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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------------------------
FORM 10-Q/A
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES ACT OF 1934
For the Quarterly Period Commission file number 0-14427
Ended December 31, 1999
-------------------------------------
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 Identification Number)
other organization)
5029 EDGEWATER DRIVE, ORLANDO, FLORIDA 32810 (407) 521-7477
(Address, including zip code, and telephone number, including
area code, of registrant's office)
-------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports to be
filed by Section 13 or 15(d) of the Securities Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports) and (2) has been subject to such filing requirements for the
past 90 days. [X] Yes [ ] No
As of February 14, 2000, 7,887,753 shares of Common Stock were outstanding.
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<PAGE>
PART I - FINANCIAL INFORMATION
DISPLAY TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
<TABLE><CAPTION>
December 31,
1999 June 30,
(Unaudited) 1999
---------- ----------
<S> <C> <C>
ASSETS
Current Assets:
Cash $ 878,774 $ 79,832
Accounts receivable:
Trade, less allowance for doubtful accounts
of $368,797and $309,543 14,401,807 10,977,251
Other 3,598,127 1,747,635
Inventories 8,869,900 6,084,709
Costs and estimated earnings in excess of billings
on uncompleted contracts 7,377,295 4,442,012
Prepaid expenses 988,568 859,371
Deferred taxes 216,000 133,000
---------- ----------
Total current assets 36,330,471 24,323,810
---------- ----------
Property, plant and equipment, net 11,176,632 7,947,010
---------- ----------
Other assets:
Intangible, less accumulated amortization 14,992,908 11,283,095
Investment in preferred stock of AmeriVision 500,000 500,000
Other 1,111,430 1,301,729
---------- ----------
Total other assets 16,604,338 13,084,824
---------- ----------
$64,111,441 $45,355,644
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $7,162,961 $4,833,042
Customer deposits 2,277,637 785,391
Accrued expenses 2,725,665 2,762,897
Billings in excess of costs and estimated earnings
on uncompleted contracts 312,665 191,304
Current portion of long-term debt 888,592 781,926
Current portion of obligations under capital leases 732,618 336,096
---------- ----------
Total current liabilities 14,100,138 9,690,656
---------- ----------
Long-term liabilities:
Borrowings against lines of credit 8,962,788 5,302,630
Long-term debt, less current portion 10,914,795 9,108,519
Obligations under capital leases, less current portion 1,443,379 962,483
Deferred tax liabilities 389,000 170,000
Other liabilities 132,951 169,876
---------- ----------
Total long term liabilities 21,842,913 15,713,508
---------- ----------
Stockholders' equity:
Common stock 7,850 6,303
Additional paid-in capital 23,126,850 18,999,292
Preferred stock 5,000,000 --
Retained earnings 33,690 945,885
---------- ----------
Total stockholders' equity 28,168,390 19,951,480
---------- ----------
$64,111,441 $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>
Six Months Ended Three Months Ended
December 31, December 31,
------------------------------- -------------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C>
Sales $ 46,166,597 $ 34,471,630 $ 23,070,039 $ 17,437,617
Cost of sales 32,315,952 22,374,607 16,103,489 11,339,827
------------ ------------ ------------ ------------
Gross profit 13,850,645 12,097,023 6,966,550 6,097,790
------------ ------------ ------------ ------------
Operating expenses:
Selling 5,471,607 4,927,865 2,531,096 2,466,625
General and administrative 5,657,667 3,598,383 2,834,571 1,846,325
------------ ------------ ------------ ------------
Total operating expenses 11,129,274 8,526,248 5,365,667 4,312,950
------------ ------------ ------------ ------------
Income from operations 2,721,371 3,570,775 1,600,883 1,784,840
------------ ------------ ------------ ------------
Other income (expense):
Interest income 191,355 60,983 147,929 42,226
Interest expense (924,232) (642,970) (491,333) (337,688)
Gain (loss) on sales of assets, net 10,138 4,377 3,293 (407)
Other, net 38,311 (13,209) 8,195 (14,130)
------------ ------------ ------------ ------------
(684,428) (590,819) (331,916) (309,999)
------------ ------------ ------------ ------------
Income before provision for income taxes 2,036,943 2,979,956 1,268,967 1,474,841
Provision for income taxes 804,000 1,162,000 501,000 575,000
------------ ------------ ------------ ------------
Net income 1,232,943 1,817,956 767,967 899,841
Preferred dividends and beneficial conversion features (259,375) -- (65,625) --
------------ ------------ ------------ ------------
Net income available to common shareholders $ 973,568 $ 1,817,956 $ 702,342 $ 899,841
============ ============ ============ ============
Earnings Per Common Share:
Basic $ .13 $ .33 $ .09 $ .16
============ ============ ============ ============
Diluted $ .12 $ .24 $ .07 $ .11
============ ============ ============ ============
Weighted average number of shares outstanding:
Basic 7,474,509 5,480,032 7,805,008 5,530,525
============ ============ ============ ============
Diluted 9,062,390 7,989,739 11,017,932 8,543,579
============ ============ ============ ============
</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>
Six Months Ended Three Months Ended
December 31, December 31,
------------------------------- -------------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income $ 1,232,943 $ 1,817,956 $ 767,967 $ 899,841
Adjustments to reconcile net income to net cash
provided by (used for) operating activities:
Depreciation and amortization 901,448 470,644 506,478 223,093
(Gain) loss on disposal of property and equipment (10,138) 4,377 (3,293) (407)
Contribution of common stock to 401(k) plan 171,662 116,504 85,212 87,249
Change in deferred income taxes 12,000 138,000 -- 69,000
Other 10,613 (41,715) 2,241 (20,858)
Changes in assets and liabilities, net of effects
of acquisitions:
Accounts receivable, trade (2,154,721) (3,121,635) (1,058,442) (921,516)
Other receivables (1,724,622) (24,280) (889,686) (21,282)
Inventories, including adjustments to costs,
billings and estimated earnings (4,209,060) (3,600,974) (548,002) (976,871)
Prepaid expenses (132,318) 143,429 (417,699) (92,228)
Accounts payable 1,499,462 2,227,680 242,285 1,338,052
Customer deposits 1,122,264 (453,039) 799,671 (241,531)
Accrued expenses (110,285) 97,087 (522,830) (83,609)
Other 28,336 19,074 (344) 13,648
------------ ------------ ------------ ------------
Net cash provided by (used for) operating activities (3,362,416) (2,206,892) (1,036,442) 272,581
------------ ------------ ------------ ------------
Cash flows from investing activities:
Purchase of property, plant and equipment (1,113,376) (645,868) (573,415) (437,662)
Business acquisitions, net of cash acquired (1,844,980) -- -- --
Patent, trademark and other intangible acquisition costs -- (1,542) -- (535)
Proceeds from sales of assets 47,534 38,026 10,475 27,500
Other (34,538) 36,000 (34,538) 36,000
------------ ------------ ------------ ------------
Net cash used for investing activities (2,945,360) (573,384) (597,478) (374,697)
------------ ------------ ------------ ------------
Cash flows from financing activities:
Net change in line of credit borrowings 3,410,158 2,723,905 2,549,577 (129,151)
Principal payments on notes payable (693,583) (384,391) (84,907) (12,316)
Proceeds from sales of stock, including option and
warrants exercises, net of issuance costs 94,755 258,457 27,246 225,020
Payments on capital lease obligations (342,133) (158,739) (144,754) (81,874)
Proceeds from the sale of preferred stock, net 4,946,000 -- -- --
Payment of preferred stock dividends (43,750) -- -- --
Other (264,729) (1,257) (246,233) (1,257)
------------ ------------ ------------ ------------
Net cash provided by financing activities 7,106,718 2,437,975 2,100,929 422
------------ ------------ ------------ ------------
Increase (decrease) in cash 798,942 (342,301) 467,009 (101,694)
Cash, beginning of period 79,832 537,564 411,765 296,957
------------ ------------ ------------ ------------
Cash, end of period $ 878,774 $ 195,263 $ 878,774 $ 195,263
============ ============ ============ ============
</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 financial statements included in this Form 10-Q/A have been amended
from the financial statements included in the Form 10-Q filed by the Company
with the Securities and Exchange Commission on February 14, 2000. The amendments
are a result of certain adjustments identified during the fourth quarter of
fiscal 2000 related to inventory and beneficial conversion features of preferred
stock. The effect of the adjustments was to reduce net income attributed to
common shareholders for the three months ended December 31, 1999 from $938,346
as reported on Form 10-Q to $702,342 as reported in this Form 10-Q/A. Basic
earnings per share was reduced from $0.12 to $0.09 and diluted earnings per
share was reduced from $0.10 to $0.07. For the 6 months ended December 31, 1999,
the amendments resulted in a reduction of income attributed to common
shareholders from $1,781,255 as reported on Form 10-Q to $973,568 as reported in
this Form 10-Q/A. Basic earnings per share was reduced from $0.24 to $0.13 and
diluted earnings per share was reduced from $0.19 to $0.12.
The results of operations for the six and three months ended December
31, 1999 are not necessarily indicative of the results to be expected for the
full year.
NOTE 2 - ACQUISITIONS
On July 1, 1999, we acquired all of the outstanding common stock of
Lockwood Sign Group, Inc. ("Lockwood") in exchange for 415,000 shares of our
common stock valued at $1,909,000 and $1,900,000 in cash. Up to an additional
285,000 shares 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 25,909 shares for
each $25,000 of net income in excess of $350,000 up to the maximum of 285,000
shares to be issued for net income of $625,000 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 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:
December 31,
1999 June 30,
(Unaudited) 1999
----------- -----------
Raw materials and work in progress $ 8,043,745 $ 5,938,552
Finished goods 826,155 146,157
----------- -----------
$ 8,869,900 $ 6,084,709
=========== ===========
NOTE 4 - UNCOMPLETED CONTRACTS
The costs and estimated earnings in excess of billings on uncompleted
contracts consist of the following:
December 31,
1999 June 30,
(Unaudited) 1999
----------- -----------
Costs incurred on uncompleted contracts $10,323,428 $ 5,851,502
Estimated earnings 4,288,765 3,441,933
----------- -----------
14,612,193 9,293,435
Billings to date (7,547,563) (5,042,727)
----------- -----------
$ 7,064,630 $ 4,250,708
=========== ===========
Included in the accompanying balance sheet under the following
captions:
Costs and estimated earnings in excess
of billings on completed contracts $ 7,377,295 $ 4,442,012
Billings in excess of costs and estimated
earnings on completed contracts (312,665) (191,304)
----------- -----------
$ 7,064,630 $ 4,250,708
=========== ===========
NOTE 5 - REVOLVING LINE OF CREDIT
We have a $10 million revolving line of credit. 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. At December 31, 1999, the interest rate was 8.66%. 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 December 31, 1999, $7,963,274 was
borrowed against this line of credit
We also have, through our Lockwood subsidiary, an additional $2,000,000
revolving line of credit. Advances on the credit line carry an interest rate of
0.5% over prime. The line of credit, which is
6
<PAGE>
renewable, initially matures June 22, 2001 and is collateralized by accounts
receivable and inventory of Lockwood and its real property in Charlotte, NC. At
December 31, 1999, $999,514 was outstanding against this line of credit.
NOTE 6 - CAPITAL STOCK
During the six months ended December 31, 1999, a total of 138,121
options to purchase our common stock were exercised for total cash proceeds of
$94,755.
Also during the six months ended December 31, 1999, 46,588 shares of
our common stock valued at $171,662 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 redeemable 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. Cash dividends of $109,375 on the preferred
stock were declared during the six months ended December 31, 1999.
On September 10, 1999, accrued executive bonuses totaling $64,795 were
paid through the issuance of 16,456 shares of common stock.
On November 22, 1999, a 5% stock dividend was granted 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 - EARNINGS PER SHARE
Diluted earnings per share are calculated as follows:
<TABLE><CAPTION>
Six months ended Three months ended
December 31 December 31
--------------------------- ---------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net income $ 1,232,943 $ 1,817,956 $ 767,967 $ 899,841
Preferred dividends and beneficial
conversion features (259,375) -- -- --
Convertibles debt interest, net 92,638 109,975 49,346 53,738
----------- ----------- ----------- -----------
Net income for purposes of calculating
diluted earnings per share $ 1,066,206 $ 1,927,931 $ 817,313 $ 953,579
=========== =========== =========== ===========
</TABLE>
7
<PAGE>
<TABLE><CAPTION>
<S> <C> <C> <C> <C>
Basic weighted average shares 7,474,509 5,480,032 7,805,008 5,530,525
Convertible securities 812,065 934,862 2,373,040 934,862
Options and warrants 503,816 1,520,712 554,884 1,753,395
Acquisition contingent shares 272,000 54,133 285,000 324,797
----------- ----------- ----------- -----------
Diluted weighted average shares 9,062,390 7,989,739 11,017,932 8,543,579
=========== =========== =========== ===========
Diluted earnings per share $ .12 $ .24 $ .07 $ .11
=========== =========== =========== ===========
</TABLE>
NOTE 8 - SUPPLEMENTAL CASH FLOW INFORMATION
Cash payments for interest for the first two quarters of fiscal 2000
totaled $750,972. The following summarizes noncash investing and financing
transactions for the six months ended December 31, 1999 and 1998:
1999 1998
----------- -----------
Equity issued for the acquisition
of Lockwood $ 1,909,000 --
Issuance of common stock for 5%
stock dividend 1,791,267 1,320,045
Capital lease obligations incurred
to acquire fixed assets 814,282 --
Contributions of common stock to
401(k) plan 171,662 116,504
Stock issued for employee bonuses 64,795 61,274
Fair value of stock options issued
for investment consulting services -- 76,950
NOTE 9 - 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 products which, when installed in compressed air lines, substantially
reduce or totally eliminate water and condensation problems and most foreign
contaminants in the air line.
8
<PAGE>
The following table shows sales and operating income from continuing
operations and other financial information by segment:
<TABLE><CAPTION>
Six months ended Three months ended
December 31 December 31
----------------------------- -----------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Sales to external customers
Displays $ 45,388,752 $ 33,638,231 $ 22,704,378 $ 17,034,344
Other 777,845 833,399 365,661 403,273
------------ ------------ ------------ ------------
$ 46,166,597 $ 34,471,630 $ 23,070,039 $ 17,437,617
============ ============ ============ ============
Operating income
Displays $ 3,761,330 $ 4,160,404 $ 2,107,286 $ 2,112,539
Other 93,352 298,541 28,393 99,668
Corporate expenses (1,133,311) (888,170) (534,796) (427,367)
------------ ------------ ------------ ------------
$ 2,721,371 $ 3,570,775 $ 1,600,883 $ 1,784,840
============ ============ ============ ============
Depreciation and amortization
Displays $ 837,320 $ 419,867 $ 480,366 $ 196,991
Other 19,066 20,483 3,274 10,474
Corporate 45,062 30,294 22,838 15,628
------------ ------------ ------------ ------------
$ 901,448 $ 470,644 $ 506,478 $ 223,093
============ ============ ============ ============
Interest income
Displays $ 191,355 $ 60,983 $ 147,929 $ 42,226
Other -- -- -- --
Corporate -- -- -- --
------------ ------------ ------------ ------------
$ 191,355 $ 60,983 $ 147,929 $ 42,226
============ ============ ============ ============
Interest expense
Displays $ 305,232 $ 329,764 $ 161,892 $ 177,987
Other -- -- -- --
Corporate 619,000 313,206 329,441 159,701
------------ ------------ ------------ ------------
$ 924,232 $ 642,970 $ 491,333 $ 337,688
============ ============ ============ ============
</TABLE>
NOTE 10 - 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.
9
<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 six and three months ended December
31, 1999, are not necessarily indicative of the results to be expected for the
full year.
SIX MONTHS ENDED DECEMBER 31, 1999 VS. DECEMBER 31, 1998
--------------------------------------------------------
Our sales for the six months ended December 31, 1999 increased by
$11,694,967, or 34% over the same period in the prior year. Operating income
decreased by $849,404, or 24% while income before provision for income taxes
decreased by $943,013, or 32%. Net income for the six months ended December 31,
1999 decreased by $585,013, or 32% over the same period in the prior year.
The increased sales resulted from increases in the sign and image
enhancement display segment (the "display segment"). The $45,388,752 display
segment's sales, which accounted for 98.3% of consolidated sales for the six
months ended December 31, 1999, increased by $11,750,521, or 35%, while filter
sales decreased by $55,554, or 7%, over the same period of the prior year. The
sales growth in the display segment can be broken down into internal sales
growth of $2,252,715 and growth from acquisitions of $9,497,806.
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 six months ended December 31, 1999, Lockwood has
reported sales totaling $9,497,806, or an average of $4,748,903 per quarter.
Therefore, Lockwood's growth rate has exceeded 89% since our July 1, 1999
acquisition. Excluding the effects of Lockwood, display segment sales increased
from $33,638,231 in the first six months of fiscal 1999 to $35,890,946 in the
first six months of fiscal 2000. The internal sales growth resulted from growth
in sales of commercial displays of $2,022,555 and growth in sales of
institutional displays of $230,160.
10
<PAGE>
Our overall gross profit margin dropped to 30.0% of sales for the six
months ended December 31, 1999 from 35.1% 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 35% to 30%, while the filter sales margins increased from 56% to
57%. 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 first six months of the
current year includes a significant amount of low margin work on certain
national accounts that are expected to produce higher margins in future periods.
A significant portion of that higher margin work with these national accounts
has been secured for production during our third and fourth quarters.
Selling expense increased by 11% from $4,927,865 in the first six
months of fiscal 1999, to $5,471,607 in the first six months of fiscal 2000. Of
this $543,742 increase, $514,311 relates to the display segment, mostly a result
of the Lockwood acquisition. Selling expenses, as a percentage of sales, dropped
from 14% of sales during the first six months of last year to 12% of sales
during the first six months of this year.
General and administrative (G&A) expenses increased by 57% from
$3,598,383 in the six months ended December 31, 1998 to $5,657,667 in the six
months ended December 31, 1999. Of this $2,059,284 increase, $1,748,651 related
to the display segment. The portion of this increase relating directly to the
acquisition of Lockwood was $1,277,522. Additionally, for the six months ended
December 31, 1999, corporate G&A expenses increased by $245,141 over the same
period of the prior year.
A majority of the increase in the display segment's G&A expenses,
excluding the result 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.
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. A majority of the increase in corporate G&A costs
resulted from increased executive salaries due to the new positions of Corporate
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.
Non-operating items netted to a $590,819 expense for the first six
months in fiscal 1999 compared to a $684,428 expense in the first six months of
fiscal 2000 - a net increase in expenses of $93,609. The main component of this
increase is interest expense, which increased by $281,262 or 44%, from $642,970
for the six months ended December 31, 1998 to $924,232 for the six months ended
December 31, 1999. A majority of the increase in interest expense is
attributable to the Lockwood acquisition, which contributed an additional
$184,221 in interest expense for the six months ended December 31, 1999, while
the remaining increase relates to increased debt. The increase in interest
expense was partially offset by increases in interest income and other
miscellaneous income.
Net income decreased by 32%, from $1,817,956 for the six months ended
December 31, 1998 to $1,232,943 for the six months ended December 31, 1999. On a
per share basis, basic earnings per share decreased by 61% from $0.33 per share
for the first six months of fiscal 1999 to $0.13 per share for the first
11
<PAGE>
six months of fiscal 2000, due partially to the 36% increase in weighted average
shares outstanding. Diluted earnings per share decreased by 50% from $0.24 for
the six months ended December 31, 1998 to $0.12 for the six months ended
December 31, 1999, again, due partially to a 13% increase in diluted weighted
average shares outstanding.
The 30% increase in our diluted weighted average shares outstanding is
due to the 5% common stock dividend granted in November, shares issued in the
acquisition 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.
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. During November 1999, AmeriVision sold two of its displays that were
not located at shopping malls. Currently, AmeriVision has 6 displays that are
either operating or scheduled for installation by March 2000. Management expects
an additional 6 displays to be installed during the fourth quarter of fiscal
2000 for a total of 12 displays operating by June 30, 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.
THREE MONTHS ENDED DECEMBER 31, 1999 VS. DECEMBER 31, 1998
----------------------------------------------------------
Our sales for the quarter ended December 31, 1999 increased by
$5,632,422, or 32% over the same quarter in the prior year. Operating income
decreased by $183,957, or 10%, while net income decreased by $131,874, or 15%.
The increased sales resulted from increases in the display segment,
which accounted for 98.4% of consolidated sales for the three months ended
December 31, 1999. Sales from this segment increased by $5,670,034, or 33%,
while filter sales decreased by $37,612, or 9%, over the same quarter of the
prior year. The sales growth in the display segment can be broken down into
internal sales growth of $2,010,431 and growth from the Lockwood acquisition of
$3,659,603. However, as discussed previously, Lockwood has been growing at an
internal rate of 89% since our July 1, 1999 acquisition.
Excluding the effects of acquisitions, display segment sales increased
from $17,034,344 in the second quarter of fiscal 1999 to $19,044,775 in the
second quarter of fiscal 2000. The internal sales growth resulted from growth in
commercial displays sales of $1,799,014 and growth in our institutional displays
of $211,417.
12
<PAGE>
Our overall gross profit margin dropped to 30.2% for the quarter ended
December 31, 1999, from 35.0% for the same quarter of the previous year. The
drop in gross margin was due to the drop in margins in the display segment from
34% to 32% and the drop in margins on filter sales from 58% to 55%. The decrease
in margins on display segment sales was a result of a change in the sales mix
from last year's second quarter. The current year's second quarter included low
margin work on certain national accounts that are expected to produce higher
margins in future periods. A significant portion of that higher margin work with
these national accounts has been secured for production during our third and
fourth quarters.
Selling expense increased by 3% from $2,466,625 in the second quarter
of fiscal 1999, to $2,531,096 in the second quarter of fiscal 2000. Of this
$64,471 increase, $232,687 resultrd from the acquisition, offset by a decrease
in display segment selling costs of $156,032, and a decrease in other segment's
selling costs of $12,184. Selling expenses, as a percentage of sales, dropped
from 14% of sales during last year's second quarter to 11% of sales during this
year's second quarter.
General and administrative expenses increased from $1,846,325 to
$2,834,571 for the three months ended December 31, 1998 and 1999, respectively.
The display segment, which includes the effects of the Lockwood acquisition, had
an increase from $1,357,591 to $2,214,890. Additionally, corporate general and
administrative expenses increased from $427,367 to $534,796 for the second
quarters of fiscal 1999 and 2000, respectively.
A majority of the increase in the display segment's general and
administrative expenses came from the acquisition of Lockwood, which added
$707,246. 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 December 31, 1998 to the
quarter ended December 31, 1999 corporate general and administrative costs
increased $107,429. A majority of this increase resulted from increased
consulting costs and increased investor relations costs.
Non-operating items netted to a $309,999 expense for the second quarter
in fiscal 1999 compared to a $331,916 expense in the second quarter of fiscal
2000 - a net increase in expenses of $21,917. The main component of this
increase is interest expense, which increased by $153,645 or 45%, from $337,688
for the three months ended December 31, 1998 to $491,333 for the three months
ended December 31, 1999. A majority of the increase in interest expense is
attributable to the Lockwood acquisition, which contributed an additional
$93,917 in interest expense for the three months ended December 31, 1999, while
the remaining increase relates to increased debt. The increase in interest
expense was partially offset by increases in interest income and other
miscellaneous income.
Net income decreased by 15%, from $899,841 for the three months ended
December 31, 1998 to $767,967 for the three months ended December 31, 1999. On a
per share basis, basic earnings per share decreased by 44% from $0.16 per share
for the second quarter of fiscal 1999 to $0.09 per share for the second quarter
of fiscal 2000, due partially to the 41% increase in weighted average shares
outstanding. Diluted earnings per share decreased by 36% from $0.11 for the
three months ended December 31, 1998 to $0.07 for
13
<PAGE>
the three months ended December 31, 1999, again, due partially to a 29% increase
in diluted weighted average shares outstanding.
The 29% increase in our diluted weighted average shares outstanding was
due to the 5% common stock dividend granted in November, shares issued in the
acquisition of Lockwood, as well as convertible preferred stock issued in August
1999.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
Net cash used for operating activities for the six months ended
December 31, 1999 was $3,362,416. Net income for the period provided cash of
$2,318,528, 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 $5,680,944 in our operating assets and liabilities, consisting
primarily of increases in inventories and receivables.
Net cash used for investing activities for the first two quarters ended
December 31, 1999 was $2,945,360 of which $1,844,980 was used to purchase
Lockwood. Additionally, $1,113,376 was used for capital expenditures and $34,538
was used for other investing activities, offset by $47,534 provided by the sale
of fixed assets.
Net cash provided by financing activities for the six months ended
December 31, 1999 was $7,106,718. Of this amount, $4,946,000 (net of issuance
costs) was received from the sale of preferred stock, $3,410,158 was received
through advances on our lines of credit, and $94,755 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 $693,583, $342,133, and $264,729, respectively, and the payment of
preferred stock dividends of $43,750.
We have a $10,000,000 revolving bank line of credit. Advances on the
credit line carry an interest rate of either (A) 3/4% over prime or (B) 325
basis points over LIBOR, and initially matures June 30, 2002. The line of credit
is collateralized by eligible receivables and inventory and is
cross-collateralized with the two letters of credit from the same lender and
$4,775,000 in notes payable secured by the letters of credit. As of February 14,
2000, $9,190,178 was borrowed against this line of credit.
We also have, through our Lockwood subsidiary, an additional $2,000,000
revolving line of credit. Advances on the credit line carry an interest rate of
1/2% over prime. The line of credit, which is renewable, initially matures June
22, 2001 and is collateralized by accounts receivable and inventory of Lockwood
and its real property in Charlotte, NC. At February 14, 2000, $999,514 was
outstanding against this line of credit.
During the first quarter of fiscal 1999, 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 $3.50 per share, subject to certain anti-dilution and other
adjustments.
14
<PAGE>
YEAR 2000 COMPUTER COMPLIANCE
-----------------------------
Many existing computer programs only use two digits to identify a year
in the date field, with the result that data referring to the Year 2000 and
subsequent years may be misinterpreted by these programs. If present in our
computer applications or our suppliers and not corrected, this problem could
cause computer applications to fail or to create erroneous results and could
cause a disruption in operations and have an adverse effect on our business and
results of operations.
Over the last few years, we have analyzed and evaluated all internal
information technology systems, equipment and operations to ensure their Year
2000 compliance. We have been actively implementing new systems over the last
few years, and believe that all of our major information technology, including
our computer operated electronic display products, are Year 2000 complaint.
Letters of compliance have been requested from each vendor and, when the need is
identified, we intend to work with our vendors in determining appropriate
testing and compliance processes. Expenditures to remediate Year 2000 issues
have not been material and are not expected to be material in the future.
We do not assess as high the risks to operations of Year 2000
noncompliance by vendors, since numerous alternate sources of suppliers exist.
However, despite this fact and our efforts to ensure our Year 2000 compliance
and that of our vendors, we could potentially experience a disruption in our
operations as a result of Year 2000 noncompliance of certain vendors, financial
institutions, governmental agencies or other third parties or external systems.
Such a disruption could potentially affect various aspects of business
operations, such as the timeliness of completion and delivery of major
electronic display products.
(THE REMAINDER OF THE PAGE INTENTIONALLY LEFT BLANK)
15
<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.
--------------------------------------------------------------
The Company held its 1999 annual meeting of shareholders (the "1999
Annual Meeting") on November 18, 1999.
Proxies for the 1999 Annual Meeting were solicited by the Company's
management pursuant to Regulation 14A under the Exchange Act, there was no
solicitation in opposition to management's nominees for election of directors as
listed in the Company's October 1, 1999 Proxy Statement delivered in connection
with the 1999 Annual Meeting, and all of such nominees were elected.
At the Annual Meeting, 12 persons were elected to serve as directors of
the Company until their successors are elected and qualified, and the Company's
shareholders ratified the appointment of BDO Seidman, LLP, as independent
auditors of the Company for the June 30, 2000 fiscal year. The Company's
shareholders also approved a new Stock Incentive Plan. The number of votes cast
for, against or withheld, as well as the number of abstentions (including broker
non-votes), as to each of such matters was as follows:
<TABLE><CAPTION>
Votes Votes Votes Votes
For Against Withheld Abstaining
--------- ------- -------- ----------
<S> <C> <C> <C> <C>
Gary J. Arnold 7,676,523 0 3,045 0
Gary Donald Bell 7,679,568 0 8,511 0
J. William Brandner 7,636,645 0 42,923 0
Thomas N. Grant 7,672,948 0 6,620 0
Kevin L. Jackson 7,671,057 0 8,511 0
Lester Jacobs 7,637,045 0 42,523 0
Larry L. Johnson 7,678,768 0 800 0
Terry J. Long 7,679,168 0 400 0
Lou A. Papais 7,673,111 0 6,457 0
William A. Retz 7,678,836 0 732 0
Robert M. Smither 7,646,276 0 33,292 0
J. Melvin Stewart 7,630,820 0 48,748 0
Stock Incentive Plan 5,249,693 473,087 0 54,012
Ratification of appointment
of BDO Seidman, LLP 7,735,475 36,170 0 12,977
</TABLE>
16
<PAGE>
ITEM 5. OTHER INFORMATION.
---------------------------
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
----------------------------------------------
3.34 November 18, 1999 Amended and Restated Bylaws of Registrant
10.141 Display Technologies, Inc. 1999 Stock Incentive Plan
27 Financial Data Schedule
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DISPLAY TECHNOLOGIES, INC.
Date: 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
Chief Accounting Officer
17
