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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended August 1,October 31, 1998
Commission file number
0-23246
DAKTRONICS, INC.
South Dakota 46-0306862
------------ ----------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation of organization)
331 32nd Avenue Brookings, SD 57006
-----------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (605) 697-4000
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(Former name, address, and/or fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes __X_____X___ No __________
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding at August 31,December 1, 1998
-------------------------- ------------------------------- ---------------------------- -------------------------------
Common Stock, No par value 4,329,9384,367,159
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Daktronics, Inc.
Table of Contents
Part I. Financial Information Page(s)
-------
Consolidated Balance Sheets -
August 1,October 31, 1998 and May 2, 1998 ....................................................... 3 - 4
Consolidated Statements of OperationsIncome -
Three months and six months ended
August 1,October 31, 1998 and August 2,November 1, 1997 ............................................... 5
Consolidated Statements of Cash Flows -
ThreeSix months ended August 1,October 31, 1998 and
August 2, 1997.............................................November 1, 1997............................................ 6
Notes to Consolidated Financial Statements.................Statements.................. 7 - 8
Management's Discussion and Analysis of
Financial Condition and Results of Operation...............Operation................ 9 - 12
Part II. Signatures.....................................................Other Information............................................. 13 - 14
Signatures.................................................. 15
2
DAKTRONICS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(In thousands)
AUGUST 1,
1998 MAY 2,
ASSETS (UNAUDITED) 1998
---------- ----------
CURRENT ASSETS
Cash and cash equivalents ................. $ 130 $ 148
Accounts receivable less allowance
for doubtful accounts of $239 at
August 1, 1998 and $208 at May 2, 1998 .. 11,646 13,632
Current maturities of long-term
receivables ............................. 794 990
Inventories ............................... 12,721 10,994
Costs and estimated earnings in
excess of billings on uncompleted
contracts ............................... 9,887 1,523
Prepaid expenses and other ................ 340 448
Deferred income tax benefit ............... 1,139 1,139
---------- ----------
Total current assets .................... $ 36,657 $ 28,874
---------- ----------
LONG-TERM RECEIVABLES
AND OTHER ASSETS
Long-term receivables,
less current maturities ................. 4,452 4,575
Intangible assets and other ............... 734 814
---------- ----------
$ 5,186 $ 5,389
---------- ----------
PROPERTY AND EQUIPMENT,
at cost
Land .................................... $ 532 $ 492
Buildings ............................... 5,297 5,069
Machinery and equipment ................. 13,164 12,177
Office furniture and equipment .......... 698 403
Transportation equipment ................ 435 590
---------- ----------
$ 20,126 $ 18,731
Less accumulated depreciation ............. 9,914 9,506
---------- ----------
$ 10,212 $ 9,225
---------- ----------
$ 52,055 $ 43,488
========== ==========
OCTOBER 31,
1998 MAY 2,
ASSETS (UNAUDITED) 1998
----------- -----------
CURRENT ASSETS
Cash and cash equivalents ................... $ 162 $ 148
Accounts receivable less allowance
for doubtful accounts of $270 at
October 31, 1998 and $208 at May 2, 1998 .. 17,287 13,632
Current maturities of long-term
receivables ............................... 838 990
Inventories ................................. 12,175 10,994
Costs and estimated earnings in
excess of billings on uncompleted
contracts ................................. 6,983 1,523
Prepaid expenses and other .................. 44 448
Deferred income tax benefit ................. 1,139 1,139
----------- -----------
Total current assets ...................... $ 38,628 $ 28,874
----------- -----------
LONG-TERM RECEIVABLES
AND OTHER ASSETS
Long-term receivables,
less current maturities ................... $ 4,800 $ 4,575
Intangible assets and other ................. 801 814
----------- -----------
$ 5,601 $ 5,389
----------- -----------
PROPERTY AND EQUIPMENT,
at cost
Land ...................................... $ 532 $ 492
Buildings ................................. 5,369 5,069
Machinery and equipment ................... 13,510 12,177
Office furniture and equipment ............ 738 403
Transportation equipment .................. 499 590
----------- -----------
$ 20,648 $ 18,731
Less accumulated depreciation ............... 10,314 9,506
----------- -----------
$ 10,334 $ 9,225
----------- -----------
$ 54,563 $ 43,488
=========== ===========
The accompanying notes are an integral part of these Consolidated Financial
Statements.
3
DAKTRONICS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(In thousands)
AUGUST 1,
1998 MAY 2,
LIABILITIES AND SHAREHOLDERS' EQUITY (UNAUDITED) 1998
---------- ----------
CURRENT LIABILITIES
Notes payable, bank ......................... $ 8,291 $ 5,594
Current maturities of
long-term debt ............................ 455 455
Accounts payable ............................ 9,117 5,730
Accrued expenses ............................ 3,515 3,752
Billings in excess of costs and
estimated earnings on uncompleted contracts 1,891 645
Income taxes payable ........................ 726 469
---------- ----------
Total current liabilities ................... $ 23,995 $ 16,645
---------- ----------
LONG-TERM DEBT
Less current maturities ..................... $ 712 $ 783
DEFERRED INCOME ............................... $ 503 $ 361
DEFERRED INCOME TAXES ......................... $ 515 $ 515
SHAREHOLDERS' EQUITY
Common stock, no par value
Authorized 15,000,000 shares
Issued August 1, 1998 4,329,010 shares
May 2, 1998 4,324,210 shares .............. $ 11,755 $ 11,722
Retained earnings ........................... 14,584 13,471
---------- ----------
$ 26,339 $ 25,193
Less:
Cost of 4,920 treasury shares ............... (9) (9)
---------- ----------
$ 26,330 $ 25,184
---------- ----------
$ 52,055 $ 43,488
========== ==========
OCTOBER 31,
1998 MAY 2,
LIABILITIES AND SHAREHOLDERS' EQUITY (UNAUDITED) 1998
----------- -----------
CURRENT LIABILITIES
Notes payable, bank .............................. $ 7,245 $ 5,594
Current maturities of
long-term debt ................................. 1,355 455
Accounts payable ................................. 7,420 5,730
Accrued expenses ................................. 3,921 3,752
Billings in excess of costs and
estimated earnings on uncompleted contracts .... 1,944 645
Income taxes payable ............................. -- 469
----------- -----------
Total current liabilities ...................... $ 21,885 $ 16,645
----------- -----------
LONG-TERM DEBT .....................................
Less current maturities .......................... $ 4,572 $ 783
DEFERRED INCOME .................................... $ 389 $ 361
DEFERRED INCOME TAXES .............................. $ 515 $ 515
SHAREHOLDERS' EQUITY
Common stock, no par value
Authorized 30,000,000 shares
Issued October 31, 1998 4,330,278 shares
May 2, 1998 4,324,210 shares ................... $ 11,783 $ 11,722
Retained earnings ................................ 15,428 13,471
----------- -----------
$ 27,211 $ 25,193
Less:
Cost of 4,920 treasury shares .................... (9) (9)
----------- -----------
$ 27,202 $ 25,184
----------- -----------
$ 54,563 $ 43,488
=========== ===========
The accompanying notes are an integral part of these Consolidated Financial
Statements.
4
DAKTRONICS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONSINCOME
(In thousands, except earnings per share)
(unaudited)
THREE MONTHS ENDED
------------------
AUGUST 1, AUGUST 2,
1998 1997
(13 WEEKS) (13 WEEKS)
---------- ----------
Net sales ........................ $ 22,236 $ 15,768
Cost of goods sold ............... 15,939 11,760
---------- ----------
Gross profit ................. $ 6,297 $ 4,008
---------- ----------
Operating expenses:
Selling ........................ $ 2,638 $ 2,207
General and administrative ..... 952 719
Product design and development . 868 628
---------- ----------
$ 4,458 $ 3,554
---------- ----------
Operating income ............. $ 1,839 $ 454
Nonoperating income (expense):
Interest income ................ 102 96
Interest expense ............... (174) (113)
Other income ................... 94 7
---------- ----------
Income before income taxes ... $ 1,861 $ 444
Income tax expense ............... 748 175
---------- ----------
Net income ................... $ 1,113 $ 269
THREE MONTHS ENDED SIX MONTHS ENDED
-------------------------- --------------------------
OCTOBER 31, NOVEMBER 1, OCTOBER 31, NOVEMBER 1,
1998 1997 1998 1997
(13 WEEKS) (13 WEEKS) (26 WEEKS) (27 WEEKS)
---------- ---------- ---------- ----------
Net sales ............................. $ 24,233 $ 16,936 $ 46,469 $ 32,704
Cost of goods sold .................... 18,064 12,049 34,003 23,809
---------- ---------- ---------- ----------
Gross profit .................. $ 6,169 $ 4,887 $ 12,466 $ 8,895
---------- ---------- ---------- ----------
Operating expenses:
Selling ........................... $ 3,054 $ 2,293 5,691 $ 4,500
General and administrative ........ 885 793 1,837 1,512
Product design and development .... 801 532 1,669 1,160
---------- ---------- ---------- ----------
$ 4,740 $ 3,618 $ 9,197 $ 7,172
---------- ---------- ---------- ----------
Operating income .............. $ 1,429 $ 1,269 $ 3,269 $ 1,723
Nonoperating income (expense):
Interest income ................... 191 160 293 256
Interest expense .................. (245) (99) (419) (212)
Other income ...................... 34 44 128 51
---------- ---------- ---------- ----------
Income before income taxes .... $ 1,409 $ 1,374 $ 3,271 $ 1,818
Income tax expense .................... 566 545 1,314 720
---------- ---------- ---------- ----------
Net income .................... $ 843 $ 829 $ 1,957 $ 1,098
========== ========== ========== ==========
Earnings per share (basic) ............ $ .19 $ .19 $ .45 $ .25
========== ========== ========== ==========
Earnings per share (diluted) .......... $ .19 $ .19 $ .44 $ .25
========== ========== ========== ==========
Earnings per share:
Basic ........................ $ .26 $ .06
---------- ----------
Diluted ...................... $ .25 $ .06
---------- ----------
The accompanying notes are an integral part of these Consolidated Financial
Statements.
5
DAKTRONICS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)thousands)
(unaudited)
THREESIX MONTHS ENDED
------------------
AUGUST----------------------------
OCTOBER 31, NOVEMBER 1, AUGUST 2
1998 1997
(13(26 WEEKS) (13(27 WEEKS)
---------- --------------------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income ............................................................................................ $ 1,1131,957 $ 2691,098
Adjustments to reconcile net income to
net cash provided by (used in) operating activities:
Depreciation ..................................... 408 344
Amortization ..................................... 80 220........................................... 808 684
Amoritization .......................................... 160 440
Provision for doubtful accounts .................. 31 12........................ 62 9
Change in operating assets and
liabilities .................................... (2,914) (928)
---------- ----------.......................................... (7,310) (1,619)
----------- -----------
Net cash provided by (used in)
operating activities .................................................... $ (1,282)(4,323) $ (83)
---------- ----------612
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment ............................................ $ (1,395)(1,917) $ (355)
---------- ----------(816)
Other, net ................................................. (147) 227
----------- -----------
Net cash (used in)
investing activities ............................................................ $ (1,395)(2,064) $ (355)
---------- ----------(589)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings on notes payable .................................................. $ 2,6971,651 $ 883709
Proceeds from long-term debt ............................... 5,000 --
Principal payments on
long-term debt ..................................... (71) (268)........................................... (311) (671)
Proceeds from exercise of stock options .............. 33.................... 61 --
---------- --------------------- -----------
Net cash provided by
financing activities .................................................................. $ 2,6596,401 $ 615
---------- ----------38
----------- -----------
Increase (decrease) in cash ........................and cash equivalents ...................... $ (18)14 $ 177
Cash:61
Cash and cash equivalents:
Beginning .............................................................................................. 148 118
---------- --------------------- -----------
Ending .................................................................................................... $ 130162 $ 295
========== ==========179
=========== ===========
The accompanying notes are an integral part of these Consolidated Financial
Statements.
6
DAKTRONICS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE A. GENERAL
The consolidated financial statements include the accounts of
Daktronics, Inc. and its wholly-owned subsidiary, Star Circuits, Inc.
Intercompany accounts and transactions have been eliminated in consolidation.
Earnings per share are calculated in accordance with the provisions of
FASB Statement No. 128, "Earnings Per Share". A reconciliation of the income and
common stock share are amounts used in the calculation of basic and diluted earnings
per share for the threesix months ended August 1,October 31, 1998 and August 2,November 1, 1997 follows
(amounts in thousands except per share amount)amounts):
Per
Net Share
Income Shares Amount
For the year ended August 1, 1998:
Basic EPS........................... $ 1,113 $ 4,324 $ 0.26
Effect of dilutive securities:
Exercise of stock options......... -- 71 .01
-------- -------- --------
Diluted EPS......................... $ 1,113 $ 4,395 $ 0.25
======== ======== ========
For the year ended August 2, 1997:
Basic EPS........................... $ 269 $ 4,306 $ 0.06
Effect of dilutive securities:
Exercise of stock options ........ -- 7 --
-------- -------- --------
Diluted EPS......................... $ 269 $ 4,313 $ 0.06
======== ======== ========
Per
Net Share
Income Shares Amount
--------- --------- ---------
For the six months ended October 31, 1998:
Basic EPS .............................. $ 1,957 4,330 $ 0.45
Effect of dilutive securities:
Exercise of stock options ............ -- 94 .01
--------- --------- ---------
Diluted EPS ............................ $ 1,957 4,424 $ 0.44
========= ========= =========
For the six months ended November 1, 1997:
Basic EPS .............................. $ 1,098 4,306 $ 0.25
Effect of dilutive securities:
Exercise of stock options ............ -- 32 --
--------- --------- ---------
Diluted EPS ............................ $ 1,098 4,338 $ 0.25
========= ========= =========
In the opinion of management, the unaudited financial statements
contain all adjustments, consisting of normal recurring accruals, necessary to
present fairly the consolidated financial position of the Company and its
subsidiary as of August 1,October 31, 1998 and the results of its operations and cash
flows for the threesix months ended August 1,October 31, 1998 and August 2,November 1, 1997. These
results may not be indicative of the results to be expected for the full fiscal
year.
NOTE B. INVENTORIES
Inventories consist of the following (in thousands):
August 1,October 31, May 2,
1998 1998
---- ----
Raw materials....................materials............. $ 8,6589,953 $ 8,657
Work-in-process.................. 2,257Work-in-process........... 956 790
Finished goods................... 1,806goods............ 1,266 1,547
--------- ---------
$ 12,72112,175 $ 10,994
========= =========
NOTE C. LITIGATION
On May 4, 1995, the Company was served with a complaint alleging that
the Company infringed on the plaintiff's patent rights. On November 5, 1997, the
case was dismissed and the plaintiff appealed the decision. Management of the
Company believes that there is no infringement and intends to defend the
litigation vigorously. The Company's trial counsel is unable to evaluate the
likelihood of an unfavorable outcome or the potential range of loss, if any.
7
During the year ended May 3, 1997, a lawsuit was brought by another
party alleging the Company breached contracts, committed tortious interference
with contract, intentionally inflicted emotional distress and is responsible for
compensatory and punitive damages. On October 28, 1997, a jury awarded the
plaintiff an amount the Company had accrued as owing the plaintiff for royalties
and commissions. The amount has been paid by the Company. The plaintiff has
appealed part of the verdict. The Company's trial counsel is unable to evaluate
the likelihood of an unfavorable outcome, or an estimate of the range or amount
of possible loss, if any.
The Company has recorded a provision for estimated costs to be incurred
in connection with the litigation described above, as well as other
miscellaneous claims and litigation arising in the ordinary course of business.
8
ITEM 2. FINANCIAL REVIEW
(Management's discussion and analysis of financial condition and results of
operations)
The following discussion highlights the principal factors affecting
changes in financial condition and results of operations.
This review should be read in conjunction with the accompanying
Consolidated Financial Statements and Notes to Consolidated Financial
Statements.
GENERAL
The Company designs, manufactures and sells a wide range of
computer-programmable information display systems to customers in a variety of
markets throughout the world. The Company focuses its sales and marketing
efforts on markets rather than products. Major categories of markets include
Sports, Business and Government.
The Company's net sales and profitability historically have fluctuated
due to the impact of large product orders, such as display systems for the
Olympic Games and major league sports, as well as the seasonality of the sports
market. The Company's gross margins on large product orders tend to fluctuate
more than those for small standard orders. Large product orders that involve
competitive bidding and substantial subcontract work for product installation
generally have lower gross margins. Although the Company follows the percentage
of completion method of recognizing revenues for these large orders, the Company
nevertheless has experienced fluctuations in operating results and expects that
its future results of operations may be subject to similar fluctuations.
The Company operates on a 52 - 5352-53 week fiscal year, with fiscal years
ending on the Saturday closest to April 30 of each year. The first three
quarters end on the Saturday closest to July 31, October 31 and January 31.
RESULTS OF OPERATIONS
The following table sets forth the percentage of net sales represented
by items included in the Company's Consolidated Statements of Operations for the
periods indicated:
THREE MONTHS ENDED
----------------------------
AUGUST 1, AUGUST 2,
1998 1997
(13 WEEKS) (13 WEEKS)
---------- ----------
Net sales............................... 100.0% 100.0%
Cost of goods sold...................... 71.7% 74.6%
--------- --------
Gross profit............................ 28.3% 25.4%
Operating expenses...................... 20.0% 22.5%
--------- --------
Operating income........................ 8.3% 2.9%
Interest income......................... 0.5% 0.6%
Interest expense........................ (0.8%) (0.7%)
Other income ........................... 0.4% --%
--------- ----------
Income before income
taxes.......................... 8.4% 2.8%
Income tax expense......................
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------- -------------------------
OCTOBER 31, NOVEMBER 1, OCTOBER 31, NOVEMBER 1,
1998 1997 1998 1997
(13 WEEKS) (13 WEEKS) (26 WEEKS) (27 WEEKS)
--------- --------- --------- ---------
Net sales .......................... 100.0% 100.0% 100.0% 100.0%
Cost of goods sold ................. 74.5% 71.1% 73.2% 72.8%
--------- --------- --------- ---------
Gross profit ....................... 25.5% 28.9% 26.8% 27.2%
Operating expenses ................. 19.6% 21.4% 19.8% 21.9%
--------- --------- --------- ---------
Operating income ................... 5.9% 7.5% 7.0% 5.3%
Interest income .................... 0.8% 0.9% 0.6% 0.8%
Interest expense ................... (1.0%) (0.6%) (0.9%) (0.6%)
Other income ....................... 0.1% 0.3% 0.3% 0.1%
--------- --------- --------- ---------
Income before income taxes ......... 5.8% 8.1% 7.0% 5.6%
Income tax expense ................. 2.3% 3.2% 2.8% 2.2%
--------- --------- --------- ---------
Net income ......................... 3.5% 4.9% 4.2% 3.4% 1.1%
--------- ---------
Net income.............................. 5.0% 1.7%
========= ========= ========= =========
9
NET SALES
Net sales were $22.2$24.2 million and $46.5 million for the three and six
months ended August 1,October 31, 1998, compared to $15.8$16.9 million and $32.7 million for
the three and six months ended August 2,November 1, 1997. The increase in net sales was
due primarily tothe result in increases in net sales in most of the sport niche markets,
particularly in the federation, and major league nichesand college and university markets.
Based on current backlog and customer quotations, the Company believes
that net sales for the last six months of fiscal year 1999 should exceed the
sports markets. The increase in the
federation niche was due to the sales relating to the 1998 Central American
Games and to the 2000 Sydney Olympics. The increase in the major league niche
was the resultlast six months of a contract with the Tampa Bay Buccaneers.fiscal year 1998.
GROSS PROFIT
Gross profit increased to $6.327% from $4.9 million for the three months ended
AugustNovember 1, 1998 from $4.01997 to $6.2 million for the three months ended August 2, 1997.October 31, 1998
while gross profit as a percentage of net sales decreased from 28.9% to 25.5%,
respectively.
Gross profit increased 40% from $8.9 million for the six months ended
November 1, 1997 to $12.5 million for the six months ended October 31, 1998
while gross profit as a percentage of net sales decreased from 27.2% to 26.8%,
respectively.
The increase in gross profit was the result of an increase inincreased net sales for
the two periods. The decrease in gross profit as a percentage of sales for the
periods was primarily the result of introducing the newest version of the
ProStar(TM) Video Plus display into two college and continued improvementuniversity stadiums with
virtually no gross profit in the second quarter.
Due in part to the impact of large orders and the amount of
subcontracting work associated with installation of these products, the Company
expects that its gross profit percentage of sales.margin will continue to fluctuate in future
periods.
OPERATING EXPENSES
Selling expenses were $2.6increased from $2.3 million for the three months ended
AugustNovember 1, 1998 and $2.21997, to $3.1 million for the three months ended August 2, 1997. As a percentOctober 31, 1998.
Selling expenses increased from $4.5 million for the six months ended November
1, 1997 to $5.7 million for the six months ended October 31, 1998. The increases
were due primarily to the addition of sales staff and increased selling
expenses decreased 2%.activity.
General and administrative expenses were $952,000increased from $793,000 and $1.5
million for the three and six months ended AugustNovember 1, 1998 compared1997 to $719,000$885,000 and $1.8
million for the three and six months ended August 2,
1997.October 31, 1998. The increase was primarily attributableincreases were
due to increases in salary and personnel.personnel to support company growth.
Product design and development expenses increased to $868,000was $532,000 and $1.2 million for the
three and six months ended AugustNovember 1, 1998 from $628,0001997 and $801,000 and $1.7 million for
the three and six months ended August 2, 1997. The increase was dueOctober 31, 1998 as the Company continues to
a greater numberaggressively develop its family of product development
projects which included continued improvement of the Company's new LED video
product, and upgrading and expanding existing products.ProStar(TM) Video Plus displays.
INTEREST INCOME
The Company occasionally sells products on an installment basis or in
exchange for advertising revenues from the scoreboard or display, both of which
result in long-term receivables. Interest income increased to $102,000from $160,000 and
$256,000 for the three and six months ended AugustNovember 1, 1998 from $96,0001997 to $191,000 and
$293,000 for the three and six months ended August
1, 1997.October 31, 1998. The increase was
due to higher average balances of long-term receivables.
INTEREST EXPENSE
Interest expense increased to $174,000from $99,000 and $212,000 for the three monthsand
six month periods ended AugustNovember 1, 1998 from $113,0001997 to $245,000 and $419,000 for the three
and six months ended August 2, 1997.October 31, 1998. The increase was the result ofdue to an increase in
average loan balances.
10
INCOME TAX EXPENSE
Income tax expensetaxes as a percentage of income before income taxes waswere 40% for
both the threesix months ended AugustNovember 1, 19981997 and August 2, 1997,October 31, 1998 respectively.
NET INCOME
Net income increased to $1,113,000 from $269,000was $829,000 and $1.1 million for the three and six months
ended AugustNovember 1, 19981997 compared to $843,000 and August 2, 1997, respectively.$2.0 million for the three and
six months ended October 31, 1998. The increase was due primarily to thean increase in gross profit and net
sales and a decrease in
operating expenses.sales.
Management believes that one of the principal factors that will
affect net sales and income growth is the Company's ability to increase the
marketing of its products in existing markets and expand the marketing of its
products to new markets.
10
LIQUIDITY AND CAPITAL RESOURCES
Working capital was $12.7$16.7 million at August 1,October 31, 1998 and $12.2 million
at May 2, 1998. Working capital provided by net income, depreciation and
amortization, and $5.0 million in additional long-term debt was offset by
purchases of property and equipment and repayment of long-term debt. The Company
has historically financed working capital needs through a combination of cash
flow from operations and borrowings under bank credit agreements.
Cash used by operations for the threesix months ended August 1,October 31, 1998 was
$1,282,000.$4.3 million. Net income of $1,113,000$2.0 million plus depreciation and amortization of
$488,000$968,000 were offset by an increase in inventories and receivables including
costs and estimated earnings in excess of billings on uncompleted contracts.
Cash used by investing activities consisted of $1,395,000$1,917,000 of purchases of
property and equipment. Cash provided from financing activities included
$2,697,000$1,651,000 net borrowings under the Company's line of credit, borrowings under a
long-term financing agreement of $5.0 million and $33,000$61,000 in proceeds from the
exercise of stock options. Cash used for financing activities consisted of
$71,000$311,000 of repayment of long-term debt.
The Company has used and expects to continue to use cash reserves and
bank borrowings to meet its short-term working capital requirements. On large
product orders, the time between acceptance and completion may extend up to 12
months depending on the amount of custom work and the customer's delivery needs.
The Company often receives a down payment or progress payments on these product
orders. To the extent that these payments are not sufficient to fund the costs
and other expenses associated with these orders, the Company uses working
capital and bank borrowings to finance these cash requirements.
The Company's product development activities include the enhancement of
existing products and the development of new products from existing
technologies. Product development expenses were $868,000$1.7 million for the threesix months
ended August 1,October 31, 1998 and $628,000$1.2 million for the threesix months ended August 2,November 1,
1997. The Company intends to continue to incur these expenditures to develop new
display products using various display technologies to offer higher resolution,
and more cost effective and energy efficient displays. Daktronics also intends
to continue developing software applications for its display controllers to
enable these products to continue to meet the needs and expectations of the
marketplace.
The Company has a credit agreement with a bank. The credit agreement
provides for a $15.0 million line of credit which includes up to $2.0 million
for standby letters of credit. The line of credit is at the primeLIBOR rate of
interest established by the bank from time to time (8.50%plus 1.55%
(6.82% at August 1,October 31, 1998) and is due on September 15, 2000.October 1, 2001. As of August 1,October 31,
1998, $8.3$7.2 million had been drawn on the line of credit and no standby letters
of credit had been issued by the bank. The credit agreement is unsecured and
requires the Company to meet certain covenants. Financial covenants include the
maintenance of tangible net worth of at least $21.5$23 million, a minimum liquidity
ratio and a maximum ratio of liabilities to tangible net worth.
11
The Company is sometimes required to obtain performance bonds for
display installations. The Company currently has a bonding line available
through an insurance company that provides for an Aggregateaggregate of $25.0 million in
bonded work outstanding. At August 1,October 31, 1998, the Company had $7.9$4.9 million of
bonded work outstanding against this line.
The Company believes that if its growth continues, it may need to
increase the amount of its credit facility. The Company anticipates that it will
be able to obtain any needed funds under commercially reasonable terms from its
current lender. The Company believes that cash from operations, from its
existing or increased credit facility, and its current working capital will be
adequate to meet the cash requirements of its operations in the foreseeable
future.
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BUSINESS RISKS AND UNCERTAINTIES
A number of risks and uncertainties exist which could impact the Company's
future operating results. These uncertainties include, but are not limited to,
general economic conditions, competition, the Company's success in developing
new products and technologies, market acceptance of new products, and other
factors, including those set forth in the Company's SEC filings, including its
current report on Form 10-K for the year ended May 2, 1998.
YEAR 2000 ISSUES
Many existing computer programs use only 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 the computer
applications of the Company or its 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 the
Company's business and results of operations. The Company has evaluated its
principal computer systems and is in the process of implementation of new
enterprise resource planning software which will be fully operational in fiscal
1999 and has been represented by the vendor to be Year 2000 compliant. The cost
of the new software will be capitalized. The Company has initiated discussions
with its key suppliers to determine whether they have any Year 2000 issues. At
this time the Company has not received assurances from all critical vendors. The
Company has not incurred any material expenses to date in connection with this
evaluation, and does not anticipate material expenses in the future, depending
on the status of its key suppliers with respect to this issue. The Company has
reviewed its computer programs which it includes in its display systems and has
started to implement changes to be Year 2000 compliant. The Company has
determined that the cost of these modifications will not have a material impact
on the result of operations in upcoming fiscal years.
RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board and the Accounting Standards Executive
Committee have issued certain Statements of Financial Accounting Standards and
Statements of Position, respectively, which have required effective dates
occurring after the Company's May 2, 1998 year end. The Company's financial
statements, including the disclosures therein, are not expected to be materially
affected by those accounting pronouncements.
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PART II - OTHER INFORMATION
Item 1 - LEGAL PROCEEDINGS
During the year ended May 3, 1997, a lawsuit was brought by another
party alleging the Company breached contracts, committed tortious interference
with contract, intentionally inflicted emotional distress and is responsible for
compensatory and punitive damages. On October 28, 1997, a jury awarded the
plaintiff an amount the Company had accrued as owing the plaintiff for royalties
and commissions. The amount has been paid by the Company. The plaintiff appealed
part of the verdict which was upheld by the appellate court on September 19,
1998 and in favor of the Company.
Item 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS
On November 19, 1998 the Company adopted a shareholders rights plan. A
copy of this plan is included in form 8-K filed on November 30, 1998.
Item 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The following items and the results were submitted to the shareholders
at the annual meeting held on August 19, 1998.
1. Election of the following three nominees as directors of the Company, until
their successors are duly elected and qualified:
James B. Morgan: For 4,183,840 Against 37,564 Abstain)
Duane E. Sander: For 4,183,840 Against 1,933 Abstain) 46,333
John L. Mulligan: For 4,183,840 Against 16,211 Abstain)
2. Consider and vote upon a proposal to approve the Amendment to the Amended
and Restated Articles of Incorporation increasing the shares authorized to
be issued from 15,000,000 to 30,000,000.
For 4,036,183 Against 239,883 Abstain 12,439
3. Consider and vote upon a proposal to approve an amendment to the
Daktronics, Inc. 1993 Stock Option Plan increasing the number of shares
reserved for issuance under the Plan by 300,000 shares.
For 2,927,486 Against 174,318 Abstain 11,383
4. Consider and vote upon a proposal to approve an amendment to the
Daktronics, Inc. 1993 Outside Directors Stock Option Plan increasing the
number of shares reserved for issuance under the Plan by 100,000 shares.
For 2,825,048 Against 252,046 Abstain 31,245
5. Ratification of the appointment of McGladrey & Pullen as independent
auditors for the Company for the fiscal year ending 1 May 1999.
For 4,223,242 Against 56,147 Abstain 9,453
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Item 6 - EXHIBITS
4.2 - Shareholder Rights Agreement (1)
10.6 - Loan Agreement dated October 14, 1998 between U.S. Bank
National Association and Daktronics Inc.
(1) Incorporated by reference under exhibit number 4.1 to the exhibits
filed with form 8-K on November 30, 1998 as Commission File No. 0-23246.
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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.
/s/ Aelred J. Kurtenbach, President
-----------------------------------
Daktronics, Inc.
(Dr. Aelred J. Kurtenbach, President)
(President)
Date September 15,December 11, 1998
----------------------------------------
/s/ Paul J. Weinand, Treasurer
-------------------------------
Daktronics, Inc.
(Paul J. Weinand, Treasurer)
(Principal Financial Officer)
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