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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 March 31, 1999 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 May 10, 1999, 6,242,377 shares of Common Stock were outstanding.
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PART I - FINANCIAL INFORMATION
DISPLAY TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited)
March 31,
1999
---------------
ASSETS
Current Assets:
Cash $ 488,638
Accounts receivable:
Trade, less allowance for doubtful accounts of $284,738 8,489,731
Other 559,701
Inventories 7,311,304
Costs and estimated earnings in excess of billings on uncompleted contracts 3,384,406
Prepaid expenses 925,482
Deferred taxes 618,000
-----------
Total current assets 21,777,262
-----------
Property, plant and equipment, net 6,822,977
-----------
Other assets:
Intangibles, less accumulated amortization 8,872,532
Other 253,265
-----------
Total other assets 9,125,797
-----------
$37,726,036
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,772,983
Customer deposits 1,241,979
Accrued expenses 2,855,374
Billings in excess of costs and estimated earnings on uncompleted contracts 99,388
Current portion of long-term debt 649,999
Current portion of obligations under capital leases 171,658
-----------
Total current liabilities 8,791,381
Long-term liabilities:
Borrowings against lines of credit 4,875,053
Long-term debt, less current portion 6,878,233
Obligations under capital leases, less current portion 470,446
Deferred tax liabilities 198,000
-----------
Total liabilities 21,213,113
-----------
Stockholders' equity:
Common stock 6,214
Additional paid-in capital 15,955,287
Retained earnings 551,422
-----------
Total stockholders' equity 16,512,923
-----------
$37,726,036
===========
See accompanying notes to condensed consolidated financial statements.
2
DISPLAY TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Nine Months Ended Three Months Ended
March 31, March 31,
-------------------------------- --------------------------------
1999 1998 1999 1998
------------- -------------- ------------ --------------
Sales $ 48,454,671 $ 17,681,019 $ 13,983,041 $ 7,909,872
Costs of sales 31,651,976 10,330,262 9,277,369 5,002,840
------------- ------------ ------------ -----------
Gross profit 16,802,695 7,350,757 4,705,672 2,907,032
------------- ------------ ------------ -----------
Operating expenses:
Selling 7,715,397 2,643,412 2,787,532 1,050,512
General and administrative 5,197,772 3,545,347 1,599,389 1,201,079
------------- ------------ ------------ -----------
Total operating expenses 12,913,169 6,188,759 4,386,921 2,251,591
------------- ------------ ------------ -----------
Income from operations 3,889,526 1,161,998 318,751 655,441
Other income (expense):
Interest income 54,262 74,370 18,051 25,497
Interest expense (923,548) (247,661) (305,350) (128,706)
Gain (loss) on sales of assets, net 1,512 4,542 (2,865) 1,392
Other 12,694 19,770 25,903 (243)
------------- ------------ ------------ -----------
Income before provision for income taxes 3,034,446 1,013,019 54,490 553,381
Provision for income taxes 1,183,000 324,000 21,000 226,000
------------- ------------ ------------ -----------
Net income $ 1,851,446 $ 689,019 $ 33,490 $ 327,381
============= ============ ============ ===========
Earnings Per Common Share:
Basic $ .34 $ .18 $ .01 $ .08
============= ============ ============ ===========
Diluted $ .26 $ .14 $ .01 $ .06
============= ============ ============ ===========
Weighted average number of shares outstanding:
Basic 5,424,841 3,879,427 5,845,712 4,141,566
============= ============ ============ ===========
Diluted 7,674,421 5,304,887 8,376,268 5,663,589
============= ============ ============ ===========
See accompanying notes to condensed consolidated financial statements.
3
DISPLAY TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended Three Months Ended
March 31, March 31,
------------------------------- -------------------------------
1999 1998 1999 1998
------------- ------------- ------------- ------------
Cash flows from operating activities:
Net income $ 1,851,446 $ 689,019 $ 33,490 $ 327,381
Adjustments to reconcile net income to net cash
used for operating activities:
Depreciation and amortization 719,710 414,455 249,066 169,452
(Gain) loss on disposal of property and equipment (1,512) (4,542) 2,865 (1,392)
Contribution of common stock to 401(k) plan 195,003 75,645 78,499 24,453
Change in deferred income taxes 276,000 112,510 138,000 37,010
Other (55,666) (12,744) (13,951) (7,755)
Changes in assets and liabilities:
Accounts receivable, trade (1,610,391) (1,407,847) 1,511,244 (1,083,477)
Other receivables (108,917) 121,433 (84,637) 63,748
Inventories, including adjustments to costs,
billing and estimated earnings (4,841,230) 121,462 (1,240,256) 226,049
Prepaid expenses 65,151 (591,342) (78,278) (541,189)
Accounts payable 951,460 (1,259,350) (1,286,380) (1,027,162)
Customer deposits (90,437) 154,299 362,602 214,999
Accrued expenses (680,175) (161,251) (777,261) 288,979
Other 52,415 - 34,747 -
------------- ------------ ------------- ------------
Net cash used for continuing operating activities (3,277,143) (1,748,253) (1,070,250) (1,308,904)
------------- ------------ ------------- ------------
Net cash used for discontinued operating activities - (22,157) - (3,018)
------------- ------------ ------------- ------------
Cash flows from investing activities:
Purchase of property, plant and equipment (902,195) (657,156) (256,327) (126,157)
Business acquisitions, net of cash acquired - (3,004,568) - (3,033,155)
Patent, trademark and other intangible acquisition costs (41,479) - (39,937) -
Proceeds from sales of assets 38,026 4,542 - 1,392
Other 11,000 99,221 (25,000) 99,221
------------- ------------ ------------- ------------
Net cash used for investing activities (894,648) (3,557,961) (321,264) (3,058,699)
------------- ------------ ------------- ------------
Cash flows from financing activities:
Net change in line of credit borrowings 1,915,858 258,814 (808,047) (202,186)
Proceeds from issuance of notes payable, net of
debt issue costs - 3,695,462 - 3,392,757
Principal payments on notes payable (396,952) (92,039) (12,561) (6,083)
Proceeds from exercise of stock options and
warrants, net of issuance costs 2,802,145 87,334 2,543,687 24,657
Proceeds from sales of common stock, net of
issue costs - 970,000 - 970,000
Net change in capital lease obligations (196,929) 184,856 (38,190) 198,845
Other (1,257) - - -
------------- ------------ ------------- ------------
Net cash provided by financing activities 4,122,865 5,104,427 1,684,889 4,377,990
------------- ------------ ------------- ------------
Increase (decrease) in cash (48,926) (223,944) 293,375 7,369
Cash, beginning of period 537,564 231,313 195,263 -
------------- ------------ ------------- ------------
Cash, end of period $ 488,638 $ 7,369 $ 488,638 $ 7,369
============= ============ ============= ============
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 in this report 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 March 31, 1998 financial statements to
conform to the March 31, 1999 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 nine months and three months ended
March 31, 1999 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 (effectively 850,500 shares after adjustment for the November
30, 1998 five percent stock dividend - see Note 6) 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) 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 consisted of the following at
March 31, 1999:
Raw materials and work in progress $5,957,601
Finished goods 1,353,703
----------
$7,311,304
==========
5
NOTE 3 - UNCOMPLETED CONTRACTS
The costs and estimated earnings in excess of billings on uncompleted
contracts consisted of the following at March 31, 1999:
Costs incurred on uncompleted contracts $5,450,621
Estimated earnings 1,942,454
----------
7,393,075
Billings to date 4,108,057
----------
$3,285,018
==========
Included in the accompanying balance sheet under the following
captions:
Costs and estimated earnings in excess of
billings on completed contracts $3,384,406
Billings in excess of costs and estimated
earnings on completed contracts (99,388)
----------
$3,285,018
==========
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 March 31, 1999, there was no outstanding balance 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 March 31, 1999,
$4,875,053 was outstanding against this line of credit.
The Company has received a commitment letter to refinance its two
lines of credit. The new financing will result in a substantial increase in
borrowing limits, a reduction of interest rates, and an extension of the current
maturity dates. The new financing is expected to be completed before the
Company's fiscal year end.
NOTE 6 - CAPITAL STOCK
During the nine months ended March 31, 1999, a total of 471,541
options to purchase the Company's common stock were exercised at prices varying
from $.46 to $3.43 per share, for total cash proceeds to the Company of
$486,864.
Additionally, a total of 537,370 public warrants to purchase the
Company's common stock were exercised at $4.32 per share, resulting in proceeds
to the Company of $2,315,281, net of $6,157 in redemption costs on unexercised
public warrants.
Also during the nine months ended March 31, 1999, 43,295 shares of
common stock valued at $195,003 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 paid 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 nine months ended March 31, 1999 and 1998:
1999 1998
---------- ----------
Common stock issued for payment of incentive bonuses $ 61,274 $ 33,400
Fair value of stock options issued for services 76,950 124,250
Issuance of common stock for 401(k) matching contribution 195,003 75,645
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
Stock issued for acquisition of Ad Art - 3,337,200
7
NOTE 8 - EARNINGS PER SHARE
Earnings per share for all periods presented is calculated under the
provisions of Financial Accounting Standards No. 128, "Earnings per Share" which
was adopted by the Company in 1998.
Diluted earnings per share for the nine months and three months ended March 31,
1999 and 1998 are calculated as follows:
Nine Months Ended March 31, Three Months Ended March 31,
------------------------------- ---------------------------------
1999 1998 1999 1998
------------- ------------- ------------ --------------
Net income $ 1,851,446 $ 689,019 $ 33,490 $ 327,381
Convertible debt interest, net 172,669 48,396 53,993 24,291
------------- ------------- ------------- --------------
Net income for purposes of calculated
diluted earnings per share $ 2,024,115 $ 737,415 $ 87,483 $ 351,672
============= ============= ============= ==============
Weighted average shares 5,424,841 3,879,427 5,845,712 4,141,566
Convertible securities 890,345 238,313 890,345 238,313
Dilutive options and warrants 1,255,285 1,187,147 1,328,361 1,283,710
Ad Art acquisition - contingent shares 103,950 - 311,850 -
------------- ------------- ------------- --------------
Diluted weighted average shares 7,674,421 5,304,887 8,376,268 5,663,589
============= ============= ============= ==============
Diluted earnings per share $ 0.26 $ 0.14 $ 0.01 $ 0.06
============= ============= ============= ==============
NOTE 9 - 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 on 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.
(THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK)
8
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 our 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.
Certain statements in this report may constitute "forward-looking
statements" within the meaning of the private Securities Litigation Reform Act
of 1995. These statements are subject to the safe harbor provisions of that
act. These statements may include, without limitation, statements about the
future competitiveness of the display and filter industries, the future
availability and prices of certain materials, potential regulatory obligations
and our strategies and other statements that are not historical facts. The
words "anticipate", "believe", "estimate", and similar expressions are generally
intended to identify forward-looking statements. Because such statements
involve risks and uncertainties, there are important factors that could cause
actual results to differ materially from those expressed or implied by such
forward-looking statements. Such factors include changes in general economic and
business conditions (in both the display and filter industries), actions of
competitors, our ability to recover material costs in the pricing of our
products, the extent to which we are able to develop new products and markets
for our existing products, the time required for such development, the level of
demand for such products, changes in our business strategies, and other factors.
For more information on the potential factors which could affect the Company's
financial results, reference should be made to our filings with the Securities
and Exchange Commission, including our Annual Report on Form 10-KSB for the
fiscal year ended June 30, 1998.
The results of operations for the nine months and three months ended
March 31, 1999 are not necessarily indicative of the results to be expected for
the full year. We are continuously exploring acquisitions and plan to continue
to grow both internally and through acquisitions. 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, 1999.
However, all of these discussions to date have been on the basis of no dilution
to the present shareholders.
NINE MONTHS ENDED MARCH 31, 1999 VS. MARCH 31, 1998
- ---------------------------------------------------
Our sales for the nine months ended March 31, 1999 increased by
$30,773,652, or 174% over the same period in the prior year. Operating income
increased by $2,727,238, or 235%, while income before provision for income taxes
increased by $2,021,137, or 200%. 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 $1,183,000 (an effective rate of
39%) for the nine month period ended March 31, 1999, compared to $324,000 (an
effective rate of 32%) for the same period in the prior year. Net income for the
nine months ended March 31, 1999 increased by $1,162,137, or 169%, over the same
period in the prior year. Basic earnings per common share increased by $.16 on
a 40% increase in weighted average shares outstanding. Diluted earnings per
common share increased by $.12 on a 45% increase in weighted average shares
outstanding over the same period.
The increased sales resulted from increases in the sign and image
enhancement display segment (the "display segment"). The $47,263,091 display
segment's sales, which accounted for 97.5% of consolidated sales for the nine
months
9
ended March 31, 1999, increased by $30,988,688, or 190%. The $1,191,580 in
filtration segment sales decreased by $215,036, or 15%, over the same period of
the prior year.
The sales growth in the display segment can be broken down between
commercial image enhancement displays and related products and services, and
institutional signage displays. Commercial image enhancement displays accounted
for sales of $40,420,778 and $10,513,398 for the nine months ended March 31,
1999 and 1998, an increase of 284%. Institutional signage displays accounted for
sales of $6,842,313 and $5,761,005, an increase of 19%.
A majority of the increased sales in commercial displays relates to
the February 18, 1998 acquisition of Ad Art. Only one and one-half months of
this subsidiary's activity is included for the nine months ended March 31, 1998.
Exclusive of the Ad Art acquisition, sales for our other commercial display
operations increased from $6,160,793 to $7,471,271 for the nine months ended
March 31, 1999 and 1998, an increase of 21%.
A majority of the increased sales in institutional signage displays
relates to government and military sales, which were $916,855 and $198,614 for
the nine months ended March 31, 1999 and 1998, an increase of 362%. Sales to
schools increased to $1,929,897 for the nine months ended March 31, 1999,
compared to $1,620,768 for the nine months ended March 31, 1998, an increase of
19%. Sales to municipal and civic organization also increased to $351,269 from
$159,539 for the nine months ended March 31, 1999 and 1998, an increase of 120%.
In contrast, church sign sales decreased over last year, with sales of
$3,644,292 and $3,782,084, a decrease of 4%. This decrease related to the
shifting of experienced sales personnel from church sign sales to government and
military sales to develop those new markets..
Our overall gross profit margin dropped to 34.7% of sales for the nine
months ended March 31, 1999 compared to 41.6% for the same period of the
previous year. This drop is attributable to 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 nine months ended March 31, 1999 increased by
$5,071,985, or 192%, over the same period of the prior year. They were 16% of
sales for the nine months ended March 31, 1999 compared to 15% 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 expenses on display segment sales were 16% and 15% for the nine
months ended March 31, 1999 and 1998. Filtration segment selling expenses
remained constant at 18% of sales. Within the display segment, selling expenses
on commercial displays were 14.7% of sales for the nine months ended March 31,
1999, compared to 10.9% in the same period of the prior year. This increase was
due to the effect of Ad Art's selling expenses, which were 15% of sales for the
nine months ended March 31, 1999. Ad Art incurred significant selling expenses
in the nine months ended March 31, 1999 which should benefit future periods and
result in selling expenses being a smaller percentage of sales. These expenses
include additional sales staff, a new sales office in Dallas, Texas and costs
associated with our mobile LED (light emitting diode) video board which has been
displayed for potential customers throughout the United States. Selling expenses
on institutional displays were 23% of sales for both the nine months ended March
31, 1999 and 1998.
General and administrative (G&A) expenses for the nine months ended
March 31, 1999 increased by $1,652,425, or 47%, over the same period of the
prior year. A majority of this increase relates to the acquisition of Ad Art.
G&A expenses related to the display segment increased by $1,307,295, or 54%,
while the filtration segment's increased by $9,321, or 4%. Additionally, for the
nine months ended March 31, 1999, corporate G&A expenses increased by $335,809,
or 45%, 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. They
include legal fees, director fees, SEC and NASDAQ filing costs and investor
relations costs. Approximately $187,000 of the
10
increase in corporate G&A expenses related 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 $75,500 resulted
from an expansion in investor relations services. Prior to this expansion,
investor relations services were very limited.
Non-operating expenses (net) for the nine months ended March 31, 1999
increased by $706,101 over the nine months ended March 31, 1998. The main
component of this increase is interest expense, which increased by $675,887, or
273%, over the prior year. This increase is directly attributable to the Ad Art
acquisition. Specifically, interest incurred during the nine months ended March
31, 1999 on debt incurred to finance the acquisition increased by $222,726.
Additionally, interest expense incurred on debt assumed in the acquisition
increased by $496,621, compared to the same period of the prior year.
Income tax expense for the first nine months of fiscal 1999 was
$1,183,000 (a 39% effective tax rate) compared to $324,000 (a 32% effective tax
rate) for the first nine months of fiscal 1998 - a net increase of $859,000.
The low effective rate for the nine months ended March 31, 1998 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 MARCH 31, 1999 VS. MARCH 31, 1998
- ----------------------------------------------------
Our sales for the three months ended March 31, 1999 increased by
$6,073,169, or 77%, over the same period in the prior year. Operating income
decreased by $336,980 and income before provision for income taxes decreased by
$499,181. Net income for the three months ended March 31, 1999 decreased by
$294,181. Basic earnings per common share decreased by $.07 on a 41% increase in
weighted average shares outstanding. Diluted earnings per common share decreased
by $.05 on a 48% increase in weighted average shares outstanding over the same
period.
The increased sales resulted from the increase in display segment's
sales, totaling $13,624,861 for the three months ended March 13, 1999, which
accounted for 97.4% of consolidated sales. This segment's sales increased by
$6,194,187, or 83%, while filtration segment sales decreased by $121,018, or
25%, over the same period of the prior year.
The sales growth in the display segment can be broken down between
commercial displays and institutional displays, with increases of 96% and 32%,
respectively. Commercial displays accounted for sales of $11,676,086 and
$5,954,766 for the three months ended March 31, 1999 and 1998. Institutional
signage displays accounted for sales of $1,948,775 and $1,475,908, respectively.
Again, a majority of the increase in commercial displays relates to the
acquisition of Ad Art, since only one and one-half months of this subsidiary's
activity is included for the three months ended March 31, 1998. Exclusive of the
Ad Art acquisition, sales for our other commercial display operations increased
from $1,602,161 to $2,837,651 for the three months ended March 31, 1999 and
1998, an increase of 77%.
A majority of the increased sales in institutional displays related to
municipal and civic sign sales, which were $212,452 and $43,726, - an increase
of 386%. Church sign sales, school sign sales, and government and military sign
sales also increased over the prior period, with sales of $1,123,412, $507,993,
and $104,918 for the three months ended March 31, 1999, and $1,000,318,
$426,131, and $5,733 for the three months ended March 31, 1998, - increases of
12%, 19%, and 1,730%, respectively.
11
Our overall gross profit margin dropped to 33.7% of sales for the three
months ended March 31, 1999 from 36.8% for the same period of the previous year.
The drop was caused by the change in the sales mix resulting from the Ad Art
acquisition. For the three months ended March 31, 1999 and 1998, both the
display and the filtration segments' gross profit margins decreased to 33.2% and
51.7%, from 35.3% and 59.2%. Further broken down, gross profit margins on
commercial displays decreased to 28.6% from 39.3% while margins on institutional
displays increased to 60.8% from 59.2% since the same period of the prior year.
Selling expenses for the three months ended March 31, 1999 increased by
$1,737,020, or 165%, and were 19.9% of sales, compared to 13.3% of sales for the
same period of the prior year. This change is also caused by the change in our
sales mix resulting from the Ad Art acquisition. Selling expenses on
display segment sales were 19.8% and 13.4% and filtration segment selling
expenses were 24.5% and 17.5% of sales. Within the display segment, selling
expenses on commercial displays were 19.2% of sales for the three months ended
March 31, 1999, compared to 10.7% in the same period of the prior year. The
increase in selling expenses as a percentage of sales on commercial displays is
partially a result of the Ad Art acquisition. Ad Art's selling expenses
typically average 15% to 17% of sales. The current quarter's selling expenses
were further impacted by approximately $200,000 in costs associated with a
mobile LED (light emitting diode) video board that we have been presenting to
potential customers throughout the United States. In addition, costs have been
incurred to add sales personnel at Ad Art and to open a new sales office in
Dallas, Texas. These costs, combined with other fixed selling costs, are spread
over a smaller than anticipated sales base resulting in selling expenses on
commercial displays being 19.2% of sales for the three months ended March 31,
1999. Selling expenses on institutional displays were 23.8% and 24.4% of sales
for the three months ended March 31, 1999 and 1998.
General and administrative (G&A) expenses for the three months ended
March 31, 1999 increased by $398,310, or 33%. G&A expenses related to the
display segment increased by $419,996, or 48%, while the filtration segment's
increased by $4,430, or 6%. The majority of the increase in G&A expenses for the
display segment relates to the differing periods in which Ad Art's operations
are included in the quarterly results subsequent to the February 18, 1998
acquisition. If not for these differing periods, G&A expenses for the display
segment would have been relatively stable except for modest increases in
personnel costs for additional support staff needed to support our growth.
Additionally, corporate G&A expenses decreased by $35,116, or 15%, from the same
period of the prior year.
Non-operating expenses (net) increased by $162,201 over the three months
ended March 31, 1998. The main component of this increase was interest expense,
which increased by $176,644 over the prior year. This increase is directly
attributable to the Ad Art acquisition. Interest incurred during the three
months ended March 31, 1999 on debt incurred to finance the acquisition
increased by $52,342, compared to the same period of the prior year.
Additionally, interest expense incurred on debt assumed in the acquisition
increased by $152,102.
Income tax expense for the third quarter of fiscal 1999 was $21,000 (a
39% effective tax rate), compared to $226,000 (a 40% effective tax rate) for the
third quarter of fiscal 1998 - a net decrease of $205,000.
LIQUIDITY AND CAPITAL RESOURCES
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Net cash used for operating activities for the nine months ended March
31, 1999 was $3,277,143. Net income for the period provided cash of $2,984,981,
net of non-cash charges for depreciation and amortization, gains on fixed asset
sales, stock contributions to our 401(k) plan, the change in deferred income
taxes, and other non-cash items. This cash provided was offset by a net change
of $6,262,124 in our operating assets and liabilities, consisting primarily of
increases in inventories and receivables, partially offset by increases in
accounts payable.
Net cash used for investing activities for the nine months ended March
31, 1999 was $894,648, of which $902,195 was used for capital expenditures and
$41,479 was used to maintain patents. These uses were partially offset by
$38,026 provided from the sale of fixed assets and $11,000 provided by other
investing activities.
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Net cash provided by financing activities for the nine months ended March
31, 1999 was $4,122,865. This amount consists of $1,915,858 that was received
through net advances on lines of credit and $2,802,145 received upon the
exercise of certain outstanding stock options and warrants. Offsetting financing
activities included net payments on notes payable and capital lease obligations
of $396,952 and $196,929, respectively, and the payment of $1,257 in cash
dividends in lieu of issuing fractional shares related to the 5% stock dividend.
We have 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
contains covenants which require the Company to maintain certain financial and
operating ratios. At May 10, 1999, $514,000 was outstanding against this line of
credit.
Our 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 May 10, 1999, $4,553,364 was outstanding against this line of
credit.
We have received a commitment letter to refinance our two lines of credit
and the mortgage debt on our Stockton, California facilities. We expect to close
on this refinancing before our fiscal year end. The new financing will result in
a substantial increase in our line of credit limits, a reduction in our overall
interest rates, and an extension of the maturity dates of our lines 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 our
computer applications or our 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 our business and
results of operations.
Over the last few years, we have analyzed and evaluated all internal
information technology systems, equipment and operations to ensure their Year
2000 compliance. We have been actively implementing new systems over the last
few years, and believes that all of our major information technology, including
our computer operated electronic display products, are Year 2000 complaint.
Letters of compliance have been requested from each vendor and, when the need is
identified, we intend to work with our 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.
We do not assess as high the risks to operations of Year 2000
noncompliance by vendors, since numerous alternate sources of suppliers exist.
However, despite this fact and our efforts to ensure our Year 2000 compliance
and that of our vendors, we could potentially experience a disruption in our
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)
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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.
- ------------------------------------------------------------
Not applicable.
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ITEM 5. OTHER INFORMATION.
- --------------------------
Not applicable.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
- -----------------------------------------------
Current Report on Form 8-K filed on March 7, 1998.
SIGNATURES
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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: May 13 , 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
14