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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES ACT OF 1934
For the Quarterly Period
Ended March 31, 1998 Commission file number 0-14427
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LA-MAN CORPORATION
(Exact name of registrant as specified in its charter)
NEVADA 38-2286268
(State or other jurisdiction (I.R.S. Employer
of incorporation or other organization) Identification Number)
5029 EDGEWATER DRIVE, ORLANDO, FLORIDA 32810 (407) 521-7477
(Address, including zip code, and telephone number, including area code, of
registrant's office)
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Indicate by check mark whether the registrant (1) has filed all reports to be
filed by Section 13 or 15(d) of the Securities Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports) and (2) has been subject to such filing requirements for the past
90 days. [x] Yes [ ] No
As of May 13, 1998, 4,665,332 shares of Common Stock were outstanding.
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PART I - FINANCIAL INFORMATION
LA-MAN CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited)
March 31,
1998
------------
ASSETS
Current Assets:
Cash $ 7,369
Accounts receivable:
Trade 6,312,964
Other 267,659
Inventories 4,236,599
Costs and estimated earnings in excess of billings on uncompleted contracts 830,457
Prepaid expenses 1,260,056
Deferred taxes 584,584
------------
Total current assets 13,499,688
------------
Property, plant and equipment, net 6,041,442
------------
Other assets:
Intangible, less accumulated amortization 8,620,818
Other 283,420
------------
Total other assets 8,904,238
------------
$28,445,368
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $2,814,551
Customer deposits 963,195
Accrued expenses 2,698,509
Deferred income 8,752
Current portion of long-term debt 425,080
Current portion of obligations under capital leases 241,373
------------
Total current liabilities 7,151,460
Long-term liabilities:
Borrowings against line of credit 3,280,057
Long-term debt, less current portion 7,511,845
Obligations under capital leases, less current portion 207,405
Deferred taxes 138,750
------------
Total liabilities 18,289,517
------------
Stockholders' equity:
Common stock 4,657
Additional paid-in capital 11,029,841
Accumulated deficit (878,647)
------------
Total stockholders' equity 10,155,851
------------
$28,445,368
============
See accompanying notes to condensed consolidated financial statements.
2
LA-MAN CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Nine Months Ended Three Months Ended
March 31, March 31,
------------------------- --------------------------
1998 1997 1998 1997
----------- ----------- ---------- ----------
Sales $17,681,019 $11,626,030 $7,909,872 $3,802,751
Costs of sales 10,330,262 6,021,752 5,002,840 1,841,592
----------- ----------- ---------- ----------
Gross profit 7,350,757 5,604,278 2,907,032 1,961,159
----------- ----------- ---------- ----------
Operating expenses:
Selling 2,643,412 1,913,215 1,050,512 637,170
General and administrative 3,503,180 2,997,668 1,187,063 1,029,461
Other 42,167 36,338 14,016 15,050
----------- ----------- ---------- ----------
Total operating expenses 6,188,759 4,947,221 2,251,591 1,681,681
----------- ----------- ---------- ----------
Income from operations 1,161,998 657,057 655,441 279,478
Other income (expense):
Interest income 74,370 79,969 25,497 30,472
Interest expense (247,661) (167,276) (128,706) (64,891)
Gain (loss) on sales of
assets, net 4,542 260,003 1,392 (4,559)
Other 19,770 3,024 (243) 2,365
----------- ----------- ---------- ----------
Income from continuing operations
before provision for income taxes 1,013,019 832,777 553,381 242,865
Provision (benefit) for income taxes 324,000 (140,623) 226,000 (11,898)
----------- ----------- ---------- ----------
Income from continuing operations 689,019 973,400 327,381 254,763
Discontinued operations:
Loss from operations of discontinued
operations - (279,928) - -
Provision for losses on
discontinued operations - (373,015) - -
----------- ---------- ---------- ----------
Net income $689,019 $320,457 $327,381 $254,763
========== ========== ========= =========
Basic Earnings Per Common Share:
Continuing operations $0.19 $0.28 $0.08 $0.07
Discontinued operations - (0.19) - -
----------- ----------- ---------- ----------
Net income per share $0.19 $0.09 $0.08 $0.07
=========== ========== ========= =========
Diluted Earnings Per Common Share:
Continuing operations $0.15 $0.24 $0.07 $0.07
Discontinued operations - (0.15) - -
----------- ----------- ---------- ----------
Net income per share $0.15 $0.09 $0.07 $0.07
========== ========== ========= =========
Weighted average number of shares
outstanding:
Basic 3,694,692 3,428,742 3,944,349 3,459,878
========== ========== ========== ==========
Diluted 5,052,273 4,272,933 5,393,894 4,121,986
========== ========= ========== ==========
See accompanying notes to condensed consolidated financial statements.
3
LA-MAN CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
March 31,
------------------------
1998 1997
------------- ----------
Cash flows from operating activities:
Net income $ 689,019 $ 320,457
Adjustments to reconcile net income to net cash
used for operating activities:
Loss from discontinued operations - 652,943
Depreciation and amortization 414,455 343,492
Gain on disposal of property and equipment (4,542) (260,003)
Contribution of common stock to 401(k) plan 75,645 55,309
Realization of deferred income (30,494) (43,303)
Change in deferred income taxes 112,510 (150,000)
Tax benefit on exercise of stock options 17,750 -
Changes in assets and liabilities:
Accounts receivable, trade (1,407,847) (535,273)
Other receivables 121,433 71,718
Inventories 121,462 (324,983)
Prepaid expenses (591,342) (25,805)
Accounts payable (1,259,350) (385,138)
Customer deposits 154,299 19,028
Accrued expenses (161,251) 91,649
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Net cash used for continuing operating activities (1,748,253) (169,909)
------------- ----------
Net cash used for discontinued operating activities (22,157) (242,912)
------------- ----------
Cash flows from investing activities:
Purchase of property, plant and equipment (657,156) (224,913)
Payment for purchase of Ad Art, net of cash received (3,033,155) -
Net cash received from acquisition of Certified Maintenance Services, Inc. 28,587 -
Proceeds from sales of assets 4,542 343,643
Other 99,221 (2,087)
------------- ----------
Net cash provided by (used for) investing activities (3,557,961) 116,643
------------- ----------
Cash flows from financing activities:
Net change in line of credit borrowings 258,814 375,100
Proceeds from issuance of notes payable, net of debt issue costs 3,695,462 -
Principal payments on notes payable (92,039) (80,638)
Proceeds from exercise of stock options and warrants, net of issuance costs 87,334 18,750
Proceeds from sales of common stock, net of issue costs 970,000 -
Net change in capital lease obligations 184,856 (13,417)
------------- ----------
Net cash provided by financing activities 5,104,427 299,795
------------- ----------
Increase (decrease) in cash (223,944) 3,617
Cash, beginning of period 231,313 112,727
------------- ----------
Cash, end of period $ 7,369 $ 116,344
============ ==========
See accompanying notes to condensed consolidated financial statements.
4
LA-MAN CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The financial information included herein is unaudited and does not
include all of the information and disclosures required by generally accepted
accounting principles; however, such information reflects all adjustments
(consisting solely of normal recurring adjustments) which are, in the opinion
of management, necessary for a fair presentation of the Company's financial
position and results of operations for the interim periods. Certain
reclassifications have been made in the prior year financial statements to
conform to the current presentation. This report should be read in conjunction
with the Consolidated Financial Statements included in the Company's Annual
Report on Form 10-KSB for the year ended June 30, 1997.
The results of operations for the nine months and three months ended
March 31, 1998 are not necessarily indicative of the results to be expected for
the full year.
NOTE 2 - ACQUISITIONS
On February 18, 1998, the Company acquired all of the outstanding common
stock of Electronic Sign Corporation (dba Ad Art) ("Ad Art") in exchange
for 810,000 shares of the Company's $.001 par value common stock and $3,000,000.
Additional costs of the acquisition, including legal and other fees, totaled
$242,550. The acquisition was recorded using the purchase method of accounting.
Accordingly, the purchase price was allocated to the net assets acquired based
upon their estimated fair market values. The excess of the purchase price over
the estimated fair value of the net assets acquired amounted to approximately
$5,550,000, which has been accounted for as goodwill and is being amortized over
its estimated life of 40 years. The operating results of Ad Art are included in
the Company's consolidated results of operations from the date of acquisition.
On July 1, 1997, the Company acquired all of the outstanding common stock
of Certified Maintenance Services, Inc. ("Certified") for the assumption of
Certified's net liabilities of approximately $600,000. The acquisition was
recorded using the purchase method of accounting. Accordingly, the purchase
price was allocated to the net assets acquired based upon their estimated fair
market values. The excess of the purchase price over the estimated fair value
of net assets acquired amounted to approximately $600,000, which has been
accounted for as goodwill and is being amortized over its estimated life of 40
years. The operating results of Certified are included in the Company's
consolidated results of operations from the date of acquisition.
5
NOTE 3 - INVENTORIES
Inventories at the end of interim periods are based on perpetual
inventory records. Inventories consist of the following at March 31, 1998:
Raw materials and work in progress $3,775,003
Finished goods 461,596
----------
$4,236,599
==========
NOTE 4 - UNCOMPLETED CONTRACTS
The costs and estimated earnings in excess of billings on uncompleted
contracts consists of the following at March 31, 1998:
Costs incurred on uncompleted contracts $1,978,553
Estimated earnings 699,244
----------
2,677,797
Billings to date (1,847,340)
----------
$ 830,457
==========
NOTE 5 - REVOLVING LINE OF CREDIT
The Company has a $1,300,000 revolving line of credit. Advances on the
credit line carry an interest rate of 1% over prime. The line of credit, which
is renewable, initially matures August 1, 1999 and is collateralized by
property, accounts receivable and inventory, and subsidiary guarantees. The
loan agreement contains covenants which require the Company to maintain certain
financial and operating ratios. At March 31, 1998, $241,000 was outstanding
against this line of credit.
The Company, through its Ad Art Subsidiary, has an additional $5,000,000
revolving line of credit. Advances on the credit line carry an interest rate of
1.5% over prime. The line of credit, which is renewable, initially matures
March 31, 2000 and is collateralized by accounts receivable and inventory of Ad
Art and a guarantee by the Company. At March 31, 1998, $3,039,000 was
outstanding against this line of credit.
6
NOTE 6 - LONG TERM DEBT
On August 28, 1997, the Company obtained a letter of credit from a
national bank and issued notes payable secured by that letter of credit in the
amount of $2.5 million. The notes bear interest at a variable rate (which,
including the effect of amortization of finance costs, was an effective rate of
approximately 7.0% at March 31, 1998). Approximately $2.1 million of the
proceeds were used to pay off all previously outstanding Company debt, including
debt assumed in the Certified acquisition, except for the Company's 8%, $750,000
convertible note payable. Interest payments are due on the notes on a monthly
basis with annual principal payments due each August through the 2012 maturity
date.
NOTE 7 - LEGAL PROCEEDINGS AND DISCONTINUED OPERATIONS
In November 1996, the contracts between MCI Telecommunications, Inc.
("MCI") and Vision Trust Marketing, Inc. ("VTM") for marketing MCI long-distance
services were abruptly terminated by MCI. The contract for commercial customers
was originally executed in 1994 and was restated and extended for a new five-
year term in May 1996. This contract revision had been proposed by MCI in
September 1995 and discussed with VTM over a period of eight months. In
reliance on the new contract, VTM invested heavily in staff, facilities and
equipment in anticipation of significant commissions as a result of enhancements
in the revised contract. A lawsuit was filed by VTM on April 16, 1997, seeking
the recovery of damages from MCI. A series of motions have been filed, but no
significant court decisions have been made to date.
Because VTM is no longer contracted to market MCI long distance services,
its sole line of business, the Company discontinued the operations of VTM in
December 1996. Sales for VTM for the six months ended December 31, 1996
amounted to $249,000. Losses totaling $284,000 for the write-down of VTM's
assets to net realizable value were recognized in December 1996.
NOTE 8 - CAPITAL STOCK
Activity in the Company's equity accounts for the nine months ended
March 31, 1998 consists of the following:
A total of 27,623 shares of common stock valued at $75,645 were
contributed to the Company's 401(k) plan
Outstanding stock options were exercised for the issuance of a total of
96,204 shares of the Company's common stock. These exercises contributed
a total of $102,334 to the Company's equity, net of issuance costs and
tax benefits to the Company.
Executive bonuses totaling $33,400 were paid via the issuance of 13,047
shares of the Company's common stock
An option to acquire 52,500 shares of the Company's common stock for
$2.62 per share was issued for consulting services. The $16,000 fair
value of this option was recorded as additional paid-in capital.
7
A total of 167,885 shares of common stock were issued on December 1, 1997
to pay a five percent stock dividend. The $577,524 value of the shares
issued was reclassified from retained earnings to common stock and
additional paid in capital. Net income per share for periods prior to
the stock dividend have been retroactively restated to reflect the
effects of the stock dividend.
The acquisition of Ad Art, and the related financing for the acquisition
resulted in the following equity transactions:
. A total of 810,000 shares of common stock valued at $3,337,200 were
issued to certain of the prior shareholders of Ad Art.
. A total of 231,482 shares of common stock were sold for total
proceeds, net of issuance costs, of $970,000 to the Company.
. Warrants with a fair value totaling $108,250 were issued for
consulting and loan acquisition fees associated with the acquisition
NOTE 9 - CHANGE IN ACCOUNTING METHOD
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings per Share" (FAS
128) effective for financial statements issued for periods ending after December
15, 1997. Accordingly, the Company adopted the provisions of FAS 128 for the
period ending December 31, 1997. FAS 128 simplifies the standards for computing
earnings per share and makes them comparable to international earnings per share
standards. Earnings per share for prior periods have been restated under the
provisions of the new standard.
NOTE 10 - SUPPLEMENTAL CASH FLOW INFORMATION
The following summarizes noncash investing and financing transactions
during the nine months ended March 31, 1998 and 1997:
1998 1997
---------- ----------
Debt refinancing $2,005,318 $ -
Debt issue costs paid from notes payable 167,605 -
Assumption of liabilities for net assets of
Certified Maintenance Services, Inc. 596,656 -
Common stock issued for payment of incentive bonuses 33,400 -
Fair value of stock options and warrants issued for services 124,250 -
Issuance of common stock for 401(k) matching contribution 75,645 40,995
Issuance of common stock for 5% stock dividend 577,524 152,768
Stock issued for acquisition of Ad Art 3,337,200 -
8
NOTE 11 - RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (FAS
130) and No. 131, "Disclosure about Segments of an Enterprise and Related
Information" (FAS 131). FAS 130 establishes standards for reporting and
displaying comprehensive income, its components and accumulated balances. FAS
131 establishes standards for the way public companies report information about
operating segments in annual financial statements and requires reporting of
selected information about operating segments in interim financial statements
issued to the public. Both FAS 130 and FAS 131 are effective for periods
beginning after December 15, 1997. Neither FAS 130 nor FAS 131 is expected to
have a material impact on the Company's financial statements.
(THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK)
9
LA-MAN CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
- ----------------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
- -----------------------------------
The following discussion should be read in conjunction with management's
discussion and analysis of financial condition and results of operations set
forth in the Company's Annual Report on Form 10-KSB for the year ended June 30,
1997, filed with the Securities and Exchange Commission on September 25, 1997,
which discussion is incorporated herein by reference.
Except for the historical information contained herein, the matters
addressed in this Quarterly Report on Form 10-QSB may constitute "forward-
looking statements" within the meaning of Section 27A of the Securities Act of
1933, as amended, and Section 21E of the Securities and Exchange Act of 1934, as
amended. Such forward-looking statements are subject to a variety of risks and
uncertainties that could cause actual results to be different materially from
those anticipated by the Company's management. The Private Securities
Litigation Reform Act of 1995 (the "1995 Act") provides certain "safe harbor"
provisions for forward-looking statements. All forward-looking statements made
in this Quarterly Report on form 10-QSB are made pursuant to the 1995 Act. For
more information on the potential factors which could affect the Company's
financial results, reference should be made to the Company's filings with the
Securities and Exchange Commission, including the Company's Annual Report on
Form 10-KSB for the fiscal year ended June 30, 1997.
The results of operations for the nine months and three months ended
March 31, 1998 are not necessarily indicative of the results to be expected for
the full year. The Company is continuously exploring acquisition candidates and
plans to continue to grow through acquisitions as well as internally.
Management is currently in various stages of acquisition discussions with
several companies. If any of these acquisitions are ultimately consummated
during the current fiscal year, operating results in future quarters could be
significantly different from the operating results for the nine months and three
months ended March 31, 1998.
Certain non-recurring events make comparison of fiscal 1997 results to
fiscal 1998 results arduous. Specifically, the Company recognized a gain of
$265,000 on the sale of three billboards during the second quarter of fiscal
1997. This sale removed the Company from the billboard business and no similar
gains are expected in the current fiscal year. Furthermore, in fiscal 1997, the
Company was able to recognize the tax benefit of certain net operating loss
carryovers which resulted in an effective tax rate for the year of negative 19%.
In fiscal 1998, while the benefits of some net operating losses are still
available, the benefits are significantly reduced from fiscal 1997.
NINE MONTHS ENDED MARCH 31, 1998 VS. MARCH 31, 1997
- ---------------------------------------------------
Sales for the nine month period ended March 31, 1998 increased by
$6,054,989, or 52% over the same period in the prior year. Operating income
increased by $504,941, or 77% while income from continuing operations, before
the provision for income taxes, increased by $180,242, or 22%, despite a non-
recurring $265,000 gain on the sale of certain equipment in the prior year.
Certain net operating losses used during the prior fiscal year, but not
available in the current fiscal year, resulted in the provision for income taxes
increasing to a $324,000 expense for the nine month period ended March 31, 1998
compared to a tax credit of $140,623 for the same period in the prior year. As
a result of the non-recurring gain on the sale of equipment and the income tax
10
credit not being available in the current year, income from continuing
operations decreased by $284,351, or 29% for the nine month period. A loss from
discontinued operations of $652,943 in the prior year reduced net income for the
nine months ended March 31, 1997. All costs associated with this discontinued
segment were recognized prior to December 31, 1996 and net income for the nine
months ended March 31, 1998 increased by $368,562, or 115% over the same period
in the prior year. Basic earnings per common share increased by $.10 while
basic earnings per common share from continuing operations decreased by $.09 on
an 8% increase in the weighted average shares outstanding from 3,428,742 for the
nine months ended March 31, 1997 to 3,694,692 for the nine months ended March
31, 1998. Over the same periods, diluted earnings per common share increased by
$.06 and diluted earnings per common share from continuing operations decreased
by $.09 on an 18% increase in weighted average shares outstanding from 4,272,933
for the nine months ended March 31, 1997 to 5,052,273 for the nine months ended
March 31, 1998.
Each of the Company's operating divisions, as well as the February 18,
1998 acquisition of Ad Art, contributed to the increase in sales over the prior
year. Institutional display sales increased by $438,830, or 8%, from $5,322,210
in the nine months ended March 31, 1997 to $5,761,040 in the nine months ended
March 31, 1998. Custom display and related maintenance sales increased by
$5,423,182, or 107%, from $5,090,423 in the nine months ended March 31, 1997 to
$10,513,605 in the nine month ended March 31, 1998. Of this increase,
approximately $4,300,000 resulted from the acquisition of Ad Art on February 18,
1998 and approximately $800,000 resulted from the acquisition of Certified on
July 1, 1997. Without the effects of the acquisitions, custom display and
related maintenance sales increased by approximately $323,000, or 6% from the
1997 period to the 1998 period. Filter sales increased by $192,977, or 16%,
from $1,213,397 in the nine months ended March 31, 1997 to $1,406,374 in the
nine months ended March 31, 1998.
Without regard to the increased sales resulting from the acquisition of
Certified and Ad Art, the Company's sales from existing operations increased by
approximately $1,000,000, or 8% from the nine months ended March 31, 1997 to the
nine months ended March 31, 1998. These increased sales resulted from new
products and new marketing techniques.
In mid 1997, the institutional display division began marketing its
products to government installations, primarily military bases, and has entered
into various contracts which improve the division's ability to make sales to the
government. These multi-year contracts, amongst various other functions, reduce
the governmental "red-tape" and permit governmental installations to purchase
signs without obtaining other competitive bids which would normally be required.
For the nine months ended March 31, 1998, sales to government installations
totaled $198,615. In addition, the division increased its product line to
include LED and wedge-based message center signs. These product lines
contributed $350,736 to sales for the nine months ended March 31, 1998
In June 1997 the custom display division created a marketing department
dedicated to creating sales leads through product awareness and promotion. The
marketing department now coordinates direct mail marketing, trade show
attendance, and other sales lead development procedures that were previously
managed by the sales staff. In addition, the division has added wedge-based and
LED color message centers and video boards to its product line. Sales from
these products for the nine months ended March 31, 1998 totaled $1,429,432,
including $1,170,114 from Ad Art.
In April 1997, the filtration division dramatically changed its marketing
methods. Additional field representatives were added, trade show attendance was
11
expanded, advertising was increased, communication with distributors was
enhanced, and a proactive program to add distributors was enacted. These new
marketing methods have resulted in the 16% growth in sales at the division.
The gross profit margin for the nine months ended March 31, 1998 was
41.6% compared to 48.2% for the same period in the prior year. The decrease in
gross margin is, in part, a result of a shift in the product mix to include a
greater percentage of custom displays as a result of the Ad Art acquisition. In
the prior nine month period, 44% of sales were from custom displays, 46% from
institutional displays, and 10% from filters. In the current nine month period,
custom displays contributed 59% of sales with institutional displays and filters
contributing 33% and 8%, respectively. Gross profit margin on custom displays
have historically been 25% to 35% compared to gross profit margins on
institutional displays and filters of 55% to 60%. Therefore, a shift in the
product mix to include a greater percentage of custom displays will result in an
overall lower gross profit margin. For the nine months ended March 31, 1998 and
1997, the gross profit margin on custom displays was 30% and 34%, respectively;
the gross profit margin on institutional displays was 58% and 60%, respectively;
and the gross profit margin on filters was 59% and 56%, respectively.
Operating expenses for the nine months ended March 31, 1998 were
$6,188,759 including operating expenses from Ad Art of $576,753. The increased
operating expenses consist of a $730,197 increase in selling expenses ($421,297
from Ad Art), a $505,512 increase in general and administrative expenses
($155,456 from Ad Art) and a $5,829 increase in other operating expenses.
Without the effects of Ad Art, these are increases of 16% in selling expenses,
12% in general and administrative expenses, and 13% in overall operating
expenses. The increase in selling expenses is consistent with the increase in
sales. Selling expenses were 16% of sales for the nine months ended March 31,
1997 and 15% of sales for the nine months ended March 31, 1998. Selling
expenses are consistently a higher percentage of sales for the institutional
display operation than for the custom display operations. For the nine months
ended March 31, 1998, selling expenses were 21% of institutional display sales
compared to 22% of sales in the year-earlier period. On custom displays
(excluding the effects of Ad Art), selling expenses were 12% of sales for the
nine months ended March 31, 1998 and 11% of sales for the nine months ended
March 31, 1997.
The increase in general and administrative expenses results primarily
from costs of employees and office space necessary to support the increased
sales as well as increased general and administrative expenses resulting from
the acquisition of Certified on July 1, 1997. The operations of Certified were
merged with the Company's existing maintenance operations and, while this
resulted in an increase in employees and office space, the general and
administrative expenses directly attributable to the Certified acquisition are
not identifiable.
Income from operations for the nine months ended March 31, 1998 totaled
$1,161,998 (including $837,750 from Ad Art), an increase of 77% over the same
period in the prior year. Without the effects of Ad Art, income from operations
would have decreased by $332,809, or 51% from the nine months ended March 31,
1997 to the nine months ended March 31, 1998. This decrease consists of
increases from the institutional display and filter operations of $4,904 (1%)
and $62,046 (19%) and decreases from the custom display division (exclusive of
the effect of Ad Art) and corporate operations division of $325,000 (71%) and
$74,759 (11%), respectively.
The $325,000 decrease in income from operations from the custom display
division (exclusive of the effects of Ad Art) resulted despite a 21% increase in
sales because of lower gross profits and increased operating expenses. Without
the effect of Ad Art, the gross profit margin on custom display and the related
12
maintenance sales dropped from 34% for the nine months ended March 31, 1997 to
28% for the nine months ended March 31, 1998 resulting in gross profit dollars
increasing only nominally. Furthermore, selling expenses increased by 23% on
the increased sales and general and administrative expenses increased by 34%.
The decreased margins and increased expenses are primarily attributable to the
effect of assimilating the operations of Certified into the previously existing
custom display and maintenance operation upon the acquisition of Certified on
July 1, 1997. The acquisition of Certified has contributed significantly to
increased sales and given the Company an entry position in the national sign and
lighting maintenance market. However, the sales and pricing policies initially
inherited from Certified resulted in low, or even negative gross margins on many
of the sales. Furthermore, the increase in the size of the Company's
maintenance department resulted in increased operating expenses. Since the
acquisition, management has revised the pricing structure of all maintenance
work, eliminated unprofitable customers and services and reduced operating
overhead for the maintenance division. These changes have slowly increased
profit margins on maintenance work and are expected to continue to improve
margins and operating results to those historically experienced by the Company
prior to the Certified acquisition. In addition, much of the revenue generated
from the Certified acquisition is from individual time and material jobs. The
Company has begun converting recurring customers to a contract maintenance
program where a flat monthly fee is paid for all sign and lighting maintenance.
This recurring revenue stream has, historically, resulting in gross profit
margins in excess of 32% on maintenance contracts that have been sold by the
Company.
Despite the 77% increase in operating income from the nine months ended
March 31, 1997 to the nine months ended March 31, 1998, income from continuing
operations decreased by 29% from $973,400 ($.28 per basic share or $.24 per
diluted share) to $689,049 ($.19 per basic share $.15 per diluted share). This
decrease, despite the operating income increase, is a result of a non-recurring
gain of $265,000 ($.08 per basic share or $.06 per diluted share) on the sale of
certain equipment in the prior nine month period and tax credits available in
the 1997 period that were not available during the 1998 period. Because these
tax credits were not available in the nine month period ended March 31, 1998,
the effective tax rate increased to 32% in the 1998 period from a negative 17%
in the 1997 period; or, an increase in income tax expense of $464,623 ($.13 per
basic share or $.09 per diluted share).
Net income for the nine months ended March 31, 1998 totaled $689,019
($.19 per basic share or $.15 per diluted share) compared to net income of
$320,457 ($.09 per share) for the nine months ended March 31, 1997 B an increase
of $368,562 ($.10 per basic share or $.06 diluted share), or 115%. In the prior
nine month period, net income was reduced by losses totaling $652,943 ($.19 per
basic share or $.15 per diluted share) on discontinued operations. The loss
from discontinued operations resulted from the operating and wind-down costs of
the Company's long-distance telephone marketing subsidiary, Vision Trust
Marketing, Inc., which was discontinued in November, 1996.
THREE MONTHS ENDED MARCH 31, 1998 VS. MARCH 31, 1997
- ----------------------------------------------------
Sales for the quarter ended March 31, 1998 increased by $4,107,121, or
108% over the same period in the prior year. Operating income increased by
$375,963, or 135% while income from continuing operations, before the provision
for income taxes, increased by $310,516, or 128%. Certain net operating losses
used during the prior fiscal year, but not available in the current fiscal year,
resulted in the provision for income taxes increasing to a $226,000 expense for
the quarter ended March 31, 1998 compared to a tax credit of $11,898 for the
same period in the prior year. Net income increased by $72,618, or 29% from
$254,763 ($.07 per share) for the quarter ended March 31, 1997 to $327,381 ($.08
per basic share or $.07 per diluted share) for the quarter ended March 31, 1998.
The basic weighted average shares outstanding increased by 14% from 3,459,878
13
shares during the quarter ended March 31, 1997 to 3,944,349 shares during the
quarter ended March 31, 1998. During the same period, diluted weighted average
shares increased by 31% from 4,121,986 shares to 5,393,894 shares.
The 108% increase in sales from the quarter ended March 31, 1997 to the
quarter ended March 31, 1998 was solely the result of the February 18, 1998
acquisition of Ad Art which contributed sales of $4,352,605 for the quarter
ended March 31, 1998. Without the effect of Ad Art, sales would have decreased
by $245,484, or 6% from the 1997 quarter to the 1998 quarter. Sales from the
Company's existing custom display and maintenance operation decrease by $98,058,
or 6%, sales from the institutional display operation decreased by $218,309, or
13% and sales from the filter operation increased by $70,883, or 17%. The drop
in sales at both the institutional and custom display operations resulted from
the seasonally slow winter period being longer in the current year than in the
prior year. The winter period is a seasonally slow period at the custom display
operation due to its large dependence on sales to themed facilities which are
tied to tourism seasonality. In 1998, the slow period did not recover until
April, whereas March was much stronger in the prior year. Similarly, the
institutional display division is slow during the winter due to an order slow
down for church and school signs during the Christmas holidays and vacation
periods as well as the result of bad weather conditions. In 1998, this seasonal
slow down was exacerbated by several factor including El Nino. Both the custom
display and institutional display operations have recovered from their seasonal
slow downs subsequent to March 31, 1998 and are expected to resume their
historical growth paths.
The gross profit margin for the quarter ended March 31, 1998 was 36.8%
compared to 51.6% for the same period in the prior year. The decrease in gross
margin is, in part, a result of a shift in the product mix to include a greater
percentage of custom displays as a result of the Ad Art acquisition. In the
year-earlier quarter, 45% of sales were from custom displays, 45% from
institutional displays, and 10% from filters. In the current quarter, custom
displays contributed 75% of sales with institutional displays and filters
contributing 19% and 6%, respectively. Gross profit margins on custom displays
have historically been 25% to 35% compared to gross profit margins on
institutional displays and filters of 55% to 60%. Therefore, a shift in the
product mix to include a greater percentage of custom displays will result in an
overall lower gross profit margin. For the quarter ended March 31, 1998 and
1997, the gross profit margin on custom displays and related maintenance was 29%
and 42% respectively; the gross profit margin on institutional displays was 59%
and 61%, respectively; and the gross profit margin on filters was 59% and 53%,
respectively. The significant drop in gross profit margins on custom displays
and the related maintenance resulted from various factors. The primary factors
include the reduced margins on maintenance sales resulting from the assimilation
of Certified into the existing operations and the acceptance of jobs at lower
than normal gross profit margins so as to increase sales.
Operating expenses for the quarter ended March 31, 1998 were $2,251,591
including operating expenses from Ad Art of $576,753. The increased operating
expenses consist of a $413,342 increase in selling expenses ($421,297 from Ad
Art), a $157,602 increase in general and administrative expenses ($155,456 from
Ad Art) and a $1,034 decrease in other operating expenses. Without the effects
of Ad Art, selling expenses, general and administrative expenses, and overall
operating expenses were essentially flat between the quarter ended March 31,
1998 and the quarter ended March 31, 1997.
Income from operations for the quarter ended March 31, 1998 totaled
$655,441 (including $837,750 from Ad Art), an increase of 135% over the same
period in the prior year. Without the effects of Ad Art, income from operations
would have decreased by $461,787, or 165% from the quarter ended March 31, 1997
to the quarter ended March 31, 1998. This decrease consists of decreases from
the custom display division (exclusive of the effect of Ad Art) and
institutional display divison of $438,466 (154%) and $93,491 (59%), respectively
which were offset by an increase of $69,228 (93%) from the filter division.
14
The decrease in operating income from the institutional sign operation is
a direct result of the decreased sales and lower gross margins. The decrease in
operating income from the custom display operation results from the lower sales
and lower gross margins as well as the increased operating expenses from the
July 1, 1997 Certified acquisition.
Net income for the quarter ended March 31, 1998 totaled $327,381 ($.08
per basic share or $.07 per diluted share) compared to net income of $254,763
($.07 per share) for the quarter ended March 31, 1997 -- an increase of $72,618
($.01 per basic share or no change per diluted share), or 29%. The increase
would have been even more significant but for the availability of tax credits in
the year-earlier quarter. In the quarter ended March 31, 1998, tax benefits
totaled $11,898 compared to a tax expense of $226,000 in the current year
quarter -- an increase in income tax expense of $237,898 ($.06 per basic share
or $.04 per diluted share).
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Net cash used for continuing operating activities for the nine months
ended March 31, 1998 was $1,748,253. Net income for the period provided cash of
$1,274,343 net of non-cash charges for depreciation and amortization, gains on
fixed asset sales, stock contributions to the Company's 401(k) plan, the
realization of deferred income, the change in deferred income taxes and the tax
benefit of stock option exercises. This cash provided was offset by a net
change of $3,022,596 in the Company's operating assets and liabilities. A
significant portion of the cash used in operating activities (approximately
$1,000,000) was used to pay past due liabilities of Ad Art upon the acquisition.
A total of $22,157 in cash was used in the wind down of the discontinued
segment.
Net cash used for investing activities for the nine months ended March
31, 1998 was $3,557,961. The primary used of investment cash was $3,033,155 in
cash spent on the Ad Art acquisition, net of cash acquired. Capital
expenditures during the period totaled $657,156 which includes expenditures of
approximately $370,000 to acquire and renovate two buildings to be used for the
production of institutional signs. Currently, signs sold by the institutional
sign division are manufactured by a third party manufacturer. The issuance of
permits for the construction of manufacturing facilities for institutional
signage were delayed in the third quarter as a result of negotiations with local
officials on requirements for certain environmental and aesthetic additions.
Whereas the permits are still pending, construction is expected to be completed
during the summer months. The cash used for capital expenditures was offset by
$4,542 received from the sale of assets, $28,587 in cash acquired in the
Certified acquisition and $99,221 from other sources. Certified was acquired
via the assumption of liabilities, so no cash was used to make the acquisition.
Net cash provided by financing activities for the nine months ended March
31, 1998 was $5,104,427. Proceeds from new debt during the period totaled
$3,695,462 net of debt issuance costs. On August 28, 1997 the Company obtained
a letter of credit from SouthTrust Bank, N.A. and issued an aggregate of its
$2.5 million Variable/Fixed Rate Credit Enhanced Notes (Notes) secured by such
letter of credit. Of this amount, $2,005,318 was used to pay off existing
Company debt and $167,604 was used to pay debt issue costs. The remaining
$327,078 was cash proceeds to the Company. On March 2, 1998, the Company
obtained convertible notes payable from affiliates of Renaissance Capital Group
totaling $3,500,000 for the purpose of financing the Ad Art acquisition. The
notes are convertible into the Company's common stock at a conversion rate of
$4.75 per share. After debt issuance costs, the net proceeds to the Company
were $3,368,384. In addition, the Company sold 231,482 shares of common stock
15
to affiliates of Renaissance Capital Group for net proceeds, after issuance
costs, of $970,000 which was also for the purpose of financing the Ad Art
acquisition. Other financing activities during the period included proceeds
from the exercises of stock options of $87,334 and increases in line of credit
borrowings of $258,814 as well as cash proceeds of $184,856 from the refinancing
of certain purchases through capital lease obligations, net of payments against
capital lease obligations.
The Company has a $1.3 million revolving bank line of credit. Advances
on the credit line carry an interest rate of 1% over prime. The line of credit,
which is renewable, initially matures August 1, 1999 and is collateralized by
property, accounts receivable and inventory, and subsidiary guarantees. The
loan agreement contains covenants which require the Company to maintain certain
financial and operating ratios. At May 13, 1998, the Company had no borrowings
outstanding against this line of credit.
In addition, the Company, through its Ad Art Subsidiary, has an
additional $5,000,000 revolving line of credit. Advances on the credit line
carry an interest rate of 2.5% over prime. The line of credit, which is
renewable, initially matures March 31, 2000 and is collateralized by accounts
receivable and inventory of Ad Art and a guarantee by the Company. At May 13,
1998, $3,075,378 was outstanding against this line of credit.
(REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK)
16
PART II - OTHER INFORMATION
- ---------------------------
ITEM 1. LEGAL PROCEEDINGS.
- --------------------------
As discussed in Note 7 to the Condensed Consolidated Financial Statements
included in Part I of the Report, the Company filed a lawsuit on April 16, 1997
in a dispute with MCI Telecommunications, Inc.
ITEM 2. CHANGES IN SECURITIES.
- ------------------------------
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
- ----------------------------------------
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY - HOLDERS.
- ------------------------------------------------------------
Not applicable
ITEM 5. OTHER INFORMATION.
- --------------------------
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
- -----------------------------------------
La-Man Corporation Current Report on Form 8-K dated as of February 18,
1998 with respect to the acquisition by La-Man Corporation of Electronic Sign
Corporation.
La-Man Corporation Current Report Amendment on Form 8-K/A filed with the
Securities and Exchange Commission on April 28, 1998 containing the following
financial statements and pro forma financial information:
(a) Financial Statements of Business Acquired. The following documents
were filed as part of this Report:
ELECTRONIC SIGN CORPORATION AND SUBSIDIARY (DBA AD ART)
Report of Independent Certified Public Accountants - Bartig, Basler and
Ray, CPAs, Inc.
Consolidated Balance Sheet as of December 31, 1997
Consolidated Statements of Income and Retained Earnings for years ended
December 31, 1997 and 1996
Consolidated Statements of Cash Flows for years ended December 31, 1997
and 1996
Notes to Consolidated Financial Statements
(b) Pro Forma Financial Information. The following pro forma financial
information was filed as part of this report:
LA-MAN CORPORATION AND SUBSIDIARIES PRO FORMA CONSOLIDATED FINANCIAL
STATEMENTS
La-Man Corporation and Subsidiaries Pro Forma Consolidated Balance Sheet
as of December 31, 1997
La-Man Corporation and Subsidiaries Pro Forma Consolidated Statement of
Income for year ended June 30, 1997
La-Man Corporation and Subsidiaries Pro Forma Consolidated Statement of
Income for the six months ended December 31, 1997
La-Man Corporation and Subsidiaries Notes to Pro Forma Consolidated
Financial Statements
SIGNATURES
- ----------
Pursuant to the requirements 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.
LA-MAN CORPORATION
Date: February 13, 1998 By: /s/ J. William Brandner
-------------------------------------
J. William Brandner, President & Chief
Executive Officer
By: /s/ Todd D. Thrasher
-------------------------------------
Todd D. Thrasher, Vice President &
Treasurer, Chief Financial Officer and
Chief Accounting Officer
17