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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES ACT OF 1934
For the Quarterly Period Ended March 31, 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
------ ----------
(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 May 15, 2000, 8,088,580 shares of common stock were outstanding.
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<PAGE>
PART I - FINANCIAL INFORMATION
DISPLAY TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE><CAPTION>
March 31,
2000
(Unaudited) June 30, 1999
------------ ------------
<S> <C> <C>
ASSETS
Current Assets:
Cash $ 267,215 $ 79,832
Accounts receivable:
Trade, less allowance for doubtful accounts of $371,606 and $309,543 16,185,662 10,977,251
Other 4,229,918 1,747,635
Inventories 13,937,804 6,084,709
Costs and estimated earnings in excess of billings
on uncompleted contracts in progress 7,568,418 4,442,012
Prepaid expenses 947,686 859,371
Deferred income taxes 310,000 133,000
------------ ------------
Total current assets 43,446,703 24,323,810
------------ ------------
Property, plant and equipment, less accumulated depreciation 11,879,762 7,947,010
------------ ------------
Other assets:
Intangible, less accumulated amortization 14,849,817 11,283,095
Investment in preferred stock of AmeriVision 500,000 500,000
Other 1,120,291 1,301,729
------------ ------------
Total other assets 16,470,108 13,084,824
------------ ------------
$ 71,796,573 $ 45,355,644
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 7,948,348 $ 4,833,042
Customer deposits 2,722,290 785,391
Accrued expenses 3,924,939 2,762,897
Billings in excess of costs and estimated earnings
on uncompleted contracts in progress 231,320 191,304
Current maturities of long-term debt 888,628 781,926
Current portion of obligations under capital leases 751,231 336,096
Reserve for loss from fire 500,000 --
------------ ------------
Total current liabilities 16,966,756 9,690,656
------------ ------------
Non-current liabilities:
Line of credit 13,021,302 5,302,630
Long-term debt, less current maturities 10,663,277 9,108,519
Obligations under capital leases, less current portion 1,270,231 962,483
Deferred income taxes 506,000 170,000
Other 127,191 169,876
------------ ------------
Total non-current liabilities 25,588,001 15,713,508
------------ ------------
Stockholders' equity:
Common stock 8,089 6,303
Additional paid-in capital 23,176,500 18,999,292
Preferred stock 5,000,000 --
Retained earnings 1,057,227 945,885
------------ ------------
Total stockholders' equity 29,241,816 19,951,480
------------ ------------
$ 71,796,573 $ 45,355,644
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2
<PAGE>
DISPLAY TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE><CAPTION>
Nine Months Ended Three Months Ended
March 31, March 31,
------------------------------ ------------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Sales $ 66,900,646 $ 48,454,671 $ 20,734,050 $ 13,983,041
Cost of sales 45,090,334 31,651,976 13,863,071 9,277,369
------------ ------------ ------------ ------------
Gross profit 21,810,312 16,802,695 6,870,979 4,705,672
------------ ------------ ------------ ------------
Operating expenses:
Selling 8,129,829 7,715,397 2,658,222 2,787,532
General and administrative 8,588,838 5,197,772 2,931,171 1,599,389
Loss from fire 500,000 -- 500,000 --
------------ ------------ ------------ ------------
Total operating expenses 17,218,667 12,913,169 6,089,393 4,386,921
------------ ------------ ------------ ------------
Income from operations 4,591,645 3,889,526 781,586 318,751
------------ ------------ ------------ ------------
Other income (expense):
Interest income 250,560 54,262 59,205 18,051
Interest expense (1,465,098) (923,548) (540,866) (305,350)
Gain (loss) on disposal of property
and equipment 31,474 1,512 21,336 (2,865)
Other, net 61,872 12,694 23,562 25,903
------------ ------------ ------------ ------------
(1,121,192) (855,080) (436,763) (264,261)
------------ ------------ ------------ ------------
Income before income taxes 3,470,453 3,034,446 344,823 54,490
Income tax expense 1,371,000 1,183,000 136,000 21,000
------------ ------------ ------------ ------------
Net income 2,099,453 1,851,446 208,823 33,490
Preferred dividends (175,000) -- (65,625) --
------------ ------------ ------------ ------------
Net income available to common shareholders $ 1,924,453 $ 1,851,446 $ 143,198 $ 33,490
============ ============ ============ ============
Earnings Per common share:
Basic $ .25 $ .32 $ .02 $ .01
============ ============ ============ ============
Diluted $ .21 $ .25 $ .02 $ .01
============ ============ ============ ============
Weighted average number of shares outstanding:
Basic 7,630,196 5,696,083 7,944,991 6,137,998
============ ============ ============ ============
Diluted 10,491,211 8,058,142 8,591,534 8,795,081
============ ============ ============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
DISPLAY TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE><CAPTION>
Nine Months Ended Three Months Ended
March 31, March 31,
------------------------------ ------------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income $ 2,099,453 $ 1,851,446 $ 208,823 $ 33,490
Adjustments to reconcile net income to net cash
used for operating activities:
Depreciation and amortization 1,470,986 719,710 569,538 249,066
(Gain) loss on disposal of property and equipment (31,474) (1,512) (21,336) 2,865
Contribution of common stock to 401(k) plan 256,882 195,003 85,220 78,499
Change in deferred income taxes 35,000 276,000 23,000 138,000
Other (902) (55,666) (11,515) (13,951)
Changes in assets and liabilities, net of effects of acquisitions:
Accounts receivable (3,975,711) (1,610,391) (1,820,990) 1,511,244
Other receivables (2,482,283) (108,917) (757,661) (84,637)
Inventories (9,583,059) (4,841,230) (4,285,312) (1,240,256)
Prepaid expenses (52,423) 65,151 79,895 (78,278)
Accounts payable 2,222,158 951,460 722,695 (1,286,380)
Customer deposits 1,591,982 (90,437) 469,718 362,602
Accrued expenses 726,039 (680,175) 405,324 (777,261)
Other 708,387 52,415 680,051 34,747
------------ ------------ ------------ ------------
Net cash used for operating activities (7,014,965) (3,277,143) (3,652,550) (1,070,250)
------------ ------------ ------------ ------------
Cash flows from investing activities:
Purchase of property, plant and equipment (2,109,081) (902,195) (995,705) (256,327)
Business acquisition, net of cash acquired (1,814,474) -- -- --
Proceeds from sale of property and equipment 82,470 38,026 34,936 --
Other (30,442) (30,479) 34,602 (64,937)
------------ ------------ ------------ ------------
Net cash used for investing activities (3,871,527) (894,648) (926,167) (321,264)
------------ ------------ ------------ ------------
Cash flows from financing activities:
Net change in line of credit borrowing 7,468,672 1,915,858 4,058,514 (808,047)
Principal payments on long-term debt (859,158) (396,952) (165,575) (12,561)
Proceeds from sales of stock, including option and
warrant exercises, net 209,425 2,802,145 114,671 2,543,687
Payments on capital lease obligations (451,123) (196,929) (108,990) (38,190)
Proceeds from the sale of preferred stock, net 4,946,000 -- -- --
Payment of preferred stock dividends (153,125) -- (109,375) --
Other (86,816) (1,257) 177,913 --
------------ ------------ ------------ ------------
Net cash provided by financing activities 11,073,875 4,122,865 3,967,158 1,684,889
------------ ------------ ------------ ------------
Increase (decrease) in cash 187,383 (48,926) (611,559) 293,375
Cash, beginning of period 79,832 537,564 878,774 195,263
------------ ------------ ------------ ------------
Cash, end of period $ 267,215 $ 488,638 $ 267,215 $ 488,638
============ ============ ============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
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 and
results of operations for the interim periods. Certain reclassifications have
been made to the prior year financial statements to conform to the current year
presentations. This report should be read in conjunction with the Consolidated
Financial Statements included in our Annual Report on Form 10-KSB for the year
ended June 30, 1999.
The results of operations for the nine and three months ended March 31,
2000 are not necessarily indicative of the results to be expected for the full
year.
NOTE 2 - ACQUISITION
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. Up to an additional 299,250 shares (as
restated for the December 20, 1999 5% stock dividend) of our common stock are
contingently issuable on a pro-rata basis if Lockwood's net income for the year
ending June 30, 2000 is between $350,000 and $625,000. The contingent shares are
issuable at a rate of approximately 27,000 shares for each $25,000 of
contributed net income in excess of $350,000 up to the maximum of 299,250 shares
to be issued for contributed net income 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. As of March 31, 2000, Lockwood has achieved sufficient net
income to earn the full 299,250 contingent shares.
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 $3,840,000, 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.
5
<PAGE>
NOTE 3 - INVENTORIES
Inventories at the end of interim periods are based on perpetual
inventory records and physical counts. Inventories consist of the following:
March 31,
2000 June 30,
(Unaudited) 1999
------------ ------------
Raw materials and work in progress $ 13,226,379 $ 5,938,552
Finished goods 711,425 146,157
------------ ------------
$ 13,937,804 $ 6,084,709
============ ============
NOTE 4 - UNCOMPLETED CONTRACTS
The costs and estimated earnings in excess of billings on uncompleted
contracts consist of the following:
March 31,
2000 June 30,
(unaudited) 1999
------------ ------------
Costs incurred on uncompleted
contracts in progress $ 10,777,427 $ 5,851,502
Estimated earnings 5,680,910 3,441,933
------------ ------------
16,458,337 9,293,435
Billings to date (9,121,239) (5,042,727)
------------ ------------
$ 7,337,098 $ 4,250,708
============ ============
Included in the accompanying balance sheets under the following
captions:
Costs and estimated earnings in
excess of billings on uncompleted
contracts in progress $ 7,568,418 $ 4,442,012
Billings in excess of costs and
estimated earnings on uncompleted
contracts in progress (231,320) (191,304)
------------ ------------
$ 7,337,098 $ 4,250,708
============ ============
NOTE 5 - REVOLVING LINE OF CREDIT
We have a $23 million revolving line of credit. The line of credit
bears interest, at our option, at either (A) .75% over the bank's prime rate or
(B) 3.25 % over LIBOR and matures July 1, 2002. At March 31, 2000, the interest
rate was 9.3%. The line of credit is secured by eligible receivables and
inventory and is cross-collateralized with two letters of credit from the same
lender and $4,775,000 in notes payable secured by the letters of credit. As of
March 31, 2000, $13,021,302 was borrowed against this line of credit. This line
of credit contains certain financial and operating covenants. We were in
compliance with all covenants at March 31, 2000.
6
<PAGE>
NOTE 6 - CAPITAL STOCK
During the nine months ended March 31, 2000, a total of 356,215 options
to purchase our common stock were exercised for total cash proceeds of $209,425.
Also during the nine months ended March 31, 2000, 67,728 shares of our
common stock valued at $256,882 were issued in connection with our 401(k) plan
matching contribution.
On July 1, 1999, in conjunction with the acquisition of Lockwood, we
issued 415,000 shares of common stock valued at $1,909,000.
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. The
preferred shares are convertible into shares of common stock at the conversion
price of $3.33 per share, subject to certain anti-dilution and other
adjustments. Cash dividends of $175,000 on the preferred stock were declared
during the nine months ended March 31, 2000.
On September 3, 1999, 560,464 shares were issued in connection with the
acquisition of Ad Art. These shares were contingent on Ad Art contributing net
income for fiscal 1999 in excess of $1.4 million.
On September 10, 1999, accrued executive bonuses totaling $64,795 were
paid through the issuance of 16,456 shares of common stock.
On December 20, 1999, a 5% stock dividend was issued to shareholders of
record on December 3, 1999, which resulted in the issuance of 370,173 additional
shares and cash payments totaling $1,330 in lieu of issuing factional shares.
Earnings per share for periods prior to the stock dividend have been
retroactively restated to reflect the effects of this stock dividend.
NOTE 7 - LOSS FROM FIRE
During December 1999, a fire occurred in a sign sold by us. We are
continuing to gather information about the cause of the fire, however,
information gathered to date indicates that a component provided by a vendor may
have been faulty and there is no overall flaw in our products. In May 2000 our
insurance carrier denied coverage for this loss. We will continue to investigate
this fire to identify any opportunities that may be available to be reimbursed
for this loss, either through insurance or through subcontracts. Based upon the
information currently available, it is impossible to know whether any such
reimbursement efforts will be successful. Accordingly, we recorded a loss from
fire for $500,000 during the third quarter of fiscal 2000.
7
<PAGE>
NOTE 8 - EARNINGS PER SHARE
Diluted earnings per share are calculated as follows:
<TABLE><CAPTION>
Nine months ended Three months ended
March 31 (unaudited) March 31 (unaudited)
------------------------- -------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net income $ 2,099,453 $ 1,851,446 $ 208,823 $ 33,490
Convertible debt interest, net 150,053 172,669 3,025 53,993
----------- ----------- ----------- -----------
Net income for purposes of calculating
diluted earnings per share $ 2,249,506 $ 2,024,115 $ 211,848 $ 87,483
----------- ----------- ----------- -----------
Basic weighted average shares 7,630,196 5,696,083 7,944,991 6,137,998
Convertible securities 2,206,375 934,862 -- 934,862
Options and warrants 364,490 1,318,049 347,293 1,394,779
Acquisition contingent shares 290,150 109,148 299,250 327,442
----------- ----------- ----------- -----------
Diluted weighted average shares 10,491,211 8,058,142 8,591,534 8,795,081
=========== =========== =========== ===========
Diluted earnings per share $ .21 $ .25 $ .02 $ .01
=========== =========== =========== ===========
</TABLE>
NOTE 9 - SUPPLEMENTAL CASH FLOW INFORMATION
Cash payments for interest and taxes totaled $1,067,786 and $153,000,
respectively, for the first three quarters of fiscal 2000, and $901,166 and
$1,122,739, respectively, for the first three quarters of fiscal 1999. The
following summarizes noncash investing and financing transactions for the nine
months ended March 31, 2000 and 1999:
<TABLE><CAPTION>
2000 1999
----------- -----------
<S> <C> <C>
Equity issued for the acquisition of Lockwood $ 1,909,000 -
Issuance of common stock for 5% stock dividend 1,791,637 1,320,045
Capital lease obligations incurred to acquire fixed assets 924,440 -
Contributions of common stock to 401(k) plan 256,882 195,003
Stock issued for employee bonuses 64,795 61,274
Fair value of stock options issued for
investment consulting services - 76,950
Accrued preferred stock dividends 21,875 -
</TABLE>
8
<PAGE>
NOTE 10 - 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 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 filter products which, when installed in compressed air lines,
substantially reduces or totally eliminates water and condensation problems and
most foreign contaminants in the air lines.
The following table shows sales and operating income from continuing
operations and other financial information by segment:
<TABLE><CAPTION>
Nine months ended Three months ended
March 31 (unaudited) March 31 (unaudited)
---------------------------- ----------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Sales to external customers
Displays $ 65,664,338 $ 47,263,091 $ 20,275,587 $ 13,632,362
Other 1,236,308 1,191,580 458,463 350,679
------------ ------------ ------------ ------------
$ 66,900,646 $ 48,454,671 $ 20,734,050 $ 13,983,041
============ ============ ============ ============
Operating income
Displays $ 5,857,642 $ 4,748,252 $ 1,007,624 $ 497,848
Other 217,170 233,125 123,818 24,584
Corporate expenses (1,483,167) (1,091,851) (349,856) (203,681)
------------ ------------ ------------ ------------
$ 4,591,645 $ 3,889,526 $ 781,586 $ 318,751
============ ============ ============ ============
Depreciation and amortization
Displays $ 1,373,760 $ 642,512 $ 536,430 $ 222,645
Other 28,813 27,347 9,747 6,864
Corporate 68,413 49,851 23,361 19,557
------------ ------------ ------------ ------------
$ 1,470,986 $ 719,710 $ 569,538 $ 249,066
============ ============ ============ ============
Interest income
Displays $ 250,560 $ 54,262 $ 59,205 $ 18,051
Other -- -- -- --
Corporate -- -- -- --
------------ ------------ ------------ ------------
$ 250,560 $ 54,262 $ 59,205 $ 18,051
============ ============ ============ ============
Interest expense
Displays $ 546,501 $ 476,694 $ 241,236 $ 171,723
Other -- -- -- --
Corporate 918,597 446,854 299,630 133,627
------------ ------------ ------------ ------------
$ 1,465,098 $ 923,548 $ 540,866 $ 305,350
============ ============ ============ ============
</TABLE>
9
<PAGE>
NOTE 11 - 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. Historically, we have not entered into
derivative contracts. Accordingly, FAS 133 is not expected to affect our
financial statements.
(THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK)
10
<PAGE>
DISPLAY TECHNOLOGIES, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
---------------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
-----------------------------------
The following discussion should be read in conjunction with
management's discussion and analysis of financial condition and results of
operations set forth in our Annual Report on Form 10-KSB for the year ended June
30, 1999, filed with the Securities and Exchange Commission on September 28,
1999, which discussion is incorporated herein by reference.
Certain matters addressed in this report 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 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-KSB for the fiscal year ended
June 30, 1999.
The results of operations for the nine and three months ended March 31,
2000 are not necessarily indicative of the results to be expected for the full
year.
NINE MONTHS ENDED MARCH 31, 2000 VS. MARCH 31, 1999
- ---------------------------------------------------
Our sales for the nine months ended March 31, 2000 increased by
$18,445,975, or 38% over the same period in the prior year. Operating income
increased by $702,119, or 18%, while income before provision for income taxes
increased by $436,007, or 14%. Net income for the nine months ended March 31,
2000 increased by $248,007, or 13% over the same period in the prior year. The
results of operations for the nine months ended March 31, 2000 include a
one-time pre-tax charge of $500,000 ($.03 per diluted share) related to a loss
incurred by us due to a fire. Absent this one-time charge, operating income
would have increased by 29% over the year-earlier period and net income would
have increased by 27%.
The increased sales resulted mostly from increases in our sign and
image enhancement display segment (the "display segment"). The $65,664,338
display segment's sales, which accounted for 98.2% of consolidated sales for the
nine months ended March 31, 2000, increased by $18,401,247, or 39%, while sales
from other segments increased by $44,728, or 4%, over the same period in the
prior year. The sales growth in the display segment can be broken down into
internal sales growth of $5,738,300 and growth from acquisitions of $12,662,947.
The acquisition growth in the display segment resulted from the July 1,
1999 acquisition of Lockwood. However, Lockwood's sales have grown dramatically
since our acquisition. During the calendar year ended immediately prior to the
acquisition, Lockwood reported sales of $10,069,183, or an average of $2,517,296
per quarter. During the nine months ended March 31, 2000, Lockwood has reported
sales totaling $12,662,947, or an average of $4,220,982 per quarter. Therefore,
Lockwood's growth rate has exceeded 68% since our July 1, 1999 acquisition.
Excluding the effects of Lockwood, display segment sales
11
<PAGE>
increased from $47,263,091 in the first nine months of fiscal 1999 to
$53,001,391 in the first nine months of fiscal 2000. The internal sales growth
resulted from growth in sales of commercial displays of $5,091,582 and growth in
sales of institutional displays of $646,718.
Our overall gross profit margin dropped to 32.6% of sales for the nine
months ended March 31, 2000 from 34.7% for the same period of the previous year.
The drop in gross margin is due to the drop in margins on the display segment
from 34% to 32%, while the margins from other our segment increased from 54% to
56%. The decrease in margins on display segment sales is a result of a change in
the sales mix from the same period last year. The current year period includes a
significant amount of low margin work on certain national accounts that is
expected to produce higher margins in future periods. A significant portion of
the higher margin work with these national accounts has been secured for
production during our fourth quarter.
Selling expense increased by 5% from $7,715,397 in the first nine
months of fiscal 1999 to $8,129,829 in the first nine months of fiscal 2000. Of
this $414,432 increase, $396,101 relates to the display segment - mostly a
result of the Lockwood acquisition. Selling expenses, as a percentage of sales,
dropped from 16% of sales during the first nine months of last year to 12% of
sales during the first nine months of this year. Again, this is due to the
effects of the Lockwood acquisition, as Lockwood's selling expenses have
averaged 6% of sales.
General and administrative (G&A) expenses increased by 65% from
$5,197,772 during the nine months ended March 31, 1999 to $8,588,838 during the
nine months ended March 31, 2000. Of this $3,391,066 increase, $2,953,476
relates to the display segment. The portion of this increase relating directly
to the acquisition of Lockwood is $1,967,463. Additionally, for the nine months
ended March 31, 2000, corporate G&A expenses increased by $391,316 over the same
period of the prior year.
A majority of the increase in the display segment's G&A expenses,
excluding the effects of acquisitions, was due to a general increases in
operating costs that have been incurred to support the growth of the Company.
The most significant areas of increase have been in personnel costs and
depreciation, as we have continued to invest in our employees and our equipment.
These increased costs will continue to support our growth throughout the
remainder of the fiscal year and into fiscal 2001.
Corporate general and administrative expenses consist primarily 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 costs. A majority of the increase in corporate G&A costs resulted from
increased executive salaries due to the new positions of General Counsel and
Chief Operating Officer, as well as salary increases over the prior year for
executives whose compensation is calculated under a formula based upon the
financial performance of the Company.
Operating expenses for the nine months ended March 31, 2000 also
include a one-time pre-tax charge of $500,000 relating to a fire which occurred
in December 1999 in a sign sold by us. We are continuing to gather information
about the cause of the fire, however, information gathered to date indicates
that a component provided by a vendor may have been faulty and there is no
overall flaw in our products. In May 2000 our insurance carrier denied coverage
for this loss. We will continue to investigate this fire to identify any
opportunities that may be available to be reimbursed for this loss, either
through insurance or through
12
<PAGE>
subcontracts. Based upon the information currently available, it is impossible
to know whether any such reimbursement efforts will be successful.
Non-operating items netted to a $855,080 expense for the first nine
months in fiscal 1999 compared to a $1,121,192 expense in the first nine months
of fiscal 2000 - a net increase in expenses of $266,112. The main component of
this increase is interest expense, which increased by $541,550 or 59%, from
$923,548 for the nine months ended March 31, 1999 to $1,465,098 for the nine
months ended March 31, 2000. A significant portion of the increase in interest
expense is attributable to the Lockwood acquisition, which contributed an
additional $258,222 in interest expense for the nine months ended March 31,
2000, while the remaining increase relates to increased line of credit
borrowings necessary to support our sales growth.
Net income increased by 13%, from $1,851,446 for the nine months ended
March 31, 1999 to $2,099,453 for the nine months ended March 31, 2000. Despite
the 13% increase in net income, basic earnings per share decreased by 22% from
$0.32 per share for the first nine months of fiscal 1999 to $0.25 per share for
the first nine months of fiscal 2000, due to the 34% increase in weighted
average shares outstanding. Diluted earnings per share decreased by 16% from
$0.25 for the nine months ended March 31, 1999 to $0.21 for the nine months
ended March 31, 2000, due to the 30% increase in diluted weighted average shares
outstanding.
The 30% increase in our diluted weighted average shares outstanding is
primarily due to shares issued in the acquisitions of Lockwood, as well as the
convertible preferred stock issued in August 1999 for net proceeds of
$4,946,000. A portion of these proceeds was used to fund the Lockwood
acquisition and $500,000 was invested in convertible preferred stock of
AmeriVision Outdoor, Inc. The remainder is held for future acquisitions and
working capital.
AmeriVision is an outdoor electronic media company that owns L.E.D.
(light emitting diode) displays that are used for third party advertising,
primarily at major shopping malls. AmeriVision owns and operates the signs and
collects revenue from the advertisers who buy time on the displays. AmeriVision
has identified sites for its first 150 displays in major markets, secured
advertising for the displays currently operating, and received serious
expressions of interest from major national advertisers for its network of
displays. Currently, AmeriVision has 9 displays that are either operating or
scheduled for installation by June 2000.
Pursuant to an agreement dated June 28, 1999, we purchased 8,000 newly
issued shares of convertible preferred stock from AmeriVision for $500,000. The
preferred stock pays quarterly cumulative dividends at a 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 80% of the outstanding common stock of AmeriVision. We also
have the option, upon certain conditions, to purchase the remaining 20% of the
common stock of AmeriVision. As of March 31, 2000, the conditions which would
permit conversion of the preferred stock were not satisfied.
THREE MONTHS ENDED MARCH 31, 2000 VS. MARCH 31, 1999
- ----------------------------------------------------
Our sales for the quarter ended March 31, 2000 increased by $6,751,009,
or 48% over the same quarter in the prior year. Operating income increased by
$462,835, or 145%, while net income increased by
13
<PAGE>
$175,333. The results of operations for the three months ended March 31, 2000
include a one-time pre-tax charge of $500,000 ($.03 per diluted share) related
to a loss incurred by us due to a fire, as previously discussed.
The increased sales resulted from increases in the display segment,
which accounted for 97.8% of consolidated sales for the three months ended March
31, 2000. Sales from this segment increased by $6,643,225, or 49%, while sales
from other segments increased by $107,784, or 31%, over the same quarter of the
prior year. The sales growth in the display segment can be broken down into
internal sales growth of $3,478,084 and growth from the Lockwood acquisition of
$3,165,141. However, as discussed previously, Lockwood has been growing at an
internal rate of 68% since our July 1, 1999 acquisition.
Excluding the effects of acquisitions, display segment sales increased
from $13,632,362 in the third quarter of fiscal 1999 to $17,110,446 in the third
quarter of fiscal 2000. The internal sales growth resulted from growth in
commercial displays sales of $3,061,526 and growth in our institutional displays
of $416,558.
Our overall gross profit margins were relatively stable at 33.1% for
the quarter ended March 31, 2000, compared to 33.7% for the same quarter of the
previous year. Margins in the display segment remained stable at 33%, while
margins in our other segment dropped from 57% to 56%.
Selling expense decreased by 5% from $2,787,532 in the third quarter of
fiscal 1999 to $2,658,222 in the third quarter of fiscal 2000. This $129,310
decrease resulted from a decrease in display segment selling costs of $336,675,
offset by an increase resulting from the Lockwood acquisition of $176,476, and a
decrease in other segment's selling costs of $30,889. Selling expenses, as a
percentage of sales, dropped from 20% of sales during last year's third quarter
to 12% of sales during this year's third quarter. The low selling expenses in
the current quarter are a result of significant "house" sales during the quarter
for which no sales commission is paid, as well as the inclusion of Lockwood in
the current period. Selling expenses at Lockwood average lower than our other
divisions in our display segment.
General and administrative expenses increased from $1,599,389 to
$2,931,171 for the three months ended March 31, 1999 and 2000, respectively. The
display segment, which includes the effects of the Lockwood acquisition, had an
increase from $1,322,572 to $2,522,800. Additionally, corporate general and
administrative expenses increased from $203,681 to $349,856, while other
segment's G&A expenses decreased from $73,136 to $58,515 for the third quarters
of fiscal 1999 and 2000, respectively.
A significant portion of the increase in the display segment's general
and administrative expenses came from the acquisition of Lockwood, which added
$689,941. The remainder of the increase was a result of general increases in
operating costs that have been incurred to support the growth of the Company.
The most significant area of increase has been in depreciation as we have
continued to invest in our equipment. These increased costs will continue to
support our growth throughout the remainder of the fiscal year.
Corporate general and administrative expenses primarily consist of
executive compensation and benefits, occupancy costs of the corporate office,
and other compliance costs incurred as a result of being a public company, such
as legal fees, director fees, SEC and NASDAQ filing costs, and investor
relations and publicity costs. From the quarter ended March 31, 1999 to the
quarter ended March 31, 2000, corporate general and administrative costs
increased $146,175. A majority of the increase in corporate G&A costs resulted
from increased executive salaries due to the new position of Chief Operating
Officer, as well as
14
<PAGE>
salary increases over the prior year for executives whose compensation is
calculated under a formula based upon the financial performance of the Company.
Operating expenses for the three months ended March 31, 2000 also
include a one-time pre-tax charge of $500,000 relating to a fire which occurred
in December 1999 in a sign sold by us. We are continuing to gather information
about the cause of the fire, however, information gathered to date indicates
that a component provided by a vendor may have been faulty and there is no
overall flaw in our products. In May 2000 our insurance carrier denied coverage
for this loss. We will continue to investigate this fire to identify any
opportunities that may be available to be reimbursed for this loss, either
through insurance or through subcontracts. Based upon the information currently
available, it is impossible to know whether any such reimbursement efforts will
be successful.
Non-operating items netted to a $264,261 expense for the third quarter
in fiscal 1999 compared to a $436,763 expense in the third quarter of fiscal
2000 - a net increase in expenses of $172,502. The main component of this
increase is interest expense, which increased by $235,516 from $305,350 for the
three months ended March 31, 1999 to $540,866 for the three months ended March
31, 2000. A significant portion of the increase in interest expense is
attributable to the Lockwood acquisition, which contributed an additional
$74,001 in interest expense for the three months ended March 31, 2000, while the
remaining increase relates to increased non-current debt, including line of
credit borrowings necessary to support our sales growth.
Net income increased by $175,333 from $33,490 for the three months
ended March 31, 1999 to $208,823 for the three months ended March 31, 2000. On a
per share basis, both basic and diluted earnings per share increased from $0.01
per share for the third quarter of fiscal 1999 to $0.02 per share for the third
quarter of fiscal 2000, on a basic weighted average share increase of 29% and a
diluted weighted average share decrease of 2%.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Net cash used for operating activities for the nine months ended March
31, 2000 was $7,014,965. Net income for the period provided cash of $3,829,945,
net of non-cash charges for depreciation and amortization, gains on fixed asset
sales, stock contributions to our 401(k) plan, the change in deferred income
taxes and other non-cash items. This cash provided was offset by a net change of
$10,844,910 in our operating assets and liabilities, consisting primarily of
increases in inventories and receivables.
Net cash used for investing activities for the nine months ended March
31, 2000 was $3,871,527, of which $1,814,474 was used to purchase Lockwood.
Additionally, $2,109,081 was used for capital expenditures and $30,442 was used
for other investing activities, offset by $82,470 provided by the sale of fixed
assets.
Net cash provided by financing activities for the nine months ended
March 31, 2000 was $11,073,875. Of this amount, $4,946,000 (net of issuance
costs) was received from the sale of preferred stock, $7,468,672 was received
through advances on our line of credit, and $209,425 was received upon the
exercise of outstanding stock options. Other financing activities included
payments of notes payable, capital lease obligations, and other financing
activities of $859,158, $451,123, and $86,816, respectively, and the payment of
preferred stock dividends of $153,125.
15
<PAGE>
We have a $23,000,000 revolving bank line of credit. Advances on the
credit line carry an interest rate of either (A) .75% over prime or (B) 3.25%
over LIBOR, and initially matures July 1, 2002. The line of credit is
collateralized by eligible receivables and inventory and is cross-collateralized
with two letters of credit from the same lender and $4,775,000 in notes payable
secured by the letters of credit. As of May 11, 2000, $14,980,875 was borrowed
against this line of credit.
During the first quarter of fiscal 2000, we issued 50,000 shares of
Series A Convertible Preferred Stock 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 $3.33 per share, subject to certain anti-dilution and other
adjustments.
YEAR 2000 COMPUTER COMPLIANCE
- -----------------------------
As of the date of this filing, we have not experienced any material
Year 2000 problems with our systems or products, nor have we experienced any
material problems with any of our key customers or suppliers. Refer to the 1999
Form 10-K for a complete discussion of the Year 2000 issue.
(THE REMAINDER OF THE PAGE INTENTIONALLY LEFT BLANK)
16
<PAGE>
PART II - OTHER INFORMATION
---------------------------
ITEM 1. LEGAL PROCEEDINGS.
- ----------------------------
Not applicable.
ITEM 2. CHANGES IN SECURITIES.
- ------------------------------
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
- ----------------------------------------
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY - HOLDERS.
- ------------------------------------------------------------
Not applicable
ITEM 5. OTHER INFORMATION.
- --------------------------
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
- -----------------------------------------
Current report on Form 8-K filed on March 16, 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 thereunto duly authorized.
DISPLAY TECHNOLOGIES, INC.
Date: May 19, 1999 By: /S/ J. WILLIAM BRANDNER
---------------------------------------
J. William Brandner, President & Chief
Executive Officer
By: /s/ TODD D. THRASHER
---------------------------------------
Todd D. Thrasher, Vice President &
Treasurer, Chief Financial Officer and
Chief Accounting Officer
17
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FORM 10-Q FINANCIAL STATEMENTS FOR THE PERIOD ENDED MARCH 31, 2000 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 3-MOS
<FISCAL-YEAR-END> JUN-30-2000 JUN-30-2000
<PERIOD-START> JUL-01-1999 JAN-01-2000
<PERIOD-END> MAR-31-2000 MAR-31-2000
<CASH> 267,215 267,215
<SECURITIES> 0 0
<RECEIVABLES> 20,787,186 20,787,186
<ALLOWANCES> 371,606 371,606
<INVENTORY> 13,937,804 13,937,804
<CURRENT-ASSETS> 43,446,703 43,446,703
<PP&E> 17,129,496 17,129,496
<DEPRECIATION> 5,249,734 5,249,734
<TOTAL-ASSETS> 71,796,573 71,796,573
<CURRENT-LIABILITIES> 16,966,756 16,966,756
<BONDS> 11,551,905 11,551,905
<COMMON> 8,089 8,089
5,000,000 5,000,000
5,000,000 5,000,000
<OTHER-SE> 24,233,727 24,233,727
<TOTAL-LIABILITY-AND-EQUITY> 71,796,573 71,796,573
<SALES> 66,900,646 20,734,050
<TOTAL-REVENUES> 66,900,646 20,734,050
<CGS> 45,090,334 13,863,071
<TOTAL-COSTS> 17,218,667 6,089,393
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 1,465,098 540,866
<INCOME-PRETAX> 3,470,453 344,823
<INCOME-TAX> 1,371,000 136,000
<INCOME-CONTINUING> 2,099,453 208,823
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 2,099,453 208,823
<EPS-BASIC> .25 .02
<EPS-DILUTED> .21 .02
</TABLE>
