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 November 2, 1996 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 (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__ 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 November 30, 1996 - ------------------------------------ ------------------------------------ Common Stock, No par value 4,306,420 Daktronics, Inc. Table of Contents Part I. Financial Information Page(s) Consolidated Balance Sheets - November 2, 1996 and April 27, 1996 ........................ 3 - 4 Consolidated Statements of Income - Three months and six months ended November 2, 1996 and October 28, 1995 . . .................. 5 Consolidated Statements of Cash Flows - Six months ended November 2, 1996 and October 28, 1995............................................ 6 Notes to Consolidated Financial Statements.................. 7 Management's Discussion and Analysis of Financial Condition and Results of Operation................ 8 - 10 Part II. Other Information............................................ 11 Signatures.................................................. 12 DAKTRONICS, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS (In thousands) NOVEMBER 2, 1996 APRIL 27, ASSETS (UNAUDITED) 1996 ----------- --------- CURRENT ASSETS Cash and cash equivalents ...................... $ 177 $ 218 Accounts receivable less allowance for doubtful accounts of $146 at Nov 2, 1996, and $129 at April 27, 1996 .................. 10,140 8,630 Current maturities of long-term notes and contracts receivable .............. 1,224 1,372 Inventories .................................... 9,787 9,800 Costs and estimated earnings in excess of billings on uncompleted contracts ................................... 3,863 2,684 Real estate held for sale ...................... -- 1,126 Prepaid expenses ............................... 169 245 Deferred income tax benefit .................... 703 703 Income taxes receivable ........................ -- 64 ------- ------- Total current assets ........................ $26,063 $24,842 ------- ------- LONG-TERM RECEIVABLES AND OTHER ASSETS Advertising rights ............................. $ 2,379 $ 2,030 Notes and contracts receivables, less current maturities ..................... 2,518 2,714 Consulting and noncompete agreements and other ........................ 1,452 1,688 ------- ------- $ 6,349 $ 6,432 ------- ------- PROPERTY AND EQUIPMENT, at cost Land ........................................ $ 491 $ 455 Buildings ................................... 4,368 3,902 Machinery and equipment ..................... 9,016 8,398 Office furniture and equipment .............. 244 233 Transportation equipment .................... 497 423 ------- ------- $14,616 $13,411 Less accumulated depreciation ............... 7,501 6,918 ------- ------- $ 7,115 $ 6,493 ------- ------- $39,527 $37,767 ======= ======= The accompanying notes are an integral part of these Consolidated Financial Statements. DAKTRONICS, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS (In thousands) NOVEMBER 2, 1996 APRIL 27, LIABILITIES AND SHAREHOLDERS' EQUITY (UNAUDITED) 1996 ----------- --------- CURRENT LIABILITIES Notes payable ............................. $ 6,004 $ 5,690 Current maturities of long-term debt ......................... 498 1,382 Accounts payable .......................... 3,432 4,330 Accrued expenses .......................... 2,943 2,295 Billings in excess of costs and estimated earnings on uncompleted contracts .............................. 2,395 1,001 Accrued loss on uncompleted contracts ..... 544 640 Income taxes payable ...................... 130 -- -------- -------- Total current liabilities .............. $ 15,946 $ 15,338 -------- -------- LONG-TERM DEBT, less current maturities ................... $ 1,340 $ 1,544 -------- -------- DEFERRED INCOME .............................. $ 430 $ 539 -------- -------- DEFERRED INCOME TAXES ........................ $ 485 $ 485 -------- -------- SHAREHOLDERS' EQUITY Common stock, no par value Authorized 15,000 shares 4,196 shares issued at Apr 27, 1996, and 4,306 shares issued at Nov 2, 1996 $ 11,680 $ 11,299 Retained earnings ......................... 9,655 8,571 -------- -------- $ 21,335 $ 19,870 Less: Cost of 5 treasury shares .............. (9) (9) -------- -------- $ 21,326 $ 19,861 -------- -------- $ 39,527 $ 37,767 ======== ======== The accompanying notes are an integral part of these Consolidated Financial Statements. <TABLE> <CAPTION> DAKTRONICS, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME (In thousands, except earnings per share) (unaudited) THREE MONTHS ENDED SIX MONTHS ENDED NOVEMBER 2, OCTOBER 28, NOVEMBER 2, OCTOBER 28, 1996 1995 1996 1995 (13 WEEKS) (13 WEEKS) (27 WEEKS) (26 WEEKS) ------------ ------------ ------------ ----------- <S> <C> <C> <C> <C> Net sales .............................. $ 16,257 $ 14,532 $ 33,279 $ 26,978 Cost of goods sold ..................... 12,184 11,181 24,798 20,891 -------- -------- -------- -------- Gross profit ........................ $ 4,073 $ 3,351 $ 8,481 $ 6,087 -------- -------- -------- -------- Operating expenses: Selling ............................. $ 2,031 $ 1,864 $ 4,087 $ 3,600 General and administrative .......... 666 490 1,315 1,024 Product design and development ...... 560 387 1,131 856 -------- -------- -------- -------- $ 3,257 $ 2,741 $ 6,533 $ 5,480 -------- -------- -------- -------- Operating income ................. $ 816 $ 610 $ 1,948 $ 607 Nonoperating income (expense): Interest income ..................... 93 72 186 152 Interest expense .................... (233) (174) (437) (220) Other income ........................ 50 84 110 139 -------- -------- -------- -------- Income before income taxes ....... $ 726 $ 592 $ 1,807 $ 678 Income tax expense ..................... 283 208 724 251 -------- -------- -------- -------- Net income ....................... $ 443 $ 384 $ 1,083 $ 427 ======== ======== ======== ======== Earnings per share ..................... $ .11 $ .09 $ .26 $ .10 ======== ======== ======== ======== Weighted average number of common and common equivalent shares... 4,210 4,240 4,219 4,247 ======== ======== ======== ======== </TABLE> The accompanying notes are an integral part of these Consolidated Financial Statements. <TABLE> <CAPTION> DAKTRONICS, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (unaudited) SIX MONTHS ENDED ---------------- NOVEMBER 2, OCTOBER 28, 1996 1995 (27 weeks) (26 weeks) ---------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES <S> <C> <C> Net income .......................................... $ 1,084 $ 427 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation ...................................... 583 548 Amortization ...................................... 138 287 Provision for doubtful accounts ................... 66 11 Change in operating assets and liabilities ...................................... (1,100) (5,297) ------- ------- Net cash provided by (used in) operating activities ........................... $ 771 $(4,024) ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES Purchase of property and equipment .................. $(1,205) $ (627) Proceeds from sale of real estate held for sale .................................... 1,126 -- Other, net .......................................... 32 (954) ------- ------- Net cash (used in) investing activities ............................ $ (47) $(1,581) ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES Net borrowings on notes payable ..................... $ 314 $ 6,043 Principal payments on long-term debt ..................................... (1,079) (206) ------- ------- Net cash provided by (used in) financing activities ............................. $ (765) $ 5,837 ------- ------- Increase (decrease) in cash and cash equivalents .. $ (41) $ 232 Cash and cash equivalents: Beginning ........................................... 218 380 ------- ------- Ending .............................................. $ 177 $ 612 ======= ======= The accompanying notes are an integral part of these Consolidated Financial Statements. </TABLE> 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 common and common equivalent share are calculated by dividing the earnings for the period by the weighted average number of common and common equivalent shares outstanding during the period, which includes the dilutive effect of outstanding stock options and warrants. 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 subsidiaries as of November 2, 1996 and the results of its operations and cash flows for the three months and six months ended November 2, 1996 and October 28, 1995. 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): November 2, April 27, 1996 1996 ----------- --------- Raw materials......................... $6,640 $5,718 Work-in-process....................... 1,967 2,606 Finished goods........................ 1,180 1,476 ------ ------ $9,787 $9,800 ====== ====== NOTE C. LITIGATION On May 4, 1995, the Company was served with a complaint, filed in the United States District Court Northern District of Georgia, by Display Solutions, Inc. alleging that the Company and Federal Sign Division of Federal Signal Corporation infringed on the plaintiff's patent rights. Based on the opinion of the Company's patent counsel, management of the Company believes that there is no infringement and intends to defend the litigation vigorously. The case is in its early stages and an evaluation of the likelihood of an unfavorable outcome, or estimate of the range or amount of possible loss, if any, is unavailable. On May 20, 1996, the Company filed a complaint in United States District Court for the District of South Dakota Southern Division against Trans-Lux Corporation requesting a declaratory judgement. Trans-Lux Corporation asserted that the Company has infringed one certain patent. Based on the opinion of the Company's patent counsel, management of the Company believes that there has been no infringement and is seeking this declaratory judgement to affirm its position. 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 52-53 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. The fiscal year ending May 3, 1997, will be a 53-week year. 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: <TABLE> <CAPTION> THREE MONTHS ENDED SIX MONTHS ENDED NOVEMBER 2, OCTOBER 28, NOVEMBER 2, OCTOBER 28, 1996 1995 1996 1995 (13 WEEKS) (13 WEEKS) (27 WEEKS) (26 WEEKS) ----------- ----------- ----------- ----------- <S> <C> <C> <C> <C> Net sales........................ 100.0% 100.0% 100.0% 100.0% Cost of goods sold............... 74.9% 76.9% 74.5% 77.4% ------ ------ ------ ------ Gross profit..................... 25.1% 23.1% 25.5% 22.6% Operating expenses............... 20.0% 18.9% 19.6% 20.4% ------ ------ ----- ------ Operating income................. 5.1% 4.2% 5.9% 2.2% Interest income.................. 0.6% 0.5% 0.6% 0.6% Interest expense................. ( 1.4%) (1.2%) (1.3%) (0.8%) Other income (expense)........... 0.3% 0.6% 0.3% 0.5% ------ ------ ------ ----- Income before income taxes....... 4.5% 4.1% 5.5% 2.5% Income tax expense............... 1.7% 1.5% 2.2% 0.9% ------ ------ ------ ------ Net income....................... 2.8% 2.6% 3.3% 1.6% ====== ====== ====== ====== </TABLE> NET SALES Net sales were $16.3 million and $33.3 million for the three and six months ended November 2, 1996, compared to $14.5 million and $27.0 million for the three and six months ended October 28, 1995, representing a increase of 12% for the three month period and 23% for the six month period. The increase in net sales for the three and six month periods was the result of increased sales in most of the sports markets. The Company also experienced an increase in sales volume of smaller orders in the sports and business markets over the same periods. Based on current backlog and customer quotations, the Company believes that net sales for the last six months of fiscal year 1997 will be similar to and may exceed the last six months of fiscal year 1996. GROSS PROFIT Gross profit increased 22% from $3.4 million for the three months ended October 28, 1995 to $4.1 million for the three months ended November 2, 1996. Gross profit as a percentage of net sales was 23.1% for the three months ended October 28, 1995 compared to 25.1% for the three months ended November 2, 1996. The increase was the result of higher gross profit margins in the sports and business markets. Gross profit increased 39% from $6.1 million for the six months ended October 28, 1995 to $8.5 million for the six months ended November 2, 1996. Gross profit as a percentage of net sales was 22.6% for the six months ended October 28, 1995, compared to 25.5 % for the six months ended November 2, 1996. The increase for the six month period was the result of the same conditions previously mentioned. 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 margin will continue to fluctuate in future periods. OPERATING EXPENSES Selling expenses increased 9% from $1.9 million for the three months ended October 28, 1995, to $2.0 million for the three months ended November 2, 1996. Selling expenses increased 14% from $3.6 million for the six months ended October 28, 1995 to $4.1 million for the six months ended November 2, 1996. The increases were due primarily to the addition of sales staff and increased selling activity. General and administrative expenses increased from $490,000 and $1.0 million for the three and six months ended October 28, 1995 to $666,000 and $1.3 million for the three and six months ended November 2, 1996. The increases were due to increases in salary and personnel to support company growth. Product design and development increased from $387,000 and $856,000 for the three and six months ended October 28, 1995 to $560,000 and $1.1 million for the three and six months ended November 2, 1996. The increases were due to a greater number of product development projects to improve and upgrade existing products and develop new products. INTEREST INCOME The Company occasionally sells products on an installment basis or in exchange for advertising revenues from the scoreboard or display, both which result in long-term receivables. Interest income increased from $72,000 and $152,000 for the three and six months ended October 28, 1995 to $93,000 and $186,000 for the three and six months ended November 2, 1996. The increase was due to higher average balances of long-term receivables. INTEREST EXPENSE Interest expense increased from $174,000 and $220,000 for the three and six month periods ended October 28, 1995 to $233,000 and $437,000 for the three and six months ended November 2, 1996. The increase was due to an increase in average loan balances to fund the increase in working capital to support sales growth. INCOME TAX EXPENSE Income taxes as a percentage of income before income taxes was 37% and 40% for the six months ended October 28, 1995 and November 2, 1996 respectively. The increase was due to the rounding of state tax accruals and a decrease in nontaxable interest income. NET INCOME Net income increased from $384,000 and $427,000 for the three and six months ended October 28, 1995 to $443,000 and $1.1 million for the three and six months ended November 2, 1996. The increase was due to increased net sales and an increase in gross profit as a percentage of 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. LIQUIDITY AND CAPITAL RESOURCES Working capital was $10.1 million at November 2, 1996 and $9.5 million at April 27, 1996. Working capital provided by net income, depreciation and amortization was offset by purchases of property and equipment, repayment of long-term debt and acquisition of advertising rights. The Company has historically financed working capital needs through a combination of cash flow from operations and borrowings under bank credit agreements. Cash provided by operations for the six months ended November 2, 1996 was $771,000. Net income of $1.1 million plus depreciation and amortization of $721,000 were offset by increases in inventory and receivables including costs and estimated earnings in excess of billings on uncompleted contracts. Cash used in investing activities consisted primarily of $1.2 million for purchase of property and equipment, and was offset by $1.1 million in proceeds from sale of real estate held for sale. Cash used in financing activities included $1.1 million of repayment of long-term debt and was offset by $314,000 net borrowings provided from the Company's line of credit. The Company has used and expects 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 or more 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. As of November 2, 1996, the Company had a credit agreement with a bank providing for an unsecured revolving line of credit of $10.0 million, which includes up to $5.0 million for standby letters of credit. The line of credit is at the prime rate as established by the bank from time to time ( 8.25 % at November 2, 1996) and is due on September 30, 1997. As of November 2, 1996, $6.0 million had been drawn on the line of credit. 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 aggregate of $25.0 million in bonded work outstanding. At November 2, 1996, the Company had $ 10.9 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 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 operation in the foreseeable future. PART II - OTHER INFORMATION Item 6 - EXHIBITS 10.1 Revolving Note between Daktronics, Inc. and Norwest Bank Minnesota, National Association dated September 30, 1996. 10.2 Second Amendment to credit agreement dated September 30, 1996 between Norwest Bank Minnesota, National Association, and Daktronics, Inc. 27.1 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. /s/ Aelred J. Kurtenbach, President ------------------------------------= Daktronics, Inc. (Dr. Aelred J. Kurtenbach, President) (President) Date December 12, 1996 /s/ Paul J. Weinand, Treasurer ------------------------------------= Daktronics, Inc. (Paul J. Weinand, Treasurer) (Principal Financial Officer)