================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------------
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES ACT OF 1934
For the Quarterly Period Ended December 31, 1998 Commission file number 0-14427
----------------------------
DISPLAY TECHNOLOGIES, INC.
(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)
(Formerly La-Man Corporation)
----------------------------
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 February 2, 1999, 5,871,035 shares of Common Stock were outstanding.
================================================================================
PART I - FINANCIAL INFORMATION
DISPLAY TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited)
December 31,
1998
------------
ASSETS
Current Assets:
Cash $ 195,263
Accounts receivable:
Trade, less allowance for doubtful accounts of $313,874 10,000,975
Other 475,064
Inventories 6,217,173
Costs and estimated earnings in excess of billings on uncompleted contracts 3,232,002
Prepaid expenses 847,203
Deferred taxes 650,000
-----------
Total current assets 21,617,680
-----------
Property, plant and equipment, net 6,430,731
-----------
Other assets:
Intangible, less accumulated amortization 8,879,078
Other 273,103
-----------
Total other assets 9,152,181
-----------
$37,200,592
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 5,063,541
Customer deposits 879,378
Accrued expenses 3,577,642
Billings in excess of costs and estimated earnings on uncompleted contracts 107,754
Current portion of long-term debt 648,861
Current portion of obligations under capital leases 108,958
-----------
Total current liabilities 10,386,134
-----------
Long-term liabilities:
Borrowings against line of credit 5,683,100
Long-term debt, less current portion 6,874,706
Obligations under capital leases, less current portion 254,012
Deferred tax liabilities 92,000
Other liabilities 55,000
-----------
Total liabilities 12,958,818
-----------
Stockholders' equity:
Common stock 5,382
Additional paid-in capital 13,332,327
Retained earnings 517,931
-----------
Total stockholders' equity 13,855,640
-----------
$37,200,592
===========
See accompanying notes to condensed consolidated financial statements.
2
DISPLAY TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Six Months Ended Three Months Ended
December 31, December 31,
-------------------------- --------------------------
1998 1997 1998 1997
----------- ---------- ----------- ----------
Sales $34,471,630 $9,771,147 $17,437,617 $4,689,800
Cost of sales 22,374,607 5,327,422 11,339,827 2,638,843
----------- ---------- ----------- ----------
Gross profit 12,097,023 4,443,725 6,097,790 2,050,957
----------- ---------- ----------- ----------
Operating expenses:
Selling 4,927,865 1,660,104 2,466,625 799,171
General and administrative 3,598,383 2,277,064 1,846,325 1,150,891
----------- ---------- ----------- ----------
Total operating expenses 8,526,248 3,937,168 4,312,950 1,950,062
----------- ---------- ----------- ----------
Income from operations 3,570,775 506,557 1,784,840 100,895
----------- ---------- ----------- ----------
Other income (expense):
Interest income 60,983 48,873 42,226 22,694
Interest expense (642,970) (118,955) (337,688) (47,467)
Gain (loss) on sales of assets, net 4,377 3,150 (407) 3,150
Other (13,209) 20,013 (14,130) 20,013
----------- ---------- ----------- ----------
(590,819) (46,919) (309,999) (1,610)
----------- ---------- ----------- ----------
Income before provision for income taxes 2,979,956 459,638 1,474,841 99,285
Provision for income taxes 1,162,000 98,000 575,000 28,000
----------- ---------- ----------- ----------
Net income $ 1,817,956 $ 361,638 $ 899,841 $ 71,285
=========== ========== =========== ==========
Earnings Per Common Share:
Basic $ .35 $ .10 $ .17 $ .02
=========== ========== =========== ==========
Diluted $ .25 $ .08 $ .12 $ .02
=========== ========== =========== ==========
Weighted average number of shares outstanding:
Basic 5,219,078 3,751,207 5,267,167 3,771,728
=========== ========== =========== ==========
Diluted 7,609,275 5,041,542 8,136,742 5,096,721
=========== ========== =========== ==========
See accompanying notes to condensed consolidated financial statements.
3
DISPLAY TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended Three Months Ended
December 31, December 31,
-------------------------- ------------------------
1998 1997 1998 1997
----------- ---------- ----------- ----------
Cash flows from operating activities:
Net income $ 1,817,956 $ 361,638 $ 899,841 $ 71,285
Adjustments to reconcile net income to net cash
provided by (used for) operating activities:
Depreciation and amortization 470,644 245,003 223,093 125,780
Gain on disposal of property and equipment (5,783) (3,150) (1,000) (3,150)
Contribution of common stock to 401(k) plan 116,504 51,192 87,249 27,918
Change in deferred income taxes 138,000 75,500 69,000 39,750
Other (41,715) (4,989) (20,858) (8,411)
Changes in assets and liabilities:
Accounts receivable, trade (3,121,635) (324,370) (921,516) 40,153
Other receivables (24,280) 57,685 (21,282) 18,764
Inventories, including adjustments to costs,
billing and estimated earnings (3,600,974) (104,587) (976,871) (125,105)
Prepaid expenses 143,429 (50,153) (92,228) (64,567)
Accounts payable 2,237,840 (232,188) 1,338,645 (166,168)
Customer deposits (453,039) (60,700) (241,531) (41,633)
Accrued expenses 97,087 (450,230) (83,609) (113,368)
Other 19,074 - 13,648 -
---------- --------- --------- ---------
Net cash provided by (used for) continuing operating
activities (2,206,892) (439,349) 272,581 (198,752)
---------- --------- --------- ---------
Net cash used for discontinued operating activities - (19,139) - (10,823)
---------- --------- --------- ---------
Cash flows from investing activities:
Purchase of property, plant and equipment (645,868) (530,999) (437,662) (429,206)
Net cash received from acquisition of Certified
Maintenance Services, Inc. - 28,587 - -
Patent, trademark and other intangible acquisition
costs (1,542) - (535) -
Proceeds from sales of assets 38,026 3,150 27,500 3,150
Other 36,000 - 36,000 -
---------- --------- --------- ---------
Net cash used for investing activities (573,384) (499,262) (374,697) (426,056)
---------- --------- --------- ---------
Cash flows from financing activities:
Net change in line of credit borrowings 2,723,905 461,000 (129,151) 461,000
Proceeds from issuance of notes payable, net of
debt issue costs - 302,705 - -
Principal payments on notes payable (384,391) (85,956) (12,316) (8,331)
Proceeds from exercise of stock options and
warrants, net of issuance costs 258,457 62,677 225,020 -
Payments on capital lease obligations (158,739) (13,989) (81,874) (4,928)
Other (1,257) - (1,257) (9,759)
---------- --------- --------- ---------
Net cash provided by financing activities 2,437,975 726,437 422 437,982
---------- --------- --------- ---------
Decrease in cash (342,301) (231,313) (101,694) (197,649)
Cash, beginning of period 537,564 231,313 296,957 197,649
---------- --------- --------- ---------
Cash, end of period $ 195,263 $ - $ 195,263 $ -
========== ========= ========= =========
See accompanying notes to condensed consolidated financial statements.
4
DISPLAY TECHNOLOGIES, INC. 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 December 31, 1997 financial statements
to conform to the December 31, 1998 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, 1998.
The results of operations for the six months and three months ended
December 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 valued at
$3,337,200 and $3,000,000 in cash. Additional costs of the acquisition,
including legal and other fees, totaled $277,800. Up to an additional 540,000
(adjusted to 567,000 as a result of the November 30, 1998 five percent stock
dividend - see Note 6) shares of the Company's $.001 par value common stock (the
"contingent shares") are issuable on a pro rata basis if Ad Art's after tax
earnings for fiscal 1999 are between $1.4 million and $2.4 million. The
contingent shares are issuable at a rate of approximately 49,000 shares for each
$100,000 of after tax income in excess of $1.4 million up to the maximum of
540,000 shares to be issued for after tax income of $2.4 million or higher. 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
$6,000,000, 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.
NOTE 3 - INVENTORIES
Inventories at the end of interim periods are based on perpetual
inventory records and physical counts. Inventories consist of the following at
December 31, 1998:
Raw materials and work in progress $5,090,826
Finished goods 1,126,347
----------
$6,217,173
==========
5
NOTE 3 - UNCOMPLETED CONTRACTS
The costs and estimated earnings in excess of billings on uncompleted
contracts consist of the following at December 31, 1998:
Costs incurred on uncompleted contracts $ 5,147,984
Estimated earnings 1,815,633
----------
$ 6,963,617
Billings to date (3,839,369)
----------
$ 3,124,248
===========
Included in the accompanying balance sheet under the following
captions:
Costs and estimated earnings in excess of
billings on completed contracts $ 3,232,002
Billings in excess of costs and estimated
earnings on completed contracts (107,754)
-----------
$ 3,124,248
===========
NOTE 5 - REVOLVING LINE OF CREDIT
The Company has a $1,500,000 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, matures October 1, 2000 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 December 31, 1998, $931,000 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, matures March 31, 2000
and is collateralized by accounts receivable and inventory of Ad Art and a
guarantee by the Company. At December 31, 1998, $4,752,100 was outstanding
against this line of credit.
NOTE 6 - CAPITAL STOCK
During the six months ended December 31, 1998, a total of 142,366 options
to purchase the Company's $.001 par value common stock were exercised at prices
varying from $.46 to $2.04 per share, for total cash proceeds to the Company of
$62,452.
During December 1998, a total of 45,000 public warrants to purchase the
Company's $.001 par value common stock were exercised at $4.32 per share,
resulting in proceeds to the Company of $194,400.
Also during the six months ended December 31, 1998, 32,739 shares of
common stock valued at $116,504 were issued in connection with the Company's
401(k) Plan matching contribution.
6
On July 1, 1998, options to acquire up to 135,000 shares of the Company's
$.001 par value common stock were issued as an advance payment for investment
consulting services. Additional paid in capital was credited for $76,950, the
fair value of the options issued, while the advance payment is being amortized
over 38 months, the term of the consulting agreement.
On November 1, 1998, accrued executive bonuses totaling $61,274 were paid
through the issuance of 18,155 shares of common stock.
On November 30, 1998, a five percent (5%) stock dividend was granted to
shareholders of record on November 16, 1998, which resulted in the issuance of
248,596 additional shares and cash payments totaling $1,257 in lieu of issuing
fractional shares. Earnings per share for periods prior to the stock dividend
have been retroactively restated to reflect the effects of this stock dividend.
NOTE 7 - SUPPLEMENTAL CASH FLOW INFORMATION
The following summarizes noncash investing and financing transactions
during the six months ended December 31, 1998 and 1997:
1998 1997
---------- ----------
Common stock issued for payment of incentive bonuses $ 61,274 $ 33,400
Fair value of stock options issued for investment consulting services 76,950 16,000
Issuance of common stock for 401(k) matching contribution 116,504 51,192
Issuance of common stock for 5% stock dividend 1,320,045 577,524
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
NOTE 8 - RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard No. 133, "Accounting for Derivative Instruments
and Hedging Activities" (FAS 133). FAS 133 requires companies to recognize all
derivative contracts as either assets or liabilities in the balance sheet and to
measure them at fair value. FAS 133 is effective for periods beginning after
June 15, 1999. Historically, the Company has not entered into derivative
contracts. Accordingly, FAS 133 is not expected to affect the Company's
financial statements.
7
(THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK)
DISPLAY TECHNOLOGIES, INC. 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,
1998, filed with the Securities and Exchange Commission on September 25, 1998,
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, 1998.
The results of operations for the six months and three months ended
December 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 six months and three
months ended December 31, 1998. However, all of these discussions to date have
been on the basis of no dilution to the present shareholders.
SIX MONTHS ENDED DECEMBER 31, 1998 VS. DECEMBER 31, 1997
- --------------------------------------------------------
The Company's sales for the six months ended December 31, 1998 increased
by $24,700,483, or 253% over the same period in the prior year. Operating
income increased by $3,064,218, or 604% while income, before provision for
income taxes, increased by $2,520,318, or 548%. Certain tax 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 $1,162,000 (an
effective rate of 39%) for the six month period ended December 31, 1998,
compared to $98,000 (an effective rate of 21%) for the same period in the prior
year. Net income for the six months ended December 31, 1998 increased by
$1,456,318, or 403% over the same period in the prior year. Basic earnings per
common share increased by $.25 on a 39% increase in weighted average shares
outstanding, while diluted earnings per common share increased by $.17 on a 51%
increase in weighted average shares outstanding over the same period.
8
The increased sales resulted from increases in the sign and image
enhancement display segment (the "display segment"). The $33,638,230 display
segment's sales, which accounted for 97.6% of consolidated sales for the six
months ended December 31, 1998, increased by $24,793,987, or 280%, while the
$833,400 in filtration segment sales decreased by $93,504, or 10%, over the same
period of the prior year.
The sales growth in the display segment can be broken down into internal
sales growth of $682,915 and growth from acquisitions of $24,111,072. The
acquisition growth in the display segment resulted from the February 18, 1998
acquisition of Ad Art. Ad Art contributed sales of $24,111,072 for the six
months ended December 31, 1998. While these sales represented increased sales
resulting from an acquisition, Ad Art has shown significant internal growth
since being acquired in February 1998. For comparative purposes, Ad Art's sales
for the twelve months ended December 31, 1997 (prior to the acquisition) were
$28,277,081. Therefore, sales for the six month period ended December 31, 1998
are 85% of a full year's sales prior to the acquisition. The Company has
enabled this rapid growth at Ad Art by providing increased access to working
capital. This working capital has allowed Ad Art to pursue larger sign
contracts and to allocate resources to new technologies, such as the full color
L.E.D. (light emitting diode) video displays introduced by Ad Art in June 1998.
Excluding the effects of the Ad Art acquisition, display segment sales
were $9,527,158 and $8,843,729 for the six months ended December 31, 1998 and
1997, respectively, an increase of 8%. This increase can be further broken down
between institutional signage displays and commercial image enhancement displays
and related products and services. Institutional signage displays accounted for
sales of $4,893,538 and $4,285,097 for the six months ended December 31, 1998
and 1997, respectively, an increase of 14%, while commercial image enhancement
displays accounted for sales of $4,633,620 and $4,558,632, respectively, an
increase of 2%.
A majority of the increased sales in institutional signage displays
relates to government and military sales, which were $811,937 and $192,881 for
the six months ended December 31, 1998 and 1997, respectively, an increase of
321%. Sales to schools increased over last year, with sales of $1,421,904 for
the six months ended December 31, 1998, compared to $1,194,637 for the six
months ended December 31, 1997, an increase of 19%. In contrast, church sign
sales decreased over last year, with sales of $2,520,880 and $2,781,766 for the
six months ended December 31, 1998 and 1997, respectively - a decrease of 9%.
This decrease relates to the shifting of experienced sales personnel from church
sign sales to government and military sales.
The Company's overall gross profit margin dropped to 35.1% of sales for
the six months ended December 31, 1998 compared to 45.5% for the same period of
the previous year. The drop in gross margin is a direct result of the change in
the sales mix resulting from the Ad Art acquisition. Ad Art's products are
typically sold at margins of 30% to 35% with some electronic products as high as
40%, which is consistent with the Company's margins on similar commercial
displays. These margins are significantly lower than the historical 55% to 60%
gross profit margins on the Company's institutional displays and the filtration
segment, which have higher gross profit margins but also have higher selling
costs.
Selling expenses for the six months ended December 31, 1998 increased by
$3,267,761, or 197%, over the same period of the prior year and were 14.3% of
sales for the six months ended December 31, 1998, compared to 17.0% of sales in
the same period of the prior year. This change, like the change in gross profit
margins, is related to the changing sales mix resulting from the acquisition of
Ad Art. Selling
9
expenses on commercial displays (which included Ad Art) were 12.8% of sales for
the six months ended December 31, 1998, compared to 11.3% of commercial display
sales in the same period of the prior year. Selling expenses on institutional
displays for the six months ended December 31, 1998 and 1997 were 22.5% and
22.7% of sales, respectively. Therefore, as the sales mix has changed to include
a much larger percentage of commercial displays, selling expenses, as a
percentage of consolidated sales, has decreased.
General and administrative (G&A) expenses for the six months ended
December 31, 1998 increased by $1,321,319, or 58% over the same period of the
prior year. The portion of this increase relating directly to the acquisition
of Ad Art is $854,306. Additionally, for the six months ended December 31,
1998, corporate G&A expenses increased by $370,925, or 72%, the display
segment's G&A expenses grew internally by $103,198, or 6%, and the filtration
segment's G&A expenses decreased by $7,110, or 5%, over the same period of the
prior year.
Corporate general and administrative expenses primarily consist of
executive compensation and benefits, occupancy costs of the corporate office,
and other compliance costs incurred as a result of being a public company such
as legal fees, director fees, SEC and NASDAQ filing costs and investor relations
and publicity costs. Approximately $254,000 of the increase in these corporate
G&A expenses as compared to the same period in the prior year relates to
increased salary and bonus compensation to executives whose compensation and
bonuses are calculated under a formula based upon the financial performance of
the Company. Additionally, the corporate division hired two new employees
during the first quarter of fiscal 1999. The other significant expense
increase, of approximately $73,000, resulted from an expansion in investor
relations and services. Prior to this expansion, investor relations and
services were very limited.
Non-operating expenses (net) for the six months ended December 31, 1998
increased by $543,900 over the six months ended December 31, 1997. The main
component of this increase is interest expense, which increased by $524,015, or
441%, over the prior year. This increase in interest expense is directly
attributable to the Ad Art acquisition. Approximately $170,000 in interest was
incurred during the six months ended December 31, 1998 on debt incurred to
finance the acquisition and approximately $344,500 in additional interest was
incurred on debt assumed in the acquisition.
Income tax expense for the first two quarters of fiscal 1999 was
$1,162,000 (a 39% effective tax rate) compared to $98,000 (a 19% effective tax
rate) for the first two quarters of fiscal 1998 - a net increase of $1,064,000.
The low effective rate for the six months ended December 31, 1997 was the result
of the recognition of tax benefits derived from tax net operating losses
incurred in prior years. All benefits of these historical tax net operating
losses have now been realized and future tax expenses should approximate
statutory rates.
THREE MONTHS ENDED DECEMBER 31, 1998 VS. DECEMBER 31, 1997
- ----------------------------------------------------------
The Company's sales for the three months ended December 31, 1998
increased by $12,747,817, or 272% over the same period in the prior year.
Operating income increased by $1,683,945 and income before provision for income
taxes increased by $1,375,556. 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 $575,000 (an effective rate of 39%) for
the three months ended December 31, 1998, compared to $28,000 (an effective rate
of 28%) for the same period in the prior year. Net income for the three months
ended December 31, 1998 increased by $828,556 over the same period in the prior
year. Basic earnings per
10
common share increased by $.15 on a 40% increase in weighted average shares
outstanding, while diluted earnings per common share increased by $.10 on a 60%
increase in weighted average shares outstanding over the same period.
The increased sales resulted from increases in the display segment's
sales, which accounted for 97.6% of consolidated sales for the six months ended
December 31, 1998. This segment's sales increased by $12,769,103, or 300%,
while filtration segment sales decreased by $21,286, or 10%, over the same
period of the prior year.
Ad Art, which was acquired in February 1998, contributed $12,510,021 in
sales, with sales from previously existing display operations increasing by
$259,082 over the same period of the prior year. Excluding the effects of the
Ad Art acquisition, display segment sales were $4,510,332 and $4,251,250 for the
three months ended December 31, 1998 and 1997, respectively - an increase of 6%.
Further broken down, institutional signage displays accounted for sales of
$2,254,748 and $2,028,104 for the three months ended December 31, 1998 and 1997,
respectively - an increase of 11%, while commercial image enhancement displays
accounted for sales of $2,255,584 and $2,223,146, respectively, an increase of
1%.
Again, a majority of the increased sales in institutional signage
displays related to government and military sales, which were $421,086 and
$163,591 for the three months ended December 31, 1998 and 1997, respectively -
an increase of 157%. Sales to schools also increased over the prior period,
with sales of $534,115 for the three months ended December 31, 1998, and
$454,527 for the three months ended December 31, 1997, an increase of 18%. In
contrast, church sign sales decreased over the prior period, with sales of
$1,206,248 and $1,353,791 for the three months ended December 31, 1998 and 1997,
respectively, a decrease of 11%. This decrease relates to the shifting of
experienced sales personnel from church sign sales to government and military
sales.
The Company's overall gross profit margin dropped to 35.0% of sales for
the three months ended December 31, 1998 from 43.7% for the same period of the
previous year. The drop in gross margin is, again, a direct result of the
change in the sales mix resulting from the Ad Art acquisition.
Selling expenses for the three months ended December 31, 1998 increased
by $1,667,454, or 209%, over the same period of the prior year and were 14.1% of
sales for the three months ended December 31, 1998, compared to 17.0% of sales
for the same period of the prior year. This change is, again, related to the
change in the Company's sales mix resulting from the Ad Art acquisition. Selling
expenses on the commercial displays (which includes Ad Art) were 12.9% of sales
for the three months ended December 31, 1998, compared to 10.6% for the same
period of the prior year. Selling expenses on institutional displays for the
three months ended December 31, 1998 and 1997 were 21.7% and 22.9% of sales,
respectively. Therefore, as the sales mix has changed to include a much larger
percentage of commercial displays, selling expenses, as a percentage of
consolidated sales, has decreased.
General and administrative (G&A) expenses for the three months ended
December 31, 1998 increased by $695,434, or 60% over the same period of the
prior year. The portion of this increase relating directly to the acquisition
of Ad Art is $459,637. Additionally, for the three months ended December 31,
1998, corporate G&A expenses increased by $171,555, or 67%, the display
segment's G&A expenses grew internally by $71,943, or 9%, and the filtration
segment's G&A expenses decreased by $7,701, or 11%, over the same period of the
prior year.
11
Approximately $133,000 of the increase in these corporate G&A expenses as
compared to the same period in the prior year relates to increased salary and
bonus compensation to executives whose compensation and bonuses are calculated
under a formula based upon the financial performance of the Company.
Additionally, the corporate division hired two new employees during the first
quarter of fiscal 1999. The other significant expense increase, of
approximately $31,000, resulted from an expansion in investor relations and
services. Prior to this expansion, investor relations and publicity activities
were very limited.
Non-operating expenses (net) for the three months ended December 31, 1998
increased by $308,389 over the three months ended December 31, 1997. The main
component of this increase was interest expense, which increased by $290,221
over the prior year. This increase in interest expense is directly attributable
to the Ad Art acquisition. Approximately $80,000 in interest was incurred
during the three months ended December 31, 1998 on debt incurred to finance the
acquisition and approximately $173,500 in additional interest was incurred on
debt assumed in the acquisition.
Income tax expense for the second quarter of fiscal 1999 was $575,000 (a
39% effective tax rate), compared to $28,000 (a 28% effective tax rate) for the
second quarter of fiscal 1998 - a net increase of $547,000. The low effective
rate for the three months ended December 31, 1997 was the result of recognition
of tax benefits derived from net operating losses incurred in prior years. All
benefits of these historical net operating losses have now been realized and
future tax expenses should approximate statutory rates.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Net cash used for operating activities for the six months ended December
31, 1998 was $2,206,892. Net income for the period provided cash of $2,495,606,
net of non-cash charges for depreciation and amortization, gains on fixed asset
sales, stock contributions to the Company's 401(k) plan, the change in deferred
income taxes, and other non-cash items. This cash provided was offset by a net
change of $4,702,498 in the Company's operating assets and liabilities,
consisting primarily of changes in inventories, receivables, and accounts
payable.
Net cash used for investing activities for the six months ended December
31, 1998 was $573,384 of which $645,868 was used for capital expenditures and
$1,542 was used to maintain patents. These uses were partially offset by
$38,026 that was provided by the sale of fixed assets and $36,000 that was
provided by other investing activities.
Net cash provided by financing activities for the six months ended
December 31, 1998 was $2,437,975. This amount consists of $2,723,905 was that
received through net advances on the Company's lines of credit and $258,457 that
was received upon the exercise of certain outstanding stock options and
warrants. Offsetting financing activities included payments on notes payable
and capital lease obligations of $384,391 and $158,739, respectively, and the
payment of $1,257 in cash dividends in lieu of issuing fractional shares related
to the 5% stock dividend.
The Company has a $1.5 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, matures October 1, 2000 and is collateralized by property,
accounts receivable and inventory, and subsidiary guarantees. The loan
agreement
12
contains covenants which require the Company to maintain certain
financial and operating ratios. At February 2, 1999, there was no balance
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 February 2, 1999, $4,697,252 was
outstanding against this line of credit.
YEAR 2000 COMPUTER COMPLIANCE
- -----------------------------
Many existing computer programs only use two digits to identify a year in
the date field, with the result that data referring to the Year 2000 and
subsequent years may be misinterpreted by these programs. If present in computer
applications of the Company or its suppliers and not corrected, this problem
could cause computer applications to fail or to create erroneous results and
could cause a disruption in operations and have an adverse effect on the
Company's business and results of operations.
Over the last few years, the Company has analyzed and evaluated all
internal information technology systems, equipment and operations to ensure
their Year 2000 compliance. The Company has been actively implementing new
systems over the last few years, and believes that all of its major information
technology, including our computer operated electronic display products, is Year
2000 complaint. Letters of compliance have been requested from each vendor and,
when the need is identified, the Company intends to work with its vendors in
determining appropriate testing and compliance processes. Expenditures to
remediate Year 2000 issues have not been material and are not expected to be
material in the future.
The Company does not assess as high the risks to operations of Year 2000
noncompliance by vendors, since the Company's numerous alternate sources of
suppliers exist. However, despite this fact and our efforts to ensure the
Company's Year 2000 compliance and that of its vendors, the Company could
potentially experience a disruption in its operations as a result of Year 2000
noncompliance of certain vendors, financial institutions, governmental agencies
or other third parties or external systems. Such a disruption could potentially
affect various aspects of business operations, such as the timeliness of
completion and delivery of major electronic display products.
(THE REMAINDER OF THE PAGE INTENTIONALLY LEFT BLANK)
13
PART II - OTHER INFORMATION
---------------------------
ITEM 1. LEGAL PROCEEDINGS.
- ----------------------------
Not applicable.
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.
- ------------------------------------------------------------
The Company held its 1998 annual meeting of shareholders (the "1998
Annual Meeting") on October 29, 1998.
Proxies for the 1998 Annual Meeting were solicited by the Company's
management pursuant to Regulation 14A under the Exchange Act, there was no
solicitation in opposition to management's nominees for election of directors as
listed in the Company's September 15, 1998 Proxy Statement delivered in
connection with the 1998 Annual Meeting, and all of such nominees were elected.
At the Annual Meeting, 11 persons were elected to serve as directors of
the Company until the next annual meeting of shareholders and until their
successors are elected and qualified, and the Company's shareholders ratified
the appointment of BDO Seidman, LLP, as independent auditors of the Company for
the June 30, 1999 fiscal year. The Company's shareholders also approved
Restated Articles of Incorporation of the Company. The number of votes cast
for, against or withheld, as well as the number of abstentions (including broker
non-votes), as to each of such matters was as follows:
Votes Votes Votes Votes
For Against Withheld Abstaining
--------- -------- -------- ----------
Gary Donald Bell 4,814,030 0 428 6,150
J. William Brandner 4,814,030 0 428 6,150
Edwin M. Freakley 4,803,192 0 11,266 6,150
Thomas N. Grant 4,813,458 0 1,000 6,150
Philip Howe Hoard 4,813,958 0 500 6,150
Lester Jacobs 4,813,958 0 500 6,150
Terry J. Long 4,813,958 0 500 6,150
Lou A. Papais 4,812,856 0 1,602 6,150
William A. Retz 4,813,958 0 500 6,150
Robert M. Smither 4,803,270 0 11,188 6,150
J. Melvin Stewart 4,812,706 0 1,752 6,150
14
Restated Articles of Incorporation 3,181,069 80,666 0 18,233
Ratification of appointment of
BDO Seidman, LLP 4,794,762 9,064 0 17,209
ITEM 5. OTHER INFORMATION.
- --------------------------
Not applicable.
---------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
- -----------------------------------------
Current Report on Form 8-K filed on December 7, 1998.
Exhibit 27 Financial Data Schedule
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.
DISPLAY TECHNOLOGIES, INC.
Date: February 2, 1999 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
15