Back to GetFilings.com

FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

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

        Indicate by checkmark 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, and (2) has been subject to such filing requirements for the past 90 days.     YES    [X]    NO [   ]

        Indicate by checkmark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).    YES   [X]    NO [   ]

        As of October 31, 2003 there were 15,759,317 shares of the Registrant’s common stock outstanding.

LSI INDUSTRIES INC.

FORM 10-Q

FOR THE QUARTER ENDED SEPTEMBER 30, 2003

INDEX

Note: All share and per share data reflect the 5-for-4 stock split announced October 28, 2003, to be effective November 14, 2003.

“Safe Harbor” Statement under the Private Securities Litigation Reform Act of 1995:

This document contains certain forward-looking statements that are subject to numerous assumptions, risks or uncertainties. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. Forward-looking statements may be identified by words such as “estimates,” “anticipates,” “projects,” “plans,” “expects,” “intends,” “believes,” “should” and similar expressions and by the context in which they are used. Such statements are based upon current expectations of the Company and speak only as of the date made. Risks and uncertainties include, but are not limited to, the impact of competitive products and services, product demand and market acceptance risks, reliance on key customers, financial difficulties experienced by customers, the adequacy of reserves and allowances for doubtful accounts, fluctuations in operating results or costs, unexpected difficulties in integrating acquired businesses, and the ability to retain key employees of acquired businesses.

Page 2

PART I.   FINANCIAL INFORMATION

ITEM 1.   FINANCIAL STATEMENTS

LSI INDUSTRIES INC.
CONSOLIDATED INCOME STATEMENTS
(Unaudited)

The accompanying Notes to Financial Statements are an integral part of these financial statements.

Page 3

LSI INDUSTRIES INC.

CONSOLIDATED BALANCE SHEETS
(Unaudited)

The accompanying Notes to Financial Statements are an integral part of these financial statements.

Page 4

LSI INDUSTRIES INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

The accompanying Notes to Financial Statements are an integral part of these financial statements.

Page 5

LSI INDUSTRIES INC.

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

NOTE 1:     INTERIM FINANCIAL STATEMENTS

NOTE 2    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Consolidation:

The consolidated financial statements include the accounts of LSI Industries Inc. (an Ohio corporation) and its subsidiaries, all of which are wholly owned. All significant intercompany transactions and balances have been eliminated.

Revenue recognition:

The Company has four sources of revenue: revenue from product sales; revenue from the installation of products; service revenue generated from providing the integrated design, project and construction management, site engineering, and site permitting; and revenue from shipping and handling.

Product revenue is recognized on product-only orders at the time of shipment. Product revenue related to orders where the customer requires the Company to install the product is generally recognized when the product is installed. In some situations, product revenue is recognized when the product is shipped, before it is installed, because by agreement the customer has taken title to and risk of ownership for the product before installation has been completed. Other than normal product warranties or the possibility of installation, the Company has no post-shipment responsibilities.

Installation revenue is recognized when the products have been fully installed. The Company is not always responsible for installation of products it sells and, other than normal warranties, has no post-installation service contracts or responsibilities.

Service revenue from integrated design, project and construction management, site engineering and permitting is recognized at the completion of the contract with the customer. With larger customer contracts involving multiple sites, the customer may require progress billings for completion of identifiable, time-phased elements of the work, in which case revenue is recognized at the time of the progress billing.

Page 6

Shipping and handling revenue coincides with the recognition of revenue from sale of the product.

Amounts received from customers prior to the recognition of revenue are accounted for as customer pre-payments and are included in accrued expenses.

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:

Costs related to the purchase, internal development, and implementation of the Company’s business operating software system are either capitalized or expensed in accordance with the American Institute of Certified Public Accountants’ Statement of Position 98-1, “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use.” The capitalized implementation costs are apportioned to and placed in service for each operating company as that company implements and begins utilization of the business operating software. The current business operating software was first implemented in January 2000. All costs capitalized for the business operating software will be fully depreciated by December 31, 2007. Other purchased computer software is being depreciated over periods ranging from three to five years.

Intangible assets:

Intangible assets consisting of customer lists, trade names, patents and trademarks are recorded on the Company’s balance sheet and are being amortized to expense over periods ranging between two and seventeen years. The excess of cost over fair value of assets acquired (“goodwill”) was amortized to expense over periods ranging between fifteen and forty years through fiscal 2002. Beginning in fiscal 2003, goodwill is no longer amortized, but is subject to review for impairment. See additional information about goodwill and intangibles in Note 6. The Company periodically evaluates intangible assets, goodwill and other long-lived assets for permanent impairment. Impairments have been recorded only with respect to goodwill (see Note 6).

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/or variable, market-driven interest rates. The Company has no financial instruments with off-balance sheet risk.

Page 7

Contingencies:

The Company is party to various negotiations, customer bankruptcies, and legal proceedings arising in the normal course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company’s financial position, results of operations, cash flows or liquidity.

Earnings per common share:

The computation of basic earnings per common share is based on the weighted average common shares outstanding for the period. The computation of diluted earnings per share is based on the weighted average common shares outstanding for the period and includes common share equivalents. Common share equivalents include the dilutive effect of stock options, contingently issuable shares (for which issuance has been determined to be probable), and common shares to be issued under a deferred compensation plan, all of which totaled 270,000 shares at September 30, 2003 and 229,000 shares at September 2002. All share and per share data reflect the five-for-four stock split declared by the Company on October 20, 2003. See also Note 4.

Stock options:

The company applies the provisions of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees.” Accordingly, no compensation expense has been reflected in the financial statements as the exercise price of options granted to employees and non-employee directors is equal to the fair market value of the Company’s common shares on the date of grant. The Company has adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123 (SFAS No. 123), “Accounting for Stock Based Compensation.”

If the Company had adopted the expense recognition provisions of SFAS No. 123, net income and earnings per share for the three months ended September 30, 2003 and 2002 would have been as follows:

Page 8

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.

Comprehensive income:

The Company does not have any comprehensive income items other than net income.

Reclassification:

Certain reclassifications may have been made to prior year amounts in order to be consistent with the presentation for the current year. The primary reclassification has been the Company’s business segment data as a result of organizational changes and the establishment of new reportable business segments. See Note 3.

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.

NOTE 3:    BUSINESS SEGMENT INFORMATION

Page 9

        The following information is provided for the following periods:

NOTE 4:    EARNINGS PER COMMON SHARE

Page 10

Page 11

NOTE 5:     BALANCE SHEET DATA

NOTE 6    GOODWILL AND OTHER INTANGIBLE ASSETS

The Company has completed its annual goodwill impairment test required by Statement of Financial Accounting Standards No. 142 (SFAS No. 142), “Goodwill and Other Intangible Assets.” This test required the Company, through an independent appraisal firm, to assess the fair value, as determined on a discounted cash flow basis, of each reporting unit that had goodwill on its balance sheet, and compare that value to the carrying value of the reporting unit’s net assets as of July 1, 2003. Based upon this analysis, there was no impairment of goodwill as of July 1, 2003. The Company determined it had three reporting units to be tested in its fiscal 2004 impairment test, two of which are acquired business in the Lighting Segment and one of which is a combination of four acquired businesses in the Graphics Segment.

The Company completed its transitional goodwill impairment test in fiscal 2003 as of July 1, 2002, its date of adoption of SFAS No. 142. The Company determined for the transitional goodwill impairment test that it had eight reporting units, each of which represented an acquired business that operated in the organizational structure one level below the business segment level. Based upon this analysis, there was full impairment of the recorded net goodwill of two reporting units in the Lighting Segment (totaling $23,593,000) and one reporting unit in the Graphics Segment (totaling $929,000). The impairment of $24,522,000, a non-cash and non-operating charge, was booked in the amount of $18,541,000, net of income taxes, as a change in accounting method and was recorded as of the date of adoption of SFAS No. 142, July 1, 2002.

The following tables present information about the Company’s goodwill and other intangible assets on the dates or for the periods indicated.

Page 12

Page 13

NOTE 8:    REVOLVING LINES OF CREDIT AND LONG-TERM DEBT

NOTE 9:    CASH DIVIDENDS

NOTE 10:    SHAREHOLDERS’ EQUITY

Page 14

NOTE 11:    SUBSEQUENT EVENT

ITEM 2.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
                 CONDITION AND RESULTS OF OPERATIONS

Net Sales by Business Segment
   (In thousands, unaudited)

Results of Operations

        Results of fiscal 2003 have been revised to reflect the Company’s new reportable business segments: the Lighting Segment and the Graphics Segment. All share and per share data reflect the 5-for-4 stock split which was announced on October 28, 2003, to be effective November 14, 2003.

Page 15

THREE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 2002

        Net sales of $59,099,000 in the first quarter of fiscal 2004 increased 5% from fiscal 2003 first quarter net sales of $56,045,000. Lighting Segment net sales increased 5% to $36.2 million and Graphics Segment net sales increased 5% to $22.9 as compared to the prior year. Sales to the petroleum / convenience store market, the Company’s largest market, are reported in both the Lighting and Graphics Segments, depending upon the product or service sold, and were up over the fiscal 2003 first quarter 5% to $17.2 million. While sales to this market have increased this quarter over the prior year, the Company believes concerns about the Middle East and the war with Iraq have had the effect of reducing spending by the major oil companies. The petroleum / convenience store market has been, and will continue to be, a very important niche market for the Company.

        The $1.9 million increase in Lighting Segment net sales is primarily the result of an approximate $4 million increase in sales to the commercial / industrial lighting markets (which includes increased sales to a major national retailer, slight improvement in the economy, as well as good response from the Company’s new commercial sales reps), partially offset by reduced lighting sales (down $1.6 million) in our niche markets.

        The $1.2 million increase in Graphics Segment net sales is primarily the result of the net effect of increased sales to the petroleum / convenience store market ($1.4 million), increased sales to a retail store customer (approximately $4 million), and reduced menu board system sales (one quick service restaurant customer sales are down $3 million as their roll out program is now nearing completion). The Company expects some additional sales in fiscal 2004 as the remaining franchisee-operated restaurants of this customer implement this new menu board system.

        Image conversion programs are important to the Company’s strategic direction. Image conversion programs include situations where our customer refurbishes its retail sites around the country by replacing some or all of the lighting, graphic elements, menu board systems and possibly other items they may source from other suppliers. These image conversions take several quarters to complete and involve both our customer’s corporate-owned sites as well as its franchisee-owned sites, the latter of which involve separate sales efforts by the Company with each franchisee. Relative to net sales to a customer before and after an image conversion program, net sales during the image conversion are typically significantly higher, depending upon how much of the lighting, graphics or menu board business is awarded to the Company. Sales related to a customer’s image conversion program are reported in either the Lighting Segment and/or the Graphics Segment, depending upon the product and/or service provided.

        Gross profit of $15,223,000 in the first quarter of fiscal 2003 increased 1% from last year, but decreased as a percentage of net sales to 25.8% in fiscal 2003 as compared to 26.9% last year. The increase in amount of gross profit is due primarily to the 5% increase in net sales, and improved direct labor efficiencies, partially offset by higher freight and distribution expenses. Selling and administrative expenses decreased $1.3 million or 10%. About $1 million of this reduction relates to lower bad debt expense (first quarter fiscal 2003 Graphics Segment had significant additional expense due primarily to customer bankruptcies and cash flow difficulties). The remainder of the reduction relates to reduced sales commissions, travel and entertainment, and legal and professional fees.

        The Company reported interest expense of $84,000 in the first quarter of fiscal 2004 as compared to $117,000 in the same period last year. The change between years is reflective of both reduced interest rates and reduced average outstanding borrowings on the Company’s line of credit. The effective tax rate in the first quarter of fiscal 2004 was 37%. The first quarter fiscal 2003 effective tax rate of 16% is the net result of a normal tax provision of about 37.5% that was reduced as the Company recorded federal and state income tax credits. The Company expects an effective income tax rate of approximately 37% in fiscal 2004.

Page 16

        Income before cumulative effect of an accounting change was $2,601,000 in the first quarter of fiscal 2004, a 17% increase as compared to $2,215,000 in the same period of fiscal 2003. The increase is primarily the result of increased gross profit on increased net sales, decreased operating expenses and interest expense, partially offset by increased income taxes. Diluted earnings per share, before the cumulative effect of an accounting change, was $0.13 in the first quarter of fiscal 2004, increased 18% from $0.11 per share reported in the same period of fiscal 2003. The weighted average common shares outstanding for purposes of computing diluted earnings per share in the first quarter of fiscal 2004 was 19,968,000 shares as compared to 19,944,000 shares in the same period last year. All share and per share data reflect the five-for-four stock split declared October 20, 2003.

        The Company completed the transitional goodwill impairment test required by Statement of Financial Accounting Standards No. 142 (SFAS No. 142), “Goodwill and Other Intangible Assets.” This test required the Company, through an independent appraisal firm, to assess the fair value, as determined on a discounted cash flow basis, of each reporting unit that had goodwill on its balance sheet, and compare that value to the carrying value of the reporting unit’s net assets as of July 1, 2002. The Company determined for the fiscal 2003 transitional goodwill impairment test that it had eight reporting units, each of which represented an acquired business that operated in the organizational structure one level below the business segment level. Based upon this analysis, there was full impairment of the recorded net goodwill of two reporting units in the Lighting Segment (totaling $23,593,000) and one reporting unit in the Graphics Segment (totaling $929,000). The impairment of $24,522,000, a non-cash and non-operating charge, was booked in the amount of $18,541,000, net of income taxes, as a change in accounting method and was recorded as of the date of adoption of SFAS No. 142, July 1, 2002. The Company has determined that it will perform its annual goodwill impairment test in accordance with SFAS No. 142 as of July 1st each year. There were no changes in accounting methods in the first quarter of fiscal 2004.

        The Company recorded a net loss of $16,326,000 in the first quarter of fiscal 2003 as compared to net income of $2,601,000 in the first quarter of fiscal 2004. The increase is primarily the result of the $18,541,000 goodwill impairment loss that was recorded as an accounting change, in fiscal 2003. Diluted earnings or (loss) per share was $(0.82) in the first quarter of fiscal 2003 as compared to $0.13 per share reported in the first quarter of fiscal 2004.

Liquidity and Capital Resources

        The Company considers its level of cash on hand, its current ratio and working capital levels to be its most important measures of short-term liquidity. For long-term liquidity indicators, the Company believes its ratio of long-term debt to equity and its historical levels of net cash flows from operating activities to be the most important measures.

        At September 30, 2003 the Company had working capital of $63.0 million, compared to $59.6 million at June 30, 2003. The ratio of current assets to current liabilities increased to 3.55 to 1 from 3.50 to 1. The $3.4 million increase in working capital is primarily attributed to increased accounts receivable and inventories, and decreased accounts payable, partially offset by increased accrued expenses and decreased other current assets. The $3.2 million increase in accounts receivable is due both to higher first quarter fiscal 2004 sales as compared to fourth quarter fiscal 2003, as well as to an increase in the days sales outstanding from 58 days at June 30, 2003 to 64 days at September 30, 2003. The Company believes it is experiencing longer payment cycles from its customers rather than issues related to collectibility. Inventories have increased $1.0 million in the first quarter of fiscal year 2004, with approximately half of the increase occurring in each of the Company’s business segments. Raw materials and work in process are down an aggregate $1.1 million, and finished goods are up approximately $2.2 million (40% of the increase is in support of programs in the Lighting Segment and 60% in support of programs in the Graphics Segment).

Page 17

        The Company generated $0.7 million of cash from operating activities in the first quarter of fiscal 2004 as compared to $1.9 million in the same period of fiscal 2003. The $1.2 million decrease in net cash flows from operating activities in fiscal 2003 is primarily the net result of increased income before cumulative effect of accounting change ($0.4 million), increased accounts receivables rather than a decrease (change of $6.9 million), more of an increase in inventories ($0.9 million), and an aggregate $0.8 million increase in accounts payable and accrued expenses in the first quarter of fiscal 2004 as compared to an aggregate $5.6 million decrease in the same period last year.

        As of September 30, 2003, the Company’s days sales outstanding (DSO) were at approximately 64 days, up 6 days from the 58 day DSO as of June 30, 2003. Net accounts and notes receivables were $40.5 million and $37.3 million at September 30, 2003 and June 30, 2003, respectively. Collection cycles from a few large customers have been slower than what the Company had been experiencing at the end of fiscal 2003. The Company believes that its net receivables are ultimately collectible or recoverable, net of certain reserves, and that aggregate allowances for doubtful accounts are adequate. The Company continues to have potential exposure to possible preferential payment (as defined by the bankruptcy statutes) demands, none of which is reserved for, from two customers who are in bankruptcy. No demands have been received. Of the total potential exposure of $1.6 million, the Company believes it has appropriate defenses in accordance with the bankruptcy statutes for at least $1.2 million.

        Inventories at September 30, 2003 are up $1.0 million from June 30, 2003. Both raw materials and work-in-process are down in the first quarter, and finished goods have increased about $0.9 million in the Lighting Segment and $1.3 million in the Graphics Segment. These inventory changes are in support of shipping requirements of the various lighting and graphics programs of the Company’s customers.

        Cash generated from operations is the Company’s primary source of liquidity. In addition, the Company has an unsecured $50 million revolving line of credit with its bank group. As of October 24, 2003 there was approximately $38.3 million available on this line of credit. This line of credit is composed of a $30 million three year committed credit facility expiring in fiscal 2006 and a $20 million credit facility with an annual renewal in the third quarter of fiscal 2004. The Company believes that the total of available lines of credit plus cash flows from operating activities is adequate for the Company’s fiscal 2004 operational and capital expenditure needs. The Company is in compliance with all of its loan covenants.

        Capital expenditures of $0.7 million in the first quarter of fiscal 2004 compare to $2.2 million in the same period of fiscal 2003. The primary spending early in fiscal 2003 was for final construction costs of the $11 million manufacturing facility for LSI Lightron. The Company commenced operations in this facility in July 2003. Fiscal 2004 spending to date is primarily for tooling and equipment ($0.5 million), and capitalization of system design costs related to the Company’s fully integrated enterprise resource planning / business operating system ($0.2 million). Total capital expenditures in fiscal 2004 are expected to be approximately $6 million, exclusive of business acquisitions.

Page 18

        The Company used $56,000 in financing activities in the first quarter of fiscal 2004 as compared to a generation of $42,000 in the same period of fiscal 2003. The change between years is the net result of a lesser borrowing on the Company’s line of credit in fiscal 2004 and no required repayment of funded debt in fiscal 2004.

        The Company has been implementing a fully integrated enterprise resource planning / business operating system over the past several fiscal years, and will continue to do so throughout all operations of the Company, with completion of the implementation scheduled in fiscal 2005. Of the $8.5 million of software expenditures that are capitalized to date, a total of $2.9 million is being depreciated for the subsidiary companies currently using the software. A total of $1.0 million of depreciation has been expensed to date. As additional subsidiaries implement this software, proportionately more of this capitalized asset will be depreciated and the depreciation per period will significantly increase to approximately $1.5 million per fiscal year. This software is scheduled to be fully depreciated in fiscal 2008. Capitalization of additional design costs for this internal-use software is expected, as well as implementation costs that will be expensed as incurred.

        On October 20, 2003 the Board of Directors declared a regular quarterly cash dividend of $0.072 per share (approximately $1,418,000), payable November 12, 2003 to shareholders of record on November 5, 2003. During the first quarter of fiscal 2004, the Company paid cash dividends of $945,000, as compared to $947,000 in the same period of fiscal 2003.

        The Company continues to seek opportunities to invest in new products and markets, and in acquisitions that fit its strategic growth plans in the lighting and graphics markets. The Company believes 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.

Critical Accounting Policies and Estimates

        The Company is required to make estimates and judgments in the preparation of its financial statements that affect the reported amounts of assets, liabilities, revenues and expenses, and related footnote disclosures. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. The Company continually reviews these estimates and their underlying assumptions to ensure they remain appropriate. The Company believes the items discussed below are among its most significant accounting policies because they utilize estimates about the effect of matters that are inherently uncertain and therefore are based on management’s judgment. Significant changes in the estimates or assumptions related to any of the following critical accounting policies could possibly have a material impact on the financial statements.

Revenue Recognition

        The Company recognizes revenue in accordance with Securities Exchange Commission Staff Accounting Bulletin No. 101, “Revenue Recognition in Financial Statements,” and the Emerging Issues Task Force EITF No. 00-21, “Revenue Arrangements With Multiple Deliverables.” Revenue is recognized when title to goods and risk of loss have passed to the customer, there is persuasive evidence of a purchase arrangement, delivery has occurred or services rendered, and collectibility is reasonably assured. Revenue is typically recognized at time of shipment. Sales are recorded net of estimated returns, rebates and discounts. Any cash received from customers prior to the recognition of revenue is accounted for as a customer pre-payment and is included in accrued expenses.

Page 19

        The Company has four sources of revenue: revenue from product sales; revenue from the installation of product; service revenue generated from providing the integrated design, project and construction management, site engineering, and site permitting; and revenue from shipping and handling. Product revenue is recognized on product-only orders at the time of shipment. Product revenue related to orders where the customer requires the Company to install the product is generally recognized when the product is installed. In some situations, product revenue is recognized when the product is shipped, before it is installed, because by agreement the customer has taken title to and risk of ownership for the product before installation has been completed. Other than normal product warranties or the possibility of installation, the Company has no post-shipment responsibilities. Installation revenue is recognized when the products have been fully installed. The Company is not always responsible for installation of products it sells and, other than normal warranties, has no post-installation service contracts or responsibilities. Service revenue from integrated design, project and construction management, site engineering and permitting is recognized at the completion of the contract with the customer. With larger customer contracts involving multiple sites, the customer may require progress billings for completion of identifiable, time-phased elements of the work, in which case revenue is recognized at the time of the progress billing. Shipping and handling revenue coincides with the recognition of revenue from sale of the product.

Asset Impairment

        Carrying values of goodwill and other intangible assets with indefinite lives are reviewed annually for possible impairment in accordance with Statement of Financial Accounting Standards No. 142 (SFAS No. 142), “Goodwill and Other Intangible Assets,” which was adopted on July 1, 2002. The Company’s impairment review involves the estimation of the fair value of goodwill and indefinite-lived intangible assets using a discounted cash flow approach, at the reporting unit level, that requires significant management judgment with respect to revenue and expense growth rates, changes in working capital and the selection and use of an appropriate discount rate. The estimates of fair value of reporting units are based on the best information available as of the date of the assessment. The use of different assumptions would increase or decrease estimated discounted future operating cash flows and could increase or decrease an impairment charge. Company management uses its judgment in assessing whether assets may have become impaired between annual impairment tests. Indicators such as unexpected adverse business conditions, economic factors and unanticipated technological change or competitive activities may signal that an asset has become impaired. An impairment charge of $24.5 million, or $18.5 million net of tax, related to goodwill was recorded in fiscal 2003 as the cumulative effect of an accounting change and charged against income. See Note 6 to the financial statements for further discussion.

        Carrying values for long-lived tangible assets and definite-lived intangible assets, excluding goodwill, are reviewed for possible impairment as circumstances warrant in connection with Statement of Financial Accounting Standards No. 144 (SFAS No. 144), “Accounting for the Impairment or Disposal of Long-Lived Assets,” which was adopted on July 1, 2002. Impairment reviews are conducted at the judgment of Company management when it believes that a change in circumstances in the business or external factors warrants a review. Circumstances such as the discontinuation of a product or product line, a sudden or consistent decline in the forecast for a product, changes in technology or in the way an asset is being used, a history of operating or cash flow losses, or an adverse change in legal factors or in the business climate, among others, may trigger an impairment review. The Company’s initial impairment review to determine if an impairment test is required is based on an undiscounted cash flow analysis at the lowest level for which identifiable cash flows exist. The analysis requires judgment with respect to changes in technology, the continued success of product lines and future volume, revenue and expense growth rates, and discount rates. There were no impairment charges related to long-lived tangible assets or definite-lived intangible assets recorded by the Company during 2003.

Page 20

Credit and Collections

        The Company maintains allowances for doubtful accounts receivable for estimated losses resulting from the inability of its customers to make required payments. If the financial condition of the Company’s customers were to deteriorate, resulting in their inability to make the required payments, the Company may be required to record additional allowances or charges against income. The Company determines its allowance for doubtful accounts by first considering all known collectibility problems of customers’ accounts, and then applying certain percentages against the various aging categories of the remaining receivables. The resulting allowance for doubtful accounts receivable is an estimate based upon the Company’s knowledge of its business and customer base, and historical trends. The Company also establishes allowances, at the time revenue is recognized, for returns and allowances, discounts, pricing and other possible customer deductions. These allowances are based upon historical trends.

ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

      Nothing to report.

ITEM 4.    CONTROLS AND PROCEDURES.

PART II. OTHER INFORMATION

ITEM 6.    EXHIBITS AND REPORTS ON FORM 8-K

Page 21

        [All other items required in Part II have been omitted because they are not applicable or are not required.]

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.

November 3, 2003