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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES ACT OF 1934
For the Quarterly Period Ended September 30, 2000
Commission file number 0-14427
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DISPLAY TECHNOLOGIES, INC.
--------------------------
(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 other organization) Identification Number)
5029 Edgewater Drive, Orlando, Florida 32810 (407) 521-7477
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(Address, including zip code, and telephone number, including
area code, of registrant's office)
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Indicate by check mark whether the registrant (1) has filed all reports to be
filed by Section 13 or 15(d) of the Securities Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports) and (2) has been subject to such filing requirements for the past
90 days.
[X] Yes [ ] No
As of November 14, 2000, 8,561,750 shares of Common Stock were outstanding.
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PART 1 - FINANCIAL INFORMATION
DISPLAY TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
September 30,
2000
(unaudited) June 30, 2000
------------ ------------
ASSETS
Current Assets:
Cash $ 422,620 $ 385,427
Accounts receivable:
Trade, less allowance for doubtful accounts of
$693,791 and $791,240 15,307,808 20,967,581
AmeriVision Outdoor, Inc. 904,197 1,782,691
Other 2,166,703 1,908,073
Inventories 12,917,360 9,073,902
Costs and estimated earnings in excess of billings
on uncompleted contracts 2,539,867 5,119,693
Prepaid expenses 788,313 633,184
Deferred tax assets 610,000 821,000
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Total current assets 35,656,868 40,691,551
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Property, plant and equipment, less accumulated depreciation 13,306,219 12,993,245
------------ ------------
Other assets:
Intangibles, less accumulated amortization 15,967,552 15,387,092
Investment in preferred stock of AmeriVision Outdoor, Inc. 500,000 500,000
Advances to AmeriVision Outdoor, Inc. 2,768,148 1,973,099
Deferred tax assets 415,000 --
Other 2,947,138 3,644,815
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Total other assets 22,597,838 21,505,006
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$ 71,560,925 $ 75,189,802
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit $ 12,356,097 $ 18,826,857
Current maturities of long-term debt 9,729,144 9,358,567
Accounts payable 10,454,651 7,552,532
Customer deposits 4,038,615 1,800,507
Accrued expenses 3,289,191 3,949,374
Billings in excess of costs and estimated earnings on
uncompleted contracts -- 148,377
Current portion of obligations under capital leases 1,024,891 906,595
Other current liabilities 876,027 --
------------ ------------
Total current liabilities 41,768,616 42,542,809
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Non-current liabilities:
Long-term debt, less current maturities 1,498,978 1,928,628
Obligations under capital leases, less current portion 1,543,047 1,578,977
Deferred tax liabilities -- 709,000
Other long term liabilities 377,315 --
------------ ------------
Total non-current liabilities 3,419,340 4,216,605
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Stockholders' equity:
Preferred stock 5,000,000 5,000,000
Common stock 8,343 8,304
Additional paid-in capital 24,427,527 24,396,858
Accumulated deficit (3,048,726) (974,774)
Accumulated other comprehensive income:
Foreign currency translation adjustment (14,175) --
------------ ------------
Total stockholders' equity 26,372,969 28,430,388
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$ 71,560,925 $ 75,189,802
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See accompanying notes to condensed consolidated financial statements.
2
DISPLAY TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three months ended
September 30,
------------------------------
2000 1999
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Sales $ 15,608,799 $ 23,096,557
Costs of sales 12,368,067 16,212,463
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Gross profit 3,240,732 6,884,094
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Operating expenses:
Selling 2,331,244 2,940,511
General and administrative 3,604,250 2,823,096
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Total operating expenses 5,935,494 5,763,607
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Income (loss) from operations (2,694,762) 1,120,487
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Other income (expense):
Interest income 86,070 43,426
Interest expense (765,491) (432,899)
Gain on disposals of property and equipment 1,420 6,845
Other 31,395 30,116
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(646,606) (352,512)
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Income (loss) before provision for income taxes (3,341,368) 767,975
Provision (benefit) for income taxes (1,270,000) 303,000
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Net income (loss) (2,071,368) 464,975
Preferred dividends (65,625) (193,750)
------------ ------------
Net income (loss) attributed to common shareholders (2,136,993) 271,225
Other comprehensive income (loss), net of taxes:
Foreign currency translation adjustment (14,175) --
------------ ------------
Comprehensive income (loss) $ (2,151,168) $ 271,255
============ ============
Earnings (loss) per common share:
Basic $ (0.26) $ 0.04
============ ============
Diluted $ (0.26) $ 0.04
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Weighted average shares outstanding:
Basic 8,329,751 6,803,893
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Diluted 8,329,751 6,803,893
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See accompanying notes to condensed consolidated financial statements.
3
DISPLAY TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended September 30,
----------------------------
2000 1999
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Cash flows from operating activities:
Net income (loss) $(2,071,368) $ 464,975
Adjustments to reconcile net income (loss) to net cash
provided (used for) operating activities:
Depreciation and amortization 586,361 394,970
Gain on disposal of property and equipment (1,420) (6,845)
Contribution of common stock to 401(k) plan 89,627 86,449
Change in deferred income taxes (913,000) 12,000
Other 377,315 8,372
Changes in operating assets and liabilities, net of
effects of acquisitions:
Accounts receivable, trade 7,084,249 (1,096,279)
Other receivables (1,220,211) (834,936)
Inventories, including adjustments to costs,
billings and estimated earnings (769,454) (3,661,058)
Prepaid expenses (151,263) 285,381
Accounts payable 2,652,531 1,257,179
Customer deposits 2,238,108 322,593
Accrued expenses (515,422) 412,545
Other (22,900) 28,680
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Net cash provided by (used for) operating activities 7,363,153 (2,325,974)
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Cash flows from investing activities:
Purchase of property, plant and equipment (150,599) (539,961)
Business acquisitions, net of cash acquired (12,290) (1,844,980)
Proceeds from sales of property, plant and equipment 4,020 37,059
Other investing activities 3,485 --
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Net cash used for investing activities (155,384) (2,347,882)
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Cash flows from financing activities:
Net change in line of credit borrowings (6,470,760) 860,581
Principal payments on notes payable (307,722) (608,676)
Proceeds from sales of stock, including option and
warrant exercises, net of issuance costs 4,120 67,509
Payments on capital lease obligations (214,672) (197,379)
Proceeds from the sale of preferred stock, net -- 4,946,000
Payment of preferred stock dividends (65,625) (43,750)
Other financing activities (101,742) (18,496)
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Net cash provided by (used for) financing activities (7,156,401) 5,005,789
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Effect of exchange rate changes on cash (14,175) --
Increase in cash 37,193 331,933
Cash, beginning of period 385,427 79,832
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Cash, end of period $ 422,620 $ 411,765
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See accompanying notes to condensed consolidated financial statements.
4
DISPLAY TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The financial information included herein is unaudited and does
not include all of the information and disclosures required by generally
accepted accounting principles; however, such information reflects all
adjustments (consisting solely of normal recurring adjustments) which are, in
the opinion of management, necessary for a fair presentation of our financial
position, results of operations and cashflows for the interim periods. Certain
reclassifications have been made to the prior year financial statements to
conform to the current year presentations. As discussed in Note 13, we have
amended the previously published results of operations for the quarter ended
September 30, 1999. This report should be read in conjunction with the
Consolidated Financial Statements included in our Annual Report on Form 10-K for
the year ended June 30, 2000.
Our 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 our 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 our 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 on
the line of credit and certain notes payable totaling $4,545,000 to October 31,
2000. On October 31, 2000, the Company and the bank executed an extension to the
forbearance agreement which extended payment terms to January 15, 2001. In
addition, on November 8, 2000, a bank with a loan to our Lockwood subsidiary
demanded payment of approximately $650,000 to satisfy outstanding balances. We
are attempting to negotiate with the lender on the settlement of this matter.
Management does not believe that we will be able to repay the over
advanced amount under the line of credit agreement through operating cash flow
during the current forbearance period. In addition, management does not believe
that we will be able to comply with the financial covenants required by the
security agreement during fiscal 2001. Accordingly, management is continuing to
actively pursue replacement financing from alternative lenders and exploring
opportunities to sell certain assets. In addition, our Board of Directors has
engaged an investment banking firm to help evaluate strategic alternatives that
may be available. These alternatives may include a sale of all or portions of
the Company to, or a merger with, various third parties.
If we are 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 January 15, 2001, our
current lender may declare an event of default under the existing loan and
security agreement causing the balance due under our line of credit agreement
and other loans to become due and payable immediately. While pursuing additional
debt and equity funding, we 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.
We continue to minimize our 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,
manufacturing plant consolidation, a more detailed review of customer credit
decisions and the suspension
5
of acquisition activities. We are continuing to evaluate our performance to
identify additional areas of cost savings that may be available.
Our 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.
The results of operations and cashflows for the three months ended
September 30, 2000 are not necessarily indicative of the results to be expected
for the full year.
NOTE 2 - ACQUISITIONS
Effective July 1, 2000, we acquired Hamilton Digital Designs Ltd.
("Hamilton"), a commercial sign manufacturer with facilities located in Province
of Ontario, Canada. The purchase price for Hamilton was a total of $1,361,062.
Of this amount, $707,483 has been paid with the remaining $653,579 to be paid
and included in other current liabilities on the September 30, 2000 balance
sheet. 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 was $709,304, which has been
accounted for as goodwill and is being amortized over 20 years. The operating
results of Hamilton are included in our consolidated results of operations from
the date of the acquisition. The Hamilton acquisition was not deemed to be
significant and, accordingly, proforma results of operations are not presented.
Effective July 1, 1999, we acquired all of the outstanding common
stock of Lockwood Sign Group, Inc. ("Lockwood") in exchange for 435,750 shares
(as restated for the December 20, 1999 5% stock dividend) of our common stock
valued at $1,909,000 and $1,900,000 in cash. In October, 2000 an additional
150,869 shares ("contingent shares") of our common stock were issued to the
previous owners of Lockwood based upon Lockwood's operating results for the year
ended June 30, 2000. The contingent shares were issuable at a rate of
approximately 27,000 shares for each $25,000 of contributed net income for
fiscal 2000 in excess of $350,000 up to the maximum of 299,250 shares to be
issued for contributed net income for fiscal 2000 of $625,000 or higher. The
contingent shares are subject to a price guarantee of $4.38 per share. If our
common stock does not trade at an average price of at least $4.38 per share for
a consecutive 20 day period in the 12 months subsequent to the issuance of the
contingent shares, an additional payment to the prior Lockwood shareholders will
be required. The payment can be made, at our option, in cash, promissary notes,
or common stock. The amount of the payment is based upon the difference between
the $4.38 target price and the highest 20-day average trading price during the
contingency period.
The Lockwood 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 was
$4,503,058, which has been accounted for as goodwill and is being amortized over
40 years. The operating results of Lockwood are included in our consolidated
results of operations from the date of the acquisition.
6
NOTE 3 - COMPREHENSIVE INCOME
SFAS 130, "Reporting Comprehensive Income", was adopted during the
fiscal year ended June 30, 1999. The standard establishes guidelines for the
reporting and display of comprehensive income and its components in financial
statements. Comprehensive income includes a foreign currency translation
adjustment and is included as a component of stockholders' equity.
NOTE 4 - 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 September 30,
2000, the network consisted of 9 electronic billboards.
AmeriVision is a start up enterprise that was founded in August,
1998. On June 28, 1999, we 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. We also hold 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.
NOTE 5 - INVENTORIES
Inventories are based on perpetual inventory records and physical
counts. Inventories consisted of the following:
September 30,
2000 June 30,
(unaudited) 2000
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Raw materials and work in progress $11,354,454 $ 8,842,707
Finished goods 1,562,906 231,195
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$12,917,360 $ 9,073,902
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7
NOTE 6 - UNCOMPLETED CONTRACTS
The costs and estimated earnings in excess of billings on
uncompleted contracts consisted of the following:
September 30,
2000 June 30,
(unaudited) 2000
------------ ------------
Costs incurred on uncompleted contracts $ 2,912,080 $ 7,112,420
Estimated earnings 805,133 4,957,706
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3,717,213 12,070,126
Billings to date (1,177,346) (7,098,810)
------------ ------------
$ 2,539,867 $ 4,971,316
============ ============
Included in the accompanying balance sheet under the following
captions:
Costs and estimated earnings in excess of
billings on completed contracts $ 2,539,867 $ 5,119,693
Billings in excess of costs and estimated
earnings on completed contracts -- (148,377)
----------- -----------
$ 2,539,867 $ 4,971,316
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NOTE 7 - REVOLVING LINE OF CREDIT
We have 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 our 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. The line of credit is secured by a security agreement
which covers substantially all of our assets 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 $4,545,000 in notes payable secured by the letters
of credit. As of September 30, 2000, $12,356,097 was borrowed against this line
of credit.
This line of credit contains certain financial and operating
covenants. As of September 30, 2000, we were in violation of certain of these
covenants. Furthermore, borrowings under the line of credit exceeded the
permitted borrowing base creating an over advanced position on the line and, as
of November 14, 2000, the over advanced amount was $2,272,000. The violations of
the financial and operating covenants, as well as the over advanced position
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.
8
On September 26, 2000, we 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. On October 31, 2000
the forbearance agreement was extended to January 15, 2001. Under the terms of
the forbearance agreement, our 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 the rate defined in the loan agreement. At September 30, 2000, the
interest rate was 11.5%. Because the forbearance period ends on January 15,
2001, 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.
NOTE 8 - CAPITAL STOCK
During the three months ended September 30, 2000, a total of 8,078
options to purchase our common stock were exercised for total cash proceeds of
$4,120.
Also during the three months ended September 30, 2000, 30,506
shares of our common stock valued at $89,627 were issued in connection with our
401(k) plan matching contribution.
Cash dividends of $65,625 on our preferred stock were declared
during the three months ended September 30, 2000.
On August 30, 2000 the Board of Directors extended the expiration
date of certain employee stock options that had originally been scheduled to
expire on August 31, 2000 and September 7, 2000. A total of 118,865 options with
an exercise price of $0.62 and 66,154 options with an exercise price of $0.51
were extended until December 31, 2000. The effects of this modification resulted
in a non-cash charge of $377,315 which was recognized in the first quarter of
Fiscal 2001. Prospectively, such options are considered variable awards and will
be subject to changes in the fair market value of the Company's common stock.
NOTE 9 - EARNINGS (LOSS) PER SHARE
The effects of options, warrants and other common stock
equivalents were anti-dilutive for the three months ended September 30, 2000 and
1999. Accordingly, these items were excluded from the calculation of diluted
earnings per share and there were no differences between basic earnings per
share and diluted earnings per share.
NOTE 10 - SUPPLEMENTAL CASH FLOW INFORMATION
The following summarizes noncash investing and financing
transactions during the three months ended September 30, 2000 and 1999:
(unaudited)
September 30,
2000 1999
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Cash paid for interest $ 712,190 $ 232,253
Capital lease obligations incurred to acquire
fixed assets 476,323 814,232
Debt incurred to acquire Hamilton Digital 653,580 --
Contribution of common stock to 401(k) plan 89,627 86,448
Stock issued for employee bonuses -- 64,795
Equity issued for the acquisition of Lockwood -- 1,909,000
Extension of employee stock options 377,315 --
9
NOTE 11 - INDUSTRY SEGMENTS
Our 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 and operating income from
continuing operations and other financial information by segment:
(unaudited)
September 30,
2000 1999
------------ ------------
Sales to external customers
Displays $ 15,165,613 $ 22,684,373
Other 443,186 412,184
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$ 15,608,799 $ 23,096,557
============ ============
Operating income (loss)
Displays $ (1,972,993) $ 1,654,043
Other 115,285 64,959
Corporate expenses (837,054) (598,515)
------------ ------------
$ (2,694,762) $ 1,120,487
============ ============
Depreciation and amortization
Displays $ 553,415 $ 363,336
Other 8,574 9,410
Corporate 24,372 22,224
------------ ------------
$ 586,361 $ 394,970
============ ============
Interest income
Displays $ 86,070 $ 43,426
Other -- --
Corporate -- --
------------ ------------
$ 86,070 $ 43,426
============ ============
Interest expense
Displays $ 418,016 $ 143,352
Other -- 21
Corporate 347,475 289,526
------------ ------------
$ 765,491 $ 432,899
============ ============
Capital expenditures
Displays $ 123,340 $ 493,307
Other 26,831 37,436
Corporate 428 9,218
------------ ------------
$ 150,599 $ 539,961
============ ============
10
NOTE 12 - RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (FAS 133). FAS 133 requires companies to
recognize all derivative contracts as either assets or liabilities in the
balance sheet and to measure them at fair value. FAS 133, as amended by FAS 137,
is effective for periods beginning after June 15, 2000. We have not entered into
derivative contracts. Accordingly, FAS 133 has not effected our 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.
NOTE 13 - AMENDMENT TO PRIOR YEAR FORM 10-Q
An amendment to Form 10-Q for the period ended September 30, 1999
was filed with the Securities and Exchange Commission on Form 10-Q1A on November
20, 2000. The effects of that amendment are reflected in the prior year
financial statements included in this Form 10-Q.
PART 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CONDITION AND RESULTS OF OPERATIONS
- -----------------------------------
The following discussion should be read in conjunction with
management's discussion and analysis of financial condition and results of
operations set forth in our Annual Report on Form 10-K for the year ended June
30, 2000, filed with the Securities and Exchange Commission on October 13, 2000,
which discussion is incorporated herein by reference.
Certain matters addressed in this report 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 our management. The Private Securities
Litigation Reform Act of 1995 provides certain "safe harbor" provisions for
forward-looking statements. All forward-looking statements made in this
Quarterly Report on form 10-Q are made pursuant to such act. For more
information on the potential factors which could affect our financial results,
reference should be made to our filings with the Securities and Exchange
Commission, including our Annual Report on Form 10-K for the fiscal year ended
June 30, 2000.
11
The results of operations and cashflows for the three months ended
September 30, 2000, are not necessarily indicative of the results to be expected
for the full year.
THREE MONTHS ENDED SEPTEMBER 30, 2000 VS. SEPTEMBER 30, 1999
- ------------------------------------------------------------
Our sales for the quarter ended September 30, 2000 decreased by
$7,487,758, or 32% over the same quarter in the prior year. Operating income
decreased by $3,815,249 and net income decreased by $2,536,343.
The decreased sales resulted from decreases in the sign and image
enhancement display segment (the "display segment"). In spite of the July 1,
2000 acquisition of Hamiltion Digital Designs ("Hamilton"), which contributed
sales for the quarter of $616,916, the display segment's sales decreased by
$7,518,760, or 33%, while sales from our other segment increased by $31,002, or
8%, over the same quarter of the prior year.
Excluding the effects of the acquisition, display segment sales
decreased from $22,684,373 in the first quarter of fiscal 2000 to $14,548,697 in
the first quarter of fiscal 2001. We experienced a decline in sales in both our
commercial displays and our institutional displays, primarily at our Ad Art
subsidiary. While specific reasons for the decline in sales during the period
are difficult to identify, a variety of factors may have contributed to the
decline in sales.
First, there was a reduction in the amount of national account
work performed during the period. Historically, we have secured large orders for
national retail chains or banks to re-image their existing locations or to
change the signage at retail locations that they have acquired in a merger. The
volume of this type of national account work was down during the first quarter.
Second, there were no sign sales to AmeriVision during the quarter as we have
suspended sales to AmeriVision pending sufficient financing. Third, significant
time was spent by our sales people attempting to secure large LED sales. While
many of these sales are still pending and those efforts may ultimately result in
sales, the efforts spent on those projects which have not yet been secured
detracted from other selling efforts. Fourth, delivery dates were changed by our
customers on a variety of projects at our Lockwood subsidiary which delayed
revenue recognition on those projects to the second quarter. Finally, increasing
interest rates during the period may have caused some customers to delay or
abandon purchases that required third party financing.
Our overall gross profit margin dropped to 20.8% for the quarter
ended September 30, 2000 from 29.8% for the same quarter of the previous year.
The drop in gross margin is due to the drop in margins on the display segment
from 29% to 20%, while the filter sales margins increased to 62% from 58%. The
decrease in margins from the display segment resulted primarily from the low
sales levels during the period. As a result of these low sales levels, fixed
overhead costs were absorbed by a lower sales base and resulted in significantly
decreased margins. We are actively pursuing reductions in our overhead costs to
improve margins in future periods.
Selling expense decreased by 21% from $2,940,511 in the first
quarter of fiscal 2000, to $2,331,244 in the first quarter of fiscal 2001. This
decrease was due to decreased costs from the display segment, as the other
segment's costs remained relatively consistent. Selling expenses, as a
percentage of sales, increased from 13% of sales during last year's first
quarter to 15% of sales during this year's first quarter. We are actively
pursuing reductions in our selling costs to improve profits in future periods.
12
General and administrative expenses increased from $2,823,096 to
$3,604,250 for the three months ended September 30, 1999 and 2000, respectively.
The display segment, which includes the effects of acquisitions, had an increase
from $2,122,498 to $2,680,384 while corporate general and administrative
expenses increased from $598,515 to $837,054 for the first quarters of fiscal
2000 and 2001, respectively.
The acquisition of Hamilton Digital contributed $101,081 to the
increase in the display segment's general and administrative expenses with the
remaining increase of $456,805 resulting from general increases in operating
costs. The most significant area of increase was depreciation expense which
increased primarily as a result of a new ERP computer system that was
implemented at our Ad Art subsidiary in September, 1999 and our Don Bell
subsidiary in May, 2000. During the first quarter of fiscal 2001, operating
expenses were being reviewed to identify areas for possible reduction. Since the
completion of that review, various variable costs have been eliminated and
general and administrative costs should decrease significantly in future
periods.
Corporate general and administrative expenses primarily consist of
executive compensation and benefits, occupancy costs of the corporate office,
and other compliance costs incurred as a result of being a public company such
as legal fees, director fees, SEC and NASDAQ filing costs and investor relations
and publicity costs. From the quarter ended September 30, 1999 to the quarter
ended September 30, 2000 corporate general and administrative costs increased by
$238,539. Corporate operating expenses for the first quarter of Fiscal 2001
include a non-cash charge of $377,315 related to the extension of certain
employee stock options. Absent this non-cash charge, corporate expenses would
have decreased by $138,776. A majority of this decrease resulted from decreased
salaries to executives whose compensation is calculated under a formula based
upon the financial performance of the Company.
Non-operating items netted to a $352,512 expense for the first
quarter in fiscal 2000 compared to a $646,606 expense in the first quarter of
fiscal 2001 - a net increase in expenses of $294,094. The main component of this
increase is interest expense, which increased by $332,592 or 77%, from $432,899
for the three months ended September 30, 1999 to $765,491 for the three months
ended September 30, 2000. The increase in interest expense is attributable to
increased debt since the prior year and higher interest rates currently being
paid on our debt under the terms of our forbearance agreement with the bank. The
increase in interest expense was partially offset by increases in other
miscellaneous income.
The net loss for the three months ended September 30, 2000 was
$2,071,368 compared to net income for the three months ended September 30, 1999
of $464,975. On a per share basis, both basic and diluted earnings per share
decreased from $0.04 per share for the first quarter of fiscal 2000 to a loss of
$0.26 per share for the first quarter of fiscal 2001.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Currently, potential events of default exist on our 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 our 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 on the line of
credit and certain notes payable totaling $4,545,000 to October 31, 2000. On
October 31, 2000, the Company and the bank executed an extension to the
forbearance agreement which extended payment terms to January 15, 2001. In
addition, on November 8, 2000, a bank with a loan to our Lockwood subsidiary
demanded payment of approximately $650,000 to satisfy outstanding balances. We
are attempting to negotiate with the lender on the settlement of this matter.
13
Management does not believe that we will be able to repay the over
advanced amount under the line of credit agreement through operating cash flow
during the current forbearance period. In addition, management does not believe
that we will be able to comply with the financial covenants required by the
security agreement during fiscal 2001. Accordingly, management is continuing to
actively pursue replacement financing from alternative lenders and exploring
opportunities to sell certain assets.
In addition, our Board of Directors has engaged an investment
banking firm to help evaluate strategic alternatives that may be available.
These alternatives may include a sale of all or portions of the Company to, or a
merger with, various third parties.
If we are 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 January 15, 2001, our
current lender may declare an event of default under the existing loan and
security agreement causing the balance due under our line of credit agreement
and other loans to become due and payable immediately. In such a case, we may be
unable to meet our current obligations and our ability to continue as a going
concern may be in doubt.
While pursuing additional debt and equity funding, we 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.
We continue to minimize our 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,
manufacturing plant consolidation, a more detailed review of customer credit
decisions and the suspension of acquisition activities. We are continuing to
evaluate our performance to identify additional areas of cost savings that may
be available.
Net cash received from operating activities for the quarter ended
September 30, 2000 was $7,363,153. The net loss for the period net of non-cash
charges for depreciation and amortization, gains on disposal of property, stock
contributions to our 401(k) plan, and changes in deferred taxes reduced cash by
$1,932,485. This was offset by cash provided from a net change of $9,295,638 in
our operating assets and liabilities, consisting primarily of decreases in
receivables and increases in accounts payable and customer deposits.
Net cash used for investing activities for the quarter ended
September 30, 2000 was $155,384, primarily for capital expenditures.
Net cash used in financing activities for the quarter ended
September 30, 2000 was $7,156,401. Of this amount, $6,470,760 was used to pay
down our lines of credit, $307,722 was used for payments on notes payable and
$214,672 was used for payments on our capital lease obligations. Other financing
activities included the payment of preferred stock dividends of $65,625 and
payments on shareholder notes of $101,742. These were offset by proceeds from
the exercise of stock options of $4,120.
(THE REMAINDER OF THE PAGE INTENTIONALLY LEFT BLANK)
14
PART II - OTHER INFORMATION
---------------------------
ITEM 1. LEGAL PROCEEDINGS.
- -----------------------------
Not applicable.
ITEM 2. CHANGES IN SECURITIES.
- ------------------------------
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
- ----------------------------------------
Currently, potential events of default exist on our 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 our 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 on the line of
credit and certain notes payable totaling $4,545,000 to October 31, 2000. On
October 31, 2000, the Company and the bank executed an extension to the
forbearance agreement which extended payment terms to January 15, 2001. In
addition, on November 8, 2000, a bank with a loan to our Lockwood subsidiary
demanded payment of approximately $650,000 to satisfy outstanding balances. We
are attempting to negotiate with the lender on the settlement of this matter.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY - HOLDERS.
- ------------------------------------------------------------
Not applicable.
ITEM 5. OTHER INFORMATION.
- --------------------------
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
- -----------------------------------------
Form 8-K Current Report of the Registrant dated September 29, 2000.
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned hereunto duly authorized.
DISPLAY TECHNOLOGIES, INC.
November 20, 2000 By: /s/ J. William Brandner
--------------------------------------
J. William Brandner, President & Chief
Executive Officer
By: /s/ Todd D. Thrasher
--------------------------------------
Todd D. Thrasher, Vice President &
Treasurer, Chief Financial Officer and
15