets: Investment loss carryforwards $ 287,000 $ 368,000 Foreign net operating loss carryforwards 288,000 - Uniform capitalization costs 465,000 457,000 Inventory reserve 489,000 271,000 Accrued vacation 80,000 101,000 Allowance for doubtful accounts 85,000 119,000 Other 57,000 103,000 ------------ --------- 1,751,000 1,419,000 Valuation allowance (287,000) (312,000) Deferred tax liabilities: Basis difference of property, plant and equipment (203,000) (197,000) Other (16,000) (20,000) ------------ ------------ Net deferred tax assets $ 1,245,000 $ 890,000 ============ ============ Current 1,123,000 992,000 Non-current 122,000 (102,000) ------------ ------------ $ 1,245,000 $ 890,000 ============ ============

Current deferred tax assets are included in the balance sheet under the caption "Prepaid expenses and other." Investment loss carryforwards consist primarily of investment losses which may be utilized to offset any future taxable gains on the sale of investments. The Company has provided a valuation allowance on these loss carryforwards as realization of these assets is considered unlikely. The effective income tax rate differed from the statutory federal income tax rate as follows:

Fiscal Year Ended ------------------------------------------------------------- 2000 1999 1998 ----------------- ----------------- ----------------- Taxes at statutory federal income tax rate $347,000 $ 779,000 $ 1,955,000 State income taxes, net of federal benefit 47,000 107,000 254,000 Tax effects attributable to foreign operations (80,000) 216,000 - Non-deductible amortization of certain intangible assets 124,000 108,000 72,000 Utilization of foreign operating loss - - (42,000) carryforwards Change in valuation allowance (25,000) - - Other (98,000) (42,000) (31,000) ----------------- ----------------- ----------------- Taxes at effective income tax rate $315,000 $ 1,168,000 $ 2,208,000 ================= ================= =================

F-18 Video Display Corporation and Subsidiaries Notes to Consolidated Financial Statements Note 11. Industry Segments During 1999, the Company adopted SFAS 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS 131 establishes standards for the way that public business enterprises report information about operating segments in their financial statements. The standard defines operating segments as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. The Company's chief operating decision maker aggregates operating segments based on the type of products produced by the segment. Based on the quantitative thresholds specified in SFAS 131, the Company has determined that it has two reportable segments with subsegments within one of the main segments. The two reportable segments are as follows: (1) the manufacture and distribution of cathode ray tubes and electron guns in the replacement market and (2) the distribution of electronic parts from foreign and domestic manufacturers. The subsegments within the CRT segment consists of data display CRTs, entertainment (television and projection) CRTs, monitors and component parts. Foreign operations are not material as the Company's sales and other activities, after intercompany eliminations, are predominantly in the United States. The accounting policies of the operating segments are the same as those described in Summary of Significant Accounting Policies. Segment amounts disclosed reflect elimination entries made in consolidation. The chief operating decision maker evaluates performance of the segments based on operating income. Costs excluded from this profit measure primarily consist of allocated corporate expenses, interest expense and income taxes. Corporate expenses are primarily comprised of corporate overhead expenses. Thus, operating income includes only the costs that are directly attributable to the operations of the individual segment. Assets not identifiable to an individual segment are corporate assets, which are primarily comprised of cash and cash equivalents, short-term investments, intangible assets and intercompany amounts, which are eliminated in consolidation. The following table sets forth net sales, operating profit, depreciation and amortization, capital expenditures, and identifiable assets for each industry segment and applicable subsegments:

Fiscal Year Ended ------------------------------------------------------------- 2000 1999 1998 ----------------- ----------------- ----------------- (in thousands) Net Sales CRT segment Data display $ 10,319 $ 11,791 $ 13,716 Entertainment 9,350 11,651 11,428 Monitors 25,430 11,311 8,126 Component parts 2,029 2,631 1,032 ----------------- ----------------- ----------------- 47,128 37,384 34,302 Wholesale Distribution segment 16,710 21,505 23,611 ----------------- ----------------- ----------------- $ 63,838 $ 58,889 $ 57,913 ================= ================= =================

F-19 Video Display Corporation and Subsidiaries Notes to Consolidated Financial Statements

2000 1999 1998 ----------------- ----------------- ----------------- (in thousands) Operating Profit (Loss) CRT segment Data display $(2,110) $(1,505) $ 272 Entertainment 4,306 4,525 5,040 Monitors 1,194 1,113 1,426 Component parts (211) (158) 159 ----------------- ----------------- ----------------- 3,179 3,975 6,897 Wholesale Distribution segment (466) (381) 44 ----------------- ----------------- ----------------- $ 2,713 $ 3,594 $ 6,941 ================= ================= ================= Depreciation and Amortization CRT segment Data display $ 238 $ 223 $ 147 Entertainment 166 203 227 Monitors 417 262 175 Component parts 86 75 70 ----------------- ----------------- ----------------- 907 763 619 Wholesale Distribution segment 531 456 798 ----------------- ----------------- ----------------- $ 1,438 $ 1,219 $ 1,417 ================= ================= ================= Capital Expenditures** CRT segment Data display $ 351 $ 562 $ 415 Entertainment 28 105 2 Monitors 588 383 48 Component parts 34 1,606 11 ----------------- ----------------- ----------------- 1,001 2,656 476 Wholesale Distribution segment 181 152 188 ----------------- ----------------- ----------------- $ 1,182 $ 2,808 $ 664 ================= ================= ================= ** Includes deletions from fixed assets through business divestitures in 2000 and additions to fixed assets through business acquisitions in 1999 Identifiable Assets CRT segment Data display $17,824 $17,768 $15,879 Entertainment 4,445 4,791 5,774 Monitors 16,137 15,351 4,707 Component parts 2,590 2,702 2,162 ----------------- ----------------- ----------------- 40,996 40,612 28,522 Wholesale Distribution segment 8,661 11,029 12,060 ----------------- ----------------- ----------------- $49,657 $51,641 $40,582 ================= ================= =================

F-20 Video Display Corporation and Subsidiaries Notes to Consolidated Financial Statements Note 12. Convertible Subordinated Debentures The Company issued $2,000,000 in face value, 8% five-year convertible subordinated debentures in payment of the acquisition of the stock of Z-Axis in May 1996. The debentures can be converted at the holder's option into common shares based upon the quoted fair market value on the date such conversion is elected. An additional amount of debentures were potentially due based upon a performance contingency formula during the years 1996 through 1998. Z-Axis did not meet the performance contingency for those fiscal years. During 1998, $225,000 of these debentures were partially converted into common shares, with the remainder redeemed for cash of $75,000. Note 13. Benefit Plan The Company has a defined contribution plan that covers substantially all U.S. employees. Employees may contribute up to 15% of their compensation, as allowed by IRS regulations. At the Company's discretion, employee contributions of up to 4% of their compensation can be matched at 50% by the Company. The Company's contributions to the Plan amounted to $100,000, $0 and $48,000 in 2000, 1999 and 1998, respectively. Note 14. Commitments and Contingencies Operating Leases ---------------- The Company leases various manufacturing facilities and transportation equipment under leases classified as operating leases. These leases provide that the Company pay taxes, insurance and other expenses on the leased property and equipment. Rent expense under these leases was approximately $2,109,000, $1,765,000, and $1,294,000 in 2000, 1999 and 1998, respectively. Future minimum rental payments due under these leases are as follows: Year Amount ---- ------ 2001 $1,356,000 2002 1,078,000 2003 527,000 2004 285,000 2005 155,000 Thereafter 100,000 ---------- $3,501,000 ========== The Company leases four of its manufacturing facilities and certain warehouse space from shareholders and officers under net operating leases expiring at various dates through 2006. Rent expense under these leases totaled approximately $597,000, $686,000, and $662,000 in 2000, 1999 and 1998, respectively. F-21 Video Display Corporation and Subsidiaries Notes to Consolidated Financial Statements Future minimum rental payments due under these leases with related parties are as follows:

Year Amount ---- ------ 2001 $ 434,000 2002 414,000 2003 314,000 2004 249,000 2005 120,000 Thereafter 100,000 ---------- $1,631,000 ==========

Concentrations of Risk and Major Customers ------------------------------------------ Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash and accounts receivable. At times, such cash in banks are in excess of the FDIC insurance limit. During 2000, the Company's sales to any one customer did not exceed 10% of consolidated sales. One of the Company's wholesale electronic parts distributors had sales to one customer that comprised approximately 19%, 26% and 28% of that subsidiary's sales in 2000, 1999 and 1998, respectively. Also, one of the Company's CRT branches had sales to two customers that comprised 52%, 50% and 53% of that subsidiary's sales in 2000, 1999 and 1998, respectively. Additionally, other subsidiaries have a few concentrated customers and vendors that could, if lost, negatively effect sales. 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. Note 15. Supplemental Cash Flow Information

2000 1999 1998 ---------- ----------- ---------- Cash paid (received) for: Interest $1,426,000 $ 1,333,000 $1,244,000 ========== =========== ========== Income taxes, net of refunds $ (121,000) $ 1,471,000 $ 708,000 ========== =========== ==========

F-22 Video Display Corporation and Subsidiaries Notes to Consolidated Financial Statements Non-cash transactions: During 1999, the Company purchased certain assets and assumed certain liabilities of MegaScan, Aydin and Wintron and purchased all the common stock of MII, as follows: Fair value of the assets acquired $ 9,586,000 Liabilities assumed (1,394,000) Stock issued (446,000) ----------- Cash paid $ 7,746,000 =========== During 1998, $225,000 of the Z-Axis subordinated debentures was converted into 30,000 shares of the Company's common stock at $5 per share and $75,000 in cash. Note 16. Subsequent Events In May 2000, the Company acquired the common stock of Lexel Imaging Systems, Inc. of Lexington, Kentucky for a purchase price of $3,000,000. The effective date of the transaction was March 31, 2000. The purchase price was financed by unsecured debt with an interest rate of LIBOR plus 2%. The note is for 120 days and is guaranteed by an officer of the Corporation. Additionally, in May 2000, the Company has agreed in principal to acquire the Electro Optical division of Imaging and Sensing Technology of Horseheads, New York. The purchase price will be funded by debt. Note 17. Quarterly Data The following table sets forth selected quarterly consolidated financial data for the years ended February 29, 2000 and February 28, 1999, respectively.

2000 ------------------------------------------------------------------------------------ First Second Third Fourth Quarter Quarter Quarter Quarter ------------------- ------------------- ---------------- ------------------ (in thousands, except per share amounts) Net Sales $17,526 $15,706 $14,565 $16,041 Gross profit 5,627 4,813 4,502 5,374 Net income (loss) 354 91 429 (169) Basic earnings (loss) per share $ 0.09 $ 0.02 $ 0.11 $ (0.04) Diluted earnings (loss) per share $ 0.09 $ 0.02 $ 0.11 $ (0.04)

F-23 Video Display Corporation and Subsidiaries Notes to Consolidated Financial Statements

1999 ------------------------------------------------------------------------------------ First Second Third Fourth Quarter Quarter Quarter Quarter ------------------- ------------------- ---------------- ------------------ (in thousands, except per share amounts) Net Sales $ 15,039 $ 13,762 $ 13,859 $ 16,229 Gross profit 5,558 5,497 4,765 4,172 Net income 896 731 481 (986) Basic earnings per share $ 0.22 $ 0.19 $ 0.12 $ (0.25) Diluted earnings per share $ 0.20 $ 0.17 $ 0.11 $ (0.25)

The summation of quarterly earnings per share may not agree with annual earnings per share. Note 18. Fourth Quarter Adjustments The fourth quarter of fiscal 2000 included additions to reserves for doubtful accounts receivable, warranty returns, inventory obsolescence and losses of investment holdings totaling approximately $650,000. During the fourth quarter of fiscal 1999, the Company incurred write-downs of inventory totaling $1,208,000 resulting from changes in estimates of realizability of certain products, as well as reserves for obsolescence. F-24 Video Display Corporation and Subsidiaries Index to Consolidated Financial Statements Schedule Report of Independent Certified Public Accountants on Financial Statements Schedule F-26 Schedule II - Valuation and Qualifying Accounts and Reserves F-27 F-25 Report of Independent Certified Public Accountants Video Display Corporation Tucker, Georgia The audits referred to in our report dated May 25, 2000 relating to the consolidated financial statements of Video Display Corporation and subsidiaries, which is contained in Item 8 of this Form 10-K, included the audit of the Financial Statement Schedule II (Valuation and Qualifying Accounts and Reserves) listed in the accompanying schedule. This Schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on the Financial Statement Schedule based upon our audits. In our opinion, such schedule presents fairly, in all material respects, the information set forth therein. BDO Seidman, LLP Atlanta, Georgia May 25, 2000 F-26 VIDEO DISPLAY CORPORATION AND SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES

Column A Column B Column C Column D Column E --------------------------------------------------------------------------------------------------------------------- Additions --------------------------------- Balance at Charged to Charged to Balance at Beginning Costs and Other End of Description of Period Expenses Accounts Deductions Period --------------------------------------------------------------------------------------------------------------------- Allowance for doubtful accounts: February 29, 2000 $581,000 $ 304,000 $ - $ 363,000(a) $ 522,000(b) February 28, 1999 $591,000 $ 254,000 $ - $ 264,000(a) $ 581,000(b) February 28, 1998 $468,000 $ 128,000 $ - $ 5,000(a) $ 591,000(b) Reserve for inventory: February 29, 2000 $713,000 $ 909,000 $ - $ 285,000(c) $1,337,000 February 28, 1999 $770,000 $1,623,000 $ - $ 1,680,000(c) $ 713,000 February 28, 1998 $488,000 $ 282,000 $ - $ - $ 770,000

(a) Uncollectible accounts written off. (b) Includes a $221,000 allowance on a note receivable. (c) Inventory written down or written off. F-27 Exhibit 21 Video Display Corporation Subsidiary Companies Apex Electronics, Inc. Aydin Displays, Inc. 100 Eighth Street 700 Dresher Road Passaic, New Jersey Horsham, Pennsylvania Fox International Ltd., Inc. Mengel Industries, Inc. 23600 Aurora Road 3110 West Ridge Pike Bedford Heights, Ohio Sanatoga, Pennsylvania Southwest Vacuum Devices, Inc. Video Display Europe B.V. 1868 Tucker Industrial Drive Sky Park Schiphol Tucker, Georgia Breguetlaan 15 1438 BA Oude Meer Netherlands Video Display (Europe), Ltd. Unit 5 Old Forge Trading Estate, Dudley Road, Stourbridge West Midlands DY9 8EL England Video Electronics, S.A. de C.V. Calle Zinc Sin No. Garza Garcia N.L. Mexico Magna View, Inc. 1240 Profit Drive Dallas, Texas Z-Axis, Inc. 15 Eagle Street Phelps, New York Teltron Technologies, Inc. 2 Riga Lane Birdsboro, PA F-28