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U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES ACT OF 1934
For the fiscal year ended: Commission file number:
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June 30, 2000 0-14427
DISPLAY TECHNOLOGIES, INC.
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(Exact Name of Registrant as Specified in Its Charter)
NEVADA 38-2286268
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(State or other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification Number)
5029 EDGEWATER DRIVE, ORLANDO, FL 32810 (407) 521-7477
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(Address, including zip code, of principal executive offices and telephone
number, including area code of Registrant )
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities Registered pursuant to Section 12(g) of the Exchange Act:
COMMON STOCK, $.001 PAR VALUE
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for past 90 days. |X| Yes |_| No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |_|
As of October 5, 2000, 8,342,451 shares of the registrant's Common Stock
were issued and outstanding, and the aggregate market value of the voting stock
held by non-affiliates of the registrant as of October 5, 2000 was approximately
$7,110,000 based on the averaged bid and ask price of $1.17 per share on October
5, 2000 on the NASDAQ/NMS.
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PART I
ITEM 1. BUSINESS.
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Display Technologies, Inc., a Nevada corporation, was originally
incorporated under the name La-Man Corporation in Michigan on November 2, 1979
and remained substantially inactive until the autumn of 1980. On February 4,
1983, La-Man Corporation, a Nevada corporation, was formed and, pursuant to a
Certificate of Merger filed on May 16, 1983, the Michigan corporation was merged
into the Nevada corporation. On October 29, 1999, we changed our name from
La-Man Corporation to Display Technologies, Inc. Our executive office is located
at 5029 Edgewater Drive, Orlando, Florida 32810. Our telephone number is (407)
521-7477.
Our direct wholly-owned subsidiaries include Ad Art Electronic Sign
Corporation, a Florida corporation ("Ad Art"), Don Bell Industries, Inc., a
Florida corporation ("Don Bell"), Certified Maintenance Services, Inc., a
Florida Corporation ("Certified"), Lockwood Sign Group, Inc., a Florida
corporation ("Lockwood"), J.M. Stewart Industries, Inc., a Florida corporation
("Stewart Industries"), J.M. Stewart Corporation, a Florida corporation
("Stewart Corporation"), La-Man Corporation, a Florida corporation ("La-Man),
and Vision Trust Marketing, Inc., a Florida corporation ("Vision"). The
Company's indirect wholly-owned subsidiaries include DTEK Canada, Inc., a
Florida corporation, DTEK Signs ULC, a Nova Scotia limited liability company,
Hamilton Digital Designs Ltd., an Ontario corporation, and E.S.C. of Nevada,
Inc., a Nevada corporation ("ESC Nevada), each of which is owned directly or
indirectly by Ad Art.
Unless the context otherwise requires, the terms "We", "Our" and "Company"
refers to Display Technologies, Inc. and our direct and indirect subsidiaries.
ABILITY TO CONTINUE AS A GOING CONCERN
Our auditor's report on our financial statements indicates that certain
factors raise substantial doubt about our ability to continue as a going
concern. Currently, potential events of default exist on the Company's existing
working capital line of credit facility and other long-term debt financing.
These potential events of default include violations of certain financial and
operating covenants and an over advanced position on the Company's line of
credit. The Company has entered into an agreement (the "forbearance agreement")
with the lender whereby the lender has agreed to forbear from declaring an event
of default through October 31, 2000.
Management does not believe that the Company will be able to repay the over
advanced amount under the line of credit agreement during the forbearance
period. In addition, management does not believe that the Company will be able
to comply with the financial covenants required by the security agreement during
fiscal 2001. Accordingly, management is continuing to negotiate with its current
lender to extend the forbearance period, provide replacement financing, or both.
Management is also actively pursuing replacement financing from alternative
lenders.
In addition, the Company's Board of Directors has engaged an investment
banking firm to help evaluate strategic alternatives that may be available to
the Company. These alternatives may include a sale of all or portions of the
Company to, or a merger with, various third parties.
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If the Company is unable to extend the term of the forbearance period,
secure additional or replacement financing, or secure a sale of all or portions
of the Company before the end of the forbearance period on October 31, 2000, the
Company's current lender may declare an event of default under the existing
loans and security agreement causing the balance due under the Company's line of
credit agreement, and additional loans to become due and payable immediately.
While pursuing additional debt and equity funding, the Company must
continue to operate on limited cash flow generated through operations and the
continued support and forbearance of the bank will be required, although this is
not assured.
The Company plans to minimize its working capital requirements by
implementing various operational changes designed to improve operating results
in future periods. These changes include personnel reductions, elimination of
non-essential expenditures, management and executive compensation freezes, a
more detailed review of customer credit decisions at the corporate level and the
suspension of acquisition activities. The Company will continue to evaluate its
performance to identify additional areas of cost savings that may be available.
ACQUISITION OF HAMILTON DIGITAL DESIGNS LTD.
Effective July 1, 2000 we acquired Hamilton Digital Designs Ltd., a
commercial sign manufacturer with facilities located in Province of Ontario,
Canada. The purchase price for Hamilton has not been finally determined pending
audited financial results of Hamilton for the fiscal year ended June 30, 2000,
but is estimated to be approximately $CDN 2,000,000 ($USD 1,350,000). Hamilton
designs and manufactures high-quality LED (light-emitting diode) message centers
and video display boards with sophisticated animation and instant replay
capabilities. Its products include high-end full-color LED products, as well as
numerous single-color LED products, for both indoor and outdoor use.
ACQUISITION OF LOCKWOOD SIGN GROUP, INC.
Effective July 1, 1999, we acquired Lockwood Sign Group, Inc., a commercial
sign manufacturer with facilities located in Marietta, Georgia, Charlotte, North
Carolina and Beltsville, Maryland. The purchase price included $1,900,000 in
cash and 565,869 shares of our common stock (which includes 150,869 shares
issuable under contingent earn-out agreements). Lockwood designs, manufactures,
installs and services illuminated letters and logos, monument and pylon signs,
neon lighting, awnings and vinyl graphics and banners.
ACQUISITION OF AD ART ELECTRONIC SIGN CORPORATION
On February 18, 1998, we acquired all of the outstanding capital stock of
Electronic Sign Corporation (dba Ad Art), a California corporation, through the
merger of the California corporation into a wholly-owned Florida subsidiary,
whose name was subsequently changed to Ad Art Electronic Sign Corporation. In
consideration of the merger, shareholders of the California corporation
initially received a combination of $3,000,000 cash and 1,370,464 shares of our
common stock. Ad Art designs and manufactures high quality electronic message
centers and video display boards with
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sophisticated animation and instant replay capabilities. It is also a major
manufacturer of traditional and electronic signage across a broad range of
industries and countries.
ACQUISITION OF CERTIFIED MAINTENANCE SERVICES, INC.
On July 1, 1997, we acquired all of the outstanding shares of Certified in
exchange for the assumption of Certified's net liabilities. Certified services
indoor and outdoor signage and lighting. Through a network of subcontractors, as
well as its own service fleet and staff, Certified specializes in providing
service nationwide to multi-store retail outlets such as department stores,
grocery stores, gas stations, office complexes and clothing outlets. Following
the acquisition, the operations of Certified were merged with the installation
and service operations of Don Bell to form a single operating division.
ACQUISITION OF DON BELL INDUSTRIES, INC.
On September 7, 1995, we acquired all of the outstanding shares of Don
Bell, a Port Orange, Florida manufacturer of commercial signs, in exchange for
275,000 shares of common stock, a $750,000 convertible note and cash of
$360,000. The note, which is convertible into the Company's common stock at
$4.53 per share, was paid down to $250,000 in September 1999. The remaining
balance was payable in September, 2000, but is yet unpaid. Interest is payable
semi-annually and we have a call feature at 105% of principal in year one
reducing annually to 100% in year five. As an adjustment to the purchase price,
additional notes payable totaling $626,477 were issued on January 31, 1997 to
the previous owners of Don Bell. These notes were paid in full and retired with
the proceeds of a refinancing of our indebtedness on August 28, 1997.
ACQUISITION OF J.M. STEWART CORPORATION AND J. M. STEWART INDUSTRIES, INC.
On January 6, 1994, we acquired Stewart Corporation and Stewart Industries
through a merger of their parent company into SEMCO, in exchange for 316,923
shares of our common stock and $214,312 cash. We simultaneously completed a
registered public offering of units of the Company's common stock and common
stock purchase warrants for net proceeds of $1,353,431, of which $1,000,020 was
used to retire debt of the acquired companies with the remainder applied to
working capital.
PRINCIPAL PRODUCTS
IMAGE ENHANCEMENT DISPLAYS Our display segment accounted for 98%, 98% and
94% of consolidated sales for 2000,1999 and 1998, respectively, and includes
products and services for both the commercial display market and the
institutional display market. The commercial display market is served by Ad Art,
Don Bell, Lockwood and Hamilton Digital (which was acquire in July, 2000) while
the institutional display market is served primarily by Stewart Corporation and
Stewart Industries.
4
ELECTRONIC PRODUCTS Our electronic products include both video and single
color LED products, wedge-based products and incandescent monochrome message
centers. The LED products are manufactured by Ad Art and Hamilton Digital while
Don Bell manufactures some monochrome incandescent products. Ad Art also
manufactures our wedge-based products. However, electronics products are
marketed by all of our display segment subsidiaries.
LED PRODUCTS Our video LED products are marketed under the brand names
StadiaVision(R), ArenaVision(R) and InfoVision(R) and provide a picture that
exceeds the quality of historical, conventional outdoor CRT (television)
displays. These products are used by a variety of commercial and entertainment
enterprises including sports stadiums and arenas, convention centers, airports,
shopping malls, casinos and concert venues. Frequently, commercial customers use
the video display both as a sign to identify and advertise their own products,
and also as a profit center on which they sell advertising time to other
commercial entities - essentially as an electronic billboard with changeable
messages.
The displays are produced in modular format with red, green and blue
light-emitting diodes (LEDs) arranged to form pixels. The clarity of the picture
is governed by the viewing distance and the density of the pixels. Pixel density
is typically determined via a measurement from the center of one pixel to the
center of the adjacent pixel. Currently, our product line includes pixel
configurations of 10.0 millimeters, 12.0 millimeters, 15.8 millimeters, 19.0
millimeters, 25.0 millimeters and 50.0 millimeters. We work with each of our
customers to determine which pixel configuration will be most effective for the
location and intended use of each display.
The displays are controlled by a dedicated personal computer with
Windows(R) based software. The customer may program its own sign or enter into a
service and maintenance contract which includes our programing services. Each
display is accessible via remote modem connections and programming services are
conducted by our graphics art department in our Las Vegas, Nevada facility. The
software that controls the video display is able to brighten and dim each LED to
256 levels of color. With 256 different levels of red, blue and green LEDs, the
video displays are capable of producing in excess of 16.7 million different
colors.
The video displays can be produced in any variety of sizes and consist of
assembled modules. The module sizes vary, depending upon the pixel
configuration, but are either 12 inches square or 16 inches square. Each module
consists of the configured LEDs connected to a computer circuitry board. These
modules are produced in our Stockton, California manufacturing facility or our
Hamilton, Ontario facility with some of the routine manufacturing processes
being outsourced. The modules are then assembled in a metal cabinet to produce
the complete display. Finally, for outdoor displays, a louver is installed above
each row of pixels to improve viewing in direct sunlight and various
weather-proofing measures are taken to ensure the display's durability in a
variety of climates.
In addition to the full color video LED products, we also offer single
color (typically red or amber) LED message centers to our customers. These
products are used to display static or scrolling text and computer generated
graphics - typically in a single or double line display.
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WEDGE-BASED PRODUCTS Our wedge-based products provide a lower-cost
alternative to our full color LED products. These products consist of
wedge-shaped light bulbs that are inserted into parabolic reflectors similar to
those found in an automobile tail light. The clear bulb is then covered with a
red, green or blue translucent, plastic lense to produce bright, vivid colors.
These assemblies are then arranged into pixels and controlled by Windows(R)
based software in the same manner as our LED products.
The individual wedge-based lamps are considerably larger than the
individual LEDs. Therefore, pixel configuration is considerably wider for our
wedge-based products than for our LED products. Our current product line for
wedge-based products includes pixel configurations of 2 inches, 3 inches and 4
inches. With these pixel configurations, some video capabilities are possible.
However, the quality of the video pictures is significantly less than that of
our LED products. As a result, these wedge-based products are generally used by
commercial enterprises to display text and computer- generated graphics in
bright, vibrant colors. Therefore, while the wedge-based and LED products use
similar technologies and manufacturing methods, the wedge-based products are
really used more often as a replacement of or substitute for our incandescent
monochrome message center displays than as a substitute for our LED displays.
INCANDESCENT MONOCHROME MESSAGE CENTERS We expect that our LED and
wedge-based color displays will eventually replace our incandescent monochrome
message centers. However, our incandescent message centers continue to be an
effective low-cost alternative to our customers who need the flexibility of an
electronically changeable message on their signs. A black and white incandescent
message center has an initial cost approximately one-third the cost of a
similarly sized color wedge-based display.
Incandescent systems have been used for several years by a variety of
commercial enterprises including restaurants and hotels, auto dealers, banks,
churches, schools, tourist gift shops and general retailers. The displays
typically consist of a single or double line text display that can be programed
with Windows(R) based software to scroll, flash, fade or perform a variety of
other functions. Some are also capable of displaying computer generated
graphics.
OTHER COMMERCIAL DISPLAY PRODUCTS Other products sold to the commercial
market include backlit cabinet displays, channel letters, pylon identification
displays, decorative neon displays and non-lighted signs and sculptures.
BACKLIT CABINET DISPLAYS Backlit cabinets are a staple product for us.
These displays can either be a standard rectangular cabinet or a more custom
designed shape. Standard cabinets are used by a wide variety of enterprises
including banks, hotels, gas stations, national retailers and restaurants.
Custom designed cabinets can also be used by all of those enterprises, but are
more typically used by themed enterprises including theaters, theme parks and
casinos.
The displays are typically constructed with a metal frame and either a
plastic or vinyl (flexible) face. The signs can either be one-sided (single
faced) or two sided (double faced) and are illuminated with either flourescent
tube lights or halogen bulbs placed within the cabinet, behind the face. The
displays can either be wall mounted or placed atop a metal pole.
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CHANNEL LETTERS Channel letters are metal fabricated letters mounted either
directly on a wall (or on raceways) or mounted on a larger sign. Channel letters
are used by virtually all types of businesses, but are most prominent in strip
malls, national retailers and shopping complexes. The letters can be virtually
any size and are bent into the appropriate shapes either by hand, or by
automated bending machinery. Typically, the letters are internally illuminated
with neon light tubes. The letters can either have a translucent face that
allows the light to shine through the front of the sign, or an open back
allowing the neon light to produce a backlit halo effect around the letter. A
reverse-cut letter has an open front that allows the neon light to be exposed
and viewed directly.
PYLON IDENTIFICATION DISPLAYS Pylon signs are designed to be placed in high
traffic areas near business entrances to identify the business location and
attract customers. The signs can be virtually any size, and height is
occasionally restricted by zoning, but pylon displays typically stand from 15 to
50 feet high. The signs are constructed of metal and decorated with paint,
lights, neon, channel letters and a variety of other products. The display can
either be a relatively standard sign on a single pole or double poles, or can be
a more customized display where the sign essentially become an architectural
structure in itself.
DECORATIVE NEON Neon displays consist of either a sign that has been
designed with bent neon tubes, or neon trim around various parts of a building,
such as the roof line. Decorative neon signs are typically used by themed
facilities such as restaurants and movie theaters - particularly when attempting
to create a nostalgic theme. Neon trim is used by a wide variety of business
enterprises as a method to attract attention to their business during twilight
and evening hours.
NON-LIGHTED SIGNS AND SCULPTURES Other display products include everything
from small wooden or metal signs to large, complex, custom-designed, three
dimensional metal or foam sculptures. Small non-lighted signs are typically sold
as part of a larger image enhancement order that may include various pylon signs
and channel letters, as well as smaller signs used to compliment the larger
signs and create an overall consistent business image throughout the business
property. Sculptures are used by business enterprises that desire a truly unique
identity sign, such as a three- dimensional sculpture of the company's logo, to
draw customers' attention to its property. The sculpture may stand alone or may
be part of a larger display that includes various other display products.
SIGN AND LIGHTING SERVICE AND MAINTENANCE All of our commercial display
subsidiaries offer service and maintenance on the signs that they sell.
Typically, maintenance contracts are sold in conjunction with the electronic
products that we sell and, occasionally, on other display products.
In addition to servicing our own signs, Don Bell has expanded its
maintenance services to include services on signs installed by other sign
companies as well as service on parking lot lighting and other exterior
lighting. This profit center was expanded in July 1997 with the acquisition of
Certified. The operations of Certified, which consisted solely of service and
maintenance, were merged with the service and maintenance operations of Don Bell
to form a single operating division. Through a network of subcontractors, and
its own fleet of service trucks in Port Orange, Orlando and Tampa, Florida and
Atlanta, Georgia, Don Bell specializes in providing service nationwide to multi-
store retail outlets such as department stores, grocery stores, gas stations,
office complexes and other
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retail outlets. Service is performed both under long-term contracts as well as
individually billed time and materials jobs.
INSTITUTIONAL DISPLAY PRODUCTS Our institutional display products have
historically been marketed specifically to churches and schools. In recent
years, we have expanded our focus to also market these displays to civic
organizations and government and military institutions. Occasionally, our
institutional products will be sold into other markets such as nursing homes and
funeral homes. While all of our display subsidiaries have occasional sales to
the institutional market, Stewart Corporation has identified this market niche
and sells exclusively to this market.
Stewart Corporation's institutional displays are standard backlit cabinet
signs in a variety of standard sizes. The sign cabinets are constructed of heavy
gauge aluminum or steel extrusions which are welded at mitered corners. The
exteriors are painted in various selected customer colors utilizing high quality
automotive paints. The formed faces of the signs are constructed of a
polycarbonate product principally manufactured by General Electric under the
product name Lexan. Lexan provides a sign face which is long lasting, weather
and hazard resistant and extremely shatterproof.
The signs are internally illuminated by fluorescent lamps for night
visibility, and have facing which permits the user to customize the message or
announcement on the signs. The signs utilize a steel base plate that can be bolt
mounted on a concrete, stone or steel pylon base, and are designed for ease of
installation by the customer.
Stewart Corporation does not manufacture the signs that it sells. The
majority of the sign manufacturing is completed by one unaffiliated company,
with a limited amount of manufacturing being fulfilled by affiliated companies.
Drawings and specifications are submitted to the manufacturer, prices are
negotiated and Stewart Corporation places individual orders with the vendor
based on the agreed upon prices. Products are shipped directly to the customer
from the third-party manufacturer and, consequently, Stewart Corporation does
not maintain an inventory of stock signs at its facilities. The manufacturing
process utilizes molds, the engineering and design of which are proprietary to
Stewart Corporation.
OTHER PRODUCTS. Our other segment, which accounted for 2%, 2% and 6% of
consolidated sales for 2000, 1999 and 1998, respectively, is comprised of the
manufacture and sale by La-Man of a line of products which, when installed in
compressed air lines, substantially reduce or totally eliminate water and
condensate problems and most foreign contaminants, such as moisture, oil, dust,
rust, and the like, in the air line. This extractor dryer is used in a wide
variety of industries from automobile paint and repair shops to large power
plants.
Recently, new and experienced management has been placed at La-Man. This
new management is embarking on a program to introduce new products that will
compliment our existing air filtration products. We recently introduced a
variety of new products including a complete line of filters, regulators and
lubricators (FRLs), a series of refrigerated extractor dryers, and a line of
extractor dryer purifiers with hoses and masks that will supply breathable air.
We expect that this new management and new product introduction will enable this
division to show significant growth over the next several years.
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PATENT AND TRADEMARK PROTECTION
La-Man is the owner of nine U.S. patents: U.S. Reg. No. 4,464,186 relating
to the Pneumatic Liquid Evaporator/Extractor (expires in the year 2001); No.
4,483,417 relating to the Pneuguard(R) Lubricator (expires in 2001); No.
4,487,618 relating to the Extractor/Dryer(R)(expires in 2001); No. Re32,989
(Reissue of No. 4,600,416) relating to the Air Line Vapor Trap (expires in
2003); No. 4,874,408 relating to a Liquid Drain Assembly (expires in 2006); No.
4,925,466 relating to a Filter Cartridge Assembly (expires in 2007); No.
5,030,262 relating to the Air Vapor Trap and Drain (expires in 2008); No.
5,114,443 relating to the Air Line Vapor Trap (expires in 2009) and No.
5,261,946 relating to the Air Line Vapor Trap With Air Warming System (expires
in 2010).
La-Man also is the owner of eight foreign patents: Canadian patent nos.
1,197,477 relating to the Air Line Vapor Trap (expires 2002), 1,206,889 relating
to the Pneumatic Liquid Evaporator/Extractor (expires 2003), 1,207,674 relating
to the Pneuguard(R) Lubricator (expires 2003), 1,267,057 relating to the
Extractor/Dryer(R) (expires 2007), and 2,064,401 relating to the Air Line Vapor
Trap With Air Warming System (expires 2014); European patent no. 0101861
relating to the Pneuguard(R) Lubricator (expires 2003); Japanese patent no.
1,410,903 relating to the Air Line Lubricator (expires 2002); and Japanese
patent no. 1,899,252 relating to the Air Line Vapor Trap (expires 2001).
La-Man is the owner of U.S. Reg. No. 1,287,666 for the trademark LA-MAN(R),
Reg. No. 1,328,054 for PNEUGUARD(R), Reg. No. 1,596,100 for EXTRACTOR/DRYER(R),
and Reg. No. 1,790,935 for ENCAPULATOR(R), and Reg No. 1,844,119 for "We Make
Compressed Air Work," all on the Principal Register of the U.S. Patent and
Trademark Office, and Reg. No. 1,359,880 for the mark EXTRACTOR(R)on the
Supplemental Register. La-Man also has pending the following trademark
applications: Serial No. 75/942895 for "OILIMINATOR," filed March 13, 2000; and
Serial No. 76/044751 for "LA-MAN AIR BREATHING SYSTEM," filed May 9, 2000.
Federal trademark protection is perpetual, but the Company must renew its
trademarks every 10 years.
The Company has the following trademark applications pending: Serial No.
75/703,465 for "DISPLAY TECHNOLOGIES," filed May 12, 1999; and Serial No.
75/703,464 for "DISPLAY TECHNOLOGIES & Design" filed May 12, 1999.
Ad Art is the owner of: U.S. Reg. No. 2,200,932 for the trademark
STADIAVISION(R); Reg. No. 2,206,932 for the trademark AD ART Design(R); Reg. No.
2,235,618 for the trademark INFOVISION(R); and Reg. No. 2,322,067 for the
trademark ARENAVISION(R), all on the Principal Register of U.S. Patent and
Trademark Office.
We believe that our filtration and lubrication products are proprietary
assets of La-Man's filtration segment. We intend to maintain all patents and
trademarks material to our business for their complete respective terms. Patents
generally are granted for 17-year terms and are nonrenewable; trademarks are
renewable for 10-year terms. Except as otherwise noted above, the products and
services of Ad Art, SEMCO, Stewart Corporation, Stewart Industries, Lockwood,
Don Bell [and Hamilton] are non-proprietary and, as a result, trademarks and
patents are not deemed material to our signage segment.
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MARKETING AND DISTRIBUTION
Marketing is handled autonomously by each of our subsidiaries. Each of our
subsidiaries represents a recognizable brand name in the signage and display
industry and each has its own historically established customer relationships.
We have made a strategic decision to continue to have each subsidiary market
under its own name to its own contacts so as to preserve these brand- name
images that have been established. However, sales representatives from each of
our subsidiaries frequently conduct joint sales calls or exchange sales leads.
In addition, when appropriate for the circumstance, our sales representatives
present themselves as part of the Display Technologies, Inc. family of companies
and enumerate the benefits that we, as a national company, can provide to the
customer. Those advantages include both the wide geographic presence we provide
as well as the wide variety of products and services that we have available.
Ad Art, Don Bell and Lockwood market all U.S. products through staffs of
commissioned salespersons and commissioned independent sales contractors. Ad Art
markets its products outside the United States through commissioned sales
persons and independent sales representatives. The companies also participate in
conventions, advertising programs and trade associations. Their long- time
reputations as quality manufacturers are valued sources of sales leads.
Hamilton Digital markets its products throughout Canada and in the United
States through commissioned salespersons. Historically, Hamilton has had limited
marketing resources available. Since our acquisition in July, 2000 our other
commercial display subsidiaries have begun marketing Hamilton's products to our
existing customers. The marketing resources that we have been able to provide to
Hamilton Digital is one of the key synergies to the acquistion.
Stewart Corporation markets its signs by direct marketing efforts which
include direct mail, telephone calls on prospective church, school and
institutional customers, and direct calls made upon the procurement personnel of
various national churches and church denominations, school board officials and
school procurement personnel. Stewart Corporation also participates in church,
school and governmental/military conventions, denominational meetings and other
events attended by representatives of potential church, school and
governmental/military customers. It advertises its products and services through
church denominational publications and bulletins, and publications of schools,
school boards and school administrative personnel.
Stewart Corporation also markets products through joint venture and
similar arrangements with the denominational headquarters of various organized
churches. Under the joint venture marketing strategy, Stewart Corporation
products are presented in denominational publications which are disseminated to
member churches. Stewart Corporation is presented as an appointed supplier of
the signs and related products and member churches are encouraged to purchase
such products from Stewart Corporation. Stewart Corporation remits a commission
to the denominational headquarters based upon product sales.
Don Bell and Certified market service agreements through direct sales calls
as well as the sale of service agreements on signs manufactured by Don Bell.
Through a network of subcontractors, as well as their own fleet of service
trucks in Port Orange, Orlando, and Tampa, Florida, as well as Atlanta, Georgia,
Don Bell and Certified specialize in providing service nationwide to multi-store
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retail outlets such as department stores, grocery stores, gas stations, office
complexes and other retail outlets. As a result, a significant portion of
marketing is dedicated to direct sales calls on the corporate or regional
headquarters of national retailers. In addition to national and regional sales,
the companies market service to local retailers such as automobile dealers and
shopping malls. They also cross market signage and lighting services to provide
a full range of services to customers.
La-Man uses various techniques in marketing its products, such as trade
media advertising, direct mail, attendance at trade shows and direct customer
contact.
BACKLOG
Customers of Ad Art, Don Bell, Lockwood and Hamilton Digital place orders
on an as-needed basis. Deposits of up to 50% with the orders are negotiated with
customers. Delivery and installation are dependent on the size and customization
required of the order and are usually completed within two months, except for
long-term contracts. Ad Art, Don Bell, Lockwood and Hamilton Digital do not have
backlog orders which they are not able to fill in accordance with their usual
practice. However, they did have orders in process exceeding $21,000,000 in
contract value as of June 30, 2000.
Stewart Corporation's customers place orders on an as-needed basis. Stewart
Corporation authorizes the manufacture of the sign when it obtains a deposit,
customarily 50% of the order, from the customer. The completed sign is shipped
to the customer approximately 6-8 weeks after the deposit is received. As of
June 30, 2000, Stewart Corporation did not have any firm orders for products
which it had not been able to fill in accordance with its usual practice.
Most of La-Man's customers place orders on an as-needed basis, which
generally are filled within one to five days after receipt and in accordance
with the delivery requirements of our customers. For the fiscal year ending June
30, 2000, La-Man did not have any firm orders for products which it had not been
able to fill in accordance with its usual practice. La-Man's larger customers
provide "blanket orders," i.e., scheduled orders, at designated prices over the
course of six-month or twelve-month periods. These orders are subject to
modification by the customer from time to time.
EMPLOYEES
We presently have 659 employees. The following table shows the breakdown of
employees:
Signage Segment:
Commercial Signage 489
Institutional Signage 56
Installation and Service 96
Executive Offices 6
Other 12
---
659
===
11
COMPETITION
We encounter significant competition in the sale of our commercial
products. However, the competition varies depending upon the type of product,
the customer and the geographic location of the sale. Overall, we are not aware
of any other signage or display company that is able to provide the variety of
products throughout the United States that we are able to provide through our
subsidiaries.
There are now several companies throughout the United States, and
internationally, that offer LED video display units and other electronic
products. Many of these competitors have introduced products in the past twelve
months and have yet to firmly establish their marketing processes. Each of the
companies in this market that does have an established marketing process tends
to market its products to a specific market. We have identified nine major
markets for LED products, including shopping centers / retail, convention
centers, sports venues, auto malls, airports, outdoor media, resorts/casinos,
theaters, and large churches. We have identified very little competition in
sales to convention centers, auto malls, airports, theaters and churches.
Competition is wide-spread in the resort/casino market - particularly in the Las
Vegas market - where we compete most frequently against Whiteway Sign and
Maintenance Company of Chicago, Illinois, Young Electric Sign Corporation of Las
Vegas, Nevada and Mikohn Gaming Corporation of Las Vegas, Nevada. In the sports
venue market, we compete most frequently against Daktronics, Inc. of Brookings,
South Dakota. Competition in the shopping center / retail market is very
widespread with different competition from essentially all companies with an LED
product. The outdoor media market is a developing market with various potential
competitors who have both LED, and alternative technologies, reviewing the
market's potential.
Competition for our other display products and services (including
electronic message centers, backlit cabinets, channel letters, pylon signs, neon
and non-lighted signs as well as service and maintenance) is significant and
diverse. There are over 3,500 sign companies in the United States producing
illuminated signs. If all sign companies are included (such as banner shops and
one-day sign franchises), the number grows to 25,000. There are no true national
companies that we compete against on a regular basis across this broad market.
Rather, competition is regionalized and dependent upon the type of product and
scope of work that is being performed. Sales are typically secured based upon
existing relationships and our ability to design, manufacture, install and
service the products that the customer requests.
Competition in the institutional market (schools, churches, civic
organizations and government and military establishments) also comes from a
myriad of 3,500 local signage companies which operate throughout the United
States. The principal factors in such competition are product pricing, service,
quality, design, production and delivery time, and product warranties. Stewart
Corporation products contain materials of high quality. A 20-year sign warranty
is also provided. We believe that the comparative quality of the Stewart
Corporation sign products, together with related services provided and the
extensive product warranty, enable us to effectively compete with other sign
companies. Additionally, Stewart Corporation's joint venture marketing strategy
provides access to potential church and school customers that is generally not
available to local competitors.
12
GOVERNMENT REGULATION
We have no knowledge of any U.S. governmental regulations which adversely
affect our business operations. In the manufacture of our products for
governmental agencies, we are required to meet certain governmental
specifications. To date, we have experienced no difficulty in satisfying these
requirements.
ENVIRONMENTAL PROTECTION COMPLIANCE
We have no knowledge of any federal, state or local environmental
compliance regulations which materially affect our current business activities.
We have not expended any material capital to comply with environmental
protection statutes and do not anticipate that material expenditures will be
necessary in the future with respect to our products.
ENGINEERING AND PRODUCT DEVELOPMENT
The majority of our product development costs relate to our hi-tech
electronic products. The technology related to our LED video display boards is
rapidly changing and we continue to anticipate and respond to changes both in
the current technology as well as emerging technologies.
Historically, we have been able to minimize product development expenses by
developing new products as needed for specific customers and by using existing
display installations for testing new techniques and technologies. As a result,
our product development expenses for 1999 and 1998 were not material.
ITEM 2. PROPERTIES.
- --------------------
We maintain our corporate offices in a 5,250 square foot leased facility in
an office and retail complex in Orlando, Florida under a five year lease
expiring in March, 2001.
Ad Art owns a 100,000 square foot manufacturing facility and a 24,000
square foot manufacturing facility, both in Stockton, California which are
situated on a 10-acre site and is suitable for plant expansion and multiple
shifts.
Ad Art also leases branch offices in San Francisco, Carson and Fresno,
California, Las Vegas, Nevada and Irving, Texas. The San Francisco lease is for
4,953 square feet of office space for a term that expires January 31, 2002. The
Carson lease is for approximately 10,510 square feet of office space for a term
ending February 28, 2001. The Fresno lease is for 1,000 square feet for a term
ending February 28, 2001. The Las Vegas lease is for 11,200 square feet of space
for a term ending August 1, 2001. The Irving lease is for 4,500 square feet for
a term expiring June 19, 2004.
Don Bell operates in its owned manufacturing facilities, a 38,000 square
foot structure in Port Orange, Florida. This building, situated on eight acres
of land owned by Don Bell, is a one and one half-story, steel frame structure
with a metal roof and slab floor. Don Bell also leases an adjacent 13,500 square
foot structure on a one-acre site for rent of $2,750 per month for a term ending
April
13
30, 2001, with an option to purchase the parcel for $400,000. Service trucks are
stationed at facilities in Atlanta, Georgia and Tampa, Florida.
Stewart Corporation leases approximately 9,175 feet of office space in
Sarasota, Florida for a five-year term that ends on December 31, 2000. Stewart
Industries and SEMCO do not have separate offices and conducts its business from
the offices of Stewart Corporation.
La-Man operates in its owned manufacturing facilities; an 8,750 square foot
structure in Port Orange, Florida. This building, situated on approximately one
acre of land adjacent to the Don Bell property, is a one-story, steel frame
structure with a metal roof, slab floor, heat and partial central air
conditioning.
Lockwood owns a 26,000 square foot manufacturing facility in Charlotte,
North Carolina, which is encumbered by a deed of trust securing certain
indebtedness of Lockwood. Lockwood also leases a 14,000 square foot
manufacturing facility in Beltsville, Maryland for a term ending on May 30, 2002
and a 26,000 square foot manufacturing facility in Marietta, Georgia for terms
ending November 30, 2000 (16,000 square feet) and September 30, 2002 (10,000
square feet).
Hamilton Digital Designs leases a 12,000 square foot manufacturing facility
in Burlington, Ontario, Canada for a term ending in May, 2002.
We own an additional facility for expansion of our commercial sign
production. The facility is approximately 18,000 square feet and is adjacent to
both the Don Bell and La-Man facilities.
All properties currently owned by us (except those of Lockwood), are
mortgaged as collateral against our debt obligations to SouthTrust Bank.
ITEM 3. LEGAL PROCEEDINGS.
- ---------------------------
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
- -------------------------------------------------------------
None.
14
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
- -----------------------------------------------------------
SECURITY HOLDER MATTERS.
- ------------------------
The Company's common stock is quoted on the NASDAQ National Market under
the trading symbol "DTEK" but is not traded on any exchange. The following table
indicates the range of high and low closing prices for the common stock for each
full quarterly period within the three most recent fiscal periods ended June 30,
2000, 1999 and 1998 as such quotes were supplied by the NASDAQ Stock Market to
the National Quotation Bureau, Inc. and reported to the Company by the National
Quotation Bureau, Inc. The market quotations reflect inter-dealer prices,
without retail mark-up, mark-down or commission and may not necessarily
represent actual transactions.
Common Stock Prices
Fiscal Year ------------------------
Ending Quarter Ending High Low
------ -------------- ---- ---
June 30, 1998 September 30, 1997 $3.13 $2.19
December 31, 1997 3.63 2.50
March 31, 1998 4.69 3.06
June 30, 1998 3.53 2.81
June 30, 1999 September 30, 1998 $3.63 $2.80
December 31, 1998 7.44 2.86
March 31, 1999 7.47 4.25
June 30, 1999 5.00 3.50
June 30, 2000 September 30, 1999 $4.88 $2.38
December 31, 1999 5.00 3.16
March 31, 2000 5.00 3.25
June 30, 2000 3.63 2.38
As of October 9, 2000 there were approximately 651 holders of record of the
common stock.
The Company has never paid and does not anticipate paying any cash
dividends on its common stock in the foreseeable future, but instead intends to
retain working capital and earnings for use in the Company's business operations
and in the expansion of its business.
15
ITEM 6. SELECTED FINANCIAL DATA
- ---------------------------------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
AS OF OR FOR THE YEAR ENDED JUNE 30, 2000 1999 1998 1997 1996
--------------------------------------------------------------------------------------------------------
Sales ................................ $ 91,813 $ 66,136 $ 32,478 $ 15,945 $ 13,670
Net Income ........................... 25 2,245 1,588 765 368
Income (loss) attributed to common
shareholders ....................... (365) 2,245 1,588 765 368
Diluted earnings (loss) per share from
continuing operations .............. (0.05) 0.31 0.29 0.18 0.10
Total assets ......................... 75,190 45,356 30,880 9,476 9,384
Long-term liabilities ................ 4,217 15,714 10,528 2,227 1,935
--------------------------------------------------------------------------------------------------------
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
- -----------------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS.
- ------------------------------------
RESULTS OF OPERATIONS
Display Technologies' consolidated financial statements include the
accounts of Display Technologies, Inc. and its subsidiaries, Ad Art Electronic
Sign Corporation (since February 18, 1998), Lockwood Sign Group (since July 1,
1999), Certified Maintenance Corporation, SEMCO, J.M. Stewart Corporation, J.M.
Stewart Industries, Don Bell Industries, J.M. Stewart Manufacturing, and La-Man
Corporation. The accounts of Hamilton Digital Designs, Ltd., which was acquired
subsequent to year-end on July 1, 2000, are not included in the consolidated
financial statements.
Except for the historical information contained herein, certain matters
addressed in this Annual Report on Form 10-K 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
Annual Report on Form 10-K are made pursuant to the 1995 Act.
YEAR ENDED JUNE 30, 2000 COMPARED WITH YEAR ENDED JUNE 30, 1999
Our sales for the year ended June 30, 2000 totaled $91,813,000 which
represents an increase of $25,677,000 (39%) over last year's sales of
$66,136,000. Sales from our display segment totaled $90,080,000 for the year
which is up by $25,538,000 (40%) from the prior year. Sales in our other segment
amounted to $1,733,000 for 2000 which is up by $139,000 (9%) from the prior
year.
Our display segment targets two broad markets - the commercial market and
the institutional market. Sales in the commercial market amounted to $80,050,000
for the year which represents an increase of $24,775,000 (45%) over last year's
sales of $55,275,000. Sales to the commercial market were aided by our
acquisition of Lockwood on July 1, 1999. For the year, Lockwood contributed
sales of $16,244,000, which is up $6,175,000 (61%) from Lockwood's sales in the
year prior to our
16
acquisition. Absent the acquisition of Lockwood, sales to the commercial market
were up $8,530,000 (15%) over the prior year.
Sales in the institutional market amounted to $10,030,000 for the year
which represents an increase of $763,000 (8%) over last year's sales of
$9,267,000. The institutional sales growth was a result of continued development
of the government and military market which contributed sales of $1,802,000 this
year compared to $1,091,000 last year. Sales in the church and school markets
showed only minimal growth over the prior year.
Gross profit margins dropped to 29.0% in 2000 compared to 33.6% in 1999.
Our display segment's margins were 28.5% for the year compared to 33.0% in the
prior year and our other segment's margins were 53.1% compared to 55.1% in the
prior year. Display segment margins were adversely affected during the year by
several factors including excessive warranty costs on one specific job for a Las
Vegas casino, lower than normal margins accepted on certain national accounts
and increased overhead costs. A portion of the increased overhead costs resulted
from a reconfiguration of certain operations at our Ad Art subsidiary which
increased our overhead costs, but reduced our selling costs.
Selling expenses for the year were $11,441,000 (12.5% of sales) compared to
$10,242,000 (15.5% of sales) in the prior year. Expressed as a percentage of
sales, selling expenses are down from last year for two specific reasons: (1)
the reconfiguration discussed in the preceding paragraph that reduced selling
expenses but increased operational overhead and (2) the acquisition of Lockwood
where selling expenses are approximately 7% of sales. Lockwood is able to
operate with lower selling costs than our other subsidiaries that sell to the
commercial display market because of its cost structure and because of a higher
degree of involvement by management, as opposed to commissioned salespersons, in
securing sales.
Our general and administrative expenses for 2000 amounted to $13,271,000
which is up $6,088,000 (84%) over the prior year. The acquisition of Lockwood
contributed $2,791,000 in general and administrative expenses in 2000. Absent
the acquisition of Lockwood, general and administrative expenses were up
$3,297,000 (45%) over 1999. A majority of the increase in our expenses result
from general increases in operating costs necessary to sustain the growth in
sales. However, fiscal 2000 expenses include a charge of $500,000 related to a
fire that occurred in a display sold by us and bad debt charges of $300,000 and
$463,000 for collection of two accounts receivable.
The $500,000 charge relates to a fire which occurred in December, 1999. We
had sold an LED electronic display and, before the installation was complete,
the display caught fire and was substantially damaged. We agreed, at the
customer's request, to replace the sign at no charge. In May, 2000 we were
advised by our insurance carrier that our loss was not insured by either our
property insurance, because title to the display had already passed to the
customer, nor by our liability insurance, because only the product we produced
was damaged. Information gathered to date about this fire indicates that a
component provided by a vendor may have been faulty and that there is no overall
flaw in our products. We are continuing to investigate this fire with the
subcontractors and vendors that were used in the production and installation
process. It is possible
17
that we may be able to recover all, or a portion of our loss through
reimbursement from one, or a group, of those subcontractors or their insurance
carriers. However, to date, we have been unable to secure reimbursement for the
loss and, accordingly, the full amount of our loss is reflected in our operating
expenses in 2000.
The $300,000 bad debt charge is against a receivable of approximately
$1,500,000 resulting from the sale of an LED display to an electronic billboard
company in Dallas, Texas. The receivable is secured by the display that was
sold, land, and personal guarantees of the partners in the business. The Company
is continuing to attempt to work with the partners to provide an acceptable
resolution to the collection of the receivable. If we are unable to collect a
substantial portion of the receivable from the parties involved, we will attempt
to recover the receivable through the security provided.
The $463,000 bad debt charge is against a receivable with a current balance
of approximately $650,000 resulting from the sale of a mobile LED display to an
entertainment partnership in Ohio. In June, 1999, we entered into a
lease-purchase transaction with the Ohio partnership, pursuant to which the
partnership leased from us an LED outdoor display board over a 60-month term for
total lease payments of approximately $1,000,000. Mr. Terry J. Long, a director
and executive officer of the Company, is a 50% non-managing partner of the Ohio
partnership. The Ohio partnership intended to move the LED display to various
entertainment venues throughout the United States and either secure weekly
rentals of the display, or sell advertising on the display. After several months
of operation, it was unable to secure sufficient revenue to make its lease
payments to us. The Ohio partnership, with our assistance, was able to sell a
portion of the display and make a substantial payment to us against the original
$1,000,000 receivable. We are continuing to assist the Ohio Partnership in its
efforts to sell the remaining portion of the display so that it will be in a
position to pay the remaining balance due us. However, to date, the Ohio
partnership has been unable to secure a buyer for the remaining portion of the
display and, accordingly, collection of our receivable is in doubt. The charge
of $463,000 essentially reduces the carrying value of our receivable to the net
realizable value.
Other expenses (net), which consist primarily of interest expense, for the
year were $1,655,000 which represents an increase of $538,000 (48%) over the
prior year. Interest expense for the year amounted to $2,171,000 which was up
$935,000 over the prior year due to increased debt levels. Interest income
increased from $72,000 last year to $329,000 this year as a result of interest
bearing receivables that existed during the year, including sales-type lease
receivables.
The effective income tax rate increased to 89% for 2000 from 39% in 1999
primarily due to the effects of state taxes and nondeductible expenses,
including goodwill amortization. Net income was $25,000 compared to $2,245,000
in the prior year. The decrease was due to decreased gross profit margins and
increased operating costs as discussed above.
YEAR ENDED JUNE 30, 1999 COMPARED WITH YEAR ENDED JUNE 30, 1998
Our sales for the fiscal year ended June 30, 1999 increased by $33,658,000,
or 104% over 1998. This increase is entirely due to increases in sales from the
sign and image enhancement display segment (the "display segment"), which
accounted for 97.6% of consolidated sales. The increase in display segment sales
of $33,855,000, or 110%, is offset by decreases in other segments of
18
$198,000, or 11%. 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 displays accounted for increases
of $32,659,000, or 144%, while institutional displays accounted for increases of
$1,196,000, or 15%.
A majority of the increased sales in commercial displays relates to the
February 18, 1998 acquisition of Ad Art. Only four and one-half months of Ad
Art's activity is included for the year ended June 30, 1998. Exclusive of the Ad
Art acquisition, sales for our other commercial display operations increased by
$1,224,000, or 14%.
A majority of the increased sales in institutional displays relates to
sales to the government and military market, which increased by $855,000, or
361%. We also saw increased sales to schools by $263,000, or 11%, and increased
sales to municipal and civic organizations by $169,000, or 56%, offset by
decreased sales to churches by $90,000, or 2%. This decrease was partially the
result of shifting experienced sales personnel from church sign sales to
government and military sign sales to develop those new markets.
Our overall gross profit margin dropped by 5.8%, to 33.6% of sales for the
fiscal year ended June 30, 1999 compared to 39.4% in 1998. Margins on the
display segment decreased by 5.1%, to 33.1% of sales compared to 38.2% in 1998,
while margins on other segments decreased by 4.1%, to 55.1% from 59.2% in 1998.
The drop in display segment margins is attributable to the change in the sales
mix resulting from the Ad Art acquisition. Ad Art's products were sold at
overall margins of 28.4%, which is slightly lower than margins on other
commercial displays of 30.8%, but significantly lower than the 58.3% margins
realized on institutional displays, which is just a 0.3% decrease since 1998.
Overall, margins on consolidated commercial displays decreased by 2.3%, to 28.8%
from 31.1% 1998. Generally, we expect margins on commercial displays to average
30% to 31%. During 1999, margins were eroded to 28.8% due to significant costs
overruns on 4 specific jobs. Had those cost overruns been avoided, margins on
commercial displays for fiscal 1999 would have been 29.7% - more in line with
our historical experience. We have identified and corrected the causes of the
cost overruns on these 4 specific jobs and should be able to avoid similar
overruns in the future.
Our selling expenses for the year ended June 30, 1999 increased by
$5,268,000, or 106%, over the prior year. They were 15.5% of sales in 1999
compared to 15.3% of sales in 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 15.4%,
compared to13.8% for 1998, while selling expenses for other segments were 18.3%
of sales for both 1999 and 1998. Within the display segment, selling expenses on
commercial displays were 14.1% of sales, compared to 12.8% in 1998, while
selling expenses on institutional displays were 23.0%, compared to 23.3% in
1998. The increase in selling expenses as a percentage of display segment sales
was due to the effect of Ad Art's selling expenses, which were 14.2% of sales
for fiscal 1999. Ad Art incurred significant selling expenses in fiscal 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 and was sold in June, 1999.
19
Our general and administrative (G&A) expenses for the year ended June 30,
1999 increased by $1,877,000, or 35.4%, over the prior year. A majority of this
increase relates to the increase in G&A costs in the display segment by
$1,402,000, or 36.2%, while other segments saw increases of $32,000, or 12.8%,
and the corporate office saw an increase of $443,000, or 37.5%. The increase in
the display segment relates to increases in G&A costs for commercial displays of
$1,133,000, or 52.9%, and increases in institutional displays of $269,000, or
13.7%. The increase in costs associated with commercial displays relates mostly
to the acquisition of Ad Art, which contributed an additional $1,330,000 in G&A
costs over 1998.
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 $156,000 of the 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 for our in-house legal department during the first quarter of fiscal
1999. Other significant expense increases include an increase of $98,000, or
77.7%, resulting from an expansion in investor relations services, and an
increase of $99,000, or 131%, resulting from increased filing costs, including a
$65,000 filing fee to NASDAQ for our national market listing that was obtained
in March, 1999.
Our non-operating expenses (net) for the year ended June 30, 1999 increased
by $809,000 over the prior year. The main component of this increase is interest
expense, which increased by $749,000, or 154%, over the prior year. This
increase is primarily attributable to the Ad Art acquisition. Specifically,
interest expense incurred during the year ended June 30, 1999 on debt assumed in
the acquisition increased by $491,000, or 229%, compared to the prior year.
Additionally, interest incurred on debt acquired to finance the acquisition,
increased by $231,000, or 268%, over the prior year.
Income tax expense for the fiscal year ended June 30, 1999 was $1,438,000
(a 39% effective tax rate) compared to $615,000 (a 28% effective tax rate) for
the fiscal year ended June 30, 1998 - a net increase of $823,000. The low
effective rate for fiscal 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.
LIQUIDITY AND CAPITAL RESOURCES
Our auditor's report on our financial statements indicates that certain
factors raise substantial doubt about our ability to continue as a going
concern. Currently, potential events of default exist on the Company's existing
working capital line of credit facility and other long-term debt financing.
These potential events of default include violations of certain financial and
operating covenants and an over advanced position on the Company's line of
credit. The Company has entered into an agreement (the "forbearance agreement")
with the lender whereby the lender has agreed to forbear from declaring an event
of default through October 31, 2000.
20
Management does not believe that the Company will be able to repay the over
advanced amount under the line of credit agreement during the forbearance
period. In addition, management does not believe that the Company will be able
to comply with the financial covenants required by the security agreement during
fiscal 2001. Accordingly, management is continuing to negotiate with its current
lender to extend the forbearance period, provide replacement financing, or both.
Management is also actively pursuing replacement financing from alternative
lenders.
In addition, the Company's Board of Directors has engaged an investment
banking firm to help evaluate strategic alternatives that may be available to
the Company. These alternatives may include a sale of all or portions of the
Company to, or a merger with, various third parties.
If the Company is unable to extend the term of the forbearance period,
secure additional or replacement financing, or secure a sale of all or portions
of the Company before the end of the forbearance period on October 31, 2000, the
Company's current lender may declare an event of default under the existing
loans and security agreement causing the balance due under the Company's line of
credit agreement, and additional loans identified in Note 11 to the financial
statements, "Long-Term Debt", to become due and payable immediately. In such a
case, the Company may be unable to meet its current obligations and its ability
to continue as a going concern may be in doubt.
During fiscal 2000, $10,777,000 in cash was used for operating activities,
$5,458,000 in cash was used for investing activities and $16,541,000 in cash was
provided by financing activities. The comparable amounts for 1999 were
$5,037,000, $1,962,000 and $6,541,000, respectively.
Cash used for operating activities during the year consisted mainly of cash
used to build up receivables and inventories associated with the increased sales
levels. These increases were offset to some extent from increases in accounts
payable. The cash used for investing activities during the year consisted
primarily of $1,814,000 used for the acquisition of Lockwood (net of cash
acquired) and $3,033,000 used to purchase property, plant and equipment,
including a new 24,000 square foot electronics manufacturing facility at Ad Art.
The cash provided from financing activities resulted from an increase of
$13,274,000 in our line of credit borrowings and $4,946,000 from the sale of
preferred stock. These items were reduced by payments made on long-term debt and
capital leases.
INFLATION
Although inflation has slowed in recent years, it continues to be a factor
in our operations. In recent years, we have taken steps to counteract the
effects of inflation by price increases and by careful cost controls. There are
no other significant factors which are expected to cause a material increase in
our general and administrative expenses.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards 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, as amended by FAS 137, is effective for
periods beginning after June 15, 2000. Historically, the Company has not entered
into
21
derivative contracts. Accordingly, FAS 133 is not expected to affect the
Company's financial statements.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, Revenue Recognition ("SAB 101") which broadly
addresses how companies report revenues in their financial statements. We are in
the process of evaluating the accounting requirements of SAB 101 and
subsequently issued guidance and do not expect that this standard will have a
material effect, if any, on our financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
- ----------------------------------------------------------------
RISK
- ----
The Company does not believe its operations are exposed to significant
market risk relating to foreign exchange risk. The Company has market risk on
increases in interest rates since a significant level of its indebtedness has
variable rate terms. The Company has not entered into any derivative instruments
to manage interest rate exposure.
ITEM 8. FINANCIAL STATEMENTS
- -----------------------------
Financial statements are included at the end of this report starting at
page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
- ---------------------------------------------------------
ACCOUNTING AND FINANCIAL DISCLOSURE
- -----------------------------------
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
- ------------------------------------------
INFORMATION CONCERNING DIRECTORS
Information regarding the principal occupations (which have continued for
at least the past five years unless otherwise noted) of the directors, as well
as certain other information, is set forth below:
Directors Whose Terms Expire in 2000
- ------------------------------------
Gary D. Bell 51, has served as a director since October 1995. He also
serves as President and Chief Executive Officer of our
subsidiary Don Bell Industries, Inc.
22
Kevin L. Jackson 39, has served as a director and a member of the Audit
and Compensation Committees since August 1999. He also
serves as President and Chief Executive Officer of
Advanced Information Systems Group, Inc., a computer
systems integrator, since 1992.
Lester Jacobs 62, has served as a director since October, 1997. He also
served as a member of the Audit Committee from October
1997 to September 2000, when he once again became a
member of the Compensation Committee. He served as a
member of the Compensation Committee from October 1997 to
August 1999, at which time he was appointed to serve as a
member and Chairman of the Nominating Committee and as a
member of the Audit Committee. Mr. Jacobs also serves as
Chairman of C 12 Group, an interactive peer study and
support system for individuals who own or are chief
executive officers of small-to medium-sized businesses in
the Florida cities of Tampa, Bradenton and Sarasota, and
in Houston, Texas. J. Melvin Stewart is a member of the C
12 Group in Sarasota, Florida.
Directors Whose Terms Expire in 2001
- ------------------------------------
Gary J. Arnold 45, has served as a director and as a member of the
Executive and Compensation Committees since August 1999.
He is a full-time investor, an activity he engaged in
beginning in June 1997 after a successful 20 year career
as a Certified Public Accountant and business executive.
He is also founder and Managing Partner of New South
Ventures, LLC, a venture capital firm, which offers early
stage financing and consulting services to high-tech
companies in the Southeastern United States. From January
1998 to February 1999, Mr. Arnold also served as Vice
President and Controller of Beall's, Inc., a national
retailer. From December 1994 to May 1997, he served as
Vice President and Controller of Boston Scientific
Corporation, a Fortune 500 manufacturer of high-tech
medical devices.
Thomas N. Grant 54, has served as a Director, as a member and Chairman of
the Compensation Committee of the Board of Directors
since October 1995, as a member of the Audit Committee
from March 1996 until October 1997, and as a member of
the Executive Committee since October 1997. Since January
1997, Mr. Grant has been First Vice President, Financial
Institutions, SunTrust Bank, Central Florida, N.A. From
1993 to 1996, he served as Senior Vice President and
Senior Lending Officer of The Bank of Winter Park, Winter
Park, Florida.
23
William A. Retz 60, Rear Admiral USN (Ret.), has served as a Director and
member of the Audit and Compensation Committees since
October 1997. He has served as chief executive officer
and a member of the board of directors of Nofire
Technologies, Inc., a publicly-held company, since August
2000. From January 1999 to August 2000, he was a self-
employed consultant and from 1996 to January 1999 he
served as Vice President, Government Services, for
Aramark Corp., a large privately-held company which
provides food and other services to a variety of
industries. Admiral Retz served in the United States Navy
from 1963 to 1995 with a variety of sea commands and
shore assignments, including several U.S. Navy personnel
management positions and command of naval bases,
including closure of the U.S. Navy base in Philadelphia,
Pennsylvania.
Directors Whose Terms Expire in 2002
- ------------------------------------
J. William Brandner 63, has served as President and Chief Executive Officer
and as a Director since April 1994, and also serves as a
member and Chairman of the Executive Committee and as a
member of the Nominating Committee. From April 1991 to
July 1993, Mr. Brandner served as Chairman and President
of American Integrity Corporation, a public insurance
holding company with revenues of more than $100 million.
From July 1971 to October 1990, Mr. Brandner served as
Vice Chairman, Director and in various other senior
executive positions with Harcourt Brace Jovanovich, Inc.,
a $1.8 billion diversified public company with
publishing, insurance and theme park operations.
Terry J. Long 55, has served as a Director since February 1998. He has
served as President and Chief Executive Officer of our
subsidiary Ad Art Electronic Sign Corporation and its
predecessor companies since 1985.
Lou A. Papais 74, has served as a Director, as a member of the Audit
and Nominating Committees, and as a consultant to Ad Art
Electronic Sign Corporation since February 1998. Mr.
Papais founded Ad Art's predecessor with his brother John
in 1958 and was its principal shareholder prior to its
acquisition by the Company.
J. Melvin Stewart 81, has served as a Director of the Company since 1994
and as Chairman of the Board since 1994. He also serves
as a member of the Executive Committee and the Nominating
Committee, and serves as Chairman of the Board, President
and Chief Executive Officer of our subsidiaries J.M.
Stewart Corporation and J.M. Stewart Industries, Inc.
24
COMMITTEES AND MEETINGS OF THE BOARD OF DIRECTORS
Our Board of Directors has established four standing committees: an
Executive Committee, an Audit Committee, a Compensation Committee, and a
Nominating Committee.
The Executive Committee, between meetings of the Board of Directors, may
exercise the powers of the Board of Directors, except with respect to a limited
number of matters, such as amending the articles of incorporation or the bylaws
of the Company and recommending to the shareholders of the Company a merger of
the Company, the sale of all or substantially all of the assets of the Company,
or the dissolution of the Company. Members are J. William Brandner (Chairman),
Gary J. Arnold, Thomas N. Grant, Lou A. Papais and J. Melvin Stewart. The
Executive Committee met six times and took action by written consent on one
occasion in fiscal 2000.
The Audit Committee provides independent, objective oversight of the
Company's accounting functions and internal controls, and ensures the
objectivity of our financial statements. Members are Gary J. Arnold (Chairman),
Kevin L. Jackson and William A. Retz. The Audit Committee met twice in fiscal
2000.
The Compensation Committee reviews and approves all salary arrangements,
including annual and long-term incentive awards and other remuneration, for
officers of the Company and certain officers of subsidiaries. It also is
responsible for administration of the Company's stock option and other
compensation plans. Members are Thomas N. Grant (Chairman), Lester Jacobs, Kevin
L. Jackson and William A. Retz. The Compensation Committee met two times and
took action by written consent once in fiscal 2000.
The Nominating Committee considers candidates for election to the Board and
makes recommendations for Board nominees to the full Board. In order for the
Nominating Committee to consider shareholder recommendations for nominees, such
shareholder recommendations must be received in writing by the President of the
Company not less than 120 days prior to the annual meeting of shareholders.
Members are Lester Jacobs (Chairman), J. William Brandner, Lou A. Papais and J.
Melvin Stewart. The Nominating Committee did not meet during fiscal 2000.
In fiscal 2000, the Board of Directors held six meetings and took action by
written consent on one occasion. Each director attended at least 75% of the
total of all meetings of the Board and each committee on which he served, except
Mr. Jacobs, who attended 62.5% of such meetings.
COMPENSATION OF DIRECTORS
We pay outside directors (directors who are not officers, employees or
consultants), the following fees for attending or participating in meetings of
the Board of Directors and its committees:
EVENT FEE
----- ---
Attended Board Meeting $1,250
Telephonic Board Meeting $500
Attended Committee Meeting $500 ($600 for Chairman)
Telephonic Committee Meeting $250 ($300 for Chairman)
25
During fiscal 2000, we paid our outside directors a total of $29,950 in
fees. Each director is entitled to be reimbursed for reasonable expenses of
attending a meeting of the Board or a Board committee.
Our compensation policy for outside directors also includes annual option
grants. On November 18, 1999, each of our outside directors was granted options
under our 1999 stock incentive plan to purchase up to 10,500 shares of Company
Stock at the exercise price of $4.10 per share, the fair market value of our
stock on the grant date. The options vest one-third on each anniversary of the
grant date, expire on November 18, 2008 and are subject to certain other
conditions on exerciseability as provided in the agreements evidencing the
option grants.
OTHER EXECUTIVE OFFICERS AND SIGNIFICANT EMPLOYEES
Set forth below is certain information regarding executive officers of the
Company and certain significant employees who do not also serve as directors:
Marshall S. Harris 50, has served as Vice President and Secretary since
October 1998. He also serves as General Counsel. He
serves until the next annual meeting of our Board of
Directors and until his successor is elected and
qualified.
Todd D. Thrasher 33, has served as Treasurer (Chief Financial Officer) and
as a Vice President since January, 1997. His term of
office is coterminous with that of Mr. Harris.
Kurt R. Johnson 41, has served as Vice President of Lockwood Sign Group,
Inc. since November 1999. He serves until the next annual
meeting of directors of Lockwood Sign Group, Inc. and
until his successor is elected and qualified.
James B. Mitchell 56, has served as President of Hamilton Digital Designs
Ltd. since 1974. He serves until the next annual meeting
of the directors of Hamilton Digital Designs Ltd. and
until his successor is elected and qualified.
Harry Shawl 53, has served as President of La-Man Corporation since
July, 1999. He serves until the next annual meeting of
the directors of La-Man and until his successor is
elected and qualified.
Section 16(a) of the Securities Exchange Act of 1934 and regulations
thereunder require our executive officers and directors and certain persons who
own more than 10% of Company Stock to file with the SEC initial reports of
ownership and reports of changes in ownership of Company Stock. They are also
required to furnish the Company with copies of all such forms they file. We
believe that during fiscal 2000, all of our directors and executive officers
complied with all of these filing requirements, except for Mr. Gary D. Bell, who
inadvertently filed one late Form 4 report, and Messrs. Lou A. Papais and J.
Melvin Stewart, each of whom inadvertently filed two late Form 4
26
reports. In making this statement, we have relied solely on our review of copies
of Section 16(a) reports to furnished to us and on the written representations
of our directors and executive officers.
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION
The following table provides certain summary information concerning
compensation paid by the Company to or on behalf of certain of our executive
officers during the fiscal year ending June 30, 2000 and the two preceding
fiscal years. The officer group, referred to as the named executive officers, is
composed of J. William Brandner, the President and Chief Executive Officer, and
the four other most highly compensated executive officers, determined as of June
30, 2000:
SUMMARY COMPENSATION TABLE
Annual Compensation(1) Long-Term Compensation
--------------------------------------- ---------------------------------------- All
Other Awards Payout Other
Annual RESTRICTED Options LTIP Com-
NAME AND Compen- STOCK /SARs Pay- pensa-
PRINCIPAL SALARY Bonus(2) sation AWARDS(S) (#) outs tion
POSITION YEAR ($) ($) ($) ($) ($) ($)(3)
==================== ======== ============ =========== ============= ============== ========== ============ ============
J. William 2000 233,120 -0- -0- -0- 78,750 -0- 6,994
Brandner,
President and Chief 1999 209,950 46,360 -0- -0- -0- -0- 6,994
Executive Officer
1998 189,535 40,830 -0- -0- -0- -0- 6,298
- ------------------------------------------------------------------------------------------------------------------------------
Marshall S. Harris, 2000 190,000 -0- -0- -0- 15,750 -0- 5,700
Vice President,
General Counsel & 1999 141,346 -0- -0- -0- 78,750 -0- 1,750
Secretary
1998 -0- -0- -0- -0- -0- -0- -0-
- ------------------------------------------------------------------------------------------------------------------------------
Terry J. Long, 2000 205,000 -0- -0- -0- 47,250 -0- 3,469
President of Ad Art
Electronic Sign 1999 175,000 -0- -0- -0- -0- -0- 5,205
Corporation
1998 63,288 -0- -0- -0- 105,000 -0- 1,899
- ------------------------------------------------------------------------------------------------------------------------------
Larry L. Johnson, 2000 190,000 -0- -0- -0- 120,750 -0- -0-
Senior Vice
President and 1999 -0- -0- -0- -0- -0- -0- -0-
Chief Operating
Officer 1998 -0- -0- -0- -0- -0- -0- -0-
- ------------------------------------------------------------------------------------------------------------------------------
J. Melvin Stewart, 2000 212,543 -0- -0- -0- 25,200 -0- 6,376
Chairman of the
Board 1999 197,919 29,248 -0- -0- -0- -0- 6,376
1998 183,384 28,976 -0- -0- -0- -0- 5,936
==================== ======== ============ =========== ============= ============== ========== ============ ============
27
1 Excludes (a) benefits generally available to all employees on a
nondiscriminatory basis and (b), except as described in Note (3) below,
the following (which did not exceed the lesser of $50,000 or 10% of the
total annual salary and bonus earned by the named individuals for the
2000 Fiscal Year): (i) automobile maintenance expenses paid to or on
behalf of the named individual by the Company; and (ii) the cost to the
Company of personal use by the named individuals of automobiles owned or
leased by the Company. Also does not include income required to be
recognized for income tax purposes as the result of personal use of
Company automobiles or the exercise of stock options.
2 Includes as awards under the senior management incentive plan: (a) with
respect to Mr. Brandner, 5,887 shares of Company Stock having a per share
value of $3.94 as of the June 30, 1999 award date and for 1998 6,049
shares of Company Stock having a per share fair market value of $3.38 as
of the June 30, 1998 award date; and (b) with respect to Mr. Stewart, for
1999 3,714 shares of Company Stock having a per share value of $3.94 as
of the June 30, 1999 award date and for 1998 4,293 shares of Company
Stock having a per share fair market value of $3.38 as of the June 30,
1998 award date.
3 Represents Company contributions to the 401(k) accounts of the named
executive officers.
STOCK OPTIONS GRANTED
The following table contains information concerning the grant of stock
options during fiscal 2000 to the named executive officer.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
NAME NUMBER OF % OF TOTAL EXERCISE OR EXPIRATION GRANT
SECURITIES OPTIONS BASE PRICE DATE DATE
UNDERLYING GRANTED ($/SH) PRESENT
OPTIONS GRANTED TO EMPLOYEES VALUE
IN FISCAL YEAR ($)(3)
========================== ===================== =================== =============== =================== ==============
J. William Brandner 78,750(1) 22.8 $4.10 11/18/08 $104,250
- -------------------------- --------------------- ------------------- --------------- ------------------- --------------
Marshall S. Harris 15,750(2) 4.6 $4.10 11/18/08 $ 20,850
- -------------------------- --------------------- ------------------- --------------- ------------------- --------------
Larry L. Johnson 15,750(1) 35.1 $4.10 11/18/08 $ 20,850
105,000(2) $3.53 08/27/09 $ 99,000
- -------------------------- --------------------- ------------------- --------------- ------------------- --------------
Terry J. Long 47,250(1) 13.7 $4.10 11/18/08 $ 62,550
- -------------------------- --------------------- ------------------- --------------- ------------------- --------------
J. Melvin Stewart 25,200(1) 7.3 $4.10 11/18/08 $ 33,360
========================== ===================== =================== =============== =================== ==============
1 These options vest at the rate of 33 1/3% per year from the November 18,
1999 grant date. All unvested options fully vest in the event of a change
in control as defined in the option agreements. Also, vested options may
not be exercised for so long as certain of our convertible debentures are
outstanding or unless and until the terms of such debentures are amended
to permit exercise. The number of options and exercise price are subject
to ratable adjustments for stock dividends and other distributions.
2 These options may not be exercised so long as certain of our convertible
debentures are outstanding or unless and until the terms of such
debentures are amended to permit such exercise.
3 The "grant date present value" is based upon the Black-Scholes option
pricing model adapted for use in valuing executive stock options. The
actual value, if any, the executive may realize upon exercise of the
option will depend on the excess of the stock price over the exercise
price on the date the option is exercised, so there is no assurance the
value realized by the executive will be at or near the value estimated by
the Black-Scholes model. The principal assumptions incorporated into the
valuation model by the Company are as follows: (i) dividend yield of 5%,
(ii) expected volatility of 40%, (iii) risk-free interest rate of 6%, and
(iv) expected life of 7 years. No assumptions were made regarding
nontransferability or risk of forfeiture. The assumptions chosen
materially impact the resulting valuations.
28
OPTION/SAR EXERCISES AND HOLDINGS
The following table provides information with respect to the named
executive officers concerning the exercise of options and/or stock appreciation
rights ("SARs") during the last fiscal year and the number of unexercised
options and SARs held as of the end of the fiscal year.
AGGREGATED OPTION/SAR EXERCISES IN FISCAL 2000,
AND FISCAL YEAR-END OPTION AND SAR VALUES
Number of
Securities Value of
Underlying Unexercised
Unexercised In-The-Money
NUMBER Options/SARs Options/SARs
OF Shares Value At FY-End At FY-End
Acquired on Realized
NAME Exercise ($) Exercisable/ Exercisable/
Unexercisable Unexercisable
======================================= =================== ==================== =================== ===================
J. WILLIAM BRANDNER, PRESIDENT AND 79,707 $183,725 66,154/ $160,754/
CHIEF EXECUTIVE OFFICER 78,750 $0.00
- --------------------------------------------------------------------------------------------------------------------------
J. Melvin Stewart 133,706 $433,207 0/ $0.00/
Chairman of the Board 25,200 $ 56,750 26,250 $0.00
======================================= =================== ==================== =================== ===================
PENSION PLANS
The Display Technologies, Inc. 401(k) profit sharing plan covers all
employees with more than six months of service and allows employees to defer up
to 15% of their income and contribute to the plan. The Company contributes to
the plan at a discretionary matching rate of 50% of the first 6% contributed by
the employee. Company contributions are in the form of the Company's common
stock.
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT ARRANGEMENTS
Each of the Company's employment agreements with its named executive
officers contains confidentiality and noncompetition provisions effective during
the term of the agreement and for a period following termination of employment.
Certain of the employment agreements also provide for indemnification of the
executive to the maximum extent permitted by Nevada law or the Company's Bylaws,
whichever is greater, and for the payment by the Company of any expense of the
executive incurred in enforcement proceedings with respect to his employment
agreement if he is successful.
J. WILLIAM BRANDNER The Company is party to an employment agreement with
Mr. Brandner under which he serves as President and Chief Executive Officer of
the Company. The agreement is extended automatically for one-year periods each
April 28 unless the Company or Mr. Brandner provides written notice to the
contrary not less than six months prior to the extension date. Mr. Brandner
presently receives $233,130 base salary per year. The agreement also provides
for the payment of severance in the event the Company elects to terminate the
agreement without cause. Should either the Board of Directors or the Chairman of
the Board deliver written notice of termination without "cause" (as defined in
the employment agreement) to Mr. Brandner, then his
29
employment agreement will be terminated effective not less than 60 days from the
date of such notice and after termination the Company will be required to pay
Mr. Brandner an amount equal to 200% of his base salary (defined as total annual
cash salary excluding bonuses) then in effect. Any such severance payments, less
required withholdings, are to be made in equal installments corresponding to
what would have been Mr. Brandner's regular pay dates and amounts.
MARSHALL S. HARRIS The Company is party to an employment agreement with
Mr. Harris under which he serves as Vice President and General Counsel of the
Company for a three-year term that commenced on September 1, 1998 and which is
renewable for successive one-year terms thereafter unless either party gives
notice to the other of an election not to renew the agreement not later than 120
days prior to the expiration of the initial term or any renewal term. Mr. Harris
presently receives $190,000 base salary per year. The agreement provides that he
is to participate in the Company's senior management incentive plan commencing
the 2000 fiscal year. The agreement also provides that if Mr. Harris' employment
is terminated other than for cause, death or disability, he will be entitled to
receive an amount equal to the greater of 100% of his base salary then in effect
or the base salary that would otherwise have been payable to him for the
remainder of the employment term then in effect.
TERRY J. LONG The Company and Ad Art Electronic Sign Corporation are
parties to an employment agreement under which Mr. Long serves as President of
Ad Art. The agreement renews for one-year terms on each February 18 unless
either the Company or Mr. Long elects not to renew by delivering written notice
to the other party not later than 90 days prior to the renewal date. Mr. Long
presently receives an annual base salary of $205,000. The agreement provides
that Mr. Long is to participate in the Company's senior management incentive
plan commencing the 2000 fiscal year. If Mr. Long's employment is terminated
other than for cause, death or disability, he is entitled to receive severance
in an amount equal to 66 2/3% of his base salary then in effect or the base
salary that would otherwise have been payable to him for the remainder of the
employment term.
J. MELVIN STEWART J.M. Stewart Corporation, an indirect wholly-owned
subsidiary of the Company, is party to an employment agreement with Mr. Stewart
under which he is to serve as President of each of J.M. Stewart Corporation and
J.M. Stewart Industries, Inc. He presently receives a base salary of $212,543
per year over a two-year term that commenced in January 1999 and which is
subject to automatic renewals for successive two-year terms thereafter unless
either party provides written notice to the contrary not less than 30 days prior
to the expiration of the renewal term. The agreement permits the Company to
terminate his status as an officer and convert him to a consultant of the
Company for a three-year period. In such status, Mr. Stewart would be required
to work only 750 hours per year and would be entitled to 50 percent of his base
salary. The agreement also allows Mr. Stewart to convert to semi-retired status
for a period of three years and in such status to work part-time for the Company
(1,200 hours per year) for compensation equal to 75% of his base salary for the
first two years and 50% of his base salary for the remaining year.
Each of the above agreements of Messrs. Brandner, Harris and Stewart
provides that in the event of a "Change of Control" (as defined below), the term
of employment will be automatically renewed for a three-year term, the employee
will be entitled to severance in the event of termination of employment other
than for cause or death in an amount equal to the greater of 200% of his then
annual base salary or his annual base salary for the remainder of the three-year
term, and to continue
30
to provide certain employee benefits for the remainder of the term. The
employment agreements define a "Change of Control" as having occurred when: (a)
any person or group engages in certain transactions that, in the judgment of a
majority of our Directors, is reasonably likely to permit such person or group
to obtain control of a sufficient number of voting securities of the Company to
elect a majority of the Directors; or (b) there occurs within any period of 12
consecutive months other than as the result of resignations or proxies solicited
by, or votes cast by, management of the Company, (i) a change in 35% of the
persons who, as of the date of the applicable agreement, constituted our Board
of Directors or (ii) an increase of 25% or more in the number of members of our
Board.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
COMPENSATION PHILOSOPHY The Compensation Committee establishes and reviews
the salaries and other compensation paid to the Company's executive officers.
The Company's executive compensation policy as implemented by the committee is
designed to provide a competitive compensation program that will enable the
Company to attract, motivate, reward and retain executives who have the skills,
experience and talents required to promote the short- and long-term financial
performance and growth of the Company. The compensation policy is based on the
principle that the financial rewards to the executives must be aligned with the
financial interests of the shareholders of the Company. In this manner, the
Company seeks to meet its ultimate responsibility to its shareholders.
The Company's executive compensation has three elements: base salary,
annual incentive compensation and long-term incentive compensation. The
following is a summary of the considerations underlying each element.
BASE SALARY The committee determines the salary ranges for each of the
executive officer positions of the Company, based upon the level and scope of
the responsibilities of the office and the pay levels of similarly positioned
executive officers in comparable companies. The evaluation of the Chief
Executive Officer is of paramount importance in setting base salaries of other
executive officers. The comparison of compensation levels is based on surveys of
various companies both within and outside the sign manufacturing industry.
Certain of these companies are included in the peer group represented in the
index used for stock performance comparisons elsewhere in this Proxy Statement
under the caption "Comparison of Five-Year Cumulative Total Returns." The
committee is satisfied that it has reasonably accurate information with respect
to salary ranges for the surveyed companies.
The committee begins its annual compensation review in August, and it
generally acts in the first quarter of each fiscal year to set the compensation
of the Company's executive officers and review annual goals set for each
executive. The committee considers (i) the Company's performance as evidenced in
changes in the price of the Common Stock during the year as compared to changes
in its industry and the broader economic environment, (ii) the Chief Executive
Officer's recommendations with respect to a particular officer, (iii) the
officer's individual performance, (iv) any significant changes in the officer's
level of responsibility, and (v) each officer's then-current salary within the
range of salaries for such position. The committee includes significant
qualitative components in evaluating the individual performance of each
executive officer. These components include the officer's leadership, the
accomplishment of goals set at the beginning of the year,
31
teambuilding and motivational skills. They also include adaptability to rapid
change and assimilation of new technical knowledge to meet the demands of the
industry's customers. In this qualitative evaluation, the committee exercises
its collective judgment as to the officer's contributions to the growth and
success of the Company during the prior year and the expected contributions of
such officer in the future. Generally, salary increases are made retroactive to
July 1 of the current fiscal year.
ANNUAL INCENTIVE COMPENSATION The senior management incentive plan calls
for the establishment annually of an incentive pool to be distributed if four
out of the following seven corporate goals are achieved: (1) consolidated
operating income must increase a minimum of 15% over the prior fiscal year; (2)
consolidated pre-tax income must increase a minimum of 15% over the prior fiscal
year; (3) consolidated net income from continuing operations must increase a
minimum of 15% over the prior fiscal year; (4) consolidated net income must
increase a minimum of 15% over the prior fiscal year; (5) diluted earnings per
share from continuing operations must increase a minimum of 15% over the prior
fiscal year; (6) diluted earnings per share must increase a minimum of 15% over
the prior fiscal year; and (7) the quoted closing price per share of the Company
Stock at fiscal year-end must be 15% higher than the quoted closing price at the
end of the previous fiscal year.
The criteria for establishing the amount of the incentive pool is
determined by the Compensation Committee at the beginning of each year. Each
participant has specific individual goals based on his direct responsibilities
and his contributions to the attainment of the corporate goals. These objectives
are established at the beginning of each fiscal year by the Chief Executive
Officer and submitted to the Compensation Committee for approval. The goals are
communicated to the participants as the basis for making awards. Awards to
participants are one-third in cash, one-third in newly issued shares of Company
Stock and one-third as an adjustment of annual base salary.
In fiscal 2000, the Company failed to achieve a sufficient number of
performance goals under the senior management plan for the creation of an
incentive pool. Accordingly, no incentive compensation was paid to the named
executive officers under the plan for fiscal 2000.
LONG-TERM INCENTIVE COMPENSATION The Compensation Committee believes that
long-term incentive compensation in the form of stock options is the most direct
way of making executive compensation dependent upon increases in shareholder
value. The Company's stock option plans provide the means through which
executive officers can build an investment in Company Stock which will align the
officers' economic interest with the interest of shareholders. The value of
stock options historically has increased as the result of increases in the price
of the Company Stock, and such options are highly valued by employees. The
committee believes that the granting of stock options has been a particularly
important component of its success in retaining talented management employees.
The exercise price of each option has generally been the market price of
the Company Stock on the date of grant. The committee believes that stock
options give the Company's executive officers greater incentives throughout the
term of the options to strive to operate the Company in a manner that directly
effects the financial interest of the shareholders both on a long-term, as well
as a short- term, basis.
32
In determining the number of options to grant to executive officers, the
committee considers on a subjective basis the same factors as it does in
determining the other components of compensation, with no single factor accorded
special weight. The recommendation of the Chief Executive Officer is of
paramount importance in determining awards to persons other than himself.
COMPENSATION OF THE CHIEF EXECUTIVE OFFICER In setting the compensation of
Mr. Brandner, the Company's President and Chief Executive Officer, the
Compensation Committee applied the quantitative, performance-based criteria of
the senior management incentive plan described above. In determining the portion
of the bonus pool under the plan to be allocated to Mr. Brandner, the committee
considered such qualitative criteria as his management responsibilities, his
efforts in aiding the Company in achieving the performance goals contained in
the senior management incentive plan, and the results of his efforts in helping
the Company increase profitable growth generally. The total compensation package
of Mr. Brandner is designed to be competitive while creating awards for
performance in line with the financial interests of our shareholders. The
committee believes that the 2000 compensation package for Mr. Brandner was
entirely consistent with this policy.
THE COMPENSATION COMMITTEE
Thomas N. Grant, Chairman Lester Jacobs
Kevin L. Jackson William A. Retz
FREEZE OF EXECUTIVE SALARIES
On September 29, 2000, our Board of Directors approved an indefinite
freeze of compensation levels of executive officers of the Company and its
subsidiaries
COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN
A line graph presentation appears below, showing a five-year comparison of
the cumulative total return on Company Stock to the S&P 500 index, the Nasdaq
Stock Market index and an index of peer group companies selected by the Company.
The peer group consists of Daktronics, Inc., Trans-Lux Corporation, Mikohn
Gaming Corporation, Trans-Industries, Inc. and Federal Sign Corp. The graph
assumes $100 invested on June 30, 1994, in Company Stock and in each index, with
the subsequent reinvestment of dividends on a quarterly basis.
33
COMPARISON OF FIVE-YEAR CUMULATIVE RETURNS AMONG
THE COMPANY, S&P 500 INDEX, NASDAQ INDEX AND PEER GROUP INDEX
[CHART]
DATE Company Stock S&P 500 Index Nasdaq Index Peer Group
---- ------------- ------------- ------------ ----------
06/30/95 100.00 100.00 100.00 100.00
06/30/96 159.62 126.18 128.39 156.48
06/30/97 339.23 170.12 156.14 136.97
06/30/98 457.96 222.02 205.59 218.94
06/30/99 561.07 272.23 294.06 150.73
06/30/00 439.53 292.18 437.18 161.57
34
ITEM. 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
- ---------------------------------------------------------------
MANAGEMENT
- ----------
PRINCIPAL SHAREHOLDERS
The identity of every person or entity known to us to beneficially own more
than five percent (5%) of our stock appears below.
NAME AND ADDRESS NUMBER OF SHARES PERCENT OF
OF BENEFICIAL OWNER BENEFICIALLY OWNED(1) CLASS(1,2)
- ------------------- -------------------- ---------
Raymond James Capital Partners, L.P. 1,327,2013 13.7%
880 Carillon Parkway
St. Petersburg, FL 33716
Renaissance Capital Growth
& Income Fund III, Inc. 948,5964 10.5%
808 North Central Expressway
Suite 210-LB59
Dallas, TX 75206
Renaissance U.S. Growth 948,5964 10.5%
& Income Trust PLC
808 North Central Expressway
Suite 210-LB59
Dallas, TX 75206
Lou A. Papais 786,979 9.4%
3133 North Ad Art Road
Stockton, CA 95215
Larry L. Johnson 527,6675 6.3%
Suite L, 9125 Whiskey Bottom Rd.
Laurel, MD 20707
J. Melvin Stewart 615,3886 7.4%
2201 Cantu Court, Suite 217
Sarasota, FL 34232
- ---------------------------
1 Rule 13d-3 under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), includes as beneficial owners of securities, among
others, any person who directly or indirectly, through any contract,
arrangement, understanding, relationship or otherwise, has or shares
voting power and/or investment power with respect to such securities, and
any person who has the right to acquire beneficial ownership of
securities within 60 days, including without limitation, through the
exercise of any option, warrant or conversion of a security.
2 Based upon 8,342,451 shares of Company Stock issued and outstanding.
35
3 Includes: (a) 1,201,120 shares of Company Stock issuable upon conversion
of 40,000 shares of Series A convertible preferred stock prior to July
30, 2004 at the present conversion price of $3.33 per share; and (b)
126,000 shares of Company Stock issuable upon exercise of common stock
purchase warrants prior to July 30, 2004 at the present exercise price of
$3.33 per share.
4 Includes, with respect to each such entity: (a) 150,150 shares of Company
Stock issuable upon conversion of 5,000 shares of Series A convertible
preferred stock prior to July 30, 2004 at the present conversion price of
$3.33 per share; (b) 15,750 shares of Company Stock issuable upon
exercise of common stock purchase warrants prior to July 30, 2004 at the
present exercise price of $3.33 per share; (c) 406,032 shares of Company
Stock issuable upon conversion of 8.75% convertible debentures due March
2, 2005 at the present conversion price of $4.31; and (d) 110,250 shares
of Company Stock issuable upon exercise of common stock purchase warrants
prior to March 2, 2005 at the present exercise price of $3.91 per share.
5 Includes 99,436 shares of Company Stock issuable at the conversion price
of $4.31 per share on a convertible note of Lockwood Sign Group, Inc. to
Mr. Johnson in the principal amount of $428,572 with a maturity date of
July 30, 2006.
6 Includes: (a) 305,000 shares held in a voting trust among Mr. Stewart,
his six children and a trust for the benefit of a grandchild which has a
term of 10 years commencing May 19,1998 and under which Mr. Stewart
serves as sole trustee and has full voting power with respect to such
shares; (b) 167,766 shares held in a trust of which Mr. Stewart is the
sole trustee and beneficiary; and (c) 30,872 shares held in a trust of
which he is the sole trustee and the sole beneficiary is his spouse,
Nancy W. Stewart.
SECURITY OWNERSHIP OF DIRECTORS AND EXECUTIVE OFFICERS
The following table shows the number of shares of Company Stock owned
beneficially by each director, each other "named executive officer" (see
"EXECUTIVE COMPENSATION -- Summary of Cash And Certain Other Compensation"
below), and by all directors and executive officers as a group. All persons
shown in the table have sole voting and investment power with regard to the
shares shown, unless otherwise indicated.
NAME AND ADDRESS NUMBER OF SHARES PERCENT OF
OF BENEFICIAL OWNER BENEFICIALLY OWNED(1) CLASS(1,2)
- ------------------- -------------------- ---------
Gary J. Arnold -0- *
5440 Azure Way
Sarasota, Florida 34242
Gary D. Bell 192,777(3, 6) 2.3%
365 Oak Place
Port Orange, Florida 32127
J. William Brandner 321,610(3, 6) 3.8%
5029 Edgewater Drive
Orlando, Florida 32810
Thomas N. Grant 29,778(3) *
200 South Orange Avenue
Orlando, Florida 32810
Marshall S. Harris 31,482(4, 6) *
5029 Edgewater Drive
Orlando, Florida 32810
36
Kevin L. Jackson -0- *
2180 West S.R. 434, Suite 6150
Longwood, FL 32779
Lester Jacobs 22,601(3) *
656 Flamingo Drive
Apollo Beach, Florida 33572
Terry J. Long 406,552(3, 6) 4.8%
3133 Ad Art Road
Stockton, California 95215
Lou A. Papais 786,979 9.4%
3133 Ad Art Road
Stockton, California 95215
William A. Retz 22,601(3) *
280 South Ridley Creek Road
Media, Pennsylvania 19063
J. Melvin Stewart 615,388(3, 5, 6) 7.4%
2201 Cantu Court
Sarasota, Florida 34232
Todd D. Thrasher 42,662(3, 6) *
5029 Edgewater Drive
Orlando, Florida 32810
All Executive Officers and Directors 2,472,430 6, 7 28.1%
as a Group (12 persons)
*Represents less than 1% of the outstanding shares of Company Stock.
- ---------------------------
1 Rule 13d-3 under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), includes as beneficial owners of securities, among
others, any person who directly or indirectly, through any contract,
arrangement, understanding, relationship or otherwise, has or shares
voting power and/or investment power with respect to such securities, and
any person who has the right to acquire beneficial ownership of
securities within 60 days, including without limitation, the exercise of
any option, warrant or conversion of a security.
2 Based upon 8,342,451 shares of Company Stock issued and outstanding.
3 Includes the following number of shares purchasable within 60 days of the
record date upon exercise of employee stock options: Gary D. Bell 179,640
shares; J. William Brandner 66,164 shares; Thomas N. Grant 27,347 shares;
Lester Jacobs 22,128 shares; Terry J. Long 110,250 shares; William A.
Retz 22,128 shares; and Todd D. Thrasher 34,728 shares.
4 These shares are held in a self-directed independent retirement account.
5 Includes: (a) 305,000 shares held in a voting trust among Mr. Stewart,
his six children and a trust for the benefit of a grandchild which has a
term of 10 years commencing May 19,1998 and under Mr. Stewart serves as
sole trustee and has full voting power with respect to such shares; (b)
167,776 shares held in a trust of which Mr. Stewart is the sole trustee
and beneficiary; and (c) 30,892 shares held in a trust of which he is the
sole trustee and the sole beneficiary is his spouse, Nancy W. Stewart.
37
6 Does not Include the following shares allocated to the following persons'
accounts under the Company's 401(k) plan: J. William Brandner 12,157
shares; Gary D. Bell 1,279 shares; Marshall S. Harris 7,198 shares; Terry
J. Long 1,334 shares; J. Melvin Stewart 9,310 shares; and Todd D.
Thrasher 1,898 shares.
7 Does not include the following shares purchaseable upon exercise of
options that, by their terms, are not presently exerciseable: Gary J.
Arnold 10,500 shares; Gary D. Bell 25,200 shares; J. William Brandner
78,750 shares; Thomas N. Grant 10,500 shares; Marshall S. Harris 15,750
shares; Kevin L. Jackson 10,500 shares; Lester Jacobs 10,500 shares;
Terry J. Long 47,250 shares; William A. Retz 10,500 shares; J. Melvin
Stewart 25,200 shares; and Todd D. Thrasher 15,750 shares.
The Company does not know of any arrangement, including any pledge by any
person of securities of the Company, the operation of which may result at a
subsequent date in a change in control of the Company.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- ---------------------------------------------------------
ACQUISITION OF LOCKWOOD SIGN GROUP, INC.
Effective July 1, 1999, the Company acquired Lockwood Sign Group, Inc., a
commercial sign manufacturer with facilities located in Marietta, Georgia,
Charlotte, North Carolina and the Washington D.C. area. Mr. Larry L. Johnson, a
director since August 27, 1999, received $1,387,000 cash and 428,231 shares of
Company Stock for his 73% interest in Lockwood.
Following the Lockwood acquisition, the Company and Lockwood entered into
an employment agreement with Mr. Johnson to serve as President and Chief
Executive Officer of Lockwood. This agreement was superseded by the employment
agreement between the Company and Mr. Johnson which terminated upon his
resignation as a director, officer and employee in August 2000.
The Company also granted Mr. Johnson options to purchase up to 105,000
shares of Company Stock at the exercise price of $3.54, the fair market value
per share of Company Stock on the August 27, 1999 grant date. The agreement
under which the options were granted provides that certain conditions must be
satisfied before the options become exerciseable.
LOCKWOOD CONVERTIBLE NOTE
On July 30, 1999, in consideration of a loan from Mr. Johnson to Lockwood
Sign Group, Inc., Lockwood issued to Mr. Johnson a promissory note in the
principal amount of $500,000, Principal on the note is payable in six equal
annual installments of $71,428 and a seventh installment of $71,432. Present
outstanding principal on the note of $428,572. The note is also convertible into
shares of Company Stock at the present conversion price of $4.31 per share.
PREFERRED STOCK OFFERING
On July 30, 1999, the Company completed a private sale of 50,000 shares of
its authorized preferred stock designated as Series A convertible preferred
stock for gross proceeds of $5,000,000. The preferred stock is convertible into
shares of Company Stock at the conversion price of $3.333 per share, subject to
certain anti-dilution and other adjustments.
38
40,000 shares of the preferred stock were purchased by Raymond James
Capital Partners L.P., and the remaining 10,000 shares were purchased 5,000 each
by Renaissance Capital Growth & Income Fund III, Inc. and Renaissance U.S.
Growth & Income Trust PLC. The Company also issued Raymond James and the two
Renaissance entities warrants to purchase 126,000 shares, 15,750 shares and
15,750 shares, respectively, of Company Stock at any time prior to July 30, 2004
at the exercise price of $3.333 per share. The exercise price is subject to
certain anti-dilution and other adjustments.
The Series A preferred stock pays dividends at the rate of 5.25% per year
on the last day of March, June, September and December in each year and is
required to be redeemed by the Company on July 30, 2004. The Series A preferred
stock is entitled to a preference over Company Stock at liquidation at the
liquidation price of $100 per share plus any accrued but unpaid dividends.
Holders of the Series A preferred stock are entitled to vote with holders
of Company Stock as a single class on all matters on which holders of Company
Stock are entitled to vote. Each share of preferred stock is entitled to the
number of votes equal to the number of shares of Company Stock into which it is
convertible.
Part of the proceeds from the preferred stock sale were used by the Company
to finance part of the purchase price for Lockwood Sign Group, Inc.
AMERIVISION
Pursuant to an agreement dated June 28, 1999, the Company purchased 8,000
newly issued shares of convertible preferred stock from AmeriVision Outdoor,
Inc. for $500,000. The preferred stock pays quarterly cumulative dividends at
the rate of 9% per year. Upon the satisfaction of certain conditions, the
preferred stock is convertible into common stock of AmeriVision at the price of
$62.50 per share, which upon issuance would be equal to 80% of the outstanding
common stock of AmeriVision. The Company also holds warrants, exerciseable
between July 1, 2001 and July 31, 2001, to purchase 8,000 shares of AmeriVision
common stock from AmeriVision at the price of $.001 per share. The Company also
has the option, upon certain conditions, to purchase the remaining 20% of the
common stock of AmeriVision.
Part of the proceeds of the preferred stock was used by AmeriVision to
purchase the assets of AmeriVision Outdoor, LLC, a Nevada limited liability
company. The Nevada company used $106,000 of such proceeds to partially repay
loans of $182,000 from Terry L. Long, a director and executive officer of the
Company.
The agreement between the Company and AmeriVision also provides that in
consideration of payment of a management fee, the Company has the right to
designate a representative to manage the day-to-day business operations of
AmeriVision and to serve on its board of directors. The Company has designated
Mr. Gary D. Bell to serve as such representative.
39
OHIO PARTNERSHIP
In June 1999, Ad Art Electronic Sign Corporation entered into a
lease-purchase transaction with an Ohio partnership, pursuant to which the
partnership leases from Ad Art an LED outdoor display board over a 60-month term
for total lease payments of approximately $1 million. Mr. Terry J. Long, a
director and executive officer of the Company, is a 50% non-managing partner of
the Ohio partnership. The Ohio partnership intended to move the LED display to
various entertainment venues throughout the United States and either secure
weekly rentals of the display, or sell advertising on the display. After several
months of operation, it was unable to secure sufficient revenue to make its
lease payments to us. The Ohio partnership, with our assistance, was able to
sell a portion of the display and make a substantial payment to us against the
original $1,000,000 receivable. We are continuing to assist the Ohio Partnership
in its efforts to sell the remaining portion of the display so that it will be
in a position to pay the remaining balance due us. However, to date, the Ohio
partnership has been unable to secure a buyer for the remaining portion of the
display and, accordingly, collection of our receivable is in doubt. During 2000,
we recorded a charge of $463,000 to essentially reduce the carrying value of our
receivable to the net realizable value.
ISSUANCE OF ADDITIONAL COMPANY STOCK FOR AD ART
On February 18, 1998, the Company acquired Ad Art Electronic Sign
Corporation, a commercial sign manufacturer located in Stockton, California. In
September 1999, Mr. Lou A. Papais received an additional 453,600 shares of
Company Stock and Mr. Terry J. Long received an additional 113,400 shares of
Company Stock, as the result of Ad Art's attainment of certain earnings levels
for the 1999 fiscal year.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
- -------------------------------------------------------------------
FORM 8-K.
- ---------
(a) The following documents are filed as part of this Report:
DISPLAY TECHNOLOGIES, INC. AND SUBSIDIARIES
Report of Independent Certified Public Accountants...........................................F-2
Consolidated Balance Sheet as of June 30, 2000 and 1999......................................F-3
Consolidated Statements of Income for the years ended June 30, 2000, 1999 and 1998...........F-4
Consolidated Statements of Stockholders' Equity for the years ended
June 30, 2000, 1999 and 1998...........................................................F-5
Consolidated Statement of Cash Flows for the years ended June 30, 2000, 1999 and 1998........F-6
Notes to Consolidated Financial Statements...................................................F-7
40
Exhibit
Number Title of Exhibit
- ------ ----------------
2.1 Stock Purchase and Sale Agreement dated as of September 7, 1995
among Registrant, Don Bell Industries, Inc., Worrell Enterprises,
Inc. and Gary D. Bell26/
2.2 Agreement for Purchase of Assets dated as of August 27, 1996
between Heritage Packaging Services, Inc. and Midwest Packaging
Products, Inc.33/
2.3 Stock Purchase and Sale Agreement among Registrant, Certified
Maintenance Service, Inc. and Mark Manfredi dated as of July, 1,
199734
2.4 Agreement and Plan of Merger and Reorganization dated as of
February 17, 1998 among Registrant, Displays Acquisitions, Inc.,
a wholly owned Florida subsidiary of Registrant, Electronic Sign
Corporation d/b/a Ad Art, a California corporation, and Terry J.
Long, Daniel G. O'Leary, individually and in his capacity as
Trustee of the Daniel O'Leary Trust Dated April 18, 1993, Betty
E. Papais, individually and in her capacity as Trustee of the
Papais Trust Dated January 29, 1991, and Lou A. Papais35/
2.5 Agreement and Plan of Merger and Reorganization dated as of July
1, 1999 among Registrant, Lockwood Acquisitions Corp., a wholly
owned Florida subsidiary of Registrant, Lockwood Sign Group,
Inc., a Georgia corporation, and Larry L. Johnson and Kurt R.
Johnson43
3.1 Articles of Incorporation of Registrant1/
3.2 Certificate of Merger1/
3.4 Amendment to Articles of Incorporation9/
3.9 Articles of Incorporation of Nevada SEMCO, Inc., a Nevada
corporation20/
3.10 By-Laws of Nevada SEMCO, Inc.20/
3.13 Articles of Incorporation of Vision Trust Marketing, Inc., a
Florida corporation29/
3.14 Bylaws of Vision Trust Marketing, Inc.29/
3.15 Articles of Incorporation of Don Bell Industries, Inc., a Florida
corporation29/
3.16 Bylaws of Don Bell Industries, Inc.29/
3.17 Articles of Incorporation of Don Bell Industries of Nevada,
Inc.29/
3.18 Bylaws of Don Bell Industries of Nevada, Inc.29/
3.19 Articles of Incorporation of Certified Maintenance Service,
Inc.34/
3.20 Bylaws of Incorporation of Certified Maintenance Service, Inc.34/
3.21 Articles of Incorporation of Displays Acquisitions Corp. (n/k/a
Ad Art Electronic Sign Corporation)37/
3.22 Articles of Merger of Electronic Sign Corporation into Displays
Acquisition Corp. (with the surviving corporation, Displays
Acquisitions Corp. changing its name to Ad Art Displays, Inc.)37/
3.23 Articles of Amendment to Articles of Incorporation of Ad Art
Displays, Inc. (changing the corporate name to Ad Art Electronic
Sign Corporation)37/
3.24 Bylaws of Ad Art Electronic Sign Corporation f/k/a Ad Art
Displays, Inc.37/
3.25 Articles of Incorporation of ESC of Nevada, Inc.37/
3.26 Bylaws of ESC of Nevada, Inc.37/
3.27 Restated Articles of Incorporation of Registrant39/
3.28 Amended and Restated Bylaws of Registrant 39/
3.29 Articles of Incorporation of La-Man Corporation, a Nevada
corporation39/
3.30 Bylaws of La-Man Corporation39/
3.31 Articles of Incorporation of Lockwood Acquisitions Corp. (n/k/a
Lockwood Sign Group, Inc.), a Florida corporation43/
3.32 Articles of Merger of Lockwood Sign Group, Inc., a Georgia
corporation, into Lockwood Acquisitions Corp. (with the surviving
corporation, Lockwood Acquisitions Corp. changing its name to
Lockwood Sign Group, Inc.)43/
3.33 Bylaws of Lockwood Sign Group, Inc. f/k/a Lockwood Acquisitions
Corp43/
3.34 November 18, 1999 Amended and Restated Bylaws of Registrant46/
4.14 8% Convertible Note of Registrant, dated September 7, 1995, in
principal amount of $750,000 to Worrell Enterprises, Inc.28/
41
4.15 Amendment No. 2 to Warrant Agreement, dated as of January
10,1997, between Registrant and Continental Stock & Transfer
Company, as Warrant Agent34/
4.16 Convertible Loan Agreement Dated March 2, 1998 by and between
Registrant and Renaissance Capital Growth & Income Fund III,
Inc., Renaissance US Growth & Income Trust PLC and Renaissance
Capital Group, Inc.36/
4.17 8.75% Convertible Debenture Due March 2, 2005 issued to
Renaissance Capital Growth & Income Fund III, Inc.36/
4.18 8.75% Convertible Debenture Due March 2, 2005 issued to
Renaissance US Growth & Income Trust PLC36/
4.19 Stock Purchase Warrant issued to Renaissance Capital Growth &
Income Fund III, Inc.36/
4.20 Stock Purchase Warrant issued to Renaissance US Growth & Income
Trust PLC36/
4.22 J. Melvin Stewart Lock-Up Agreement36/
4.23 Amendment No. 3 to Warrant Agreement, dated as of May 27, 1997,
between Registrant and Continental Stock Transfer & Trust
Company, as Warrant Agent37/
4.24 Amendment No. 4 to Warrant Agreement, dated as of March 20, 1998,
between Registrant and Continental Stock Transfer & Trust
Company, as Warrant Agent40
4.25 Amendment No. 5 to Warrant Agreement, dated as of November 4,
1998, between Registrant and Continental Stock Transfer & Trust
Company, as Warrant Agent40
4.26 Redemption Notice to Warrant Holders dated December 29, 199840
4.27 Unit Purchase Option Amendment dated as of January 4, 1999
between Registrant and Peter D. Mathews40/
4.28 Stock Option Agreement dated March 18, 1997 between Registrant
and Halyx Partners, Inc. d/b/a The Howell Group41/
4.29 Stock Option Agreement dated August 29, 1997 between Registrant
and Halyx Partners, Inc. d/b/a The Howell Group41/
4.30 Stock Purchase Warrant dated as of March 2, 1998 issued to Croft
& Bender LLC by Registrant41/
4.31 Stock Option Agreement dated July 1, 1998 between Registrant and
Pacific Consulting Group, Inc.41/
4.32 Press release dated January 6, 1999 announcing the redemption
date for the Registrant's common stock purchase warrants42/
4.32 Certificate of Designation of the Series A Preferred Stock43/
4.33 Form of Stock Purchase Warrant issued to Raymond James Capital
Partners, L.P., Renaissance Capital Growth & Income Fund III,
Inc. and Renaissance U.S. Growth & Income Trust PLC 43/
4.34 Trust Indenture dated June 1, 1999 between the Registrant and
SouthTrust Bank, National Association43/
4.35 Form of $2,500,000 Variable/Fixed Rate Secured Notes43/
4.36 Rights Agreement, dated as of September 21, 1999 between Display
Technologies, Inc. and Continental Stock Transfer & Trust
Company, including the Certificate of Designation, the form of
Rights Certificate and the Summary of Rights attached thereto as
Exhibits A, B and C, respectively44/
4.37 Certificate of Designation of the Series B Junior Participating
Preferred Stock
9 Voting Trust Agreement dated as of May 19, 1998 among J. Melvin
Stewart, as Trustee, and Rebecca Stewart Brooks, Bonnie Stewart
Knox, J. Melvin Stewart as Trustee for the Emily Stewart
Michelsen Irrevocable Trust dated May 6, 1998, Susan Stewart
Michelsen, Elizabeth Stewart Ricci, Deborah Stewart, John M.
Stewart and Mary Stewart38/
10.1 Royalty Agreement Re: U.S. Patent No. 4,116,6501/
10.2 License Agreement Re: U.S. Patent No. 4,116,6501/
10.3 Assignment of U.S. Patent No. 4,116,6501/
10.9 License Agreement between Registrant and J & M1/
10.14 License Agreement dated November 9, 1987 between Registrant and J
& M Company, Ltd.6/ 10.15 Agreement to Purchase Patents and
Applications for Patents, Trademarks and Applications for
Trademarks and International Marketing and Sales Rights between
Registrant and J & M Company Ltd. dated November 9, 19876/
42
10.16 Assignment of Patents and Applications for Patents, Trademarks
and Applications for Trademarks and International Marketing and
Sales Rights to J & M Company, Ltd. dated November 9, 19876/
10.36 Merger Agreement between Nevada SEMCO, Inc. and Stewart
Eleemosynary Marketing Corporation, dated August 19, 199319/
10.37 Amendment to J & M Agreement dated May, 199216/
10.46 1988 Incentive Stock Option Plan17/
10.47 1992 Stock Option and Appreciation Rights Plan17/
10.60 Employment Agreement dated August 19, 1993, between J.M. Stewart
Corporation and J. Melvin Stewart20/
10.61 Agreement dated January 17, 1992, between J.M. Stewart
Corporation and the Sunday School Board of the Southern Baptist
Convention21 /
10.62 Agreement dated March 24, 1993, between J.M. Stewart Corporation
and Gospel Publishing House21/
10.63 Endorsement Agreement dated May 21, 1992, between J.M. Stewart
Corporation and Florida Association of School Administrators21 /
10.64 Employment Agreement dated as of April 28, 1994 between
Registrant and J. William Brandner23/
10.65 Stock Option Agreement dated as of September 6, 1994 between
Registrant and J. William Brandner25/
10.97 Amendment No. 1, dated as of August 31, 1995 to Employment
Agreement between Registrant and J. William Brandner29/
10.99 Amendment No. 1, dated as of August 31, 1995 to Employment
Agreement between Registrant and J. Melvin Stewart29/
10.100 Stock Option Agreement dated as of September 1, 1995 between
Registrant and J. William Brandner29/
10.103 Stock Option Agreement dated as of September 1, 1995 between
Registrant and J. Melvin Stewart29/
10.106 Employee Stock Option Agreement dated as of September 7, 1995
between Registrant and Gary D. Bell28/
10.107 La-Man Corporation 1994 Amended and Restated Employee and
Consultant Stock Compensation Plan, as amended by Amendment No. 1
thereto dated as of August 31, 199528/
10.109 $2,570,000 Irrevocable Letter of Credit No. SB 1326 issued by
SouthTrust Bank, National Association, on August 28, 1997 for the
account of Registrant.34/
10.110 Form of La-Man Corporation $2,500,000 Variable/Fixed Rate Credit
Enhanced Notes.34/ 10.111 Trust Indenture dated August 1, 1997
between Registrant and SouthTrust Bank, National Association34/
10.112 Remarketing Agent Agreement dated as of August 1, 1997 among
Registrant, SouthTrust Bank, National Association, as Trustee and
SouthTrust Securities, Inc., as Remarketing Agent34/
10.121 Employment Agreement dated February 18, 1998 between and among
Registrant, Ad Art Displays, Inc. and Terry J. Long35/
10.122 Employee Stock Option Agreement dated February 18, 1998 by and
between Registrant and Terry J. Long35/
10.123 Consulting Agreement dated February 18, 1998 between and among Ad
Art Displays, Inc. and Lou A. Papais35/
10.124 Pledge Agreement dated March 2, 1998 between Registrant and
Renaissance Capital Growth & Income Fund III, Inc. and
Renaissance US Growth & Income Trust PLC36/
10.125 Security Agreement dated March 2, 1998 between Registrant and
Renaissance Capital Growth & Income Fund III, Inc. and
Renaissance US Growth & Income Trust PLC36/
10.126 Form of Subsidiary Continuing Guaranty36/
10.127 Form of Subsidiary Security Agreement36/
10.128 Amendment No. 2 to La-Man Corporation 1992 Stock Option and
Appreciation Rights Plan, as amended36/
10.129 Amendment No. 3 to La-Man Corporation 1992 Stock Option and
Appreciation Rights Plan, as amended36/
10.130 Amendment No. 2 to La-Man Corporation Amended and Restated 1994
Employee and Consultant Stock Compensation Plan, as amended36/
43
10.131 Employment Agreement dated as of February 17, 1998 among
Registrant, Don Bell Industries, Inc. and Gary D. Bell37/
10.132 Employment Agreement dated as of September 1, 1998 between
Registrant and Marshall S. Harris38/ 10.133 Employee Stock Option
Agreement dated as of August 28, 1998 between Registrant and
Marshall S. Harris39/
10.134 Promissory Note and Mortgage Modification Agreement dated as of
December 31, 1998, by Registrant, Don Bell Industries, Inc.,
Vision Trust Marketing, Inc., Don Bell Industries of Nevada,
Inc., La-Man Corporation, Nevada SEMCO, Inc., J.M. Stewart
Corporation, J.M. Stewart Industries, Inc., and Certified
Maintenance Service, Inc. to and for the benefit of SouthTrust
Bank, National Association40/
10.135 Security Agreement dated January 5, 1999 between La-Man
Corporation and Renaissance Capital Growth & Income Fund III,
Inc. and Renaissance US Growth & Income Trust PLC40/
10.136 Securities Purchase Agreement dated as of July 30, 1999 between
Registrant, Raymond James Capital Partners, L.P., Renaissance
Capital Growth & Income Fund III, Inc. and Renaissance U.S.
Growth & Income Trust PLC43/
10.137 Loan and Security Agreement dated June 2, 1999 between Registrant
and SouthTrust Bank, National Association43/
10.138 Employment Agreement dated July 30, 1999 between and among
Registrant, Lockwood Sign Group, Inc. and Larry L. Johnson43/
10.139 Employment Agreement dated July 30, 1999 between and among
Registrant, Lockwood Sign Group, Inc. and Kurt R. Johnson43/
10.140 Agreement dated as of June 28, 1999 between and among Registrant,
AmeriVision Outdoor, Inc., AmeriVision Outdoor, LLC, Michael T.
Barr, Joe W. Brown, William W. Byrd and George Whitlow 10.141
1999 Stock Incentive Plan46/
10.142 Amendment No. 1, dated March 3, 2000, to Loan and Security
Agreement dated as of June 2, 1999 among Registrant, certain of
Registrant's subsidiaries and SouthTrust Bank, National
Association47/
10.143 Amended and Restated Revolving Loan Promissory Note, dated March
3, 2000, from Registrant and certain of its subsidiaries to
SouthTrust Bank, National Association47/
20.1 Registrant's press release dated September 29, 200048/
21 Subsidiaries
23.1 Consent of BDO Seidman, LLP41/
27 Financial Data Schedule
99.3 U.S. Patent No. 4,483,4171/
99.4 Trademark Registration No. 1,287,6661/
99.5 U.S. Patent No. 4,487,6182/
99.6 Trademark Registration No. 1,328,0542/
99.7 Trademark Registration No. 1,359,880 (Supplemental Register)4/
99.8 Canadian Patent No. 1,197,47716/
99.9 U.S. Patent Number 4,600,416 for the Extractor Dryer16/
99.10 Canadian Patent Number 1,206,889 for the Pneumatic Dryer16/
99.11 Trademark Registration Number 1,372,35916/
99.12 Canadian Patent Number 1,207,67416/
99.14 U.S. Patent Number 4,865,815 for the In-Line Compressed Air
Carbon Monoxide Filter11/
99.16 U.S. Patent Number 5,030,262 for the Air Vapor Trap and Drain
Therefore14/
99.17 U.S. Patent Number 5,114,443 for the Air Line Vapor Trap With Air
Warming System16/
99.19 Trademark Registration Number 1,790,935 for Encapulator(R)21 /
- ------------------------------------
1/ Incorporated by reference from Registrant's Pre-Effective Amendment No.
1 to the Registrant's Registration - Statement on Form S-18
(Registration No. 2-89341).
44
2/ Incorporated by reference from Registrant's Pre-Effective Amendment No.
2 to the Registrant's Registration Statement on Form S-18 (Registration
No. 2-8934 1).
4/ Incorporated by reference from Registrant's Post-Effective Amendment
No. 1 to Registrant's Registration Statement on Form S-18 (Registration
No. 2-89341).
6/ Filed as an exhibit to Registrant's Current Report on Form 8-K filed on
December 23, 1987 (File No. 0-14427), and incorporated by reference.
9/ Filed as an exhibit to Registrant's Form 10-K for the period ended
September 30, 1988 (File No. 0-14427), and incorporated by reference.
11/ Filed as an exhibit to Registrant's Form 10-K for the period ended
September 30, 1989 (File No. 0-14427), and incorporated by reference.
14/ Filed as an exhibit to Registrant's Form 10-K for the period ending
September 30, 1991 (File No. 0-14427), and incorporated by reference.
16/ Filed as an exhibit to Registrant's Form 10-K for the transition period
ending June 30, 1992 (File No. 0-14427), and incorporated by reference.
17/ Filed as an exhibit to Registrant's Registration Statement on Form S-1
(Registration No. 33-54230), and incorporated by reference.
19/ Filed as an Exhibit to Registrant's Form 8-K dated August 19, 1993
(File No. 0-14427) and incorporated by reference.
20/ Filed as an exhibit to Registrant's Post Effective Amendment No. 2 to
Registration Statement on Form S-1 (Registration No. 33-54230), and
incorporated by reference.
21/ Filed as an exhibit to Registrant's Post Effective Amendment No. 3 to
Registration Statement on Form S-1 (Registration No. 33-54230), and
incorporated by reference.
23/ Filed as an exhibit to Registrant's Form 8-K dated June 23, 1994 filed
on June 28,1994 (File No. 0-14427), and incorporated by reference.
25/ Filed as an exhibit to Registrant's Form 10-K for the period ending
June 30, 1994 (File No. 0-14427), and incorporated by reference.
26/ Filed as an exhibit to Registrant's Form 8-K dated November 14, 1994
and filed on January 27, 1995 (File No. 0-14427), and incorporated by
reference.
28/ Filed as an exhibit to Registrant's Form 8-K dated September 7, 1995
and filed effective September 22, 1995 (File No. 0-14427), and
incorporated by reference.
29/ Filed as an exhibit to Registrant's Form 10-KSB for the period ending
June 30, 1995 (File No. 0-14427), and incorporated by reference.
33/ Filed as an exhibit to Registrant's Form 8-K dated August 28, 1996
(File No. 0-14427), and incorporated by reference.
45
34/ Filed as an exhibit to Registrant's Form 10-KSB for the period ending
June 30, 1997 (File No. 0-14427), and incorporated by reference.
35/ Filed as an exhibit to Registrant's Form 8-K dated February 18, 1998
and filed March 2, 1998 (File No. 0- 14427), and incorporated by
reference.
36/ Filed as an exhibit to Registrant's Form 8-K dated March 2, 1998 and
filed March 12, 1998 (File No. 0- 144227), and incorporated by
reference.
37/ Filed as an exhibit to Registrant's Registration Statement on Form S-3
(Registration No. 333-51835), and incorporated by reference.
38/ Filed as an exhibit to Registrant's Form 10-KSB for the period ending
June 30, 1998 (File No. 0-14427), and incorporated by reference.
39/ Filed as an exhibit to Registrant's Form 8-K dated August 28, 1998 and
filed December 7, 1998 (File No. 0- 144227), and incorporated by
reference.
40/ Filed as an exhibit to Registrant's Form 8-K dated December 29, 1998
and filed January 15, 1999 (File No. 0- 144227), and incorporated by
reference.
41/ Filed as an exhibit to Registrant's Registration Statement on Form S-3
(Registration No. 333-71705), and incorporated by reference.
42/ Filed as an exhibit to Registrant's Form 8-K dated January 28, 1999 and
filed February 5, 1999 (File No. 0- 144227), and incorporated by
reference.
43/ Filed as an exhibit to Registrant's Form 8-K dated July 30, 1999 and
filed August 10, 1999 (File No. 0-144227), and incorporated by
reference.
44/ Filed as an exhibit to Registrant's Form 8-A filed September 21, 1999,
and incorporated by reference.
45/ Filed as an exhibit to Registrant's Form 10-KSB for the period ending
June 30, 1999 (File No. 0-14427), and incorporated by reference.
46/ Filed as an exhibit to Registrant's Form 10-Q for the period ending
December 31, 1999 (File No. 0-14427), and incorporated by reference.
47/ Filed as an exhibit to Registrant's Form 8-K dated March 3, 2000 and
filed March 16, 2000 (File No. 0-144227), and incorporated by
reference.
48/ Filed as an exhibit to Registrant's Form 8-K dated and filed September
29, 2000 (File No. 0-144227), and incorporated by reference.
(b) No reports on Form 8-K were filed by the Registrant during the
three-month period ended June 30, 2000, the last quarter of the period
covered by this Annual Report on Form 10-KSB.
46
(c) Exhibits:
2.6 Share Purchase Agreement dated June 30, 2000 among Registrant,
Hamilton Digital Designs Ltd., Farell M. Boyce, James B.
Mitchell, Brian G. Nugent and DTEK Signs ULC, an indirect wholly
owned subsidiary of Registrant
2.7 Share Purchase Agreement among Ontario Development Corporation,
Hamilton Digital Designs Ltd. and DTEK Signs ULC
3.35 Articles of Incorporation of Hamilton Digital Designs Ltd., an
Ontario corporation
3.36 Bylaws of Hamilton Digital Designs Ltd.
3.37 Articles of Incorporation of DTEK Canada, Inc., a Florida
corporation
3.38 Bylaws of DTEK Canada, Inc.
3.39 Memorandum and Articles of Association of DTEK Signs ULC, a Nova
Scotia unlimited liability company
4.38 Stock Purchase Warrant dated June 28, 1999 issued to Registrant
by AmeriVision Outdoor, Inc.
10.144 8% Convertible Note of Lockwood Sign Group, Inc. (f/k/a Lockwood
Acquisitions Corp.), dated July 30, 1999, in the principal amount
of $500,000 to Larry L. Johnson
10.145 Joinder and Forbearance Agreement dated as of September 26, 2000
among the Registrant, its subsidiaries and SouthTrust Bank
21 Subsidiaries
27 Financial Data Schedule
47
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this amendment to be signed
on its behalf by the undersigned, thereunto duly authorized.
By: /s/ J. William Brandner
--------------------------------------
J. William Brandner, President
(Chief Executive Officer) and Director
October 13, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report had been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
By: /s/ J. Melvin Stewart By: /s/ Lester Jacobs
-------------------------------- --------------------------------
J. Melvin Stewart, Chairman of Lester Jacobs, Director
the Board and Director October 13, 2000
October 13, 2000
By: By: /s/ Terry J. Long
-------------------------------- --------------------------------
Gary J. Arnold, Director Terry J. Long, Director
October 13, 2000 October 13, 2000
By: /s/ Gary D. Bell By: /s/ Lou A. Papais
-------------------------------- --------------------------------
Gary D. Bell, Director Lou A. Papais, Director
October 13, 2000 October 13, 2000
By: /s/ William A. Retz By: /s/ Todd D. Thrasher
-------------------------------- --------------------------------
William A. Retz, Director Todd D. Thrasher
October 13, 2000 Vice President and Treasurer (Chief
Financial Officer)
By: /s/ Thomas N. Grant October 13, 2000
--------------------------------
Thomas N. Grant, Director
October 13, 2000
By:
--------------------------------
Kevin L. Jackson, Director
October 13, 2000
48
DISPLAY TECHNOLOGIES, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
DISPLAY TECHNOLOGIES, INC. AND SUBSIDIARIES
Report of Independent Certified Public Accountants ..........................................F-2
Consolidated Balance Sheet as of June 30, 2000 and 1999 .....................................F-3
Consolidated Statements of Income for the years ended June 30, 2000, 1999 and 1998...........F-4
Consolidated Statements of Stockholders' Equity for the years ended
June 30, 2000, 1999 and 1998............................................................F-5
Consolidated Statement of Cash Flows for the years ended June 30, 2000, 1999 and 1998........F-6
Notes to Consolidated Financial Statements...................................................F-7
F-1
Display Technologies, Inc.
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
Display Technologies, Inc.
We have audited the accompanying consolidated balance sheets of Display
Technologies, Inc. and subsidiaries as of June 30, 2000 and 1999, and the
related consolidated statements of income, stockholders' equity and cash flows
for each of the three years in the period ended June 30, 2000. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Display
Technologies, Inc. and subsidiaries as of June 30, 2000 and 1999, and the
results of their operations and their cash flows for each of the three years in
the period ended June 30, 2000 in conformity with generally accepted accounting
principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has not complied with certain financial
covenants with its line of credit and other note payable agreements with the
same bank. On September 26, 2000 the Company and the bank executed a forbearance
agreement which waived covenant violations but extended the payment terms of the
line of credit and certain notes payable totaling $24,130,156 to October 31,
2000. The Company and the bank are currently negotiating possible extension
terms and the Company is considering alternative or replacement financing. If
the bank demands payment on these obligations, the Company may be unable to
obtain alternative or replacement financing to pay off such amounts. Such
condition raises substantial doubt about the Company's ability to continue as a
going concern. Management's plans in regard to these matters are also described
in Note 1. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
BDO Seidman, LLP
New York, New York
October 6, 2000
F-2
Display Technologies, Inc.
CONSOLIDATED BALANCE SHEET
JUNE 30 2000 1999
- -------------------------------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash $ 385,427 $ 79,832
Accounts receivable:
Trade, less allowance for doubtful accounts of $791,240 and $309,543 20,967,581 10,977,251
AmeriVision Outdoor, Inc. 1,782,691 -
Other, principally lease receivables 1,908,073 1,747,635
Inventories 9,073,902 6,084,709
Costs and estimated earnings in excess of billings on uncompleted contracts in progress 5,119,693 4,442,012
Prepaid expenses 633,184 859,371
Deferred income tax 821,000 133,000
- -------------------------------------------------------------------------------------------------------------------------
40,691,551 24,323,810
- -------------------------------------------------------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT, less accumulated depreciation 12,993,245 7,947,010
- -------------------------------------------------------------------------------------------------------------------------
OTHER ASSETS
Intangibles, less accumulated amortization 15,387,092 11,283,095
Investment in preferred stock of AmeriVision Outdoor, Inc. 500,000 500,000
Advances to AmeriVision Outdoor, Inc. 1,973,099 -
Other 3,644,815 1,301,729
- -------------------------------------------------------------------------------------------------------------------------
21,505,006 13,084,824
- -------------------------------------------------------------------------------------------------------------------------
$75,189,802 $45,355,644
=========================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Line of credit $18,826,857 $ -
Current maturities of long-term debt 9,358,567 781,926
Accounts payable 7,552,532 4,833,042
Customer deposits 1,800,507 785,391
Accrued expenses 3,949,374 2,762,897
Billings in excess of costs and estimated earnings on uncompleted contracts in progress 148,377 191,304
Current portion of obligations under capital leases 906,595 336,096
- -------------------------------------------------------------------------------------------------------------------------
42,542,809 9,690,656
- -------------------------------------------------------------------------------------------------------------------------
NON-CURRENT LIABILITIES
Line of credit - 5,302,630
Long-term debt, less current maturities 1,928,628 9,108,519
Obligations under capital leases, less current portion 1,578,977 962,483
Deferred income taxes 709,000 170,000
Other - 169,876
- -------------------------------------------------------------------------------------------------------------------------
4,216,605 15,713,508
- -------------------------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock; $.001 par value; authorized 50,000,000 shares; issued and
outstanding 50,000 and -0- shares 5,000,000 -
Common stock; $.001 par value; authorized 50,000,000 shares; issued and
outstanding 8,303,867 and 6,302,544 shares 8,304 6,303
Additional paid-in capital 24,396,858 18,999,292
Retained earnings (accumulated deficit) (974,774) 945,885
- -------------------------------------------------------------------------------------------------------------------------
28,430,388 19,951,480
- -------------------------------------------------------------------------------------------------------------------------
$75,189,802 $45,355,644
=========================================================================================================================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-3
Display Technologies, Inc.
CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED JUNE 30 2000 1999 1998
- -------------------------------------------------------------------------------------------------------------------------
SALES $ 91,813,257 $ 66,135,714 $ 32,478,018
COST OF SALES 65,219,287 43,912,587 19,688,873
- -------------------------------------------------------------------------------------------------------------------------
Gross profit 26,593,970 22,223,127 12,789,145
OPERATING EXPENSES
Selling expenses 11,441,495 10,241,634 4,973,451
General and administrative expenses 13,270,593 7,182,385 5,305,649
- -------------------------------------------------------------------------------------------------------------------------
24,712,088 17,424,019 10,279,100
- -------------------------------------------------------------------------------------------------------------------------
Income from operations 1,881,882 4,799,108 2,510,045
OTHER INCOME (EXPENSE)
Interest income 329,488 72,156 94,812
Interest expense (2,170,881) (1,235,483) (486,460)
Gain on disposal of property and equipment 30,378 46,872 4,649
Miscellaneous income 156,508 - 79,895
- -------------------------------------------------------------------------------------------------------------------------
(1,654,507) (1,116,455) (307,104)
- -------------------------------------------------------------------------------------------------------------------------
Income before income taxes 227,375 3,682,653 2,202,941
Income tax expense 202,000 1,438,000 615,000
- -------------------------------------------------------------------------------------------------------------------------
Net income 25,375 2,244,653 1,587,941
Preferred dividends and beneficial conversion features (390,625) - -
- -------------------------------------------------------------------------------------------------------------------------
Net income (loss) attributed to common shareholders $ (365,250) $ 2,244,653 $ 1,587,941
=========================================================================================================================
EARNINGS (LOSS) PER COMMON SHARE
Basic $ (0.05) $ 0.38 $ 0.36
Diluted $ (0.05) $ 0.31 $ 0.29
- -------------------------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING
Basic 7,758,240 5,914,265 4,371,368
Diluted 7,758,240 7,932,806 5,941,871
- -------------------------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-4
Display Technologies, Inc.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
COMMON STOCK
---------------------- SERIES A SERIES A
NUMBER PAR PREFERRED PREFERRED
OF SHARES VALUE SHARES STOCK
- -------------------------------------------------------------------------------------------------------------------------
BALANCE, JUNE 30, 1997 3,310,869 $ 3,311 -- $ --
Issuance of five percent stock dividend 167,885 168 -- --
Issuance of stock for acquisition of Ad Art 810,000 810 -- --
Sales of common stock, net 231,482 232 -- --
Exercise of stock options and warrants, net 322,396 322 -- --
Issuance of stock options and warrants -- -- -- --
Stock contributed to 401(k) plan 35,845 36 -- --
Stock issued for employee bonuses 13,047 13 -- --
Net income -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------
BALANCE, JUNE 30, 1998 4,891,524 4,892 -- --
Issuance of five percent stock dividend 248,596 249 -- --
Contingent stock earn-out for Ad Art acquisition -- -- -- --
Exercise of stock options and warrants, net 1,086,254 1,086 -- --
Tax benefit on exercise of options and warrants -- -- -- --
Issuance of stock options to nonemployees -- -- -- --
Stock contributed to 401(k) plan 58,015 58 -- --
Stock issued for employee bonuses 18,155 18 -- --
Net income -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------
BALANCE, JUNE 30, 1999 6,302,544 6,303 -- --
Issuance of five percent stock dividend, including
effect of cash payments in lieu of issuing
fractional shares 370,173 370 -- --
Issuance of stock for acquisition of Lockwood 415,000 415 -- --
Issuance of Contingent stock for Ad Art acquisition 560,464 560 -- --
Contingent stock earn-out for Lockwood acquisition -- -- -- --
Issuance of preferred stock, net -- -- 50,000 5,000,000
Exercise of stock options and warrants, net 546,513 547 -- --
Tax benefit on exercise of options and warrants -- -- -- --
Issuance of stock options to nonemployees -- -- -- --
Stock contributed to 401(k) plan 92,717 93 -- --
Stock issued for employee bonuses 16,456 16 -- --
Preferred stock dividends paid in cash -- -- -- --
Beneficial conversion features of preferred stock -- -- -- --
Net income -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------
BALANCE, JUNE 30, 2000 8,303,867 $ 8,304 50,000 $ 5,000,000
=========================================================================================================================
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY(CONTINUED)
ADDITIONAL RETAINED EARNINGS TOTAL
PAID-IN (ACCUMULATED STOCKHOLDERS'
CAPITAL DEFICIT) EQUITY
- ----------------------------------------------------------------------------------------------------------
BALANCE, JUNE 30, 1997 $ 5,809,832 $ (989,140) $ 4,824,003
Issuance of five percent stock dividend 577,356 (577,524) --
Issuance of stock for acquisition of Ad Art 3,336,390 -- 3,337,200
Sales of common stock, net 969,768 -- 970,000
Exercise of stock options and warrants, net 548,398 -- 548,720
Issuance of stock options and warrants 124,250 -- 124,250
Stock contributed to 401(k) plan 101,812 -- 101,848
Stock issued for employee bonuses 33,387 -- 33,400
Net income -- 1,587,941 1,587,941
- ----------------------------------------------------------------------------------------------------------
BALANCE, JUNE 30, 1998 11,501,193 21,277 11,527,362
Issuance of five percent stock dividend 1,319,796 (1,320,045) --
Contingent stock earn-out for Ad Art acquisition 2,206,827 -- 2,206,827
Exercise of stock options and warrants, net 2,818,975 -- 2,820,061
Tax benefit on exercise of options and warrants 743,000 -- 743,000
Issuance of stock options to nonemployees 76,950 -- 76,950
Stock contributed to 401(k) plan 271,295 -- 271,353
Stock issued for employee bonuses 61,256 -- 61,274
Net income -- 2,244,653 2,244,653
- ----------------------------------------------------------------------------------------------------------
BALANCE, JUNE 30, 1999 18,999,292 945,885 19,951,480
Issuance of five percent stock dividend, including
effect of cash payments in lieu of issuing
fractional shares 1,789,937 (1,796,034) (5,727)
Issuance of stock for acquisition of Lockwood 1,908,585 -- 1,909,000
Issuance of Contingent stock t for Ad Art acquisition (560) -- --
Contingent stock earn-out for Lockwood acquisition 660,806 -- 660,806
Issuance of preferred stock, net (54,000) -- 4,946,000
Exercise of stock options and warrants, net 315,694 -- 316,241
Tax benefit on exercise of options and warrants 392,000 -- 392,000
Issuance of stock options to nonemployees 68,250 -- 68,250
Stock contributed to 401(k) plan 342,700 -- 342,793
Stock issued for employee bonuses 64,779 -- 64,795
Preferred stock dividends paid in cash (240,625) -- (240,625)
Beneficial conversion features of preferred stock 150,000 (150,000) --
Net income -- 25,375 25,375
- ----------------------------------------------------------------------------------------------------------
BALANCE, JUNE 30, 2000 $ 24,396,858 $ (974,774) $ 28,430,388
==========================================================================================================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-5
Display Technologies, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED JUNE 30 2000 1999 1998
- ---------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 25,375 $ 2,244,653 $ 1,587,941
Adjustments to reconcile net income to net cash used for operating activities:
Depreciation and amortization 2,046,238 1,068,896 666,941
Gain on disposal of property and equipment (30,378) (46,872) (4,649)
Contribution of common stock to 401(k) plan 342,793 271,353 101,848
Deferred income taxes 119,000 733,000 (137,656)
Tax benefit on options and warrants exercised 392,000 743,000 --
Other 15,000 (64,901) --
Changes in assets and liabilities, net of effects of acquisitions:
Accounts receivable (11,049,421) (4,098,419) (1,992,004)
Other receivables (4,031,612) (1,139,886) (43,655)
Inventories (2,353,375) (4,595,192) (550,953)
Prepaid expenses 262,080 131,261 (240,100)
Accounts payable 1,782,595 2,015,944 (1,079,715)
Customer deposits 500,323 (461,665) 754,520
Accrued expenses 293,159 (864,790) (88,771)
Sales-type lease receivable 818,916 (1,251,602) --
Other 90,186 278,147 --
- ---------------------------------------------------------------------------------------------------------------------------
NET CASH USED FOR OPERATING ACTIVITIES (10,777,121) (5,037,073) (1,026,253)
- ---------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property, plant and equipment (3,033,031) (1,542,694) (882,813)
Business acquisitions, net of cash acquired (1,814,474) -- (3,004,568)
Proceeds from sale of property, plant and equipment 131,069 87,926 19,470
Investment in equity securities -- (500,000) --
Other (741,410) (7,114) --
- ---------------------------------------------------------------------------------------------------------------------------
NET CASH USED FOR INVESTING ACTIVITIES (5,457,846) (1,961,882) (3,867,911)
- ---------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in line of credit borrowings 13,274,227 2,343,435 (62,048)
Proceeds from issuance of long term debt -- 3,223,817 3,827,077
Principal payments on long term debt (1,123,867) (1,550,407) (114,458)
Proceeds from sales of common stock (including option and warrant
exercises), net 384,491 2,821,316 1,518,720
Payments on capital lease obligations (692,962) (265,886) (108,265)
Payment of fees for long-term debt -- (29,795) (142,630)
Proceeds from sales of preferred stock, net 4,946,000 -- --
Payment of preferred dividends (175,000) -- --
Other financing activities (72,327) (1,257) 282,019
- ---------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 16,540,562 6,541,223 5,200,415
- ---------------------------------------------------------------------------------------------------------------------------
NET INCREASE(DECREASE) IN CASH 305,595 (457,732) 306,251
CASH, beginning of year 79,832 537,564 231,313
- ---------------------------------------------------------------------------------------------------------------------------
CASH, end of year $ 385,427 $ 79,832 $ 537,564
===========================================================================================================================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-6
Display Technologies, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
NATURE OF BUSINESS
The Company designs, manufactures, installs and services hi-tech electronic
computer driven video displays, message centers, scoreboards, and business
identity signs.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Display
Technologies, Inc. and its wholly-owned subsidiaries (the "Company"). All
intercompany accounts and transactions have been eliminated in consolidation.
GOING CONCERN MATTERS
The Company's consolidated financial statements are presented on the going
concern basis, which contemplates the realization of assets and the satisfaction
of liabilities in the normal course of business. Currently, potential events of
default exist on the Company's existing working capital line of credit facility
and other long-term debt financing. These potential events of default include
violations of certain financial and operating covenants and an over advanced
position on the Company's line of credit. On September 26, 2000 the Company and
the bank executed a forbearance agreement which waived covenant violations, but
extended the payment terms of the line of credit and certain notes payable
totaling $24,130,156 to October 31, 2000.
Management does not believe that the Company will be able to repay the over
advanced amount under the line of credit agreement during the forbearance
period. In addition, management does not believe that the Company will be able
to comply with the financial covenants required by the security agreement during
fiscal 2001. Accordingly, management is continuing to negotiate with its current
lender to extend the forbearance period, provide replacement financing, or both.
Management is also actively pursuing replacement financing from alternative
lenders.
In addition, the Company's Board of Directors has engaged an investment banking
firm to help evaluate strategic alternatives that may be available to the
Company. These alternatives may include a sale of all or portions of the Company
to, or a merger with, various third parties.
If the Company is unable to extend the term of the forbearance period, secure
additional or replacement financing, or secure a sale of all or portions of the
Company before the end of the forbearance period on October 31, 2000, the
Company's current lender may declare an event of default under the existing
loans and security agreement causing the balance due under the Company's line of
credit agreement, and additional loans identified in Note 10, "Long-Term Debt",
to become due and payable immediately.
While pursuing additional debt and equity funding, the Company must continue to
operate on limited cash flow generated through operations and the continued
support and forbearance of the bank will be required, although this is not
assured. The Company plans to minimize its working capital requirements by
implementing various operational changes designed to improve operating results
in future periods. These changes include personnel reductions, elimination of
non-essential expenditures, management and executive compensation freezes, a
more detailed review of customer credit decisions at the corporate level and the
suspension of acquisition activities. The Company will continue to evaluate its
performance to identify additional areas of cost savings that may be available.
The consolidated financial statements do not include any adjustments to reflect
the possible future effects on the recoverability and classification of assets
or the amounts and classification of liabilities that may result from the
possible inability of the Company to continue as a going concern.
INVENTORIES
Inventories are valued at the lower of first-in, first-out (FIFO) cost or
market.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Depreciation is computed over
the estimated useful lives of the assets by the straight-line method.
INTANGIBLE ASSETS
Intangible assets are amortized using the straight-line method over their
estimated useful lives.
INVESTMENT IN AMERIVISION OUTDOOR, INC.
The Company holds 100% of the outstanding preferred stock of AmeriVision
Outdoor, Inc. This investment is recorded at cost.
IMPAIRMENTS
Assets are evaluated for impairment when events occur or changes in
circumstances indicate that the carrying amounts of the assets may not be
recoverable. When any such impairment exists, the related assets are written
down to fair value.
REVENUE RECOGNITION
The Company recognizes revenue on long-term construction contracts under the
percentage-of-completion method, measured by the percentage of contract costs
incurred to estimated total costs for each contract. Contract costs include all
direct material and labor costs and those indirect costs related to contract
performance. Provisions for estimated losses on uncompleted contracts are made
in the period in which such losses are determined. Changes in job performance,
job conditions, and estimated profitability may result in revisions to costs and
income and are recognized in the period in which the revisions are determined.
Profit is included in revenues when its realization is reasonably assured.
The Company recognizes revenue on short-term contracts under the completed
contract method and, accordingly, revenue is recognized when the contract is
complete.
F-7
Display Technologies, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
LEASING ACTIVITIES
The Company leases certain of its signs to customers under long- term
noncancellable leases which are accounted for as sales-type leases. The present
value of the minimum rentals to be received under such leases is recorded
currently as net sales revenue. The cost of the leased property is charged
against income at the time the sale is recorded.
INCOME TAXES
Income tax expense or benefit includes both current and deferred state and
federal income taxes. Deferred income taxes are provided for temporary
differences in the recognition of income and expense for financial reporting and
income tax purposes. Deferred income tax assets and liabilities are computed for
differences between the financial statement and tax bases of assets, liabilities
and tax carry forwards that will result in taxable or deductible amounts in
future periods based upon enacted tax laws and rates applicable to the periods
in which the differences are expected to affect taxable income. Deferred tax
liabilities are recognized when incurred; deferred tax assets, when necessary,
are offset by a valuation allowance which is reduced when it is more likely than
not that the asset will be realized.
STOCK BASED COMPENSATION
The Company accounts for stock based compensation under the provisions of
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS 123). As permitted by SFAS 123, the Company has elected to
continue to follow Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" (APB 25) and related interpretations in accounting
for stock based compensation to employees.
Stock options granted to non-employees are valued using a Black-Scholes option
pricing model with appropriate assumptions for risk free investment rates,
expected lives, dividend yields and volatility factors. The value of options
granted to non-employees is charged to appropriate asset or expense accounts
when the options are granted.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value estimates discussed herein are based upon certain market assumptions
and pertinent information available to management as of June 30, 2000. The
respective carrying value of certain on-balance-sheet financial instruments
approximated their fair values. These financial instruments include cash, trade
receivables, accounts payable and accrued expenses. The fair value of the
Company's long-term debt is estimated based upon the quoted market prices for
the same or similar issues or on the current rates offered to the Company for
debt of the same remaining maturities.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Significant estimates used in the preparation of the Company's financial
statements include the valuation of accounts receivable, inventory, contract
costing, goodwill and liabilities.
NOTE 2. ACQUISITIONS
Ad Art Electronic Sign Corporation
- ----------------------------------
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. Other costs of the acquisition, including legal and other
fees, totaled $277,800. An additional 560,464 shares of the Company's $.001 par
value common stock (the "contingent shares") were issued to certain former
owners of Ad Art on September 3, 1999. These contingent shares were issued at a
rate of approximately 49,000 shares for each $100,000 of after tax income
contributed by Ad Art for fiscal 1999 in excess of $1.4 million up to the
maximum of 567,000 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 $8,206,827,
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.
The following unaudited pro-forma summary presents the consolidated results of
operations as if the acquisition of Ad Art had occurred on July 1, 1997 and does
not purport to be indicative of what would have occurred had the acquisition
been made as of that date or of results which may occur in the future.
Year ended June 30 1998
- --------------------------------------------------------------------------------
Net sales $ 52,546,000
Net income $ 1,170,000
Earnings per share
Basic $ .21
Diluted $ .18
================================================================================
Lockwood Sign Group, Inc.
- -------------------------
On July 1, 1999, the Company acquired all of the outstanding common stock of
Lockwood Sign Group, Inc. ("Lockwood") in exchange for 415,000 shares of the
Company's $.001 par value common stock valued at $1,909,000 and $1,900,000 in
cash. An additional 150,869 shares of the Company's $.001 par value common stock
(the "contingent shares") are issuable to the former owners of Lockwood based
upon Lockwood's contribution to the Company's net income for fiscal 2000. These
contingent shares are issuable on or before October 15, 2000. The contingent
shares were issuable at a rate of approximately 27,204 shares for each $25,000
of net income in excess of $350,000 up to the
F-8
Display Technologies, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
maximum of 299,250 shares to be issued for net income of $625,000 or higher. The
purchase price of Lockwood and stockholder's equity at June 30, 2000 have been
adjusted to reflect the anticipated issuance of 150,869 shares of common stock
under this agreement.
Additional common stock is contingently issuable (the "additional contingent
shares") should the market price of the Company's common stock not exceed $4.38
per share (the "guaranteed price") for any consecutive 20 day period for the 12
months following the issuance of the contingent shares (the "contingent
period"). The number of additional contingent shares issued will be calculated
based upon the difference between the guaranteed price and the highest 20-day
average trading price (the "target price") during the contingent period.
Additional contingent shares will be issued to the extent necessary to provide
the same value, using the target price as the value of the originally issued
contingent shares valued at the guaranteed price.
The acquisition has been recorded using the purchase method of accounting.
Accordingly, the purchase price has been 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 $4,503,058,
which has been accounted for as goodwill and is being amortized over its
estimated life of 40 years. The acquisition was not deemed to be significant
and, accordingly, pro forma results of operations are not presented.
NOTE 3. INVENTORIES
Inventories consist of the following:
JUNE 30 2000 1999
- --------------------------------------------------------------------------------
Raw materials $ 6,241,494 $ 3,849,215
Work in process 2,601,213 2,089,337
Finished goods 231,195 146,157
- --------------------------------------------------------------------------------
$ 9,073,902 $ 6,084,709
================================================================================
NOTE 4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
ESTIMATED
JUNE 30, USEFUL LIVES 2000 1999
- --------------------------------------------------------------------------------
Land $1,766,267 $1,518,635
Buildings and improvements 15-30 years 5,596,515 3,352,258
Machinery and equipment 5-10 years 3,351,720 2,613,966
Office equipment and furniture 5-10 years 4,447,017 2,186,310
Transportation equipment 3-5 years 1,692,889 885,534
Signs held for lease 11 years 255,527 255,527
- --------------------------------------------------------------------------------
17,109,935 10,812,230
Less accumulated depreciation (4,116,690) (2,865,220)
- --------------------------------------------------------------------------------
$12,993,245 $7,947,010
================================================================================
Depreciation expense for the years ended June 30, 2000, 1999 and 1998 was
$1,593,433, $786,089 and $507,088, respectively.
NOTE 5. INTANGIBLE ASSETS
Intangible assets are summarized as follows:
JUNE 30, ESTIMATED LIVES 2000 1999
- --------------------------------------------------------------------------------
Patents 5 years $ 233,806 $ 227,528
Debt fees 7 - 15 years 747,484 689,213
Goodwill 40 years 15,658,845 11,155,787
- --------------------------------------------------------------------------------
16,640,135 12,072,528
Less accumulated amortization (1,253,043) (789,433)
- --------------------------------------------------------------------------------
$15,387,092 $11,283,095
================================================================================
Amortization expense for the years ended June 30, 2000, 1999 and 1998 was
$452,805, $282,807 and $159,853, respectively.
NOTE 6. INVESTMENT IN, RECEIVABLE FROM AND
ADVANCES TO AMERIVISION OUTDOOR,
INC.
AmeriVision Outdoor, Inc. ("AmeriVision") is an electronic advertising media
company. They own and operate a network of electronic billboards at various
locations throughout the United States. At June 30, 2000, the network consisted
of 8 electronic billboards.
AmeriVision is a start up enterprise that was founded in August, 1998. On June
28, 1999, the Company acquired 100% of the preferred stock of AmeriVision in
exchange for $500,000 which is carried at cost. The preferred stock is
convertible into an 80% common stock position upon the occurrence of certain
events. Specifically, the preferred stock is convertible when AmeriVision
reports net income of $150,000 per month for 3 consecutive months or if there is
a material adverse change in the operations of AmeriVision. The Company also
holds options to acquire the remaining 20% common stock ownership if and when
the preferred stock is converted. The option price is calculated based upon a
formula defined in the option agreement.
F-9
Display Technologies, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At June 30, 2000, the Company had a total investment in and advances to
AmeriVision of $4,255,790 detailed as follows:
- --------------------------------------------------------------------------------
Preferred stock investment in AmeriVision $ 500,000
Trade receivables from AmeriVision 1,782,691
Advances to AmeriVision 1,973,099
- --------------------------------------------------------------------------------
$4,255,790
================================================================================
In addition, the Company is contingently liable as guarantor of $3,184,757 in
capital lease obligations of AmeriVision. Sales from the Company to AmeriVision
during fiscal 2000 totaled $3,792,000.
The following is an unaudited summary balance sheet of AmeriVision as of June
30, 2000:
- --------------------------------------------------------------------------------
Current assets $ 396,477
Equipment 6,715,987
Other assets 241,185
- --------------------------------------------------------------------------------
Total Assets $ 7,353,649
================================================================================
Current liabilities due to Display Technologies $ 1,782,691
Current liabilities - other 1,270,693
Long-term liabilities due to Display Technologies 1,973,099
Long-term liabilities - other 4,056,116
- --------------------------------------------------------------------------------
Total Liabilities 9,082,599
- --------------------------------------------------------------------------------
Common stock and paid in capital 125,000
Preferred stock 500,000
Accumulated deficit (2,353,950)
- --------------------------------------------------------------------------------
Total Deficit (1,728,950)
- --------------------------------------------------------------------------------
Total Liabilities and Deficit $ 7,353,649
================================================================================
The following is an unaudited summary statement of operations of AmeriVision for
the year ended June 30, 2000:
- --------------------------------------------------------------------------------
Revenues $ 598,165
Operating expenses (1,977,796)
- --------------------------------------------------------------------------------
Loss from operations (1,379,631)
Other expenses - net (258,657)
- --------------------------------------------------------------------------------
Net loss $ (1,638,288)
================================================================================
NOTE 7. NET INVESTMENT IN SALES-TYPE LEASES
The Company is the lessor of a variety of signs and advertising display units
under agreements expiring through 2005. The Company accounts for these leases as
sales-type leases. The net investment in sales-type leases consists of the
following:
JUNE 30, 2000 1999
- --------------------------------------------------------------------------------
Minimum lease payments to be received $ 689,142 $1,656,968
Less unearned income 131,823 305,722
- --------------------------------------------------------------------------------
Net investment in sales-type leases $ 557,319 $1,351,246
================================================================================
The following is a schedule of minimum lease payments to be received as of June
30, 2000:
- --------------------------------------------------------------------------------
2001 $ 203,280
2002 153,104
2003 145,502
2004 109,632
2005 77,624
- --------------------------------------------------------------------------------
$ 689,142
================================================================================
NOTE 8. COSTS AND ESTIMATED EARNINGS IN
EXCESS OF BILLINGS ON UNCOMPLETED
CONTRACTS IN PROGRESS
Costs and estimated earnings on uncompleted contracts consists of the following:
JUNE 30, 2000 1999
- --------------------------------------------------------------------------------
Costs incurred on uncompleted contracts $7,112,420 $5,851,502
Estimated earnings 4,957,706 3,441,933
- --------------------------------------------------------------------------------
12,070,126 9,293,435
Billings to date (7,098,810) (5,042,727)
- --------------------------------------------------------------------------------
$4,971,316 $4,250,708
================================================================================
Such amounts are included in the accompanying balance sheets under the following
captions:
JUNE 30, 2000 1999
- --------------------------------------------------------------------------------
Costs and estimated earnings
in excess of billings on uncompleted
contracts in progress $5,119,693 $4,442,012
Billings in excess of costs and
estimated earnings on uncompleted
contracts in progress (148,377) (191,304)
- --------------------------------------------------------------------------------
$4,971,316 $4,250,708
================================================================================
F-10
Display Technologies, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9. ACCRUED EXPENSES
Accrued expenses consist of the following:
JUNE 30, 2000 1999
- --------------------------------------------------------------------------------
Payroll and benefits $2,149,352 $1,759,310
Product claim 500,000 -
Warranty 389,747 371,646
Taxes 346,225 174,867
Professional fees 173,582 121,709
Other 390,468 335,365
- --------------------------------------------------------------------------------
$3,949,374 $2,762,897
================================================================================
NOTE 10. LINE OF CREDIT
The Company has a $23 million revolving line of credit with a national bank.
Borrowings against this line of credit are limited to the lesser of $23 million
or the sum of 80% of eligible receivables and 50% of eligibles inventories as
defined in the line of credit agreement (the "collateral base"). The line of
credit bears interest, at the Company's option, at either (A) three quarters of
a percent over the bank's prime rate or (B) 325 basis points over LIBOR and
matures June 30, 2002. At June 30, 2000, the interest rate was 9.625%. The line
of credit is secured by a security agreement which covers substantially all
assets of the Company with the exception of specific real estate and equipment
and is cross- collateralized with the two letters of credit from the same lender
and the $4,670,000 in notes payable secured by the letters of credit. As of June
30, 2000, $18,826,857 was borrowed against this line of credit.
This line of credit contains certain financial and operating covenants. The
Company was in violation of certain of these covenants as of June 30, 2000.
Furthermore, subsequent to June 30, 2000, borrowings under the line of credit
exceeded the permitted borrowing base creating an over advanced position on the
line and, as of October 6, 2000, the over advanced amount was $1,220,000. The
violations of the financial and operating covenants, as well as the over
advanced position subsequent to year end, created potential events of default
under the security agreement that secures the line of credit. If the bank were
to declare an event of default because of these violations of the loan and
security agreement, the full balance of the line of credit would be due and
payable immediately.
On September 26, 2000, the Company entered into an agreement (the "forbearance
agreement") with the bank whereby the bank has agreed to forbear from declaring
an event of default through October 31, 2000. Under the terms of the forbearance
agreement, the Company's option of selecting a LIBOR rate for the loan is
withdrawn and the line of credit bears interest at a rate two percentage points
higher than defined in the loan agreement. Because the forbearance period ends
on October 31, 2000, the balance outstanding on the line of credit has been
classified on the balance sheet as a current liability. For additional
information, see Note 1.
F-11
Display Technologies, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11. LONG-TERM DEBT
Long term debt is summarized as follows:
JUNE 30, 2000 1999
- ------------------------------------------------------------------------------------------------------------------------------------
Notes payable secured by a letter of credit with a national bank, variable interest rate plus 1% letter of
credit fee (effective rate at June 30, 2000 was 6.73%), secured by substantially all the assets of the
Company, and cross collateralized with and covered by the same covenants as the line of credit with
the same national bank, interest due monthly with annual principal payments due in varying amounts
each May through 2014.(1) $ 2,395,000 $ 2,500,000
Notes payable secured by a letter of credit with a national bank, variable interest rate plus 1% letter of
credit fee (effective rate at June 30, 2000 was 6.83%), secured by substantially all assets of the
Company, subsidiary guarantees, and cross-collateralized with and covered by the same covenants
as the line of credit with the same national bank, interest due monthly with annual principal payments
due in varying amounts each August through 2012.(1) 2,275,000 2,390,000
Term note payable to a national bank, variable interest rate at prime plus 1 3/4% (effective rate at
June 30, 2000 was 11.25%), secured by substantially all the assets of the Company, subsidiary
guarantees and cross collateralized with and covered by the same covenants as the line of credit with
the same national bank, monthly principal payments of $27,778, plus interest , matures June 2002.(1) 633,299 972,222
8.75% convertible subordinated debentures, convertible into the Company's $.001 par value common
stock at $4.31 per share, secured by substantially all assets of the Company and subsidiary
guarantees, but subordinated to bank debt, interest due monthly, monthly principal payments begin
March 2, 2001 at the rate of 1% of the outstanding principal balance, final balloon payment due March
2, 2005.(2) 3,500,000 3,500,000
8% unsecured convertible note payable, convertible into the Company's $.001 par value common
stock at $4.11 per share, interest due semi-annually with the final annual principal payment of
$250,000 due September 2000. 250,000 500,000
7.5% term note payable, secured by specific assets of Lockwood, with monthly payments of principal
and interest of $11,504, matures June 2006. 667,677 -
8.75% term note payable, secured by real property in Charlotte, NC, principal, interest, and excrow
payments of $9,139 due monthly, matures August 2012. 663,142 -
8% unsecured convertible note payable to a former owner of Lockwood, convertible into the
Company's $.001 par value common stock at $4.31 per share, interest due semi-annually with annual
principal payments of $71,432 due each July 30, matures July 30, 2006. The holder of this note
resigned as a director and an executive officer of the Company effective August 25, 2000. 516,667 -
8% unsecured convertible note payable to a former owner of Lockwood, convertible into the
Company's $.001 par value common stock at $4.31 per share, interest due semi-annually with annual
principal payments of $14, 290 due each July 30, matures July 30, 2006 103,333 -
Other 283,077 28,222
- ------------------------------------------------------------------------------------------------------------------------------------
11,287,195 9,890,444
Less current portion (9,358,567) (781,926)
- ------------------------------------------------------------------------------------------------------------------------------------
Long-term debt $ 1,928,628 $ 9,108,519
===================================================================================================================================
(1) This note is covered by the same security agreement, subject to the same
financial and operating covenants, and cross-collateralized and cross-
defaulted with the line of credit described in Note 10, "Line of Credit". As
described in Note 10, potential events of default exist under the loan and
security agreements and the Company has entered into an agreement with the
lender whereby the lender forbears from declaring an event of default
through October 31, 2000. Accordingly, the balance due under this note is
classified as a currently liability on the balance sheet. See Note 1 for
additional information.
(2) This convertible note contains certain financial and operating covenants
similar to those on the line of credit and other notes discussed above. The
Company was in violation of certain of these covenants as of June 30, 2000
and those covenant violations have not been waived by the lender. So long of
these covenant violations exist, the lender may demand payment at any time,
which, to date, they have not done. Because payment of this note is due on
demand so long as the covenant violations exist, the balance due under this
note is classified as a current liability on the balance sheet. See Note 1
for additional information.
Aggregate maturities of long-term debt over future years are as follows: 2001 -
$9,358,567; 2002 - $293,799; 2003 - $289,577; 2004 - $310,500; 2005 - $253,192
and thereafter - $781,560
F-12
Display Technologies, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12. FOURTH QUARTER ADJUSTMENTS During the fourth quarter of 2000, the
Company recorded the following pre-tax adjustments:
- --------------------------------------------------------------------------------
Charges for bad debts $ 763,000
Reduction in carrying value of Inventory $ 1,763,000
Beneficial conversion feature of preferred stock $ 150,000
- --------------------------------------------------------------------------------
A portion of the above fourth quarter adjustments affected previously disclosed
quarterly results as follows:
QUARTER QUARTER QUARTER
ENDED ENDED ENDED
09/30/99 12/31/99 03/31/00
- --------------------------------------------------------------------------------
Quarterly Adjustment, net
of tax $ 571,683 $ 236,004 $ 32,504
- --------------------------------------------------------------------------------
Net Income attributed
to common shareholders:
As reported $ 842,908 $ 938,346 $ 143,198
As restated 271,225 702,342 109,694
Basic earnings per share:
As reported $ 0.12 $ 0.12 $ 0.02
As restated 0.04 0.09 0.01
Diluted earnings per share:
As reported $ 0.10 $ 0.10 $ 0.02
As restated 0.04 0.07 0.01
- --------------------------------------------------------------------------------
The balance of these adjustments are reflected in the results for the quarter
ended June 30, 2000.
NOTE 13. COMMITMENTS
LEASES
The Company conducts its operations partially from leased facilities. These
leases are classified as operating leases and expire on various dates through
2005.
The Company also leases equipment under capital leases which expire on various
dates through 2004. The total capitalized cost for this equipment is $2,885,366
with accumulated depreciation of $607,909 as of June 30, 2000.
As of June 30, 2000, future net minimum lease payments under capital leases and
future minimum rental payments required under operating leases that have initial
or remaining noncancelable lease terms in excess of one year are as follows:
CAPITAL OPERATING
YEAR ENDING JUNE 30 LEASES LEASES
- --------------------------------------------------------------------------------
2001 $ 1,143,102 $ 1,681,070
2002 1,046,769 1,237,016
2003 429,754 785,642
2004 237,105 660,648
2005 64,011 266,004
Thereafter 48,156 786,422
- --------------------------------------------------------------------------------
$ 2,968,897 $ 5,416,802
=============
Less amount representing
interest (483,325)
- --------------------------------------------
Present value of minimum
lease payments $ 2,485,572
============================================
Rental expense under operating leases for the years ended June 30, 2000, 1999
and 1998 was approximately $1,797,468, $1,348,000 and $736,000, respectively.
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements expiring at various dates
through 2001. As of June 30, 2000, the Company's total noncancellable obligation
under all employment contracts is approximately $220,000.
GUARANTEE
At June 30, 2000 the Company is contingently liable as guarantor of $3,184,757
in capital lease obligations of AmeriVision Outdoor, Inc. The Company has a
preferred stock investment in AmeriVision as discussed in Note 6.
NOTE 14. INCOME TAXES
The components of deferred tax assets and liabilities consist of the following:
JUNE 30, 2000 1999
- --------------------------------------------------------------------------------
DEFERRED TAX ASSETS
Accruals and reserves $ 349,000 $ 357,000
Accounts receivable 298,000 32,000
Net operating loss and
other tax carry forwards 1,901,000 727,000
Customer deposits 121,000 37,000
Intangible assets 8,000 6,000
- --------------------------------------------------------------------------------
Total deferred tax assets 2,677,000 1,159,000
DEFERRED TAX LIABILITIES
Sales-type lease receivables (73,000) (111,000)
Inventory (1,814,000) (524,000)
Plant and equipment (678,000) (561,000)
- --------------------------------------------------------------------------------
Net deferred tax asset (liability) $ 112,000 $ (37,000)
================================================================================
F-13
Display Technologies, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Significant components of the income tax expense (benefit) are as follows:
JUNE 30, 2000 1999 1998
- --------------------------------------------------------------------------------
CURRENT
Federal $ - $ 610,000 $ 632,000
State 83,000 95,000 120,000
- --------------------------------------------------------------------------------
83,000 705,000 752,000
- --------------------------------------------------------------------------------
DEFERRED
Federal 165,000 669,000 (117,000)
State (46,000) 64,000 (20,000)
- --------------------------------------------------------------------------------
119,000 733,000 (137,000)
- --------------------------------------------------------------------------------
$ 202,000 $1,438,000 $ 615,000
================================================================================
At June 30, 2000, the Company had unused federal tax net operating losses (NOLs)
to carry forward against future years' taxable income of approximately
$5,179,000 expiring in various amounts from 2006 to 2019. As a result of the
consummation of the Company's public offering and certain acquisitions, the use
of these NOLs will be limited each year under the provisions of Section 382 of
the Internal Revenue Code of 1986, as amended and the provisions of Treasury
Regulation 1.1502-21 regarding Separate Return Limitation years.
The following summary reconciles the difference between the federal statutory
rate and the reported effective rate:
2000 1999 1998
- --------------------------------------------------------------------------------
Federal taxes on income at statutory rates 34% 34% 34%
Goodwill 57% 2% 2%
State taxes 16% 3% 2%
Reduction of deferred tax asset
valuation allowance - - (14%)
Other, net (18%) - 4%
- --------------------------------------------------------------------------------
Taxes on income at effective rates 89% 39% 28%
================================================================================
During fiscal 2000 and 1999, the Company recognized tax benefits of $392,000 and
$743,000, respectively, related to the exercise of employee stock options and
warrants. The effect of these benefits was to increase additional paid in
capital.
NOTE 15. CAPITAL STOCK
Preferred Stock
- ---------------
On August 1, 1999, 50,000 shares of Series A Convertible Preferred Stock were
issued for $5 million. The issuance costs of $54,000 reduced additional paid in
capital. The Series A Preferred Stock pays dividends of 5.25% per year on the
last day of March, June, September, and December in each year and is required to
be redeemed by the Company on July 30, 2004. The preferred stock is entitled to
a preference over common stock at liquidation at the liquidation price of $100
per share plus any accrued but unpaid dividends and is convertible into shares
of common stock at the conversion price of $3.50 per share, subject to certain
anti- dilution and other adjustments. The preferred stock also contains certain
redemption rights in the event of a defined default. Dividends of $240,625 on
the preferred stock were declared during fiscal 2000.
In connection with issuance of these preferred shares, the Company issued
options (valued at $150,000 using the Black- Scholes option pricing model) to
purchase up to 157,500 shares of the Company's common stock at a price of $3.33
per share. As of June 30, 2000, all 157,500 options were exercisable.
Fiscal 2000 included a non-recurring deemed dividend and offsetting increase in
additional paid in capital of $150,000 to reflect the beneficial conversion
feature of preferred stock issued in the first quarter of 2000 when compared to
prevailing market rates.
Options Plans and Warrants
- --------------------------
On November 16, 1999, the shareholders adopted the 1999 Stock Incentive Plan
("the 1999 plan"). The 1999 plan provides for the issuance of up to 1,575,000
shares of the Company's common stock to employees and consultants of the
Company. Options granted under the plan are not permitted to have a term in
excess of ten years and have a three year vesting period.
On June 29, 1994, the Board of Directors adopted the amended and restated 1994
Employee and Consultant Stock Compensation Plan ("the 1994 plan"). The 1994 plan
provides for the issuance of up to 2,674,114 shares of the Company's common
stock to employees and consultants of the Company. Options granted under the
plan are not permitted to have a term in excess of ten years.
On November 4, 1992, the Board of Directors adopted the 1992 Stock Option and
Appreciation Rights Plan ("the 1992 plan"). The 1992 plan provides for the
issuance of up to 698,917 shares of the Company's common stock to employees,
officers, directors and consultants of the Company. Options granted to employees
or directors under this plan must have an exercise price equal to or greater
than 85% of the fair value of the stock on the date of grant and cannot have a
term in excess of 10 years.
On April 25, 1988, the Company adopted the 1988 Incentive Stock Option Plan
("the 1988 plan"). The 1988 plan provides for the issuance of up to 202,584
shares of the Company's common stock to employees of the Company. Options
granted under this plan must have an exercise price equal to or greater than the
fair value
F-14
Display Technologies, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
of the stock on the date of grant and are not exercisable until 18 months from
the date of grant.
On August 27, 1999, the Company entered into an agreement with an investor
relations firm, and separate from each of the above established plans, issued an
option to purchase up to 78,750 shares of the Company's common stock at a price
of $3.81 per share. These options were valued at $68,250 using the Black-
Scholes option pricing model. The value of these options is being amortized over
the 5 year term of the investor relations agreement. As of June 30, 2000, all of
these options were exercisable.
On July 1, 1998, the Company entered into an agreement with an investor
relations firm, and separate from each of the above established plans, issued an
option to purchase up to 82,688 shares of the Company's common stock at a price
of $2.95 per share, 33,075 shares at a price of $3.40 per share, and 33,075
shares at a price of $4.09 per share. As of June 30, 2000, all 148,838 options
were exercisable.
On March 2, 1998, in connection with the issuance of the 8.75% convertible note
payable, the Company issued a stock purchase warrant to the lender separate from
each of the above established plans. The stock purchase warrant entitles the
holder to purchase up to 220,500 shares of the Company's common stock at a price
of $3.91 per share. As of June 30, 2000, all 220,500 warrants were exercisable.
Also on March 2, 1998, in connection with consulting services received for the
acquisition of Ad Art, the Company issued a stock purchase warrant to a
consulting firm separate from each of the above established plans. The stock
purchase warrant entitles the holder to purchase up to 82,688 shares of the
Company's common stock at a price of $3.91 per share. As of June 30, 2000, all
82,688 warrants were exercisable.
On March 18, 1997, the Company entered into an agreement with an investor
relations firm and, separate from each of the above established plans, issued an
option to purchase up to 57,881 shares of the Company's common stock at an
exercise price of $1.33 per share. On August 29, 1997, the Company extended the
agreement with this investor relations firm and issued an additional option to
purchase up to an additional 57,881 shares of the Company's common stock at an
exercise price of $2.38 per share. As of June 30, 2000, all 115,762 of the
options issued to this investor relations firm were exercisable.
On November 22, 1996 the Company entered into an agreement with an investment
banking firm and, separate from each of the above established plans, issued
warrants to purchase up to 220,500 shares of the Company's common stock at an
exercise price of $1.66 per share. These warrants were exercised during fiscal
1998 for total proceeds to the Company of $365,400.
All stock options and warrants issued during 2000, 1999 and 1998 pursuant to the
above plans and agreements were issued with an exercise price that approximated
the fair market value of the stock on the date of grant. A summary of the status
of the Company's stock options and warrants for the plans and agreements
discussed above as of June 30, 2000, 1999 and 1998 and changes during the years
ended on those dates (as restated for stock dividends) is presented below:
WEIGHTED
AVERAGE
EXERCISE
SHARES PRICE
- --------------------------------------------------------------------------------
Outstanding - June 30, 1997 1,804,275 $ 0.83
Granted 635,040 3.54
Exercised (359,486) 1.34
Forfeited (14,344) 0.97
- --------------------------------------------------------------------------------
Outstanding - June 30, 1998 2,065,485 1.57
Granted 837,638 3.58
Exercised (503,364) 0.66
Forfeited (29,895) 1.62
- --------------------------------------------------------------------------------
Outstanding - June 30, 1999 2,369,864 2.47
Granted 809,026 3.85
Exercised (546,513) 0.59
Forfeited (40,669) 2.65
- --------------------------------------------------------------------------------
Outstanding - June 30, 2000 2,591,708 $ 3.30
================================================================================
The following table summarizes stock options and warrants issued under the plans
and agreements discussed above outstanding at June 30, 2000:
WEIGHTED WEIGHTED
RANGE OF AVERAGE AVERAGE
EXERCISE EXERCISE REMAINING
PRICE OUTSTANDING PRICE CONTRACTUAL LIFE
- --------------------------------------------------------------------------------
$ 0.52-0.62 193,096 $ 0.58 0.2 years
0.87-1.33 160,678 1.24 1.3 years
2.07-2.95 205,397 2.71 3.1 years
3.23-4.82 1,917,037 3.66 6.0 years
5.71 115,500 5.71 2.6 years
- --------------------------------------------------------------------------------
$ 0.52-5.71 2,591,708 $ 3.30 4.9 years
================================================================================
F-15
Display Technologies, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of June 30, 1998, 2,024,967 options and warrants were exercisable under the
plans and agreements discussed above at a weighted average exercise price of
$1.54. As of June 30, 1999, 1,455,048 options and warrants were exercisable
under the plans and agreements discussed above at a weighted average exercise
price of $1.74. As of June 30, 2000, 1,449,571 options and warrants were
exercisable under the plans and agreements discussed above at a weighted average
exercise price of $3.08 as follows:
WEIGHTED WEIGHTED
RANGE OF AVERAGE AVERAGE
EXERCISE EXERCISE REMAINING
PRICE EXERCISABLE PRICE CONTRACTUAL LIFE
- --------------------------------------------------------------------------------
$ 0.52-0.62 193,096 $ 0.58 1.2 years
0.87-1.33 160,678 1.24 2.0 years
2.07-2.95 205,397 2.71 4.1 years
3.33-4.82 774,900 3.78 4.2 years
5.71 115,500 5.71 3.6 years
- --------------------------------------------------------------------------------
$ 0.52-5.71 1,449,571 3.08 3.5 years
================================================================================
The Company applies Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees", and related interpretations in accounting for its
stock based compensation to employees. Accordingly, no compensation expense has
been recognized for stock based compensation issued to employees. Had
compensation cost for the Company's stock based compensation issued to employees
been determined based upon the fair value at the grant date consistent with the
methodology prescribed under Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation", the Company's proforma net
income (loss) for 2000, 1999 and 1998 would have been $(233,987), $1,761,228 and
$1,406,357, respectively. Proforma basic earnings (loss) per share would have
been $(.08) for 2000, $.30 for 1999, and $.31 for 1998 and diluted earnings
(loss) per share would have been $(.08), $.25, and $.26 for 2000, 1999 and 1998,
respectively.
The weighted average fair value of options granted during 2000, 1999, and 1998
was estimated at $1.39, $1.17, and $0.86 per share, respectively, based upon the
Black-Scholes option-price model with the following weighted average
assumptions: 5% dividend yield, expected volatility of 40%, risk-free interest
rate of 6% and expected life of 7 years, 6.9 years, 2.9 years for 2000, 1999,
and 1998, respectively.
On January 13, 1994 in conjunction with a public offering of the Company's
common stock, the Company issued 651,000 common stock purchase warrants with an
exercise price of $4.11 per share. During fiscal 1999, 564,239 of these warrants
were exercised, resulting in proceeds to the Company of $2,315,281, net of
$6,157 in redemption costs on the unexercised warrants.
In conjunction with the same public offering, the Company issued an option to
purchase 37,681 "units", each unit consisting of two shares of common stock and
two nonredeemable common stock purchase warrants, for a price of $6.53 per unit.
Each common stock purchase warrant obtainable under this option entitles the
holder to purchase one share of common stock at a price of $4.71. During fiscal
1999, these units were exercised resulting in proceeds to the Company of
$245,826. The purchase warrants included in the units expire on September 30,
2000 As of June 30, 2000, 75,363 warrants were exercisable.
Reserved Shares
- ---------------
The Company has reserved shares of common stock for convertible securities as
follows as of June 30, 2000:
- --------------------------------------------------------------------------------
Preferred stock 1,501,420 shares
Convertible debt 931,387 shares
Options and warrants 3,514,990 shares
- --------------------------------------------------------------------------------
5,947,797 shares
================================================================================
NOTE 16. EMPLOYEE BENEFIT PLAN
The Display Technologies, Inc. 401(k) profit sharing plan covers all employees
with more than six months of service and allows employees to defer up to 15% of
their income and contribute to the plan. The Company contributes to the plan at
a discrectionary matching rate of 50% of the first six percent contributed by
the employee. Company contributions to the plan are in the form of the Company's
common stock. The Company issued to the 401(k) plan in fiscal years 2000, 1999
and 1998, 92,717, 58,015 and 35,845 shares of the Company's common stock at an
average price of $3.70, $4.68, and $2.84 per share, respectively.
F-16
Display Technologies, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17. EARNINGS (LOSS) PER SHARE
Basic and diluted earnings (loss) per share for 2000, 1999 and 1998 (as restated
for stock dividends) is calculated as follows:
2000 1999 1998
- --------------------------------------------------------------------------------
Net Income (loss) attributed
to common shareholders $(365,250) $2,244,653 $1,587,941
Convertible debt interest, net - 225,932 119,177
- --------------------------------------------------------------------------------
Net income for purposes of
calculating diluted
earnings per share $(365,250) $2,470,585 $1,707,118
================================================================================
Basic weighted average shares 7,758,240 5,914,265 4,371,368
Convertible securities - 934,581 453,323
Dilutive options and warrants - 932,273 1,117,180
Other - 151,687 -
- --------------------------------------------------------------------------------
Diluted weighted average shares 7,758,240 7,932,806 5,941,871
================================================================================
Basic earnings per share $ (.05) $ .38 $ 0.36
================================================================================
Diluted earnings per share $ (.05) $ .31 $ 0.29
================================================================================
The effects of options, warrants and other common stock equivalents were
anti-dilutive in 2000 and, as such, were excluded from the diluted calculation.
NOTE 18. INDUSTRY SEGMENTS
The Company's operations are classified into two business
segments: image enhancement displays ("displays") and other.
The display segment markets and produces custom designed and stock sign products
which are specifically designed for internal and external use by institutional,
governmental and commercial enterprises. The display segment also provides
peripheral services on the sign products such as installation, maintenance and
service.
Operations within the other segment include the manufacture and sale of a line
of products which, when installed in compressed air lines, substantially reduce
or totally eliminate water and condensate problems and most foreign contaminants
in the air line.
The following table shows sales, operating income and other financial
information by segment as of and for the years ended June 30, 2000, 1999 and
1998:
2000 1999 1998
- --------------------------------------------------------------------------------
SALES TO EXTERNAL CUSTOMERS
Displays $90,079,870 $64,541,680 $30,686,361
Other 1,733,387 1,594,034 1,791,657
- --------------------------------------------------------------------------------
$91,813,257 $66,135,714 $32,478,018
================================================================================
OPERATING INCOME
Display $3,608,017 $6,118,084 $3,201,907
Other 281,479 306,783 490,792
Corporate expenses (2,007,614) (1,625,759) (1,182,654)
- --------------------------------------------------------------------------------
$1,881,882 $4,799,108 $2,510,045
================================================================================
DEPRECIATION AND AMORTIZATION
Displays $1,918,218 $ 965,359 $ 590,443
Other 38,040 44,388 43,187
Corporate 89,980 59,149 33,311
- --------------------------------------------------------------------------------
$2,046,238 $1,068,896 $ 666,941
================================================================================
INTEREST INCOME
Displays $ 329,488 $ 72,156 $ 94,812
Other - - -
Corporate - - -
- --------------------------------------------------------------------------------
$ 329,488 $ 72,156 $ 94,812
================================================================================
INTEREST EXPENSE
Displays $ 926,974 $ 620,318 $ 189,908
Other - 35 632
Corporate 1,243,907 615,130 295,920
- --------------------------------------------------------------------------------
$2,170,881 $1,235,483 $ 486,460
================================================================================
IDENTIFIABLE ASSETS
Displays $68,438,993 $41,850,698 $28,418,273
Other 1,329,462 1,007,339 1,053,464
Corporate 5,421,347 2,497,607 1,322,871
- --------------------------------------------------------------------------------
$75,189,802 $45,355,644 $30,794,608
================================================================================
CAPITAL EXPENDITURES
Displays $2,939,243 $2,631,509 $ 836,230
Other 74,784 25,118 39,509
Corporate 19,004 46,465 7,074
- --------------------------------------------------------------------------------
$3,033,031 $2,703,092 $ 882,813
================================================================================
F-17
Display Technologies, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 19. SUPPLEMENTAL CASH FLOW
INFORMATION
The Company paid $2,658,961, $1,232,301, and $511,753 for interest and $238,800,
$1,552,389 and $4,440 for income taxes for the years ended June 30, 2000, 1999
and 1998, respectively.
The following summarizes noncash investing and financing transactions:
2000 1999 1998
- --------------------------------------------------------------------------------
Equity issued for acquisition
of Ad Art $ - $ 2,206,827 $ 3,372,450
Equity issued for acquisition
of Lockwood $ 2,569,806 $ - $ -
Debt refinancing $ - $ - $ 2,005,318
Issuance of five percent stock
dividend $ 1,791,637 $ 1,320,045 $ 577,524
Non-cash purchase of fixed
assets $ 1,630,388 $ 1,160,398 $ -
Fees on long-term debt paid
from debt proceeds $ - $ 276,183 $ 167,605
Common stock contributed to
401(k) plan $ 342,795 $ 271,353 $ 101,848
Issuance of stock warrants for
fees on long-term debt $ - $ - $ 73,000
Stock issued for employee
bonuses $ 64,795 $ 61,274 $ 33,400
Issuance of stock options for
prepaid investment services $ 68,250 $ 76,950 $ 16,000
================================================================================
NOTE 20. STOCK DIVIDEND
On November 18, 1999, the Company authorized a five percent stock dividend to be
issued on December 20, 1999 to holders of record on December 3, 1999. The
dividend resulted in the issuance of an additional 370,173 shares of the
Company's $.001 par value common stock, plus cash payments of $1,330 in lieu of
issuing fractional shares.
On October 29, 1998, the Company authorized a five percent stock dividend to be
issued November 30, 1998 to holders of record on November 16, 1998. The dividend
resulted in the issuance of an additional 248,596 shares of the Company's $.001
par value common stock, plus cash payments of $1,257 in lieu of issuing
fractional shares.
On October 30, 1997, the Company authorized a five percent stock dividend to be
issued December 1, 1997 to holders of record on November 14, 1997. The dividend
resulted in the issuance of an additional 167,885 shares of the Company's $.001
par value common stock.
Earnings per share for all periods presented have been retroactively restated to
reflect the effects of these stock dividends.
NOTE 21. SUBSEQUENT EVENTS
Effective July 1, 2000 the Company acquired Hamilton Digital Designs Ltd., a
commercial sign manufacturer with facilities located in Province of Ontario,
Canada. The purchase price for Hamilton has not been finally determined pending
audited financial results of Hamilton for the fiscal year ended June 30, 2000,
but is estimated to be approximately $CDN 2,000,000 ($USD 1,350,000) of which
$CDN 1,050,000 ($USD 700,000) has already been paid. The acquisition will be
recorded using the purchase method of accounting. Accordingly, the purchase
price will be allocated to the net assets acquired based upon their estimated
fair market values. The acquisition was not deemed to be significant and,
accordingly, pro forma results of operations are not presented.
In September 2000, the Company contracted with an investment banking firm to
assist the Company in evaluating strategic alternatives including, but not
limited to, the sale of the Company or a portion of its assets.
NOTE 22. RECENT ACCOUNTING
PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards 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, as amended by FAS137, is effective for
periods beginning after June 15, 2000. Historically, the Company has not entered
into derivative contracts. Accordingly, FAS 133 is not expected to affect the
Company's financial statements.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101, Revenue Recognition ("SAB 101") which broadly addresses how
companies report revenues in their financial statements. We are in the process
of evaluating the accounting requirements of SAB 101 and subsequently issued
guidance and do not expect that this standard will have a material effect, if
any, on our financial statements.
F-18