-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, I7FrDkATyMEHCC8v+fVCQEz2bwrkS5evGF709HFu9BPfna7DTYYMab+LG8EmMR9l c+fQhR+FqB/FuUhz7g59bg== 0000950152-98-007526.txt : 19980914 0000950152-98-007526.hdr.sgml : 19980914 ACCESSION NUMBER: 0000950152-98-007526 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980911 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: LSI INDUSTRIES INC CENTRAL INDEX KEY: 0000763532 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC LIGHTING & WIRING EQUIPMENT [3640] IRS NUMBER: 310888951 STATE OF INCORPORATION: OH FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-13375 FILM NUMBER: 98707907 BUSINESS ADDRESS: STREET 1: 10000 ALLIANCE RD STREET 2: P O BOX 42728 CITY: CINCINNATI STATE: OH ZIP: 45242 BUSINESS PHONE: 5135796411 MAIL ADDRESS: STREET 1: 10000 ALLIANCE RD STREET 2: P O BOX 42728 CITY: CINCINNATI STATE: OH ZIP: 45242 FORMER COMPANY: FORMER CONFORMED NAME: LSI LIGHTING SYSTEMS INC DATE OF NAME CHANGE: 19891121 10-K405 1 LSI INDUSTRIES FORM 10-K405 1 SECURITIES AND EXCHANGE COMMISSION ---------------------------------- WASHINGTON, D.C. 20549 ---------------------- FORM 10-K --------- X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE - ---- ACT OF 1934 FOR THE FISCAL YEAR ENDED JUNE 30, 1998. OR ____ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____________ TO _____________. Commission File No. 0-13375 LSI Industries Inc. State of Incorporation - Ohio IRS Employer I.D. No. 31-0888951 10000 Alliance Road Cincinnati, Ohio 45242 (513) 793-3200 Securities Registered Pursuant to Section 12(b) of the Act: None Securities Registered Pursuant to Section 12(g) of the Act: Common Shares (No par value) 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 by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] Aggregate market value of the voting stock held by non-affiliates of the registrant at September 4, 1998 was approximately $161,623,000, based on a closing price of $18.625. At September 4, 1998, 9,679,647 shares of no par value Common Shares were issued and outstanding. DOCUMENTS INCORPORATED BY REFERENCE ----------------------------------- Portions of the Registrant's Proxy Statement filed with the Commission for its 1998 annual meeting are incorporated by reference in Part III, as specified. 2 LSI INDUSTRIES INC. 1998 FORM 10-K ANNUAL REPORT TABLE OF CONTENTS -----------------
Begins on Page ---- PART I ITEM 1. BUSINESS .............................................................. 1 ITEM 2. PROPERTIES ............................................................ 2 ITEM 3. LEGAL PROCEEDINGS ..................................................... 3 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ....................................................... 3 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDERS' MATTERS ................................. 3 ITEM 6. SELECTED FINANCIAL DATA ............................................... 3 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ........................... 3 ITEM 7A. QUANTATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK .............. 3 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ........................... 3 ITEM 9. DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE .......................................... 4 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT .................... 4 ITEM 11. EXECUTIVE COMPENSATION ................................................ 4 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT ................................................ 4 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ........................ 4 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, REPORTS ON FORM 8-K ...................................................... 4 SIGNATURES ..................................................................... 6
i 3 PART I ------ ITEM 1. BUSINESS The Company's two business segments are the Image Group and the Commercial / Industrial Lighting Group. Sales by segment are as follows (in thousands):
1998 1997 1996 -------- -------- -------- Image Group ........... $138,886 $101,562 $110,808 Commercial / Industrial Lighting Group ... 50,253 43,180 41,925 -------- -------- -------- Total ................. $189,139 $144,742 $152,733 ======== ======== ========
The Image Group manufactures and sells exterior and interior visual image elements (lighting, graphics, and menu board systems) for the petroleum / convenience store market and for multi-site retail operations. The Image Group includes the operations of LSI Petroleum Lighting, LSI Automotive, LSI Images, LSI Metal Fabrication, SGI Integrated Graphic Systems and Grady McCauley. The Commercial / Industrial Lighting Group manufactures and sells outdoor, indoor, and landscape lighting for the commercial / industrial and multi-site retail markets. The Commercial / Industrial Lighting Group includes the operations of LSI Lighting Systems, Courtsider Lighting, and Greenlee Lighting, and the Company's most recent acquisition, LSI Marcole. The Company's most significant market is the petroleum / convenience store market with approximately 50% of net sales concentrated in this market. See Note 3 of Notes to Consolidated Financial Statements beginning on page S-13 of this Form 10-K for additional information on business segments. On February 6, 1998, the Company acquired the outstanding common shares of Marcole, Inc., a privately owned manufacturer of electrical wiring harnesses primarily for the appliance industry. For financial statement purposes the acquisition was accounted for as a purchase with operating results of Marcole first included in the Company's fiscal 1998 third quarter financial statements. The purchase price was 12,000 common shares of the Company (valued at $200,000) plus $712,000 in cash. The purchase price exceeded the estimated fair value of net assets acquired by $210,000, which is recorded as goodwill. See Note 12 of Notes to Consolidated Financial Statements beginning on page S-20 of this Form 10-K for additional information on this acquisition. The Company believes that it is a low-cost producer for its types of products, and as such, is in a position to promote its product lines with substantial marketing and sales activities. The Company is not dependent on any one supplier for any of its component parts. The Company's sales are partially seasonal as installation of outdoor lighting and graphic systems in the northern states lessens during the harshest winter months. One customer, Chevron U.S.A. Inc. accounted for 12% of consolidated net sales in 1996. The Company had a backlog of orders, believed by it to be firm, of $13.9 million and $13.6 million at June 30, 1998 and 1997, respectively. All orders are believed to be shippable within twelve months. The Company has approximately 1,100 full-time and 200 temporary employees. The Company has a comprehensive compensation and benefit program for most employees, including competitive wages, a discretionary bonus plan, a profit-sharing plan and retirement plan, a 401(k) savings plan, a non-qualified deferred compensation plan (for certain employees), a stock option plan, and medical and dental insurance. -1- 4 The Company sells its products throughout the United States and Canada. LSI Industries encounters strong competition in all markets served by the Company's product lines. The Company has many competitors, some of which have greater financial and other resources. The Company considers product quality and performance, price, customer service, prompt delivery, and reputation to be important competitive factors. The Company has several product and process patents which it has obtained in the normal course of business. The Company in general does not believe that patent protection is critical to its business, however it does believe that patent protection is important for a few select products. ITEM 2. PROPERTIES The Company has seven facilities:
Description Size Location Status ----------- ---- -------- ------ 1) LSI Corporate 225,000 sq. ft., Cincinnati, OH Owned Headquarters, and (includes 38,000 lighting fixture and sq. ft. of office graphics manufacturing space) 2) LSI pole manufac- 131,000 sq. ft. Cincinnati, OH Owned turing and dry powder-coat painting 3) LSI Metal Fabrication 99,000 sq. ft. Independence, KY Owned and LSI Images manu- (includes 5,000 facturing and dry sq. ft. of office powder-coat painting space) 4) SGI office; 229,000 sq. ft. Houston, TX Leased screen printing (includes 35,000 manufacturing; and sq. ft. of office space architectural graphics and 35,000 sq. ft. of manufacturing outside warehouse space) 5) Greenlee office 40,000 sq. ft. Dallas, TX Leased and manufacturing (includes 4,000 sq. ft. of office space) 6) Grady McCauley office 120,000 sq. ft. North Canton, OH Owned and manufacturing (includes 20,000 sq. ft. of office space) 7) LSI Marcole office and 38,000 sq. ft. Manchester, TN Owned manufacturing of electrical (includes 4,000 sq. ft. wire harnesses (acquired of office space) February 6, 1998)
The Company considers these facilities adequate for its current level of operations. -2- 5 ITEM 3. LEGAL PROCEEDINGS None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders, through the solicitation of proxies or otherwise, during the fourth quarter of the year covered by this report. PART II ------- ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDERS' MATTERS "Common Share Information" appears beginning on page S-21 of this Form 10-K. ITEM 6. SELECTED FINANCIAL DATA "Selected Financial Data" appears on page S-23 of this Form 10-K. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS "Management's Discussion and Analysis of Financial Condition and Results of Operations" appears on pages S-1 through S-4 of this Form 10-K. ITEM 7A. QUANTATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Begins Index to Financial Statements on Page ------- Financial Statements: Report of Independent Public Accountants S-5 Consolidated Income Statements for the years ended June 30, 1998, 1997 and 1996 S-6 Consolidated Balance Sheets at June 30, 1998 and 1997 S-7 Consolidated Statements of Cash Flows for the years ended June 30, 1998, 1997 and 1996 S-9 Consolidated Statements of Shareholders' Equity for the years ended June 30, 1998, 1997 and 1996 S-10 Notes to Consolidated Financial Statements S-11 Financial Statement Schedules: II - Valuation and Qualifying Accounts for the S-24 years ended June 30, 1998, 1997 and 1996
-3- 6 Schedules other than those listed above are omitted for the reason(s) that they are either not applicable or not required or because the information required is contained in the financial statements or notes thereto. ITEM 9. DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None PART III -------- ITEMS 10, 11, 12 and 13 of Part III are incorporated by reference to the LSI Industries Inc. Proxy Statement for its Annual Meeting of Shareholders to be held November 12, 1998, as filed with the Commission pursuant to Regulation 14A. PART IV ------- ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this report: (1) Financial Statements Appear as part of Item 8 of this Form 10-K. (2) Financial Statement Schedules Appear as part of Item 8 of this Form 10-K. (3) Exhibit list - listing of exhibits required to be filed with Form 10-K incorporated by reference to Exhibit(s) filed as part of: Proxy-89 = Proxy statement for 1989 Annual Shareholders' Meeting 10K-89 = Annual Report on Form 10-K for the fiscal year ended June 30, 1989 10K-95 = Annual Report on Form 10-K for the fiscal year ended June 30, 1995 10K-96 = Annual Report on Form 10-K for the fiscal year ended June 30, 1996 S-3 (96) = Form S-3 Registration Statement No. 33-65043 S-8 (95-1) = Form S-8 Registration Statement No. 33-64721 for the LSI Industries Inc. 1995 Stock Option Plan S-8 (95-2) = Form S-8 Registration Statement No. 33-64723 for the LSI Industries Inc. 1995 Directors' Stock Option Plan or filed herewith where so noted.
-4- 7 EXHIBIT INDEX -------------
Current Form 10-K Report/ Exhibit Exhibit No. Description of Exhibit Document Number - ----------- ---------------------- -------- ------ 3.1 Articles of Incorporation of LSI Industries Inc. S-3 (96) 3.1 3.2 Code of Regulations of LSI Industries Inc. S-3 (96) 3.2 4 Instruments Defining the Rights of o Security Holders Management Compensatory Agreements ---------------------------------- 10.1 LSI Industries Inc. Retirement Plan 10K-95 10.4 and Trust 10.2 1985 Stock Option Plan 10K-89 10.1 10.3 LSI Industries Inc. 1995 Stock Option Plan S-8 (95-1) 4.1 10.4 LSI Industries Inc. 1995 Directors' Stock Option Plan S-8 (95-2) 4.1 10.5 LSI Industries Inc. Nonqualified Deferred 10K-96 10.5 Compensation Plan, and Rabbi Trust Agreement 22 Subsidiaries of the Registrant Filed herewith 23 Consent of Independent Public Accountants Filed herewith 24 Powers of Attorney (4) Filed herewith 27 Financial Data Schedule Filed herewith o The Company has no outstanding issue or indebtedness exceeding 10% of the Company's assets on a consolidated basis. A copy of the instruments defining the right of security holders will be furnished to the Commission upon request.
(b) Form 8-K: There have been no reports on Form 8-K filed during the last quarter of fiscal year 1998. -5- 8 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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. LSI INDUSTRIES INC. September 9, 1998 BY:/s/ Robert J. Ready - ------------------------------ --------------------------------------- Date Robert J. Ready Chairman of the Board and President Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title - --------- ----- /s/ Robert J. Ready Chairman of the Board and President - ----------------------------------- (Principal Executive Officer) Robert J. Ready Date: September 9, 1998 --------------------- /s/ Ronald S. Stowell Vice President, Chief Financial Officer, and - ----------------------------------- Treasurer Ronald S. Stowell (Principal Financial and Accounting Officer) Date: September 9, 1998 --------------------- *Michael J. Burke Director - ----------------------------------- Michael J. Burke *Allen L. Davis Director - ----------------------------------- Allen L. Davis *James P. Sferra Secretary; Executive Vice President - ----------------------------------- - Manufacturing; and Director James P. Sferra *John N. Taylor, Jr. Director - ----------------------------------- John N. Taylor, Jr.
*The undersigned, by signing his name hereto, executed this Annual Report on Form 10-K on September 9, 1998, pursuant to Powers of Attorney executed by the above named Directors of the Registrant and filed with the Securities and Exchange Commission as Exhibit 24 hereto. September 9, 1998 By: /s/ Ronald S. Stowell - ---------------------------------- ---------------------------- Date Attorney-in-Fact -6- 9 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SALES BY BUSINESS SEGMENT
(In thousands) 1998 1997 1996 -------- -------- -------- Image Group $138,886 $101,562 $110,808 Commercial / Industrial Lighting Group 50,253 43,180 41,925 -------- -------- -------- $189,139 $144,742 $152,733 ======== ======== ========
RESULTS OF OPERATIONS 1998 COMPARED TO 1997 Net sales of $189,139,000 in 1998 increased 31% over 1997 net sales of $144,742,000. Results of the Image Group in fiscal 1998 include the operations of the Company's new graphics subsidiary, Grady McCauley, which was acquired June 30, 1997. Results of the Commercial / Industrial Lighting Group include the operations of the Company's newest subsidiary, LSI Marcole, which was acquired February 6, 1998. Image Group net sales increased 37% and Commercial / Industrial Lighting Group net sales increased 16% in fiscal 1998 as compared to the prior year primarily as a result of growth in the multi-site retail market. The increase in Image Group sales is attributed to growth in substantially all markets and products, particularly graphics, petroleum lighting, and quick service restaurant, as well as to the inclusion of Grady McCauley in the operating results in fiscal 1998. Net sales of the Image Group to the petroleum / convenience store market represented 49% and 50% of net sales in fiscal 1998 and fiscal 1997, respectively. While sales prices were increased, inflation did not have a significant impact on sales in 1998 as competitive pricing pressures held price increases to a minimum. Gross profit of $64,480,000 increased 33% over last year's gross profit of $48,542,000, and increased as a percentage of net sales to 34.1% in fiscal year 1998 as compared to 33.5% in the prior year. The increase in amount of gross profit is due primarily to the 31% increase in net sales. The increase in gross profit percentage is primarily related to the Company's graphics operations reporting an improved aggregate gross profit percentage, to changes in lighting product mix to higher margin products, and to improved manufacturing operating efficiencies in the Company's lighting business. Selling and administrative expenses increased to $44,286,000 from $34,833,000 primarily as a result of increased sales volume and the addition of Grady McCauley. As a percentage of net sales, selling and administrative expenses were at 23.4% in fiscal 1998 as compared to 24.1% in the prior year. The Company reported net interest income of $37,000 in fiscal 1998 as compared to net interest income of $487,000 in fiscal 1997 reflective of the significantly reduced amount of short-term cash investments during the year. Cash which had been invested was used at the end of fiscal 1997 for the acquisition of Grady McCauley. The Company's effective tax rate increased to 37.5% in fiscal 1998 as compared to 37.0% in fiscal 1997 primarily due to an increase in the rate of federal income tax. S-1 10 Net income of $12,587,000 in fiscal 1998 increased 42% over $8,872,000 in fiscal 1997. The increased net income resulted from increased gross profit on higher net sales, partially offset by increased operating expenses, increased income taxes, and from the reporting of a larger amount of net interest income in fiscal 1997 as compared to fiscal 1998. Diluted earnings per share of $1.29 increased 33% in fiscal 1998 from $.97 per share in fiscal 1997. The weighted average common shares outstanding for purposes of computing diluted earnings per share increased 7% in 1998 to 9,790,000 shares from 9,188,000 shares in 1997 primarily as a result the common shares used in the acquisition of Grady McCauley in June 1997. Certain recently issued accounting pronouncements will affect the Company's future financial statements and / or disclosures. See Note 1 to these financial statements for additional discussion. 1997 COMPARED TO 1996 Net sales of $144,742,000 for 1997 compared to 1996 net sales of $152,733,000 -- a 5% reduction. Image Group net sales decreased 8% while Commercial / Industrial Lighting Group net sales increased 3% during fiscal 1997. The Company recorded strong sales growth in the multi-site retail market which was more than offset by reduced sales in the petroleum / convenience store market and commercial / industrial lighting market. Sales in the Image Group to the petroleum / convenience store market, representing 50% of net sales in fiscal 1997, decreased 12%. The reduction in net sales is primarily related to significant re-imaging and re-lighting programs for customers last year that did not repeat this year, as well as to lower volume of printed graphics sales. The Company has one customer, Chevron U.S.A., who accounted for 12% of net sales (reported in the Image Group) in fiscal 1996. The Company believes that it continues to maintain a good business relationship with this continuing customer; however, the level of total net sales, which for fiscal 1997 was under ten percent of the Company's total net sales, is never assured in the future. While sales prices were increased, inflation did not have a significant impact on sales in fiscal 1997 as competitive pricing pressures held price increases to a minimum. Gross profit of $48,542,000 was increased slightly over last year's gross profit; however, as a percentage of net sales, fiscal year 1997 performance improved to 33.5% as compared to 31.8% of net sales. With a 5% reduction in net sales between years, the increase in gross profit as a percentage of net sales is primarily due to improved manufacturing operating efficiencies in the Company's lighting business, and to changes in lighting product mix to higher margin products, partially offset by lower utilization of manufacturing capacity in the Image Group's graphics operations. Selling and administrative expenses decreased to $34,833,000 from $35,101,000 primarily as a result of decreased sales volume as well as some non-recurring expenses in 1996, but increased to 24% of net sales in fiscal 1997 from 23% last year. The Company reported net interest income of $487,000 in fiscal 1997 as compared to net interest expense of $344,000 in fiscal 1996. The change reflects the Company's use of the net proceeds from the February 1996 Public Offering of Common Shares. Substantially all outstanding debt in February 1996 was retired with a portion of the net proceeds. Remaining proceeds from the Public Offering were invested during the year in high grade, short-term cash investments. Cash which had been invested was used at the end of fiscal 1997 for an S-2 11 acquisition of a business (see also LIQUIDITY AND CAPITAL RESOURCES). The Company's effective tax rate increased to 37.0% from 36.4% the prior year. Income from continuing operations of $8,872,000 increased 7% over $8,270,000 in fiscal 1996. The increased income resulted from an increased gross profit percentage on lower net sales, decreased operating expenses, and from the reporting of net interest income rather than net interest expense, partially offset by an increased income tax provision. Diluted earnings per share from continuing operations in fiscal 1997 of $.97 compares to $.98 per share in fiscal 1996. The weighted average common shares outstanding increased 9% in 1997 to 9,188,000 shares from 8,456,000 shares in 1996 primarily as a result of the effect of the 1.2 million common shares issued in the Company's February 1996 Public Offering. Net income of $8,872,000, or $.97 per share, compares to fiscal 1996 net income of $6,770,000, or $.80 per share. The increase resulted from increased income from continuing operations in fiscal 1997 and the $1.5 million charge to Discontinued Operations taken in fiscal 1996 (as more fully described in Note 10 to the financial statements) with no similar charge in 1997. LIQUIDITY AND CAPITAL RESOURCES At June 30, 1998 the Company had working capital of $40.2 million, compared to $30.2 million at June 30, 1997. The ratio of current assets to current liabilities increased to 2.37 to 1 from 2.22 to 1. The increased working capital is primarily attributed to increased accounts receivable, cash, and inventories, partially offset by increased accrued expenses and accounts payable. The Company generated $14.3 million of cash from operating activities in fiscal 1998 as compared to $11.9 million fiscal 1997. The Company generated more cash in fiscal 1998 primarily due to increased net income, and increased depreciation and amortization expenses. Additionally, significant increases in accounts receivable and inventories in fiscal 1998 compared to lesser increases in fiscal 1997, and significantly larger fiscal 1998 decreases in accounts payable and accrued expenses contributed to the change between years in net cash flows from operating activities. As of June 30, 1998, the Company's days sales outstanding were at approximately 55 days as compared to 58 days at June 30, 1997. Inventories increased $1.6 million with increases primarily in the Company's graphics operations in addition to all lighting operations. In addition to cash generated from operations, the Company's primary source of liquidity continues to be its lines of credit. The Company has two revolving lines of credit totaling $24 million, all of which was available as of August 26, 1998. These lines of credit are unsecured and expire in fiscal 1999. The Company believes that the total of available lines of credit plus cash flows from operating activities is adequate for the Company's fiscal 1999 operational and capital expenditure needs. The Company is in compliance with all of its loan covenants. Excluding the acquisitions of Marcole and Grady McCauley in their respective years, capital expenditures of $4.1 million in fiscal 1998 compare to $2.6 million in the prior year. Spending in fiscal year 1998 is primarily related to tooling for new products and to expansion of certain of the Company's graphics operations. Capital expenditures totaling approximately $7 million are planned for fiscal 1999. On August 19, 1998, the Board of Directors declared a cash dividend of $0.125 per share (approximately $1,211,000), comprised of a $0.0625 regular quarterly dividend and a S-3 12 $0.0625 special year-end dividend, to be paid September 15, 1998 to shareholders of record on September 8, 1998. During fiscal 1998, the Company paid cash dividends each quarter. The Company has completed a review of its business systems, office support systems, and its facilities and equipment with respect to year 2000 programming deficiencies. The review has extended to major suppliers and customers, and this element of the review is expected to be completed by June 30, 1999. The Company does not anticipate material costs to be incurred to modify or replace any affected systems. The Company anticipates completion of this process prior to June 30, 1999. The Company acquired the outstanding common stock of Marcole Industries, Inc. on February 6, 1998 as well as the building and real estate in Manchester, Tennessee from which Marcole will continue to operate. Total purchase price was approximately $912,000, which includes 12,000 common shares (valued at approximately $200,000) of LSI Industries. For financial statement purposes the acquisition was accounted for as a purchase, effective on the date of acquisition. The new subsidiary, LSI Marcole Inc., is a manufacturer of electrical wire harnesses for the appliance and white goods industry. The purchase price exceeded the estimated fair value of net assets acquired by $210,000, which is being amortized over forty years. The allocation was based on preliminary estimates and may be revised at a later date pending the completion of certain analysis. On June 30, 1997, the Company acquired substantially all assets and assumed certain liabilities of Grady McCauley, Incorporated, a privately owned manufacturer of custom interior graphics primarily for the retail market. For financial statement purposes the acquisition was accounted for as a purchase with operating results of Grady McCauley first included in the Company's fiscal 1998 financial statements. The purchase price was 475,700 common shares of the Company (valued at $6,000,000) plus $15.2 million in cash, exclusive of acquisition costs. The purchase price exceeded the estimated fair value of net assets acquired by $11.8 million, which is recorded as goodwill and is being amortized over forty years. The Company continues to seek opportunities to invest in new products and markets, and in acquisitions which fit its strategic growth plans in the lighting and graphics markets. The Company believes that adequate financing for any such investments or acquisitions will be available through future borrowings or through the issuance of common or preferred shares in payment for acquired businesses. S-4 13 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ---------------------------------------- To the Board of Directors and Shareholders of LSI Industries Inc.: We have audited the accompanying consolidated balance sheets of LSI Industries Inc. (an Ohio corporation) and subsidiaries as of June 30, 1998 and 1997, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended June 30, 1998. These financial statements and the schedule referred to below are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audit. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of LSI Industries Inc. and subsidiaries as of June 30, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 1998 in conformity with generally accepted accounting principles. Our audit was made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed in the index to the financial statements is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. The information in this schedule as of June 30, 1998 and 1997 and for each of the years in the period ended June 30, 1998 has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. /s/ Arthur Andersen LLP Arthur Andersen LLP Cincinnati, Ohio August 14, 1998 S-5 14 LSI INDUSTRIES INC. CONSOLIDATED INCOME STATEMENTS FOR THE YEARS ENDED JUNE 30, 1998, 1997, AND 1996 (In thousands, except per share)
1998 1997 1996 --------- --------- --------- Net sales $ 189,139 $ 144,742 $ 152,733 Cost of products sold 124,659 96,200 104,221 --------- --------- --------- Gross profit 64,480 48,542 48,512 Selling and administrative expenses 44,286 34,833 35,101 --------- --------- --------- Operating income 20,194 13,709 13,411 Interest (income) (143) (528) (154) Interest expense 106 41 498 Other expense 108 114 62 --------- --------- --------- Income from continuing operations before income taxes 20,123 14,082 13,005 Income tax expense 7,536 5,210 4,735 --------- --------- --------- Income from continuing operations 12,587 8,872 8,270 Discontinued operations -- -- (1,500) --------- --------- --------- Net income $ 12,587 $ 8,872 $ 6,770 ========= ========= ========= Earnings per common share Basic earnings per share from continuing operations $ 1.32 $ .99 $ 1.02 ========= ========= ========= Basic earnings per share $ 1.32 $ .99 $ .84 ========= ========= ========= Diluted earnings per share from continuing operations $ 1.29 $ .97 $ .98 ========= ========= ========= Diluted earnings per share $ 1.29 $ .97 $ .80 ========= ========= =========
The accompanying notes are an integral part of these financial statements. S-6 15 LSI INDUSTRIES INC. CONSOLIDATED BALANCE SHEETS JUNE 30, 1998 AND 1997 (In thousands, except shares)
1998 1997 --------- --------- ASSETS Current Assets Cash and cash equivalents $ 9,338 $ 2,612 Accounts receivable, less allowance for doubtful accounts of $560 and $401, respectively 33,184 27,412 Inventories 24,958 23,058 Refundable income taxes 157 157 Other current assets 1,911 1,613 --------- --------- Total current assets 69,548 54,852 Property, Plant and Equipment, at cost Land 3,459 3,348 Buildings 15,458 14,433 Machinery and equipment 25,874 22,893 --------- --------- 44,791 40,674 Less accumulated depreciation (17,056) (13,529) --------- --------- Net property, plant and equipment 27,735 27,145 Goodwill, net 12,921 13,047 Other Assets 112 145 --------- --------- $ 110,316 $ 95,189 ========= =========
The accompanying notes are an integral part of these financial statements. S-7 16
1998 1997 -------- -------- LIABILITIES & SHAREHOLDERS' EQUITY Current Liabilities Current maturities of long-term debt $ 190 $ 187 Accounts payable 13,689 12,337 Accrued expenses 15,432 12,136 -------- -------- Total current liabilities 29,311 24,660 Long-Term Debt 1,005 1,195 Other Long-Term Liabilities 112 68 Deferred Income Taxes 1,231 1,298 Shareholders' Equity Preferred shares, without par value; Authorized 1,000,000 shares, none issued -- -- Common shares, without par value; Authorized 30,000,000 shares; Outstanding 9,634,608 and 9,499,231 shares, respectively (see Note 7) 35,368 34,516 Retained earnings 43,289 33,452 -------- -------- Total shareholders' equity 78,657 67,968 -------- -------- $110,316 $ 95,189 ======== ========
S-8 17 LSI INDUSTRIES INC. CONSOLIDATED STATEMENTS OF CASH FLOWS For the years ended June 30, 1998, 1997 and 1996 (In thousands)
1998 1997 1996 -------- -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 12,587 $ 8,872 $ 6,770 Non-cash items included in income Depreciation and amortization 4,375 2,975 2,456 Deferred income taxes (401) (74) (129) Deferred compensation plan 209 346 -- Loss on disposition of fixed assets 108 75 23 Change in Accounts receivable (5,326) (73) (5,552) Inventories (1,569) (564) (1,076) Refundable income taxes -- 188 93 Accounts payable 1,086 92 214 Accrued expenses and other 3,235 44 (2,069) Change in liability for discontinued operations (21) (17) (324) -------- -------- -------- Net cash flows from operating activities 14,283 11,864 406 -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES Purchase of property, plant, and equipment (4,120) (2,587) (3,392) Proceeds from sale of fixed assets 30 3 23 Acquisition of businesses, net of cash received (712) (15,639) -- -------- -------- Net cash flows from investing activities (4,802) (18,223) (3,369) -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES Payment of long-term debt (448) (180) (6,537) Cash dividends paid (2,750) (2,075) (1,653) Exercise of stock options 676 321 586 Purchase of treasury shares (233) (233) -- Proceeds from public offering of shares -- -- 19,581 -------- -------- -------- Net cash flows from financing activities (2,755) (2,167) 11,977 -------- -------- -------- Increase (decrease) in cash and cash equivalents 6,726 (8,526) 9,014 Cash and cash equivalents at beginning of year 2,612 11,138 2,124 -------- -------- -------- Cash and cash equivalents at end of year $ 9,338 $ 2,612 $ 11,138 ======== ======== ========
The accompanying notes are an integral part of these financial statements. S-9 18 LSI INDUSTRIES INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE YEARS ENDED JUNE 30, 1998, 1997, AND 1996 (In thousands)
Common Shares ------------------------ Number of Retained Shares Amount Earnings Total -------- -------- -------- -------- BALANCE AT JUNE 30, 1995 7,554 $ 7,915 $ 21,538 $ 29,453 Net income -- -- 6,770 6,770 Public offering of shares 1,233 19,581 -- 19,581 Stock options exercised 177 586 -- 586 Dividends - $.21 per share -- -- (1,653) (1,653) -------- -------- -------- -------- BALANCE AT JUNE 30, 1996 8,964 28,082 26,655 54,737 Net income -- -- 8,872 8,872 Purchase of treasury shares (21) (233) -- (233) Deferred stock compensation -- 346 -- 346 Stock options exercised 80 321 -- 321 Common shares issued for acquisition 476 6,000 -- 6,000 Dividends - $.23 per share -- -- (2,075) (2,075) -------- -------- -------- -------- BALANCE AT JUNE 30, 1997 9,499 34,516 33,452 67,968 NET INCOME -- -- 12,587 12,587 PURCHASE OF TREASURY SHARES (12) (233) -- (233) DEFERRED STOCK COMPENSATION -- 209 -- 209 STOCK OPTIONS EXERCISED 136 676 -- 676 COMMON SHARES ISSUED FOR ACQUISITION 12 200 -- 200 DIVIDENDS - $.29 PER SHARE -- -- (2,750) (2,750) -------- -------- -------- -------- BALANCE AT JUNE 30, 1998 9,635 $ 35,368 $ 43,289 $ 78,657 ======== ======== ======== ========
The accompanying notes are an integral part of these financial statements. S-10 19 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONSOLIDATION: The consolidated financial statements include the accounts of LSI Industries Inc. and its subsidiaries, all of which are wholly owned. All significant intercompany transactions have been eliminated. RECLASSIFICATION: Certain reclassifications have been made to prior year amounts in order to be consistent with the presentation for the current year. USE OF ESTIMATES: The preparation of the financial statements in conformity with generally accepted accounting principles requires the Company to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. REVENUE RECOGNITION: Revenue is recognized when the customer accepts title and the resultant risks and rewards of ownership. Generally this occurs upon shipment of goods or shortly thereafter. Amounts received from customers prior to the recognition of revenue are accounted for as customer pre-payments under accrued expenses. CASH AND CASH EQUIVALENTS: The cash balance includes cash and cash equivalents which have original maturities of less than three months. INVENTORIES: Inventories are stated at the lower of cost or market. Cost is determined on the first-in, first-out basis. PROPERTY, PLANT AND EQUIPMENT AND RELATED DEPRECIATION: Property, plant and equipment are stated at cost. Major additions and betterments are capitalized while maintenance and repairs are expensed. For financial reporting purposes, depreciation is computed on the straight-line method over the estimated useful lives of the assets as follows: Buildings 31 - 40 years Machinery and equipment 3 - 10 years
S-11 20 GOODWILL: The excess of cost over fair value of assets acquired ("goodwill") is amortized over a forty year period. As of June 30, 1998 and 1997, accumulated amortization of goodwill was $662,000 and $326,000, respectively. The Company periodically evaluates goodwill and other long-lived assets for permanent impairment based upon anticipated cash flows. To date no impairments have been recorded, nor are any anticipated. FAIR VALUE OF FINANCIAL INSTRUMENTS: The Company has financial instruments consisting primarily of cash and cash equivalents, revolving lines of credit, and long-term debt. The fair value of these financial instruments approximates carrying value because of their short-term maturity and variable, market-driven interest rates. The Company has no financial instruments with off-balance sheet risk. EMPLOYEE BENEFIT PLANS: The Company has a defined contribution retirement plan and a discretionary profit sharing plan covering substantially all of its employees, and a non-qualified deferred compensation plan covering certain employees. The costs of employee benefit plans are charged to expense and funded annually. Total costs were $1,641,000 in 1998, $1,399,000 in 1997, and $1,378,000 in 1996. INCOME TAXES: Deferred income taxes are provided on items reported in income in different periods for financial reporting and tax purposes. NET INCOME PER COMMON SHARE: The computation of net income per common share is based on the weighted average common shares outstanding for the period, including Common Share equivalents. Common share equivalents include the dilutive effect of stock options and common shares to be issued under a deferred compensation plan of 231,000 shares in 1998, 184,000 shares in 1997, and 360,000 shares in 1996. See also Notes 4 and 7. RECENT PRONOUNCEMENTS: In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128 (SFAS No. 128), "Earnings Per Share," which requires the presentation of basic and diluted earnings per share on the face of the income statement for all entities with complex capital structures and requires a reconciliation of both the numerator and denominator of the basic and dilutive earnings per share computations. SFAS No. 128 is effective for financial statements for both interim and annual periods ending after December 15, 1997. The Company adopted this standard in the second quarter of fiscal year 1998 with no material impact on earnings per share. All prior period earnings per share have been restated for the new disclosure. S-12 21 In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130 (SFAS No. 130), "Reporting Comprehensive Income," which establishes standards for reporting and display of comprehensive income and its components (revenues, expenses, gains, and losses) in a full set of general-purpose financial statements. SFAS No. 130 is effective for financial statements for annual periods beginning after December 15, 1997 (fiscal 1999 for the Company). The Company does not expect adoption to have a significant impact on its financial statements. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133 (SFAS No. 133), "Accounting for Derivative Instruments and for Hedging Activities," which establishes standards for reporting and disclosure of derivative and hedging instruments. SFAS No. 133 is effective as of the beginning of fiscal years ending after June 15, 1999. The Company will not be affected by this new standard because the Company has no derivative or hedging financial instruments. NOTE 2 - DISCONTINUED OPERATIONS In 1992 the Company sold the assets and operations of its U.K. subsidiary, Duramark, to its management and reported a loss from Discontinued Operations. Consideration received included cash and assumption of liabilities by management. The remaining liabilities which were not assumed by the management buy-out group of the discontinued operations, net of related taxes, are included in accrued expenses in the amounts of $562,000 and $575,000 as of June 30, 1998 and 1997, respectively. NOTE 3 - BUSINESS SEGMENT INFORMATION LSI operates in two business segments - the Image Group and the Commercial / Industrial Lighting Group. The Image Group manufactures and sells exterior and interior visual image elements (lighting, graphics, and menu board systems) for the petroleum / convenience store market and for multi-site retail operations. The Image Group includes the operations of LSI Petroleum Lighting, LSI Automotive, LSI Images, LSI Metal Fabrication, SGI Integrated Graphic Systems, and Grady McCauley. The Commercial / Industrial Lighting Group manufactures and sells primarily outdoor, indoor, and landscape lighting for the commercial / industrial and multi-site retail markets. The Commercial / Industrial Lighting Group includes the operations of LSI Lighting Systems, Courtsider Lighting, Greenlee Lighting, and LSI Marcole. The Company's most significant market is the petroleum / convenience store market with approximately 50% of net sales concentrated in this market. The following information is provided for the following periods:
1998 1997 1996 -------- -------- -------- (In thousands) NET SALES: Image Group $138,886 $101,562 $110,808 Commercial / Industrial Lighting Group 50,253 43,180 41,925 -------- -------- -------- $189,139 $144,742 $152,733 ======== ======== ======== OPERATING INCOME: Image Group $ 15,056 $ 9,055 $ 10,903 Commercial / Industrial Lighting Group 5,138 4,654 2,508 -------- -------- -------- $ 20,194 $ 13,709 $ 13,411 ======== ======== ========
S-13 22
IDENTIFIABLE ASSETS: Image Group $ 79,555 $ 74,284 $ 48,449 Commercial / Industrial Lighting Group 20,730 17,734 19,223 -------- -------- -------- 100,285 92,018 67,672 Corporate 10,031 3,171 11,824 -------- -------- -------- $110,316 $ 95,189 $ 79,496 ======== ======== ======== CAPITAL EXPENDITURES: Image Group $ 3,029 $ 1,902 $ 2,085 Commercial / Industrial Lighting Group 1,091 685 1,307 -------- -------- -------- $ 4,120 $ 2,587 $ 3,392 ======== ======== ======== DEPRECIATION AND AMORTIZATION: Image Group $ 3,410 $ 2,085 $ 1,695 Commercial / Industrial Lighting Group 965 890 761 -------- -------- -------- $ 4,375 $ 2,975 $ 2,456 ======== ======== ========
Operating income of the business segments includes sales less all operating expenses including allocations of corporate expense, but excluding interest expense. Sales between business segments are immaterial. Identifiable assets are those assets used by each segment in its operations, including allocations of shared assets. Corporate assets consist primarily of cash and cash equivalents, and refundable income taxes. NOTE 4 - EARNINGS PER COMMON SHARE The following table presents the amounts used to compute earnings per common share and the effect of dilutive potential common shares on net income and weighted average shares outstanding:
(In thousands, except per share) 1998 1997 1996 ---------- ---------- ---------- BASIC EARNINGS PER SHARE Income from continuing operations $ 12,587 $ 8,872 $ 8,270 ========== ========== ========== Net income $ 12,587 $ 8,872 $ 6,770 ========== ========== ========== Weighted average shares outstanding during the period, net of treasury shares 9,559 9,004 8,096 ========== ========== ========== Basic earnings per share from continuing operations $ 1.32 $ .99 $ 1.02 ========== ========== ========== Basic earnings per share $ 1.32 $ .99 $ .84 ========== ========== ==========
S-14 23 DILUTED EARNINGS PER SHARE - -------------------------- Income from continuing operations $12,587 $ 8,872 $ 8,270 ======= ======= ======= Net income $12,587 $ 8,872 $ 6,770 ======= ======= ======= Weighted average shares outstanding during the period, net of treasury shares 9,559 9,004 8,096 Effect of dilutive securities: Impact of common shares to be issued under stock option plans and a deferred compensation plan 231 184 360 ------- ------- ------- Weighted average shares outstanding (A) (B) 9,790 9,188 8,456 ======= ======= ======= Diluted earnings per share from continuing operations $ 1.29 $ .97 $ .98 ======= ======= ======= Diluted earnings per share $ 1.29 $ .97 $ .80 ======= ======= =======
(A) Calculated using the "Treasury Stock" method as if dilutive securities were exercised and the funds were used to purchase Common Shares at the average market price during the period. (B) Options to purchase 4,390 common shares, 15,385 common shares, and 5,862 common shares at June 30, 1998, 1997, and 1996, respectively, were not included in the computation of diluted earnings per share because the exercise price was greater than the average fair market value of the common shares. NOTE 5 - BALANCE SHEET DATA The following information is provided as of June 30:
1998 1997 ------- ------- (In thousands) INVENTORIES: Raw materials $12,192 $10,272 Work-in-process and finished goods 12,766 12,786 ------- ------- $24,958 $23,058 ======= ======= ACCRUED EXPENSES: Compensation and benefits $ 6,405 $ 3,797 Customer prepayments $ 3,945 $ 5,098
S-15 24 NOTE 6 - REVOLVING LINES OF CREDIT AND LONG-TERM DEBT The Company has lines of credit with its banks in the aggregate amount of $24 million, all of which was available at June 30, 1998. These revolving lines of credit are unsecured and expire in fiscal year 1999. Interest on the revolving lines of credit is charged based upon an increment over the LIBOR rate as periodically determined, or at the banks' base lending rate less 1.25 percentage points, at the Company's option. The increment over the LIBOR borrowing rate, as periodically determined, with one of the Company's credit lines is 100 basis points, and with the second credit line fluctuates between 85 and 150 basis points depending upon the ratio of indebtedness to tangible net worth. As of June 30, 1998 the borrowing rate on this line of credit would be 85 basis points over the LIBOR rate. Under terms of these agreements, the Company has agreed to maintain minimum levels of profitability and net worth, and is subject to certain maximum levels of leverage. The Company has an Industrial Revenue Development Bond (IRB) borrowing in the amount of $1,070,000 associated with its facility in Northern Kentucky. The term of this IRB is 15 years with semi-annual interest payments and annual principal payments for retirement of bond principal in increasing amounts over the term of the bonds. The IRB interest rate, which is reestablished semi-annually, is currently 4.45%, plus a .75% letter of credit fee. The IRB is secured by the Company's Kentucky real estate, which has a net carrying value of $1.4 million. The Company has equipment loans outstanding totaling $125,000 with two governmental agencies in Kentucky. The loans are for terms of five years at a weighted average interest rate of 2.2% and are secured by the Company's Kentucky equipment which has a net carrying value of $1.3 million. The Company makes quarterly principal and interest payments of $32,000 through June 1999 and has committed to specified job growth in its Kentucky facility.
LONG-TERM DEBT: 1998 1997 ------ ------ (In thousands) Industrial Revenue Development Bond at 5.2% $1,070 $1,135 Equipment loans (average rate of 2.2%) 125 247 ------ ------ 1,195 1,382 Less current maturities 190 187 ------ ------ $1,005 $1,195 ====== ======
Future maturities of long-term debt at June 30, 1998 are as follows (in thousands):
1999 2000 2001 2002 2003 2004 and after ---- ---- ---- ---- ---- -------------- $190 $ 70 $ 75 $ 80 $ 80 $700
NOTE 7 - SHAREHOLDERS' EQUITY The Company generated $19.6 million in net proceeds from a public offering of 1,232,894 common shares in February 1996. The Company used a portion of the net proceeds to repay all outstanding indebtedness under its revolving lines of credit and its term loan facility with its banks. The Company has stock option plans which cover all of its full-time employees and has a plan covering all non-employee directors. The options granted pursuant to these plans are granted at fair market value at date of grant. Options granted to non-employee directors are immediately S-16 25 exercisable and options granted to employees generally become exercisable 25% per year (cumulative) beginning one year after the date of grant. The number of shares reserved for issuance is 890,126, of which 389,750 shares were available for future grant as of June 30, 1998. The plans allow for the grant of both incentive stock options and non-qualified stock options. At June 30, 1998, there were 127,837 options exercisable at an average price of $9.40 per share. On June 30, 1997 the Company issued 475,700 common shares at a stated value of $6,000,000 as a portion of the purchase price of an acquired business, and on February 6, 1998 the Company issued 12,000 common shares at a stated value of $200,000 as a portion of the purchase price of an acquired business (see further discussion in Note 12). Statement of Financial Accounting Standards No. 123 (SFAS No. 123) requires, at a minimum, pro forma disclosures of expense for stock-based awards based on their fair values. The fair value of each option on the date of grant has been estimated using the Black-Scholes option pricing model. The following weighted average assumptions were used for grants in fiscal 1998, 1997, and 1996.
1998 1997 1996 ---- ---- ---- Dividend yield 2% 2% 2% Expected volatility 49% 43% 38% Risk-free interest rate 5.56%-6.54% 6.17%-6.28% 5.91%-6.64% Expected life 4-8 yrs. 4-8 yrs. 4-8 yrs.
At June 30, 1998, the 154,400 options granted during fiscal 1998 to employees and non-employee directors have exercise prices ranging from $14.00 to $19.00, fair values ranging from $6.16 to $9.44 per option, and remaining contractual lives of four to nine years. The 6,900 options granted during fiscal 1997 to employees and non-employee directors had, as of June 30, 1997, exercise prices ranging from $11.25 to $13.66, fair values ranging from $4.91 to $5.26, and remaining contractual lives of four to nine years. If the Company had adopted the expense recognition provisions of SFAS No. 123, net income and earnings per share for the years ended June 30, 1998, 1997, and 1996 would have been as follows:
1998 1997 1996 ---------- ---------- ---------- (In thousands except earnings per share) Net income As reported $ 12,587 $ 8,872 $ 6,770 Pro forma $ 12,225 $ 8,646 $ 6,539 Earnings per share Basic Continuing operations As reported $ 1.32 $ .99 $ 1.02 Pro forma $ 1.28 $ .96 $ .99 Basic As reported $ 1.32 $ .99 $ .84 Pro forma $ 1.28 $ .96 $ .81
S-17 26 Diluted Continuing operations As reported $1.29 $.97 $.98 Pro forma $1.26 $.95 $.96 Diluted As reported $1.29 $.97 $.80 Pro forma $1.26 $.95 $.78
Since SFAS No. 123 has not been applied to options granted prior to December 15, 1994, the resulting compensation cost shown above may not be representative of that expected in future years. Transactions involving the stock option plans for the years ended June 30, 1998, 1997 and 1996 are shown in the table below:
1998 1997 1996 ---------------------- ---------------------- ---------------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise (Shares in thousands) Shares Price Shares Price Shares Price ------ -------- ------ -------- ------ -------- Outstanding at beginning of year 518 $ 9.89 619 $ 9.04 492 $ 4.13 Granted 154 15.31 7 11.68 342 13.14 Terminated (17) 13.86 (21) 12.95 (22) 12.10 Exercised (155) 5.79 (87) 3.23 (193) 3.43 ------ ------ ------ Outstanding at end of year 500 $12.70 518 $ 9.89 619 $ 9.04 === === ===
The Company implemented a non-qualified Deferred Compensation Plan in fiscal 1997 and a certain portion of the Plan's investments are in common shares of the Company. A total of 33,723 and 21,045 common shares were held in the Plan as of June 30, 1998 and 1997, respectively, and, accordingly, have been recorded as treasury shares. On August 19, 1998, the Board of Directors declared a cash dividend of $0.125 per share, comprised of a $0.0625 regular quarterly dividend and a $0.0625 special year-end dividend, to be paid September 15, 1998 to shareholders of record on September 8, 1998. Annual cash dividend payments made during fiscal years 1998, 1997, and 1996 were $.29, $.23, and $.21 per share, respectively. NOTE 8 - SALES TO MAJOR CUSTOMERS The Company made sales in the Image Group to a major customer which exceeded 10% of consolidated net sales. Sales to Chevron U.S.A. represented 12% of consolidated net sales in 1996. NOTE 9 - LEASES The Company leases certain of its facilities and equipment under operating lease arrangements. Rental expense was $1,094,000 in 1998, $920,000 in 1997, and $656,000 in 1996. Minimum S-18 27 annual rental commitments under non-cancelable operating leases are: $994,000 in 1999, $973,000 in 2000, $895,000 in 2001, and $197,000 in 2002. NOTE 10 - INCOME TAXES The following information is provided for the years ended June 30:
1998 1997 1996 ---- ---- ---- (In thousands) PROVISION (BENEFIT) FOR INCOME TAXES: Current federal $ 7,143 $ 4,705 $ 4,290 CURRENT STATE AND LOCAL 794 579 574 Deferred (401) (74) (129) -------- -------- -------- $ 7,536 $ 5,210 $ 4,735 ======== ======== ======== RECONCILIATION TO FEDERAL STATUTORY RATE: Federal statutory tax rate 35.0% 34.3% 34.2% STATE AND LOCAL TAXES 2.6 2.7 2.9 Goodwill and other (.1) -- (.7) -------- -------- -------- Effective tax rate 37.5% 37.0% 36.4% ======== ======== ========
The components of deferred income tax assets and liabilities at June 30, 1998 and 1997 are as follows:
1998 1997 ------- ------- (In thousands) CURRENT ASSETS (LIABILITIES): Reserves against current assets $ 515 $ 267 Prepaid expenses (256) (101) Accrued expenses 842 593 ------- ------- Deferred income tax asset included in Other Current Assets on the Consolidated Balance Sheets $ 1,101 $ 759 ======= ======= NONCURRENT (ASSETS) LIABILITIES: Depreciation $ 1,573 $ 1,595 Goodwill and acquisition costs (144) (154) Deferred compensation (198) (143) ------- ------- $ 1,231 $ 1,298 ======= =======
The Company discontinued its European operations in 1992 and reported a $4.3 million loss, net of a $3.2 million income tax benefit. The Internal Revenue Service (IRS) completed its audit of the Company's 1989 through 1992 federal income tax returns and proposed audit adjustments which would have resulted in a return of approximately $2 million of income taxes (plus interest) to the IRS which had been refunded to the Company with the filing of its 1992 income tax return. The IRS questioned the tax treatment of the loss associated with the discontinued operations, specifically as to whether it should receive ordinary loss or capital loss treatment. S-19 28 The Company's settlement discussions with the IRS Appeals Division relating to the proposed audit assessment were concluded in December 1995. An agreement was reached that re-characterized a portion of the 1992 loss associated with discontinued European operations as a long-term capital loss. The agreement resulted in payment of $1.7 million (composed of taxes and interest), and in a fiscal 1996 charge to discontinued operations of $1.5 million to increase the Company's reserve for remaining liabilities associated with the discontinued operations. NOTE 11 - SUPPLEMENTAL CASH FLOW INFORMATION (In thousands)
1998 1997 1996 -------- -------- -------- Cash payments: Interest $ 126 $ 109 $ 924 Income taxes $ 7,184 $ 4,786 $ 5,588 Non-cash investing and financing activities: Common shares issued for acquisitions $ 200 $ 6,000 $ -- Details of acquisitions: Working capital, less cash $ 59 $ 2,377 $ -- Property, plant & equipment 647 7,245 -- Other assets, net (4) 232 -- Excess of purchase price paid over estimated net assets of acquired businesses 210 11,785 -- -------- -------- -------- 912 21,639 -- less fair value of common shares issued (200) (6,000) -- -------- -------- -------- Cash paid for acquisitions $ 712 $ 15,639 $ -- ======== ======== ========
NOTE 12 - ACQUISITIONS On June 30, 1997, the Company acquired substantially all assets and assumed certain liabilities of Grady McCauley, Incorporated, a privately owned manufacturer of custom interior graphics primarily for the retail market. For financial statement purposes the acquisition was accounted for as a purchase with operating results of Grady McCauley first included in the Company's fiscal 1998 financial statements. The purchase price was 475,700 common shares of the Company (valued at $6,000,000) plus $15.2 million in cash, exclusive of acquisition costs. The purchase price exceeded the estimated fair value of net assets acquired by $11.8 million, which is recorded as goodwill and is being amortized over forty years. On February 6, 1998, the Company acquired the outstanding common shares of Marcole, Inc., a privately owned manufacturer of electrical wiring harnesses primarily for the appliance industry. For financial statement purposes the acquisition was accounted for as a purchase with operating results of Marcole first included in the Company's fiscal 1998 third quarter financial statements. The purchase price was 12,000 common shares of the Company (valued at $200,000) plus $712,000 in cash. The purchase price exceeded the estimated fair value of net assets acquired by $210,000, which is recorded as goodwill and is being amortized over forty years. The allocation was based on preliminary estimates and may be revised at a later date pending the completion of certain appraisals and other analysis. The following unaudited pro forma consolidated results give effect to the above acquisition of Grady McCauley, Incorporated as though it had been acquired at the beginning of each period S-20 29 presented. Neither the acquisition price of Marcole nor its operating results are material to LSI Industries and therefore Marcole is not included in the pro forma results presented below. The pro forma information has been presented for comparative purposes only and does not purport to be indicative of the results of operations which actually would have resulted had the acquisition been made at the beginning of the earliest period presented, or of results which may occur in the future.
1997 1996 ------------ ------------ (In thousands except earnings per share; unaudited) Net sales $ 159,082 $ 167,034 Income from continuing operations $ 8,901 $ 8,577 Net income $ 8,901 $ 7,077 Earnings per share Basic Continuing operations $ .94 $ 1.00 Total $ .94 $ .83 Diluted Continuing operations $ .92 $ .96 Total $ .92 $ .79
NOTE 13 - SUMMARY OF QUARTERLY RESULTS (UNAUDITED)
Quarter Ended -------------------------------------------------------------------- Fiscal Sept. 30 Dec. 31 March 31 June 30 Year ---------- ---------- ---------- ---------- ---------- 1998 Net sales $ 43,957 $ 47,754 $ 43,386 $ 54,042 $ 189,139 Gross profit 15,519 17,120 13,717 18,124 64,480 Net income 2,975 3,680 1,917 4,015 12,587 Earnings per share Basic $ .31 $ .39 $ .20 $ .42 $ 1.32 Diluted $ .31 $ .38 $ .20 $ .41 $ 1.29(a) Range of share prices High $ 17.38 $ 19.38 $ 22.75 $ 24.00 $ 24.00 Low $ 13.50 $ 15.75 $ 16.75 $ 18.38 $ 13.50 1997 Net sales $ 36,885 $ 37,539 $ 30,836 $ 39,482 $ 144,742 Gross profit 12,140 13,258 10,013 13,131 48,542 Net income 2,136 2,718 1,269 2,749 8,872 Earnings per share Basic $ .24 $ .30 $ .14 $ .30 $ .99(a) Diluted $ .23 $ .30 $ .14 $ .30 $ .97
S-21 30 Range of share prices High $ 18.00 $ 16.75 $ 14.50 $ 15.25 $ 18.00 Low $ 13.50 $ 9.50 $ 12.00 $ 10.50 $ 9.50
(a) The total of the earnings per share for each of the four quarters does not equal the total earnings per share for the full year because the calculations are based on the average shares outstanding during each of the individual periods. At August 21, 1998, there were 410 shareholders of record. The Company believes this represents approximately 2,800 beneficial shareholders. NOTE 14 - SUBSEQUENT EVENT In August 1998, the Company entered into a letter of intent to acquire, through merger, all of the capital stock of Mid-West Chandelier Company and Fairfax Lighting Co. both privately owned and located in Kansas City. The purchase price for the two related companies is expected to be $16 million consisting of $8 million in cash and $8 million in common shares of LSI Industries. In addition, a contingent "earn-out" having a maximum value of $1 million in cash and $1 million in stock could be earned during the three years subsequent to the closing of the contemplated merger provided certain minimum earnings thresholds are exceeded. The merger is expected to be completed in the third quarter of fiscal 1999, and is subject to, among other things, completion of pre-acquisition due diligence, execution of a definitive merger agreement, and completion of the required Hart-Scott-Rodino Act filing. Mid-West Chandelier and Fairfax Lighting are engaged in the business of designing, manufacturing, and selling a broad line of fluorescent lighting fixtures for the retail and commercial markets. Net sales for the two companies for the year ended December 31, 1997, were approximately $19,000,000. S-22 31 LSI INDUSTRIES INC. SELECTED FINANCIAL DATA (In thousands except per share) The following data has been selected from the Consolidated Financial Statements of the Company for the periods and dates indicated:
INCOME STATEMENT DATA: 1998 1997 1996 1995 1994 --------- --------- --------- --------- --------- Net sales $ 189,139 $ 144,742 $ 152,733 $ 119,927 $ 93,535 Cost of products sold 124,659 96,200 104,221 80,156 62,430 Operating expenses 44,286 34,833 35,101 29,509 23,965 --------- --------- --------- --------- --------- Operating income 20,194 13,709 13,411 10,262 7,140 Interest (income) (143) (528) (154) (39) (25) Interest expense 106 41 498 498 224 Other (income) expense 108 114 62 160 290 --------- --------- --------- --------- --------- Income from continuing opera- tions before income taxes 20,123 14,082 13,005 9,643 6,651 Income taxes 7,536 5,210 4,735 3,469 2,461 --------- --------- --------- --------- --------- Income from continuing operations $ 12,587 $ 8,872 $ 8,270 $ 6,174 $ 4,190 ========= ========= ========= ========= ========= Net income $ 12,587 $ 8,872 $ 6,770 $ 6,174 $ 4,190 ========= ========= ========= ========= ========= Earnings per share from continuing operations Basic $ 1.32 $ .99 $ 1.02 $ .82 $ .56 Diluted $ 1.29 $ .97 $ .98 $ .79 $ .55 Cash dividends paid $ .29 $ .23 $ .21 $ .15 $ .03 Weighted average common shares Basic 9,559 9,004 8,096 7,515 7,420 Diluted 9,790 9,188 8,456 7,802 7,656 BALANCE SHEET DATA: (At June 30) 1998 1997 1996 1995 1994 --------- --------- --------- --------- --------- Working capital $ 40,237 $ 30,192 $ 36,146 $ 17,788 $ 11,223 Total assets 110,316 95,189 79,496 62,553 46,287 Long-term debt, including current maturities 1,195 1,382 1,562 8,099 3,600 Shareholders' equity 78,657 67,968 54,737 29,453 23,981
S-23 32 LSI INDUSTRIES INC. AND SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED JUNE 30, 1998, 1997 AND 1996 (IN THOUSANDS)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E -------- -------- -------- -------- -------- Additions Balance Charged to Balance Beginning Costs and (A) End of Description of Period Expenses Deductions Period - ----------- --------- -------- ---------- ------ ALLOWANCE FOR DOUBTFUL ACCOUNTS: Year Ended June 30, 1998 $401 $465 $(306) $560 Year Ended June 30, 1997 $358 $ 11 (B) $ 32 $401 Year Ended June 30, 1996 $242 $328 $(212) $358 INVENTORY OBSOLESCENCE RESERVES: Year Ended June 30, 1998 $551 $688 $(398) $841 Year Ended June 30, 1997 $694 $525 (C) $(668) $551 Year Ended June 30, 1996 $453 $892 $(651) $694
(A) For allowance for doubtful accounts, deductions are uncollectible accounts charged off, less recoveries. (B) Includes $50 resulting from net assets purchased on June 30, 1997. (C) Includes $100 resulting from net assets purchased on June 30, 1997. S-24 EX-22 2 EXHIBIT 22 1 EXHIBIT 22 SUBSIDIARIES OF THE REGISTRANT ------------------------------
Percent Business and Owned by State of Subsidiary Location Registrant Incorporation - ---------- ------------ ---------- ------------- SGI Integrated Graphic Limited Partner 100% Delaware Systems Inc. Wilmington, DE SGI Delaware Systems Inc. General Partner 100% Delaware Wilmington, DE SGI Integrated Graphic Screen printed materials, 100% Delaware Systems L.P. and illuminated and non- (Partnership) illuminated architectural graphics Houston, TX Greenlee Lighting Inc. Limited Partner 100% Delaware Wilmington, DE Greenlee Incorporated General Partner 100% Delaware Wilmington, DE Greenlee Lighting L.P. Landscape Lighting 100% Delaware Dallas, TX (Partnership) Grady McCauley Inc. Digital image and screen 100% Ohio printed graphics North Canton, OH LSI Marcole Inc. Electrical wire harnesses 100% Tennessee Manchester, TN
EX-23 3 EXHIBIT 23 1 EXHIBIT 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS ----------------------------------------- As independent public accountants, we hereby consent to the incorporation of our report included in this Form 10-K, into the Company's previously filed Registration Statement File No.'s 33-3490, 33-19326, 33-30840, 33-64721, 33-64723, 333-11503, and 333-31239. /s/ Arthur Andersen LLP Arthur Andersen LLP Cincinnati, Ohio September 9, 1998 EX-24 4 EXHIBIT 24 1 EXHIBIT 24 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned officer and/or director of LSI Industries Inc., an Ohio corporation, which is about to file an annual report on Form 10-K for the fiscal year ended June 30, 1998, under provisions of the Securities Exchange Act of 1934, with the Securities and Exchange Commission, Washington, D.C., hereby constitutes and appoints Robert J. Ready or Ronald S. Stowell his true and lawful attorney-in-fact and agent, and each of them with full power to act without the other, his true and lawful attorney-in-fact and agent, for him and in his name, place and stead, in any and all capacities, to sign such Form 10-K and any and all amendments thereof, with power where appropriate to affix the corporate seal of said corporation thereto and to attest to said seal, and to file such Form 10-K and each such amendment, with all exhibits thereto, and any and all other documents, in connection therewith, with the Securities and Exchange Commission, hereby grants unto said attorney-in-fact and agent, and each of them, full power and authority to do and perform any and all acts and things requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person and hereby ratifies and confirms all that said attorney-in-fact and agent, or either of them may lawfully do or cause to be done by virtue thereof. IN WITNESS WHEREOF, the undersigned has hereunto set his hand on this 19th day of August, 1998. /s/ Michael J. Burke --------------------------------------- Michael J. Burke 2 EXHIBIT 24 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned officer and/or director of LSI Industries Inc., an Ohio corporation, which is about to file an annual report on Form 10-K for the fiscal year ended June 30, 1998, under provisions of the Securities Exchange Act of 1934, with the Securities and Exchange Commission, Washington, D.C., hereby constitutes and appoints Robert J. Ready or Ronald S. Stowell his true and lawful attorney-in-fact and agent, and each of them with full power to act without the other, his true and lawful attorney-in-fact and agent, for him and in his name, place and stead, in any and all capacities, to sign such Form 10-K and any and all amendments thereof, with power where appropriate to affix the corporate seal of said corporation thereto and to attest to said seal, and to file such Form 10-K and each such amendment, with all exhibits thereto, and any and all other documents, in connection therewith, with the Securities and Exchange Commission, hereby grants unto said attorney-in-fact and agent, and each of them, full power and authority to do and perform any and all acts and things requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person and hereby ratifies and confirms all that said attorney-in-fact and agent, or either of them may lawfully do or cause to be done by virtue thereof. IN WITNESS WHEREOF, the undersigned has hereunto set his hand on this 19th day of August, 1998. /s/ Allen L. Davis --------------------------------------- Allen L. Davis 3 EXHIBIT 24 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned officer and/or director of LSI Industries Inc., an Ohio corporation, which is about to file an annual report on Form 10-K for the fiscal year ended June 30, 1998, under provisions of the Securities Exchange Act of 1934, with the Securities and Exchange Commission, Washington, D.C., hereby constitutes and appoints Robert J. Ready or Ronald S. Stowell his true and lawful attorney-in-fact and agent, and each of them with full power to act without the other, his true and lawful attorney-in-fact and agent, for him and in his name, place and stead, in any and all capacities, to sign such Form 10-K and any and all amendments thereof, with power where appropriate to affix the corporate seal of said corporation thereto and to attest to said seal, and to file such Form 10-K and each such amendment, with all exhibits thereto, and any and all other documents, in connection therewith, with the Securities and Exchange Commission, hereby grants unto said attorney-in-fact and agent, and each of them, full power and authority to do and perform any and all acts and things requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person and hereby ratifies and confirms all that said attorney-in-fact and agent, or either of them may lawfully do or cause to be done by virtue thereof. IN WITNESS WHEREOF, the undersigned has hereunto set his hand on this 19th day of August, 1998. /s/ James P. Sferra --------------------------------------- James P. Sferra 4 EXHIBIT 24 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned officer and/or director of LSI Industries Inc., an Ohio corporation, which is about to file an annual report on Form 10-K for the fiscal year ended June 30, 1998, under provisions of the Securities Exchange Act of 1934, with the Securities and Exchange Commission, Washington, D.C., hereby constitutes and appoints Robert J. Ready or Ronald S. Stowell his true and lawful attorney-in-fact and agent, and each of them with full power to act without the other, his true and lawful attorney-in-fact and agent, for him and in his name, place and stead, in any and all capacities, to sign such Form 10-K and any and all amendments thereof, with power where appropriate to affix the corporate seal of said corporation thereto and to attest to said seal, and to file such Form 10-K and each such amendment, with all exhibits thereto, and any and all other documents, in connection therewith, with the Securities and Exchange Commission, hereby grants unto said attorney-in-fact and agent, and each of them, full power and authority to do and perform any and all acts and things requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person and hereby ratifies and confirms all that said attorney-in-fact and agent, or either of them may lawfully do or cause to be done by virtue thereof. IN WITNESS WHEREOF, the undersigned has hereunto set his hand on this 19th day of August, 1998. /s/ John N. Taylor --------------------------------------- John N. Taylor EX-27 5 EXHIBIT 27
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-K FOR THE YEAR ENDED JUNE 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000763532 LSI INDUSTRIES, INC. 1,000 YEAR JUN-30-1998 JUL-01-1997 JUN-30-1998 9,338 0 33,744 (560) 24,958 69,548 44,791 (17,056) 110,316 29,311 1,005 0 0 35,368 43,289 110,316 189,139 189,139 124,659 43,821 108 465 (37) 20,123 7,536 12,587 0 0 0 12,587 1.32 1.29
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