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F O R M 1 0 - K
S E C U R I T I E S A N D E X C H A N G E C O M M I S S I O N
Washington, D.C. 20549
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended July 31, 1995
or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from _______________ to _______________
Commission File Number: 0-15240
L O W R A N C E E L E C T R O N I C S, I N C.
-----------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 44-0624411
- ------------------------ --------------------------------------
(State of incorporation) (I.R.S. Employer Identification No.)
12000 East Skelly Drive
Tulsa, Oklahoma 74128
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (918) 437-6881
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, par
value $.10 per share
--------------------
(Title of class)
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 for any amendment to
this Form 10-K. [X]
Aggregate Market Value of the Voting Stock Held By
Non-Affiliates on October 23, 1995, $4,201,108
Number of Shares of Common Stock
Outstanding on October 23, 1995- 3,352,458
DOCUMENT INCORPORATED BY REFERENCE
Proxy Statement for Annual Meeting of Stockholders to be held
December 12, 1995 - Part III
FORM 10-K
Annual Report for Fiscal Year Ended July 31, 1995
LOWRANCE ELECTRONICS, INC.
Page
----
Table of Contents
-----------------
PART I
Item 1. Business.................................................. 1
Item 2. Properties................................................ 11
Item 3. Legal Proceedings......................................... 12
Item 4. Submission of Matters to a Vote of Security Holders....... 12
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters....................................... 13
Item 6. Selected Financial Data................................... 14
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 15
Item 8. Financial Statements and Supplementary Data............... 22
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure....................... 22
PART III
Item 10. Directors and Executive Officers of the Registrant........ 23
Item 11. Executive Compensation.................................... 23
Item 12. Security Ownership of Certain Beneficial Owners
and Management............................................ 23
Item 13. Certain Relationships and Related Transactions............ 23
PART IV
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K....................................... 24
and F-1 to F-15
Signatures.......................................................... 28
LOWRANCE ELECTRONICS, INC.
Annual Report
For the Year Ended July 31, 1995
PART I
Item 1. Business
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General
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The Company designs, manufactures, and markets sonars (also known as depth
sounders) and accessories for use in recreational and commercial boating. The
Company's sonars are principally used by sports fishermen for detecting the
presence of fish and by sports fishermen and boaters as navigational and safety
devices for determining bottom depth in lakes, rivers, and coastal waters. The
Company also designs, manufactures, and markets Loran-C and Global Positioning
System (GPS) navigational modules that may be attached to and used with certain
of the Company's liquid crystal display (LCD) sonars or with stand-alone
displays to provide a variety of navigational information. The sonars,
navigational modules, and the stand-alone navigation displays are marketed under
the Company's three trade names, "Lowrance" "Eagle", and "SeaView", primarily
through wholesalers, original equipment manufacturers (OEMs), mail-order
catalogs, mass merchandisers, and other retail outlets in all fifty states and
to a lesser and limited extent in forty-one foreign countries.
In fiscal 1994, the Company began production and marketing of a portable,
hand-held GPS receiver, which can be used in a variety of marine and non-marine
applications, such as hunting, hiking, and backpacking, and production of a
stand-alone mapping/navigational system, which provides the user with full
mapping capabilities utilizing a built-in mapping database and offering an
option which makes the unit compatible with the most popular mapping cartridges
available to boaters. These products are distributed under the trade names
"Eagle" and "Lowrance", respectively, through channels similar to the Company's
sonar products.
The Company was formed in 1957, incorporated in 1958, and re-organized as a
Delaware corporation in 1986. As used herein, the term "Company" refers to
Lowrance Electronics, Inc., (including its subsidiaries) and its predecessors,
unless the context indicates otherwise.
The Company's principal executive offices are located at 12000 East Skelly
Drive, Tulsa, Oklahoma, 74128, and its telephone number is (918) 437-6881.
Products
- --------
The Company's products consist of sonars and related equipment, such as
water temperature gauges, and Loran-C and Global Positioning System (GPS)
navigational products.
Sonars
------
Each sonar consists of a transmitter, receiver, display, and
transducer. The transmitter, receiver, and display are normally combined in
one housing connected by a cable to the transducer. The housing containing
the transmitter, receiver, and display is normally mounted where it may be
viewed by the boat operator, and the transducer is mounted under or in the
hull of a boat. The transmitter takes electrical energy and sends it
through the cable to the transducer, which converts the electrical energy
to sound pulses. These sound pulses travel through
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the water until they hit the bottom or an object such as fish or a
shipwreck and then bounce back as an echo. The transducer converts the
echoes back to electrical impulses which are sent to the receiver. The
receiver processes the impulses and transmits the information to the
display for use by the boater.
The Company's sonars are either waterproof or weatherproof and are
designed to withstand the harsh environments and shocks encountered by
sport boats. Sport boats, unlike offshore commercial boats, are usually
open and subject to shock, rain, salt spray, and temperature extremes that
constantly test the durability of the sonar. The Company's sonars are also
designed for the needs of sport fishermen who, unlike their commercial
counterparts, are sometimes more interested in the size, depth, and
location of individual fish, depth of the thermocline, and underwater
structures, rather than the location of large schools of fish. The
Company's sonars are designed for and used by both fresh and saltwater
sports fishermen and boaters. The Company's sonars feature a variety of
transducers manufactured by the Company in different sizes and shapes to
fit all types of boats and with different frequencies and angles for both
deep and shallow water use. The Company's sonars are distinguished by the
type of display--liquid crystal graph displays (LCDs) and non-liquid
crystal graph displays (non-LCDs).
Liquid Crystal Graph Display (LCD) Sonars. The Company's LCD products
-----------------------------------------
are easier to use, provide more advanced capabilities, and incorporate
advanced signal processing, which allows automatic operation of LCD
sonars in a way that sets the controls for best performance whether at
trolling or high speeds. The Company markets twenty-one LCD sonar
models. All of the models utilize advanced computer technology and are
keyboard controlled. The Company's LCD models graphically display the
depth of the water, bottom contour, fish, and other underwater objects
on a LCD and digitally display the water depth. Twelve models can also
digitally display the surface temperature of the water, boat speed,
and distance traveled. LCD sonars are easier to read and interpret
than the Company's flasher sonars and generally are less expensive to
buy and operate than the Company's paper graph sonars. Because LCD
sonars have no moving parts, they are more durable than other sonars.
The more advanced models usually retail from $350 to $550. The other
LCD models, with fewer features, usually retail from $99 to $300. The
Company's various LCD models range in maximum depth capabilities from
350 feet to 2,500 feet.
Non-Liquid Crystal Graph Display (Non-LCD) Sonars. The Company's non-
-------------------------------------------------
LCD sonars include paper graph displays, flasher displays, and digital
displays. Paper graphs display similar information to liquid crystal
graphs but utilize electro-sensitive paper to provide a permanent
record. Flasher models were the first type of sonar products designed
and manufactured by the Company. The display consists of a neon bulb
affixed to a spinning disk. The bulb lights when it receives a sonar
signal, flashing next to the appropriate depth mark on a calibrated
circular dial. Digital sonars are marketed and used solely to
determine water depth which is digitally depicted on a LCD. The non-
LCD sonars have varying depth capabilities ranging from 60 feet for
flashers to 1,300 feet for paper graphs and range in retail price from
$140 to $700, respectively.
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Accessories
-----------
The Company also has a line of accessories consisting of water
temperature gauges, cables, portable power packs, and various mounting
brackets, which are used primarily in conjunction with the Company's sonars
and GPS products.
Loran-C
--------
The Company's Loran-C navigation modules receive low-frequency radio
signals which are transmitted at precise intervals by a chain of land-based
stations. The navigation modules use the radio signals to display
navigational information, such as present position, current bearing, and
distance to destination, and course plotting on an LCD sonar or stand-alone
Loran-C display. The modules usually retail from $225 to $300, and the
stand-alone Loran-C displays (module included) usually retail from $350 to
$400.
Global Positioning System (GPS).
-------------------------------
The GPS, unlike its Loran-C counterpart, offers worldwide navigational
information for users via a constellation of twenty-one satellites plus
three spares. The system offers precise global navigation for land, sea,
and air applications providing constant updates of an individual's or
object's position in latitude, longitude, and altitude. Additionally, GPS
measures speed and direction of travel. Similar to the Loran-C optional
equipment, the Company's GPS navigational modules may be attached to and
used with three of the Company's LCD sonars. The combination sonar/GPS
models (module included) usually retail from $850 to $1,200, and the stand-
alone, gimbal-mounted GPS displays (module included) usually retail from
$400 to $1,200.
The Company's Global Map 2000 product utilizes input from either a GPS
or Loran module to display the user's position on a pictorial background
map in addition to providing the navigational information and course
plotter available in all Lowrance and Eagle GPS products. Further, the
user, at their option, can purchase mapping cartridges which contain over
7,000 highly detailed nautical charts. The Global Map 1000, the predecessor
to the Global Map 2000, began shipping in fiscal 1994. The Global Map 2000
began shipping in the first quarter fiscal 1996 and retails for
approximately $1,000 including the GPS module and cartridge reader. This
unit will also be sonar capable with the purchase of a sonar access module.
In addition to the Company's gimbal-mounted GPS products, it began
shipping a portable, hand-held GPS navigation receiver during fiscal 1994.
This product is battery-powered and features a high resolution LCD screen
with full graphics capabilities which will display navigational information
and course plotting. For fiscal 1996, the Company will begin shipping a
second hand-held GPS product, the GlobalMap Sport, with capabilities
similar to that of the Global Map 2000. These products can be used in both
marine and non-marine applications and retail from approximately $399 to
$699.
-3-
Product Sales
- -------------
The following table sets forth the percentage of total sales of LCD and
non-LCD sonars and accessories, including stand-alone Loran-C and GPS
navigational products, sold by the Company in the past three fiscal years.
Percent of Total Product Sales
------------------------------
1993 1994 1995
-------- -------- --------
Type of Sonar Displays -
Liquid Crystal Graph (LCDs), including
combination navigation units 80.0% 69.1% 68.9%
Non-Liquid Crystal Graphs (non-LCDs) 5.5 5.1 4.6
GPS, including stand-alone units
and modules 4.6 13.8 16.3
Accessories, including stand-alone
Loran-C units and modules 9.9 12.0 10.2
----- ----- -----
Total 100.0% 100.0% 100.0%
===== ===== =====
Distribution
- ------------
The Company markets its products under three trade names, "Lowrance",
"Eagle", and "SeaView". Sales of Eagle products, as a percent of total sales
were approximately 66% in 1993, 63% in 1994, and 58% in 1995.
The Lowrance line, with its selection of eighteen interchangeable
transducers and its more complicated keyboard, is intended for the more
sophisticated user. The wide choice of transducers available with the Lowrance
sonars allows for greater installation and operating flexibility through
selection of a transducer of the appropriate size, shape, and frequency to meet
the boater's specific needs. As a result of recent developments in transducer
design, the Company packages its Lowrance sonar models with a high-performance
transducer suitable for use on nearly all types of boat hulls. Lowrance
customers can exchange this transducer for credit toward one which better meets
their specialized requirement for installation or operation. Generally, the
boater will require special assistance with the installation and operation of a
Lowrance sonar. To this end, the Company sells its Lowrance line primarily to
boat manufacturers, wholesalers, and retailers that the Company believes have
basic knowledge of the installation, use, and service of the Lowrance line and
can pass on such knowledge to customers. Wholesalers and retailers purchasing
products in the Lowrance line are parties to agreements with the Company
providing for non-exclusive authorized dealerships and distributorships for a
term of one year. As of July 31, 1995, the Company had approximately one
thousand seven hundred fifty wholesalers and retailers that were parties to such
agreements. A sonar installation subsidy is offered to authorized dealers that
sell and install Lowrance products as a means of sharing the costs of the
installation. The Company believes that, over the past three years, the Lowrance
line has been sold primarily through dealers having the requisite level of
knowledge to sell, install, and properly instruct the fisherman and boat owner
as to the product's use. Terms of payment for products in the Lowrance line vary
based on the time of the season with the longest dating terms of 120 days being
offered for shipments during the first quarter of the fiscal year.
The Eagle line is sold primarily to mass merchandisers, mail-order catalog
companies, retail sporting goods stores, and wholesalers that usually do not
provide technical assistance to the consumer regarding the installation and
operation of sonars. Recognizing that special assistance will not be available
as to the selection of an appropriate transducer or the operation of an Eagle
sonar, the Company prepackages each Eagle sonar with a universal
-4-
transducer designed to work adequately on most boats and has simplified the
sonar's operating requirements. The Eagle sonars do not have all of the
installation and operating flexibility of the Lowrance sonars but are less
expensive to the consumer. Terms of payment for products in the Eagle line are
generally thirty days. However, dating terms similar to those for the Lowrance
line are also offered.
Beginning in fiscal 1995, the Company began marketing a third brand of
sonar and GPS navigational products, "SeaView". These products are marketed
through select coastal dealers and sales of SeaView products were not a material
contributor to fiscal 1995 sales.
The Company's products are sold to fishermen and boat owners in all fifty
states and forty-one countries internationally. The Company's international
sales totaled $15,000,000 in fiscal 1993, $17,000,000 in fiscal 1994, and
$21,000,000 in fiscal 1995, representing approximately , 19%, 21%, and 23% of
total net sales in each respective fiscal year. See Note 9 to the consolidated
financial statements. The two largest international markets for the Company's
products are Canada and Australia, where the Company maintains its own
distribution warehouses for sales and distribution of its products. Sales in
neither of these two countries represented 10% or more of the Company's total
annual sales for the latest three fiscal years.
LEI Extras, Inc., a wholly-owned subsidiary, allows consumers to purchase
by mail-order extended warranties for their sonar units and accessories that
otherwise would be difficult to obtain. Because LEI Extras, Inc., is not
intended to directly compete with retail outlets that carry the Company's
products, the Company does not expect revenues from its mail-order operations to
be significant.
Sales to Wal-Mart Stores, Inc., accounted for 14% of the Company's net
sales in each of fiscal years 1993, 1994, and 1995. The top ten customers,
including Wal-Mart Stores, Inc., accounted for approximately 40%, 37%, and 35%,
in 1993, 1994 and 1995, respectively, of the Company's net sales.
Inventories and Backlog
- -----------------------
The Company normally manufactures its products in anticipation of, and not
in response to, customer orders and fills orders within a short period of time
after receipt. Thus, the Company must maintain significant inventories of
finished goods to permit it to fill orders promptly after receipt. The Company's
receipt of orders generally peaks upon the introduction of a new product and
during the peak sales months of January, February, March, and April. See "Item
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations".
As of October 23, 1995, the Company's backlog of orders exceeded $10.7
million, including orders for new products which represented 39% of the backlog.
Backlog is not necessarily comparable from year to year because of the
significant impact on backlog resulting from the timing and pent-up demand for
the introduction of the Company's new products each year. While the Company
believes that the present backlog of orders is firm, the orders for its products
are subject to cancellation without further obligation by the customer at any
time prior to shipment.
Advertising and Promotion
- -------------------------
To support the sales of its products to wholesalers, mass merchandisers,
mail-order catalog companies, and others, the Company actively promotes and
advertises its products to fishermen and boat owners. The highly-technical
nature of the Company's products makes education of the user an important
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aspect of the Company's promotional activities. Through educating and
familiarizing the user with the practical benefits and use of sonar, the Company
endeavors to create demand for its products.
To satisfy this need, the Company utilizes a sales force of twenty-three
full-time employees to promote its products worldwide. The sales force replaces
the more traditional manufacturer's representative who may represent more than
one brand or product. The sales personnel employed by the Company have the
knowledge and time necessary to educate wholesalers, dealers, fishermen, and
boat owners on sonar products and demonstrate the practical benefits of sonar.
The sales personnel train wholesalers and dealers to sell the Company's
products, give demonstrations at tackle and boat shows, and participate in store
promotions, seminars, and talks.
To supplement the sales force, the Company has a part-time independent
sales group known as the "pro-staff". The pro-staff consists of approximately
two hundred and fifty fishing professionals, tournament fishermen, and serious
amateur fishermen trained and equipped by the Company to promote the Company's
products at fishing tournaments, store promotions, club talks, seminars, and
tackle and boat shows.
The Company also advertises its products in newspapers and magazines and on
television. In addition, the Company has a video department which produces and
distributes video catalogs and buyer guides, specific instructional tapes, and
sonar educational materials. Within such advertising expenditures are separate
advertising programs designed specifically for the Lowrance line and the Eagle
line.
Public relations activities include a variety of press releases covering
new products and feature stories highlighting use of sonar and navigational
products; press trips, where products are demonstrated to members of the outdoor
media; distribution of product photos and other technical support for writers
and broadcasters.
In addition to advertising expenses and public relations activities, the
Company incurs promotional expenses which include sponsorship of fishing
tournaments, store promotions, and contributions to environmental groups. In
fiscal 1992, the Company became an official sponsor of the Bass Angler's
Sportsman Society's (B.A.S.S.) professional tournament trail, replacing
Techsonic Industries, Inc.; The Company continues to be the official sponsor of
B.A.S.S. which is the nation's largest sportsman's organization with more than
550,000 active members. In addition to conducting the country's largest and
best-known tournament trail, B.A.S.S. publishes four major national magazines
and has more than 2,200 affiliated clubs through which the Company can
strategically market its sonar and navigational products. Dealer and
distributor support includes the availability of point-of-purchase displays,
posters, videos, and product simulators to assist in displaying the Company's
products.
-6-
Competition
- -----------
Sonar and Sonar/GPS Combination Units-
- -------------------------------------
The Company encounters intense competition for its products from a number
of domestic and foreign manufacturers. More than 300 brands of sonars have been
offered to the consumer since the Company's formation in 1957. Presently, there
are more than twenty-five competitors worldwide. Historically, the sonar market,
as it relates to sonars marketed primarily to sports fishermen and recreational
boat owners, has been dominated by the Company and Techsonic Industries, Inc.
According to independent marketing research commissioned by the Company and
issued in June 1992, the Company together with this competitor have, over the
past several years, accounted for approximately 70% to 80% of sonar sales within
this market segment in the United States. In this 1992 study, the Company's
total market share (Eagle and Lowrance brands combined) was found to be higher
than that of Techsonic. The Company continues to believe that the study results
reflect current market conditions.
Competition in the sports fishing and boating market for the Company's
products is based upon a number of factors, including quality, technological
development, performance, service, and price. The primary basis for competition
is technological innovation and price. In order to maintain its competitive
position, the Company must continually enhance and improve its products and
anticipate rapid, major technological innovations and changes within the
industry.
Hand-held GPS Units -
- ---------------------
The hand-held GPS market has expanded rapidly in the past twelve months.
Target markets for these products include but are not limited to hunting,
hiking, avionics and sport fishing. The market for hand-held GPS products is
growing rapidly and is expected to surpass the size of the market for sonar
products within the next year. The Company believes that it has captured less
than 10% of this market to date.
Two competing GPS companies currently dominate this market and the Company
believes these two competitors combined control in excess of 70% of the hand-
held GPS market. The primary reason for their success is that both companies are
successfully marketing products retail priced at under $250. It is the Company's
belief that these low-cost products are being produced outside of the United
States to take advantage of lower labor costs. Both companies offer a range of
higher priced products with more features including products specifically aimed
at the avionics market. These companies presently do not compete with the
Company in the manufacture or sale of sonar products.
Currently, the Company offers one Eagle and one Lowrance hand-held product,
both of which retail for approximately $399. The Company has introduced the
Lowrance GlobalMap Sport which should begin shipping in fiscal 1996. This hand-
held product combines the features found in its existing hand-held products with
mapping capabilities similar to its permanent mount Global Map 1000 and 2000 and
will retail for under $700. There are currently no other products on the market
with these features at or below this price point.
-7-
The Company has attempted to differentiate its products through quality,
technological development, performance, price, and service. The Company believes
its products offer a competitive advantage due to quality, technological
advancement, and the wide range of features. This advantage results from the
Company's long history of product innovation, such as Advanced Signal Processing
(ASP), fully waterproof sonar/Loran-C and sonar/GPS combination units, Grayline,
interchangeable high-performance transducers and dual-frequency capability, and
innovative features such as optional Broadview sonars, split screen
sonar/navigational displays, mapping capabilities and programmable "windows".
The Company has been an industry leader in offering advanced performance
products at strategically acceptable price points. Further, the Company believes
that its service programs, designed to rapidly respond to the customers' needs,
along with the extended warranty programs covering both the Eagle and Lowrance
lines, are the most comprehensive services available to the customer in the
industry.
Product Research and Development
- --------------------------------
The Company's operations and competitive position are dependent to a large
extent upon its ability to anticipate and react to the technological innovations
inherent in its industry. The Company has been engaged in the development of
sonars and the refinement of its existing sonar models since its formation in
1957. See "Patents and Trademarks" below. In 1957, the Company invented and
marketed a portable sonar capable of locating individual fish and their depths.
Among other significant sonar advancements, the Company developed and patented
an effective interface suppression system and interchangeable high speed
transducers which permit operation of sonar at boat speeds of up to 70 miles per
hour. The Company also introduced in 1979 a computer-controlled sonar with
microprocessor chip and software allowing high speed boating with accurate depth
readings and no false signals. In 1987, the Company introduced the industry's
first high resolution and "Supertwist" high visibility liquid crystal displays.
In 1989, the Company introduced the first fully waterproof sonar/navigation
combination units featuring Loran-C circuitry and software contained solely in
the antenna coupler module. Advanced Signal Processing (ASP), a breakthrough in
automatic sonar control developed in 1990, constantly evaluates the effect of
varying water conditions, boat speeds, and interference sources, adjusting the
sonar's many settings for optimum performance. Based on the Company's belief
that the military's GPS would be the preferred method of navigation in the
future, if it became affordable, the Company introduced six marine GPS products
in 1992 with most at breakthrough price points. The SupraPro ID, a new sonar
model for 1994 which retails for under $100, provided users with four times the
resolution of its nearest competitive model. Another new 1994 model, the Global
Map 1000, represented the first fully waterproof mapping unit with a built-in
mapping database and the capability of using highly-popular detailed mapping
cartridges. The AccuNav Sport hand-held GPS product, which retails for under
$400, revolutionized the GPS market in 1994 by offering users all the highly-
detailed chart plotting features previously available only on larger and more
costly gimbal-mounted GPS products at less than half the price. In 1995, the
Company introduced its latest generation of "3D" sonar products, the ULTRA III
3D and the X-70A 3D which provide expansive underwater coverage and innovative
"3D" images of bottom contours in addition to traditional detailed "2D" views.
Six new 1995 products offered the Company's new "Broadview" technology. By
purchasing a "Broadview" accessory transducer (which can be installed on the
transom or on a trolling motor), users can expand their sonar coverage to search
out -- left or right -- to detect fish and cover down and outward from the boat.
For 1996, the Company is introducing six new sonar products and three new GPS
products, two with mapping capabilities. The GlobalMap Sport will incorporate
the advanced mapping capabilities of the GlobalMap 2000 into a hand-held GPS
product.
-8-
Research and development expenditures of the Company were $2,693,000 in
fiscal 1993, $2,574,000 in fiscal 1994, and $2,868,000 in fiscal 1995. The
Company plans additional development of its LCD sonars to increase performance
and versatility and is conducting research and development into other marine
electronic equipment utilizing technology with which it is familiar. Also, the
Company intends to develop additional GPS products for use in marine and non-
marine applications.
To augment its continued investment in product research and development,
the Company has invested in several new manufacturing and design technologies:
Surface Mount Technology (SMT) production equipment, Computer Aided Design (CAD)
systems, Application Specific Integrated Circuits (ASICS), Tape Automated
Bonding (TAB), Tab-On-Glass (TOG), and Liquid Crystal Display (LCD) assembly.
These advanced technologies, which were essential to the development of the
Company's new marine products, have allowed the Company to reduce its material
and manufacturing costs and to provide even greater product performance.
Manufacturing and Suppliers
- ---------------------------
Through fiscal 1993, the Company manufactured substantially all of its
products at its plant in Tulsa, Oklahoma. In fiscal 1994, the Company began
manufacturing most of its high volume transducer and cable assemblies in Mexico,
with the finished assemblies shipped to Tulsa for final inspection, packaging,
and shipping. Currently, the Company is manufacturing all of its transducers,
connectors and cable assemblies in Ensenada, Mexico at the Company's 25,000
square foot leased manufacturing facility. The manufacturing process primarily
involves the assembly of component parts purchased from suppliers. Quality
control and functional testing, including component testing, sub-assembly
testing, and final testing of finished products, are an integral part of the
Company's manufacturing process. The Company's current manufacturing facilities
are sufficient to allow for some increases in production. However, it will need
to make significant investments in fixed assets in order to greatly increase its
production capacity and to produce its products for 1996. Accordingly, the
Company expects its fiscal 1996 capital expenditures to exceed historical
levels.
Certain component parts of the Company's products are technologically
advanced and/or specifically designed for the Company's use, and thus are
presently available only through single-source suppliers, some of which are
located in foreign countries. Certain other component parts are available from a
number of suppliers, but the Company largely relies on single-source suppliers
for these parts. Purchasing from a single source in these instances allows the
Company to have more consistent quality in the component parts and to receive
quantity discounts and permits the Company to establish long-standing
relationships with its suppliers. The Company believes long-standing
relationships lead to better performance by the Company's suppliers by
shortening delivery time, improving quality, and fostering a better
understanding of and adaptation to the nature of the Company's needs and the
suppliers' capabilities.
With respect to plastic component parts, such as housings for sonars, the
Company, because of the expense, generally maintains only one mold for each
plastic part. Although typically the Company owns each mold and could move it to
another supplier, the Company is limited to one supplier at a time.
The Company has never experienced a substantial interruption in product
shipment resulting in the loss of any material amount of sales due to
unavailability of or delay in receiving component parts. However, if for any
reason (such as a protracted strike, war, fire, explosion, or wind damage
affecting production at the supplier's manufacturing plant or import
restrictions or a
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damaged or destroyed mold or a supplier being unable to obtain certain raw
materials necessary to produce component parts), certain critical component
parts were to become unavailable or the shipment of such parts were to be
substantially delayed, such unavailability or delay could materially and
adversely affect the Company's ability to produce its products on a timely basis
until an alternative source of supply or a replacement mold could be made
available. This could adversely affect the Company's results of operations. The
use of alternate components may, in some cases, require the Company to redesign
other components or its sub-assemblies and the Company could experience
manufacturing delays. The extent of the impact upon the Company's sales and
earnings would depend upon the products affected and the time of year of the
interruption.
To protect against interruptions and loss of sales, the Company maintains a
limited amount of safety inventory of component parts and some insurance
coverage against loss of supply. The Company limits the amount of safety stock
to avoid the cost of carrying raw material inventory and problems associated
with obsolescence. To further protect against interruptions, the Company is
selective of its suppliers, and with limited exceptions, relies upon those who
are substantial in size, financial strength, background, and experience.
Product Warranty and Support Services
- -------------------------------------
Substantially all of the Company's products are sold with a full one-year
warranty. The Company offers the consumer the right to extend the warranty for
an additional two years on sonar products by purchasing an extended warranty
package. Warranty expenses have averaged approximately 2.0% of sales during the
last three fiscal years. The Company emphasizes service after the sale in
connection with its products by providing a prepaid, pre-addressed shipping
label packed with each unit for use by the consumer located in the United States
electing to return the unit to the Company for warranty or non-warranty repairs.
The Company guarantees a three-day in-house turnaround on units sent in for
repair. Warranty and non-warranty repairs are available from the Company's plant
in Tulsa, Oklahoma, and from sixteen "depo" centers throughout the United States
and from dealers and distributors in forty-one foreign countries.
Patents and Trademarks
- ----------------------
Since 1970, the Company has obtained thirty-four patents expiring at
various dates from 1987 through 2009. Since 1970, ten design patents have also
been issued. See "Product Research and Development" above. All of the Company's
patents have been assigned to secure the Company's accounts receivable and
inventory line of credit financing. The Company does not expect that the
expiration of patents will have an adverse impact on the Company's operations.
Notwithstanding the number of patents it has obtained, the Company believes
that its technical and proprietary expertise and continuation of technological
advances are more important factors to the protection of its ongoing proprietary
interests and markets than its patents. However, the Company will under certain
limited circumstances continue to file patent applications to insure its
products remain protected from attack from competitors.
The Company has registered twenty-three trademarks with the United States
Patent Office including the trademark, "Lowrance" and the trademark "Eagle",
with an accompanying logo and has additional trademark applications filed.
-10-
Employees
- ---------
As of July 31, 1995, the Company employed 791 persons on a full-time basis
of whom approximately 586 were involved in manufacturing and materials. Of the
586 full time employees involved in manufacturing and materials, 439 employees
are located in the Company's headquarters in Tulsa, Oklahoma and 147 are located
in the Company's leased manufacturing facility in Ensenada, Mexico. The
remaining 205 employees were engaged in research and development, sales and
marketing, and administration. During the year, the Company utilizes temporary
workers to allow it to adjust its workforce as its production needs change. At
July 31, 1995, approximately 100 of such workers were engaged by the Company
which are included in the above amounts. Additionally, the Company retains, on a
part-time basis, over 250 independent contractors, the "pro-staff", that assist
in promoting its products.
The Company has never experienced a work stoppage, and none of its
employees are represented by a union. Management considers its employee
relations to be excellent.
Item 2. Properties
- ------- ----------
The Company maintains its offices and manufacturing and warehouse
facilities at 12000 East Skelly Drive, Tulsa, Oklahoma, 74128. The Company's
Tulsa facilities are located on approximately 23 acres of land and consist
primarily of a masonry building containing approximately 116,000 square feet of
floor space, of which 47,000 square feet are used for manufacturing operations,
24,000 square feet for warehousing, and 45,000 square feet for office and
laboratory space.
The Company, through its Mexican subsidiary, leases a manufacturing
facility in Ensenada, Mexico. The facility has approximately 25,000 square feet,
and the Company uses this facility to manufacture most of its high volume
transducer and cable assemblies.
The Company also leases a 79,000 square foot facility for warehousing and
shipping in Tulsa, Oklahoma and 2,500 square feet and 3,500 square feet of
warehousing, shipping and office space in Australia and Canada, respectively.
The Company believes that its facilities and equipment are well suited to
its needs and are properly maintained. While the Company's current manufacturing
facilities are sufficient to allow for some increases in production, it will
however, need to make significant investments in fixed assets to greatly
increase its production capacity and to produce its new products for 1996.
Accordingly, the Company expects its fiscal 1996 capital expenditures to exceed
historical levels. The facilities and equipment are believed to be operating in
substantial compliance with all current regulations. All the facilities and
equipment are, in the opinion of the Company, adequately insured.
-11-
Item 3. Legal Proceedings
- ------- -----------------
None presently. However, the Company incorporates by reference disclosures on
three Form 10Q's in Item 1, Part II, filed with the Commission on March 15,
1994, June 15, 1994 and December 15, 1994, as well as in Item 3 of Part I of the
Company's Form 10K filed on October 31, 1994, and Item 5 of the Company's Form
8K filed with the Commission on January 11, 1995 which disclosed the filing of
the lawsuit on November 12, 1993, alleging patent infringement against the
Company in the United States District Court for the District of Idaho in a case
styled as Computrol, Inc., an Idaho corporation, Plaintiff v. Lowrance
------------------------------------------------------------
Electronics, Inc., a Delaware corporation d/b/a Eagle Electronics, Inc.,
- ------------------------------------------------------------------------
Defendant, Case No. 93-0439 S HLR (the "Lawsuit") and the settlement of the
- ---------
Lawsuit on January 10, 1995. The Company entered into a Settlement Agreement
with Computrol, Inc. ("Computrol") on January 10, 1995, whereby the Company paid
four settlement payments to Computrol aggregating $1,000,000. Settlement
payments were made on January 10, 1995, March 15, 1995, and June 30, 1995. The
Company received a full and complete release from Computrol, with each party to
pay its own costs and attorneys' fees. The Company also entered into a License
Agreement as part of the Settlement Agreement on January 10, 1995, whereby for a
one-time license fee of $100,000 paid by the Company, the Company is free to use
Computrol's '912 Patent in connection with any new side-scanning product the
Company might introduce in the future or the Company's ScanPac, which the
Company elected to voluntarily cease manufacturing as an accessory on October
31, 1994. As a result of the foregoing settlement, all litigation between the
Company and Computrol was terminated.
Item 4. Submission of Matters to a Vote of Security Holders
- ------- ---------------------------------------------------
None.
-12-
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
- ------- ---------------------------------------------------------------------
As of October 23, 1995, the Company had more than 400 holders of record of
its Common Stock. The Company has not paid cash dividends for over twenty years.
The Company's inventory and accounts receivable line of credit agreement
prohibits the payment of dividends without prior written consent of the lender.
The Company anticipates that for the foreseeable future its earnings will be
retained for use in its business and no cash dividends will be paid on the
Common Stock. Declaration of dividends in the future will remain within the
discretion of the Company's Board of Directors and will depend upon the
Company's growth, profitability, financial condition, and other relevant
factors.
The Company's Common Stock is traded in the over-the-counter market and is
listed with the NASDAQ National Market System under the NASDAQ symbol of "LEIX".
The table below reflects the high and low trade prices for each of the Company's
fiscal quarters for the latest two fiscal years. The trade prices reflect inter-
dealer prices, without retail mark up, mark down, or commission and do not
necessarily represent actual transactions.
1994 1995
----------------- -----------------
High Low High Low
$ $ $ $
----------------- -----------------
1st Quarter 6 1/2 3 1/2 5 3/4 3 1/4
2nd Quarter 11 1/2 6 6 1/4 3 3/4
3rd Quarter 9 1/2 6 1/4 7 5 1/4
4th Quarter 7 1/2 4 3/4 7 1/4 5
-13-
Item 6. Selected Financial Data
- ------- -----------------------
The selected financial information shown below has been extracted from the
consolidated financial statements included elsewhere in this report and from
other financial information of the Company not appearing herein. The balance
sheet information is presented as of the end of the fiscal years shown. The
information set forth below should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the consolidated financial statements and related notes included elsewhere
herein.
Years Ended July 31,
---------------------------------------
1991 1992 1993 1994 1995
-------- -------- -------- -------- --------
(in thousands, except per share amounts)
Operating Data:
Net sales $ 53,586 $ 68,373 $ 79,634 $ 81,250 $ 91,116
Gross profit $ 16,397 $ 24,965 $ 28,182 $ 25,330 31,069
Income (loss) before
income taxes and
extraordinary credit $( 2,722) $ 2,697 $ 4,423 $ (1,663) 2,061
Extraordinary credit $ - $ 863 $ - $ - -
Net income (loss) $( 2,442) $ 2,501 $ 3,000 $ (672) 1,422
Per Share Data:
Weighted average number
of shares outstanding 3,416 3,416 3,403 3,350 3,352
Income (loss) before
extraordinary credit $ (.72) $ .48 $ .88 $ (.20) .42
Extraordinary credit - .25 - - -
-------- ------- ------- ------- -------
Net income (loss) $ (.72) $ .73 $ .88 $ (.20) $ .42
Balance Sheet Data:
Working capital $ 9,861 $ 8,122 $ 11,090 $ 12,872 $ 14,777
Total assets $ 22,406 $ 24,391 $ 28,376 $ 35,028 $ 40,228
Long term debt, less
current maturities $ 9,018 $ 3,452 $ 5,269 $ 9,379 $ 9,975
Stockholders' equity $ 7,535 $ 10,036 $ 12,630 $ 11,991 $ 13,452
-14-
Item 7. Management's Discussion and Analysis of Financial Condition and
- ------- ---------------------------------------------------------------
Results of Operations
---------------------
General
- -------
The following table sets forth for the periods indicated the relative
percentages that certain items of income and expense bear to net sales:
Years Ended July 31,
------------------------------
1993 1994 1995
-------- -------- --------
(percent of net sales)
Net sales 100.0% 100.0% 100.0%
Cost of sales 64.6 68.8 65.9
----- ----- -----
Gross profit 35.4 31.2 34.1
Operating expenses:
Selling and administrative 23.9 27.0 24.2
Research and development 3.4 3.2 3.2
Unusual Item - - 1.2
----- ----- -----
Operating income 8.1 1.0 5.5
Interest expense (1.1) (1.5) (1.7)
Other, net (1.4) (1.5) (1.5)
----- ----- -----
Income (loss) before income
taxes 5.6 (2.0) 2.3
Provision (benefit) for
income taxes 1.8 (1.2) .7
----- ----- -----
Net income (loss) 3.8 (.8) 1.6
===== ===== =====
Demand for the Company's products is seasonal with approximately 35% to 40%
of its sales and a majority of its net income usually occurring in the third
quarter (February, March, and April). During this period, the Company's
customers purchase the Company's products so that the products will be available
to sport fishermen and recreational boat owners for the peak fishing and boating
season. Generally, with the exception of the third quarter, quarterly results
are dependent on the timing and acceptance of new product introductions,
advertising, and product availability, and as such, the Company does not
experience any consistent quarterly trends for those three quarters.
-15-
The following table sets forth the quarterly results for the past three
fiscal years:
Years Ended July 31 Sales Net Income (Loss)
- -------------------------- ------------------- --------------------
(dollars in thousands)
1993
----
First Quarter (Aug.-Oct.) $ 11,188 14.0% $ (743) (24.7)%
Second Quarter (Nov.-Jan.) 19,042 23.9 (20) (.7)
Third Quarter (Feb.-Apr.) 31,067 39.0 2,859 95.3
Fourth Quarter (May-July) 18,337 23.1 904 30.1
------- ----- ------- -----
Total for Year $ 79,634 100.0% $ 3,000 100.0%
======= ===== ======= =====
1994
----
First Quarter (Aug.-Oct.) $ 12,176 15.0% $ (1,076) (159.1)%
Second Quarter (Nov.-Jan.) 18,583 22.9 (88) (13.1)
Third Quarter (Feb.-Apr.) 31,614 38.9 966 143.8
Fourth Quarter (May-July) 18,877 23.2 (474) (71.6)
------- ----- ------- -----
Total for Year $ 81,250 100.0% $ (672) (100.0)%
======= ===== ======= =====
1995
----
First Quarter (Aug.-Oct.) $ 14,215 15.6% $ (1,203) (84.6)%
Second Quarter (Nov.-Jan.) 25,417 27.9 445 31.3
Third Quarter (Feb.-Apr.) 32,151 35.3 2,181 153.3
Fourth Quarter (May-July) 19,333 21.2 (1) 0.0
------- ----- ------- -----
Total for Year $ 91,116 100.0% $ 1,422 100.0%
======= ===== ======= =====
Demand for the Company's products is also subject to the rapidly changing
technological environment of consumer electronics. If the Company fails to
anticipate technological innovations advanced by its competitors and introduces
technologically competitive products, demand for the Company's products will
diminish. In each of the past three fiscal years, new product sales have
accounted for 25% to 50% of total sales.
Sales of the Company's products are affected by adverse changes in economic
conditions, increased oil prices or adverse weather conditions. The Company
believes that the lower-priced and easier to use LCD sonar products available in
recent years have attracted an increasing number of less serious fishermen to
the marketplace who are more likely to reduce their purchase of sonar products
during adverse economic conditions and /or prolonged adverse weather conditions.
Accordingly, the Company's future sales could be adversely affected by a
reduction in consumer spending or by a decline in recreational boating and sport
fishing, resulting from significant increases in oil prices.
The Company's production of its products is scheduled on the basis of sales
forecasts rather than actual orders. Products are designed and manufactured and
parts are ordered in advance of the peak sales period so that products can be
shipped within days of receipt of customers' orders. The Company's profitability
is largely dependent upon its ability to accurately forecast and plan for market
demand for its products in advance of the peak selling season and to meet the
demand of the peak sales months with technologically acceptable products at
acceptable prices.
-16-
The Company begins planning for sales during each fiscal year in February
or March of the preceding year. The planning includes the preparation of an
annual sales forecast for the upcoming fiscal year. The forecast is reviewed by
the Company at least monthly, and if necessary, the forecast is revised. The
forecast of products must allow time for ordering raw materials and parts, which
may take as long as five months for delivery following the Company's order, and
for manufacturing so that the Company has a build-up of finished goods inventory
sufficient to meet demand prior to the peak sales months. Failure by the Company
to accurately forecast market trends, introduction of technological
advancements, or the demand for particular models can result in a build-up of
raw material and finished goods inventory that is obsolete or must be liquidated
at reduced prices. The build-up of raw material and finished goods inventory in
anticipation of orders during the peak selling season, the cash outlays required
to purchase tooling to manufacture new products, together with extended payment
terms of up to 120 days offered by the Company, results in a significant
increase in working capital requirements from a low in June through August to a
high in September through December.
The Company uses a Material Requirements Planning system to control
inventory by eliminating stock piling and by utilizing a continuous flow method
of manufacturing. Under the continuous flow method of manufacturing, parts and
supplies are ordered and scheduled for purchase and delivery only at such time
as they are expected to be needed in the manufacturing process. The Material
Requirements Planning also results in a reduction of the Company's safety stock
and a shorter manufacturing cycle.
The following discussion and analysis relate to factors that have affected
the financial condition and operating results of the Company for fiscal years
1993 through 1995. Reference should also be made to the Consolidated Financial
Statements and the notes thereto included elsewhere herein.
Results of Operations
- ---------------------
Net Sales
---------
Net sales for fiscal 1995 increased 12% over fiscal 1994. Unit sales,
which include sonar units, combination sonar/navigation units, and stand-
alone navigation units, increased 6% and the average price per unit
increased 6%.
When comparing fiscal 1995 to 1994, unit sales increased primarily due
to: 1) an increase in sales of substantially all of the Company's Lowrance
sonar and sonar/navigation combination units which are sold primarily
through boat and motor dealers, 2) higher sales of units to OEM's and 3)
increased sales of the Company's GPS products. Increased sales of Lowrance
models and increased sales to OEM's can be attributed to continued strong
demand for new boats in the United States. The increased sales of Lowrance
products were offset by a decrease in certain of the Company's Eagle
products. The decline in Eagle units results from competitive factors and
an unusually cool and wet spring and early summer in a large number of the
Company's markets. The Company feels that Eagle product sales are more
susceptible to the effects of adverse weather during the peak selling
season.
-17-
The 1995 average selling price increased 6% when compared to 1994 due
primarily to the increased sales of Lowrance products, which generally
carry higher prices and the corresponding decrease in Eagle sales which
generally carry lower prices. Also, increased sales of GPS products
contributed to the increase in the average selling price between years.
Net sales for fiscal 1994 increased 2% over fiscal 1993. Unit sales,
which include sonar units, combination sonar/navigation models, and stand-
alone navigation units, increased 7%, and the average price per unit
decreased by 3.4%.
When comparing fiscal 1994 to 1993, unit sales increased due to: (1)
an increase in sales of the highest priced (over $350 retail) Lowrance
products which are sold at retail primarily through boat and motor dealers;
(2) higher sales of units to OEM's, and (3) sales of a new hand-held GPS
product. Increased sales of the highest priced Lowrance models and
increased sales to OEM's can be attributed to increasing demand for new
boats in the United States.
The 1994 average selling price per unit decreased 3.4% when compared
to 1993 due primarily to price reductions made on several models in
response to competitive market factors.
Gross Profit
------------
The gross profit margin increased to 34.1% in fiscal 1995 from 31.2%
in 1994 due primarily to: 1) the shift in mix of units sold to the Lowrance
units which generally carry higher prices and corresponding higher margins
and, 2) the Company's 1995 product offering, which began shipping in volume
in the second quarter of 1995, generally carried higher overall margins
than the 1994 product offering. This margin differential was enhanced by
volume increases and increased manufacturing efficiencies.
The gross profit margin decreased to 31.2% in fiscal 1994 from 35.4%
in 1993 due primarily to the 3.4% decline in the average selling price per
unit as discussed above without a corresponding cost decrease.
Operating Expenses
------------------
Operating expenses, comprised of selling, administration and research
and development expenses, as a percent of net sales, decreased from 30.2%
in fiscal 1994 to 28.6% in 1995. Total costs increased $1,523,000. The
major factors contributing to this increase were 1) the $1,100,000 unusual
item related to the settlement Agreement and License Agreement with
Computrol reached on January 10, 1995, 2) other variable selling expenses,
such as freight-out and products returns cost, were up approximately
$800,000 due to increased volumes, and 3) research and development
expenditures were up $294,000 due to the Company's continuing efforts to
develop new products. Expense reductions in sales and marketing partially
offset the effects of the above increases.
-18-
Operating expenses, as a percent of net sales, increased from 27.3% in
fiscal 1993 to 30.2% in 1994. Total costs increased $2.8 million. The major
factors contributing to this increase in cost were: (1) increased
marketing, advertising, and promotional expenses incurred to promote the
Company's new GPS products, to expand international distribution networks,
and in response to competitive pressures in the marketplace ($2,340,000 -
29.6% increase) and (2) increased freight out and shipping costs resulting
from higher unit sales and expanding foreign markets ($404,000 - 33%).
Interest Expense
----------------
Interest expense in fiscal 1995 increased by $317,000 from 1994 due to
an increase in the Company's effective interest rate as the prime rate, to
which most of the Company's borrowings are tied, was increased several
times.
Interest expense in fiscal 1994 increased when compared to fiscal 1993
due to higher average borrowings on the Company's revolving line of credit
($3.6 million). The higher borrowings resulted from higher inventory levels
and the net loss incurred in fiscal 1994. The effective interest rate in
1994 was approximately the same as the effective rate in fiscal 1993.
Income Taxes
------------
Effective August 1, 1993, the Company changed its method of accounting
for income taxes to adopt Statement No. 109 of the Financial Accounting
Standards Board which requires an asset and liability approach to financial
accounting and reporting for income taxes. The cumulative effect of the
change in accounting principle was determined to be immaterial at that
date.
The effective tax rate for fiscal 1993, 1994, and 1995 was 32.2%,
(59.6)%, and 31%, respectively. For Fiscal 1995, the effective tax rate is
less than the statutory federal tax rate of 34% due primarily to the
research and development credit offset by state income tax provisions. The
effective rate for fiscal 1994 was positively impacted due to the
realization of tax benefits from the research and development credit, the
recognition of foreign tax loss carryforwards, and state income tax
credits. For fiscal 1993, the tax provision is less than the statutory
Federal tax rate of 34% due primarily to the tax benefit from the research
and development credit.
Income/(Loss)
-------------
Net income (loss), as a percentage of net sales, was 1.6% in fiscal
1995, (.8%) in fiscal 1994, and 3.8% in fiscal 1993. The higher percentages
in 1995 and 1993 were primarily the result of higher gross margin
percentages during both of those years combined with increased operating
expenses as a percentage of net sales in fiscal 1994. As noted under
"Results of Operations", the margin declines in 1994 were the result of
price reductions and certain of the operating expense increases in 1994
were made in response to competitive market conditions. Management believes
that these actions were essential in order to ensure the long-term
viability of the Company, and for the most part, achieved the desired
results.
-19-
Liquidity and Capital Resources
- -------------------------------
The Company's working capital needs increase in the fall and winter
months as the Company manufactures and stockpiles its products for the peak
sales months of January, February, March, and April. Also, the days
outstanding in the Company's accounts receivable increase in the off-season
due to favorable purchase terms offered to customers in order to stimulate
sales during these slow periods.
The Company's primary sources of liquidity are cash flow from
operations, an accounts receivable and inventory line of credit, and lease
financing. The line of credit allows the Company to borrow up to 85% of its
qualifying accounts receivable, 30% of qualifying raw materials inventory,
and 60% of qualifying finished goods inventory. Borrowings for inventory,
however, are limited to $10,000,000. A yearly lease line of credit is
usually established to finance the acquisition of qualifying equipment and
certain other assets.
Traditionally, the Company's near-term liquidity is at its lowest
during the period September through December due to limits on borrowings
against inventories, cash outlays required to purchase tooling to
manufacture new products, and extended payment terms offered to customers
to stimulate sales during the seasonally slow period. As previously
described, it is during this period that the Company begins to manufacture
and build-up inventory levels in anticipation of product demands for the
peak sales months. By the end of the second quarter with the historical
increase in sales, the Company's sources of liquidity begin to improve.
For the foreseeable future, these sources discussed above should
satisfy the Company's financing needs. At July 31, 1995, there were
approximately $2.5 million of additional borrowings available under the
Company's revolving line of credit. This additional availability was
depleted in early August 1995. As is consistent with prior years,
management expects to be at maximum borrowing limits through the first two
quarters of fiscal 1996. Because the line of credit will be at its maximum
levels during this period, the Company must delay payments to vendors
during these months. Delays in payments to vendors were and continue to be
more severe than normal for 1995 and early 1996 primarily as the result of
increased inventory levels discussed below. Management does not anticipate
any significant long-term negative effects, as most vendors have supplied
the Company for several years and realize that seasonality plays a
significant role in the timing of payments from the Company.
In fiscal 1995, net cash provided by operating and financing
activities was used to finance capital additions (not financed by leases)
of $1.3 million. Cash flows provided by financing activities for fiscal
1994 were used to finance capital additions (not financed by leases) of $2
million and to provide funds consumed in operating activities of $1.2
million. Cash flows from operating activities for fiscal 1993 of $4.1
million were used primarily to finance capital additions (not financed by
leases) of $2.2 million and to reduce outstanding borrowings by $1.9
million.
-20-
Working Capital
---------------
The Company's working capital ratio was 2.0 at July 31, 1994 and 1.9
at July 31, 1995.
Inventory levels at July 31, 1995 are up $5.1 million or 40% from July
31, 1994. The increase in inventory levels can be attributed to 1) an
unexpected softening of sales at retail which occurred in the late
spring/early summer months of fiscal 1995. Sales levels to this point in
1995 were significantly ahead of 1994 levels. With long lead times on
certain raw material parts, it proved difficult to delay shipments of
materials from vendors on short notice. It is believed that the softening
of sales resulted from adverse weather conditions and hints of a general
economic slow-down. 2) A worldwide shortage of certain key raw material
parts developed during 1995. The Company purchases common parts used in the
computer and cellular phone industries. The Company was forced to continue
receiving certain "allocated" materials after the sales levels fell off or
run the risk of not being able to secure parts in the future. 3) Overall
sales levels have increased and distribution channels have changed
necessitating the general need to carry higher inventory levels and 4) The
Company has "level-loaded" production from its Mexican manufacturing
facility which causes higher inventory levels at year-end.
The Company does not expect substantial realization problems with this
inventory. Management expects lower inventory levels in fiscal 1996
compared to fiscal 1995.
Long-Term Debt and Revolving Credit Agreement
---------------------------------------------
During October, 1995 the Company's $26.5 million accounts receivable
and inventory line of credit and its associated $3.5 million term loan were
amended. Significant provisions of the amendment include: 1) The due date
was extended to December 1998 from December 1996; 2)The interest rate for
the revolver was reduced from prime plus 1.00% to prime plus .75%; and 3)
The term loan was funded to its original $3.5 million amount with monthly
principal payments of $23,167 plus interest at prime plus 1.5%. Additional
principal payments of $500,000 will be due on May 31, 1996 and May 31, 1997
with the remaining principal due in December 1998. In addition to the
financing described above, the Company has arranged a $2.5 million lease
line to finance its qualifying capital additions during fiscal 1996.
Capital Expenditures
--------------------
Capital expenditures were $3,191,000, $4,221,000, and $2,461,000 for
the years ended July 31, 1993, 1994, and 1995, respectively. Of the fiscal
1995 total, approximately $1.5 million is related to tooling, molds, dies,
and equipment to design and manufacture the Company's products.
-21-
Effects of Inflation
- --------------------
A significant portion of the Company's cost and expenses consist of
materials, supplies, salaries, and wages that are impacted by inflation. Due to
the intense market pressures on prices, the Company does not believe that it
will be able to pass on inflationary increases in its selling prices.
Accordingly, the Company concentrates on changes in design, manufacturing
process, material scheduling, and sourcing to help contain costs. The Company
does not expect that the effects of inflation will have a significant impact on
its profitability in the near future. Additionally, a significant portion of the
Company's raw material items are sourced overseas. Significant devaluation of
the dollar relative to these currencies would not be able to be passed on in the
form of price increases to consumers.
Outlook
- -------
The Company anticipates continued profitability in fiscal 1996, primarily
as the result of continuing strong economic and market conditions, market
acceptance of the Company's 1996 product offering which includes nine new
models, and steps taken to improve gross margins and reduce operating expenses.
However, because of the dynamic environment in which the Company operates, one
or more key factors which are discussed in "Part I, Item 1. Business" could have
an adverse effect on results for the upcoming year.
Item 8. Financial Statements and Supplementary Data
- ------- -------------------------------------------
The consolidated financial statements and supplementary data are indexed in
Item 14 hereof.
Item 9. Changes in and Disagreements with Accountants on Accounting and
- ------- ---------------------------------------------------------------
Financial Disclosures
---------------------
None.
-22-
PART III
Item 10. Directors and Executive Officers of the Registrant
- -------- --------------------------------------------------
Incorporated by reference to the Company's Proxy Statement to be filed
with the Securities and Exchange Commission in connection with the Company's
1995 annual meeting.
Item 11. Executive Compensation
- -------- ----------------------
Incorporated by reference to the Company's Proxy Statement to be filed
with the Securities and Exchange Commission in connection with the Company's
1995 annual meeting.
Item 12. Security Ownership of Certain Beneficial Owners and Management
- -------- --------------------------------------------------------------
Incorporated by reference to the Company's Proxy Statement to be filed
with the Securities and Exchange Commission in connection with the Company's
1995 annual meeting.
Item 13. Certain Relationships and Related Transactions
- -------- ----------------------------------------------
Incorporated by reference to the Company's Proxy Statement to be filed
with the Securities and Exchange Commission in connection with the Company's
1995 annual meeting.
-23-
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
- ------- ----------------------------------------------------------------
(a) Financial Statements, Schedules, and Exhibits:
---------------------------------------------
Page
----
1. Consolidated Financial Statements and Schedules:
Index to Consolidated Financial Statements F-1
Report of Independent Public Accountants F-2
Consolidated Balance Sheets - July 31, 1994 and 1995 F-3
Consolidated Statements of Income (Loss) for the Years
Ended July 31, 1993, 1994, and 1995 F-4
Consolidated Statements of Stockholders' Equity for the
Years Ended July 31, 1993, 1994, and 1995 F-5
Consolidated Statements of Cash Flows for the Years
Ended July 31, 1993, 1994, and 1995 F-6
Notes to Consolidated Financial Statements
for the Years Ended July 31, 1993, 1994, and 1995 F-7
Schedules for the Years Ended July 31, 1993, 1994, and 1995
II - Valuation and Qualifying Accounts F-15
Other schedules are omitted because of the absence of conditions
under which they are required or because the required information is
included in the consolidated financial statements or notes thereto.
2. Exhibits:
3.1 Certificate of Incorporation of Lowrance Electronics,
Inc., previously filed as Exhibit 3.1 to the Company's
Registration Statement on Form S-1 (SEC File No. 33-9464),
which is incorporated herein by reference thereto.
3.2 By-Laws of Lowrance Electronics, Inc., previously filed
as Exhibit 3.2 to the Company's Registration Statement on
Form S-1 (SEC File No. 33-9464), which is incorporated
herein by reference thereto.
-24-
4.1 Shareholders' Agreement dated December 22, 1978, by and
between Darrell J. Lowrance, James L. Knight, and Ben V.
Schneider previously filed as Exhibit 4.3 to the Company's
Registration Statement on Form S-1 (SEC File No. 33-9464),
which is incorporated by reference thereto.
4.2 First Amendment to Shareholders' Agreement dated October 7,
1986 by and between Darrell J. Lowrance, James L. Knight,
and Ben V. Schneider previously filed as Exhibit 4.4 to the
Company's Registration Statement on Form S-1 (SEC File No.
33-9464), which is incorporated by reference thereto.
4.3 Agreement between Stockholders dated October 7, 1986, by and
between the Company and Darrell J. Lowrance, James L.
Knight, and Ben V. Schneider previously filed as Exhibit 4.5
to the Company's Registration Statement on Form S-1 (SEC
File No. 33-9464), which is incorporated herein by reference
thereto.
10.1 1986 Incentive Stock Option Plan of the Company previously
filed as Exhibit 10.1 to the Company's Registration
Statement on Form S-1 (SEC File No. 33-9464), which is
incorporated herein by reference thereto.
10.2 Lowrance Retirement Plan and Trust previously filed as
Exhibit 10.2 to the Company's Registration Statement on Form
S-1 (SEC File No. 33-9464), which is incorporated herein by
reference thereto.
10.3 Form of Distributor Agreements previously filed as Exhibit
10.4 to the Company's Registration Statement on Form S-1
(SEC File No. 33-9464), which is incorporated herein by
reference thereto.
10.4 Form of Service Center Agreement previously filed as Exhibit
10.5 to the Company's Registration Statement on Form S-1
(SEC File No. 33-9464), which is incorporated herein by
reference thereto.
10.5 Credit Agreement dated April 27, 1989, by and between the
Company and Norwest Business Credit, Inc., previously filed
as Exhibit 10.8 to the Company's 1989 Annual Report on Form
10-K, which is incorporated herein by reference thereto.
10.6 Promissory note dated April 27, 1989, by the Company in
favor of Norwest Leasing, Inc., previously filed as Exhibit
10.7 to the Company's 1989 Annual Report on Form 10-K, which
is incorporated herein by reference thereto.
-25-
10.7 1989 Stock Option Plan of the Company previously filed as
Appendix A to the Company's Proxy Statement for its Annual
Meeting of Stockholders held on December 12, 1989, which is
incorporated herein by reference thereto.
10.8 First, Second, and Third Amendments to Credit Agreement
dated April 27, 1989, by and between the Company and Norwest
Business Credit, Inc., previously filed as Exhibit 10.8 to
the Company's 1990 Annual Report on Form 10-K, which is
incorporated herein by reference thereto.
10.9 Fourth and Fifth Amendments to Credit Agreement dated April
27, 1989, by and between the Company and Norwest Business
Credit, Inc., previously filed as Exhibit 10.9 to the
Company's 1992 Annual Report on Form 10-K, which is
incorporated herein by reference thereto.
10.10 Sixth Amendment to Credit Agreement dated March 17, 1993, by
and between the Company and Norwest Business Credit, Inc.,
which is incorporated herein by reference thereto.
10.11 Seventh Amendment to Credit Agreement dated October 21,
1993, by and between the Company and Norwest Business
Credit, Inc., previously filed as Exhibit 10.11 to the
Company's 1993 Annual Report on Form 10-K, which is
incorporated herein by reference thereto.
10.12 Eighth Amendment to Credit Agreement dated September 29,
1993, by and between the Company and Norwest Business
Credit, Inc., previously filed as Exhibit 10.12 to the
Company's 1993 Annual Report on Form 10-K, which is
incorporated herein by reference thereto.
10.13 Loan and Security Agreement dated December 15, 1993, by the
Company in favor of Barclays Business Credit, Inc., filed
herewith.
10.14 Amended and Restated Secured Promissory Note dated October
16, 1995, by and between the Company and Shawmut Capital
Corporation (formally Barclays Business Credit, Inc.), filed
herewith.
10.15 Amended and Restated Revolving Credit Notes dated October
16, 1995, by and between the Company and Shawmut Capital
Corporation (formally Barclays Business Credit, Inc.), filed
herewith.
10.16 First Amendment to Loan and Security Agreement dated October
16, 1995, by and between the Company and Shawmut Capital
Corporation (formally Barclays Business Credit, Inc.), filed
herewith.
10.17 Amended and Restated Stock Pledge Agreement dated October
16, 1995, by and between the Company and Shawmut Capital
Corporation (formally Barclays Business Credit, Inc.), filed
herewith.
10.18 Unconditional Guaranty dated October 16, 1995, by and
between Sea Electronics, Inc. and Shawmut Capital
Corporation, filed herewith.
-26-
10.19 First Amendment to Mortgage, Security Agreement, Financing
Statement and Assignment of Rents dated October 16, 1995,
by and between the Company and Shawmut Capital Corporation
(formally Barclays Business Credit, Inc.), filed herewith.
22.1 Subsidiaries of the Company previously filed as Exhibit
22.1 to the Company's 1993 Annual Report on Form 10-K,
which is incorporated herein by reference thereto.
22.12 Subsidiaries of the Company, filed herewith.
(b) Reports on Form 8-K:
-------------------
No reports on Form 8-K were filed for the three months ended July 31,
1995.
-27-
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.
LOWRANCE ELECTRONICS, INC.
DATE: October 27, 1995 BY:/s/ Darrell J. Lowrance
------------------------- ---------------------------------
Darrell J. Lowrance,
President and
Chief Executive Office9
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 indicated and on the dates indicated:
/s/ Darrell J. Lowrance
- ------------------------
Darrell J. Lowrance President, Chief Executive October 27, 1995
Officer, and Director
(Principal Executive Officer)
/s/ Mark C. Wilmoth
- ------------------------
Mark C. Wilmoth Vice President of Finance and October 27, 1995
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
/s/ Alpo F. Crane
- ------------------------
Alpo F. Crane Director October 27, 1995
/s/ Willard P. Britton
- ------------------------
Willard P. Britton Director October 27, 1995
/s/ Peter F. Foley, III
- ------------------------
Peter F. Foley, III Director October 27, 1995
/s/ Ronald G. Weber
- ------------------------
Ronald G. Weber Senior Vice President of October 27, 1995
Engineering and Director
/s/ Robert F. Biolchini
- ------------------------
Robert F. Biolchini Secretary and Director October 27, 1995
-28-
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
- ---------------------------------------------------------------------
Report of Independent Public Accountants F-2
Consolidated Balance Sheets - July 31, 1994 and 1995 F-3
Consolidated Statements of Income (Loss) for the Years
Ended July 31, 1993, 1994, and 1995 F-4
Consolidated Statements of Stockholders' Equity for the
Years Ended July 31, 1993, 1994, and 1995 F-5
Consolidated Statements of Cash Flows for the Years Ended
July 31, 1993, 1994, and 1995 F-6
Notes to Consolidated Financial Statements for the Years Ended
July 31, 1993, 1994, and 1995 F-7
Supplemental Schedule
---------------------
Schedule II - Valuation and Qualifying Accounts
for the Years Ended July 31, 1993, 1994, and 1995 F-15
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors of Lowrance Electronics, Inc.:
We have audited the accompanying consolidated balance sheets of LOWRANCE
ELECTRONICS, INC., (a Delaware corporation) and subsidiaries as of July 31, 1994
and 1995, and the related consolidated statements of income (loss),
stockholders' equity, and cash flows for each of the three years in the period
ended July 31, 1995. These consolidated 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 consolidated financial
statements and schedule based on our audits.
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 Lowrance Electronics, Inc., and
subsidiaries as of July 31, 1994 and 1995, and the results of their operations
and their cash flows for each of the three years in the period ended July 31,
1995, in conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplemental schedule listed in the
index to financial statements is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not a required part of the
basic financial statements. This information has been subjected to the auditing
procedures applied in our audits of the basic financial statements and, in our
opinion, is fairly stated in all material respects in relation to the basic
financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Tulsa, Oklahoma
September 29, 1995
F-2
LOWRANCE ELECTRONICS, INC.
-------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
ASSETS
------
JULY 31,
------------------
1994 1995
----- ------
(in thousands)
CURRENT ASSETS:
Cash and cash equivalent $ 976 $ 643
Trade accounts receivable, net of reserves
of $483,000 in 1994 and $480,000 in 1995 9,158 10,665
Inventories (Note 2) 12,878 17,976
Prepaid income taxes 1,351 1,326
Prepaid expenses 708 479
Income tax refund receivable 1,066 -
------- -------
Total current assets 26,137 31,089
PROPERTY, PLANT, AND EQUIPMENT, net (Note 2) 8,744 8,691
OTHER ASSETS 147 448
------- -------
$35,028 $40,228
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Current maturities of long-term debt $ 2,857 $ 3,499
Accounts payable 5,670 7,494
Accrued liabilities:
Compensation and benefits 2,203 2,418
Product costs 1,503 1,656
Other 1,032 1,245
------- -------
Total current liabilities 13,265 16,312
------- -------
DEFERRED INCOME TAXES 393 489
------- -------
LONG-TERM DEBT, less current maturities
(Note 3) 9,379 9,975
------- -------
STOCKHOLDERS' EQUITY, per accompanying
statements (Note 5):
Preferred stock, 300,000 shares authorized,
none issued - -
Common stock, $.10 par value, 10,000,000
shares authorized, 3,352,458 shares issued 335 335
Paid-in capital 5,600 5,600
Retained earnings 6,239 7,661
Foreign currency translation adjustment (183) (144)
------- -------
Total stockholders' equity 11,991 13,452
------- -------
$ 35,028 $ 40,228
======= ======
The accompanying notes are an integral part of these consolidated balance
sheets.
F-3
LOWRANCE ELECTRONICS, INC.
--------------------------
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
----------------------------------------
FOR THE YEARS ENDED JULY 31,
-------------------------------------------
1993 1994 1995
-------- --------- ---------
(in thousands, except per share amounts)
NET SALES $ 79,634 $ 81,250 $ 91,116
COST OF SALES 51,452 55,920 60,047
------- ------- -------
Gross profit 28,182 25,330 31,069
------- ------- -------
OPERATING EXPENSES:
Selling and administrative 19,056 21,966 22,095
Research and development 2,693 2,574 2,868
Unusual Item (Note 12) - - 1,100
------- ------- -------
Total operating expenses 21,749 24,540 26,063
------- ------- -------
Operating income 6,433 790 5,006
------- ------- -------
OTHER EXPENSES:
Interest 896 1,264 1,581
Other 1,114 1,189 1,364
------- ------- -------
Total other expenses 2,010 2,453 2,945
------- ------- -------
INCOME (LOSS) BEFORE INCOME TAXES 4,423 (1,663) 2,061
------- ------- -------
PROVISION (BENEFIT) FOR INCOME
TAXES (Note 7) 1,423 (991) 639
------- ------- -------
NET INCOME (LOSS) $ 3,000 $ (672) $ 1,422
======= ======= =======
NET INCOME (LOSS) PER COMMON SHARE (Note 5) $ .88 $ (.20) $ .42
======= ======= =======
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING (Note 5) 3,403 3,350 3,352
======= ======= =======
The accompanying notes are an integral part of these consolidated statements.
F-4
LOWRANCE ELECTRONICS, INC.
--------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
----------------------------------------------
FOR THE YEARS ENDED JULY 31, 1993, 1994, AND 1995
-------------------------------------------------
(NOTE 5)
--------
Foreign
Currency
Common Stock Paid-In Retained Translation
----------------
Shares Amount Capital Earnings Adjustment
------- ------- -------- --------- ------------
(in thousands)
Balance -
July 31, 1992 3,416 $ 342 $ 5,783 $ 3,911 $ -
Net income - - - 3,000 -
Repurchase and
retirement of stock (69) (7) (194) - -
Foreign currency
translation adjustment - - - - (205)
----- ----- ----- ----- ------
Balance -
July 31, 1993 3,347 335 5,589 6,911 (205)
Net loss - - - (672) -
Exercised options 5 - 11 - -
Foreign currency
translation adjustment - - - - 22
----- ----- ----- ----- ------
Balance -
July 31, 1994 3,352 335 5,600 6,239 (183)
Net Income - - - 1,422 -
Foreign Currency
translation adjustment - - - - 39
Balance - ----- ----- ----- ----- ------
July 31, 1995 3,352 $ 335 $ 5,600 $ 7,661 $ (144)
===== ===== ====== ====== ======
The accompanying notes are an integral part of these consolidated statements.
F-5
LOWRANCE ELECTRONICS, INC.
--------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(Note 8)
FOR THE YEARS ENDED JULY 31,
----------------------------------------
1993 1994 1995
---------- ---------- ----------
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 3,000 $ (672) 1,422
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating
activities:
Depreciation 1,692 2,212 2,480
Gain on sale of fixed assets (16) (1) (8)
Change in operating assets and liabilities:
Increase in trade accounts
receivable (263) (861) (1,507)
Increase in inventories (1,949) (1,808) (5,098)
Decrease (increase) in
income tax refunds receivable 120 (1,066) 1,066
(Increase)Decrease in prepaid expenses
and prepaid income taxes (314) (559) 254
Decrease (increase) in other assets 4 80 (301)
Increase in accounts payable and
accrued liabilities 994 1,857 2,405
Increase (decrease) in other liabilities 839 (365) 135
------- ------- -------
Net cash provided by (used in)
operating activities 4,107 (1,183) 848
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (2,179) (2,018) (1,346)
Proceeds from sale of property, plant
and equipment 16 1 8
------- ------- -------
Net cash used in investing activities (2,163) (2,017) (1,338)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under lines of credit 73,871 81,918 91,257
Borrowings under term loan - 3,500 -
Repayments of borrowings under lines of
credit (74,443) (78,188) (89,477)
Principal payments on term loans and
capital lease obligations (1,088) (3,600) (1,623)
Repurchase of common stock (200) - -
Additional common stock issued - 11 -
------- ------- -------
Net cash provided by (used in)
financing activities (1,860) 3,641 157
------- ------- -------
Net increase(decrease)in cash and
cash equivalent 84 441 (333)
CASH AND CASH EQUIVALENT - beginning of year 451 535 976
------- ------- -------
CASH AND CASH EQUIVALENT - end of year $ 535 $ 976 $ 643
======= ======= =======
The accompanying notes are an integral part of these consolidated statements.
F-6
LOWRANCE ELECTRONICS, INC.
--------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
FOR THE YEARS ENDED JULY 31, 1993, 1994, AND 1995
------------------------------------------------
(1) BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business -
--------
Lowrance Electronics, Inc., and subsidiaries (the Company) design,
manufacture, and market sonars (also known as depth-sounders and fish-
finders) and other marine electronic products and accessories for use in
recreational and commercial boating. The Company's sonars are principally
used by sports fishermen for detecting the presence of fish and by sports
fishermen and boaters as navigational and safety devices for determining
bottom depth in lakes, rivers, and coastal waters. The Company's Loran-C
and Global Positioning System (GPS) navigational modules are used in
conjunction with certain of its sonar units or with stand-alone displays to
provide navigational information.
Principles of Consolidation -
---------------------------
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All material intercompany transactions
and accounts have been eliminated in consolidation.
Property and Depreciation -
-------------------------
Property, plant, and equipment is stated at cost. For financial reporting
purposes, depreciation is provided on a straight-line basis over the
estimated service lives of the respective classes of property. The building
is being depreciated using an estimated useful life of thirty years, while
the estimated lives for other assets range from two to fifteen years. Fully
depreciated property and equipment with a cost of approximately $10 million
is still in use.
When properties are retired, or otherwise disposed of, the cost and related
accumulated depreciation are removed from the accounts, and the resulting
gain or loss is credited or charged to operations.
Maintenance, repairs, and renewals, including replacement of minor items of
physical properties, are charged to income; major additions and betterments
to physical properties are capitalized.
Research and Development Costs -
------------------------------
Costs associated with the development of new products and changes to exist-
ing products are charged to expense as incurred and include an allocation
of indirect costs.
Foreign Currency Translations -
-----------------------------
Foreign currency transactions and financial statements are translated in
accordance with Statement of Financial Accounting Standards ("SFAS") No.
52. Assets and liabilities are translated to U.S. dollars at the current
exchange rate. Income and expense accounts are translated using the
weighted average exchange rate for the period. Adjustments arising from
translation of foreign financial statements are reflected in the cumulative
translation adjustment in the equity section of the consolidated balance
sheet. Transaction gains and losses are included in net income (loss).
Accrued Product Costs -
---------------------
Product Warranties - The majority of the Company's sales are made under a
one-year product warranty. A provision is made at the time of sale for the
estimated future warranty costs.
F-7
Dealer Premium Coupons - The Company offers a sonar installation subsidy
to qualified boat and motor dealers of its Lowrance product line. At the
time of shipment, the Company provides for the estimated cost of this
program.
Returns and Refurbishments - Estimated costs related to refurbishment of
returned goods are accounted for by providing a reserve based on the
Company's historical experience. These reserves are analyzed and adjusted
quarterly. Returns are recorded as a reduction of net sales at the time
of receipt of the goods.
Cash and Cash Equivalent -
------------------------
For purposes of the Consolidated Statements of Cash Flows, the Company
considers only certificates of deposit with a maturity of three months or
less to be cash equivalents.
(2) BALANCE SHEET DETAIL
Inventories -
-----------
Inventories are priced at the lower of cost (first-in, first-out) or
market and consist of the following:
1994 1995
------- -------
(in thousands)
Raw materials $ 6,636 $ 7,670
Work-in-process 4,010 4,764
Finished goods 2,680 6,332
Excess, obsolete, and realization reserves (448) (790)
------ ------
Total inventories $12,878 $17,976
====== ======
Property, Plant, and Equipment - 1994 1995
-------------------------------- ------- -------
(in thousands)
Land $ 557 $ 557
Building and improvements 3,331 3,420
Machinery and equipment 16,906 17,546
Office furniture and fixtures 4,217 4,592
------ ------
25,011 26,115
Less - accumulated depreciation 16,267 17,424
------ ------
Net property, plant, and equipment $ 8,744 $ 8,691
====== ======
F-8
The property, plant, and equipment accounts include the following amounts
for leased property under capitalized leases:
1994 1995
------- -------
(in thousands)
Building and improvements $ 82 $ -
Machinery and equipment 6,378 5,383
Office furniture and fixtures 982 1,629
----- -----
7,442 7,012
Less - accumulated depreciation 4,351 3,750
----- -----
Net property, plant, and equipment
under capitalized leases $3,091 $3,262
===== =====
(3) LONG-TERM DEBT AND REVOLVING CREDIT LINE
Long-term debt and the revolving credit line are summarized below:
1994 1995
------- -------
(in thousands)
Revolving credit line $5,913 $ 7,693
Term loan, payable in monthly
installments of $23,167 with
interest at prime plus 1.5%, with
the final payment due December 1998 2,815 2,037
Capitalized equipment lease
obligations, payable in monthly
installments of approximately
$130,000, including interest at
rates from 7% to 13%, with final
payments ranging from August 1995
through November 2000 3,474 3,744
Other 34 0
------ ------
12,236 13,474
Less - current maturities 2,857 3,499
------ ------
Total long-term debt $ 9,379 $ 9,975
====== ======
Future maturities of the above debt obligations at July 31, 1995, are
$3,499,000, $1,220,000, $1,076,000, $7,568,000, and $111,000 for the years
ending July 31, 1996 through 2000, respectively.
On December 15, 1993, the Company secured a $30 million financing package
which was utilized to pay off and replace its then existing $20 million
facility. Payments of $11.3 million and $1.8 million were made to the
previous primary lender as payment in full settlement of the then
outstanding obligations for the revolving credit line and the term loan,
respectively. The financing consists of a $3.5 million term loan together
with a $26.5 million revolving credit line. The term loan is payable in
monthly installments of $23,167 plus interest at 1.5% over prime (currently
8.75%). Additionally, principal payments for the term loan of $500,000 were
paid on May 31, 1994 and May 31, 1995. The revolving credit line provides
for borrowings up to $26.5 million based on varying percentages of
qualifying categories of receivables and
F-9
inventories. Borrowings against inventories are limited to $10 million in
total.
During October, 1995 the Company's $26.5 million accounts receivable
and inventory line of credit and its associated $3.5 million term loan were
amended. Significant provisions of the amendment include: 1) The due date
was extended to December 1998 from December 1996; 2)The interest rate for
the revolver was reduced from prime plus 1.00% to prime plus .75%; and 3)
The term loan was funded to its original $3.5 million amount with monthly
principal payments of $23,167 plus interest at prime plus 1.5%. Additional
principal payments of $500,000 will be due on May 31, 1996 and May 31, 1997
with the remaining principal due in December 1998. In addition to the
financing described above, the Company has arranged a $2.5 million lease
line to finance its qualifying capital additions during fiscal 1996.
Current maturities for the revolving credit line are estimated based on
future results and collateral limitations. The terms of the foregoing
agreement include a commitment fee based on the unused portion of the bank
credit line in lieu of compensating balances.
The agreement requires, among other things, that the Company maintain a
minimum tangible net worth and limits the ratio of total liabilities to
tangible net worth. Additionally, the agreement limits capital expenditures
and capital leases. Violation of any of these provisions would constitute
an event of default which, if not cured, would empower the lender to
declare all amounts immediately payable.
The Company's indebtedness is collateralized by substantially all of the
Company's assets.
Average short-term borrowings under the revolving credit line and related
interest rates shown in the following table are weighted by using the
average month-end principal balances.
Years Ended July 31,
---------------------------------
1993 1994 1995
---------- ---------- ---------
(in thousands)
Highest amount borrowed $ 11,205 $ 14,824 $ 14,422
Average amount borrowed $ 6,152 $ 9,796 9,552
Weighted average interest rate 8.2% 8.3% 9.8%
(4) CAPITAL LEASES
Certain equipment is leased under agreements that are structured as capital
leases. Accordingly, such equipment has been recorded as an asset, and the
discounted value of the remaining lease obligations has been recorded as a
liability in the accompanying Consolidated Balance Sheets (See Note 3).
F-10
The following is a schedule by years of future minimum lease payments under
capital leases, together with the present value of the net minimum lease
payments as of July 31, 1995, (in thousands):
Years ending July 31:
1996 $ 1,430
1997 1,138
1998 881
1999 734
2000 320
Later years 24
------
Total minimum lease payments 4,527
Less amounts representing interest 783
------
Present value of net minimum lease payments $ 3,744
======
Current portion of obligations under
capital leases $ 1,165
Long-term portion of obligations under
capital leases $ 2,579
(5) STOCKHOLDERS' EQUITY AND RELATED ITEMS
The Company's 1986 and 1989 Stock Option Plans provide for a maximum of
400,000 common shares to be issued under these Plans. Options and stock
appreciation rights granted cannot have terms greater than ten years. The
Plans provide for non-qualified stock options to be granted at an option
price of not less than 100% of the fair market value of the Company's
Common Stock at the date of grant.
Following is a summary of outstanding and exercisable options under the
Plans as of July 31 for the respective years set forth below:
1993 1994 1995
-------- ------- -------
Total outstanding 130,000 92,500 92,500
Average option price $ 3.02 $ 2.92 $ 2.92
No options were exercised in 1993 or 1995. In 1994, options on 5,000
shares were exercised and options on 32,500 shares expired.
Earnings per share were computed using the weighted average number of
common shares, including common share equivalents outstanding during each
year. Stock options were not considered in the calculation of earnings per
share since they are immaterial. Earnings per share assuming full dilution
would be the same as primary earnings per share.
(6) RETIREMENT PLANS
Substantially all Company employees participate in the Lowrance Savings
Plans which requires the Company to contribute 3% of the participants'
qualified earnings to the Plans. Also, each participant may make
contributions of qualified earnings into the Plans which will be matched by
the Company at 100% for the first $10 per pay period and 50%
F-11
thereafter, not to exceed 3% of compensation. Contributions made by the
Company to the Plans for the years ended July 31, 1993, 1994, and 1995 were
$501,000, $547,000, and $596,000, respectively.
(7) INCOME TAXES
The provision (benefit) for income taxes consists of the following:
Years Ended July 31,
-----------------------------
1993 1994 1995
---------- ---------- -----
(in thousands)
Current $1,820 $(1,066) $ 505
Deferred (prepaid) (397) 75 134
------ ------- -----
Total $1,423 $ (991) $ 639
====== ======= =====
The provision (benefit) for income taxes differs from the amount calculated
by multiplying income (loss) before provision (benefit) for income taxes by
the statutory Federal income tax rate due to the following:
Years Ended July 31,
-------------------------------
1993 1994 1995
--------- ----------- -------
Statutory rate 34.0 % (34.0)% 34.0 %
State income taxes - (10.1) 3.8
Research & development credits (1.8) (7.2) (6.0)
Realized loss of
foreign subsidiary (.5) (9.7) -
Other .5 1.4 (.8)
---- ------ -----
Effective rate 32.2 % (59.6)% 31.0 %
==== ====== =====
Effective August 1, 1993, the Company changed its method of accounting for
income taxes to adopt Statement No. 109 of the Financial Accounting
Standards Board which requires an asset and liability approach to financial
accounting and reporting for income taxes. The cumulative effect of the
change in accounting principle was determined to be immaterial at that
date. The difference between the financial statement and tax bases of
assets and liabilities is determined and deferred tax assets or liabilities
are computed for those differences that have future tax consequences. The
Company determined that no valuation allowance is necessary as of July 31,
1995.
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The tax effect of temporary differences giving rise to the Company's
consolidated deferred income taxes at July 31 are as follows:
1994 1995
------ ------
Deferred tax assets -
Reserves for product costs $ 480 $ 560
Reserves for compensation and benefits 469 410
State tax credit carryforwards 168 198
Accounts receivable reserves 167 112
Other accruals 46 46
Other 21 -
----- -----
$1,351 $1,326
===== =====
Deferred tax liabilities -
Depreciation $ 393 $ 489
===== =====
(8) CONSOLIDATED STATEMENTS OF CASH FLOWS
During 1993, 1994, and 1995, the Company acquired approximately $1,013,000,
$2,191,000, and $1,081,000 respectively, in equipment under capital lease
obligations. These transactions were accounted for as non-cash investing
and financing activities, and therefore, are not included in the
Consolidated Statements of Cash Flows. Interest of approximately $903,000,
$1,264,000, and $1,581,000 was paid during 1993, 1994, and 1995,
respectively. Income tax payments for 1993, 1994, and 1995 were $1,239,000,
$378,000, and $475,000 respectively. An income tax refund of $1,066,000 was
received in 1995.
(9) SALES BY GEOGRAPHIC REGION
The Company markets its products internationally through foreign
distributors, except in Canada and Australia where it has established its
own distribution operation. The following table presents a summary of
domestic, export, and foreign sales:
1993 1994 1995
-------- -------- --------
(in thousands)
Net sales:
Domestic $ 64,656 $ 63,789 $ 69,846
Export sales 6,892 6,329 8,779
Foreign sales 8,086 11,132 12,491
------- ------- -------
Total $ 79,634 $ 81,250 $ 91,116
======= ======= =======
(10) SALES TO A MAJOR CUSTOMER
During 1993, 1994, and 1995, one customer accounted for approximately 14%
of consolidated net sales in each year. No other customer accounted for 10%
or more of consolidated net sales in 1993, 1994, and 1995.
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(11) CONCENTRATIONS OF CREDIT RISK
The Company extends credit to various companies in the marine and non-
marine markets in the normal course of business. Within these markets,
certain concentrations of credit risk exist. These concentrations of credit
risk may be similarly affected by changes in economic or other conditions
and may, accordingly, impact the Company's overall credit risk. However,
management believes that receivables are well diversified, thereby reducing
the potential credit risk and that allowances for doubtful accounts are
adequate to absorb estimated losses at July 31, 1995.
At July 31, 1994, and 1995 trade receivables related to these group
concentrations were:
1994 1995
----- -----
Marine 61% 55%
Non-Marine 39% 45%
(12) UNUSUAL ITEM
On January 10, 1995, the Company entered into a Settlement Agreement with
Computrol, Inc., resolving a patent infringement lawsuit filed against the
Company in November 1993. This legal proceeding was previously disclosed
by the Company on its Form 10-Q in Item 1 of Part II filed with the
Securities and Exchange Commission on March 15, 1994, June 15, 1994,
December 15, 1994, March 17, 1995, June 14, 1995, and the Company's 8-K, in
Item 5, filed on January 11, 1995, as well as in Item 3 of Part I of the
Company's Form 10-K filed on October 29, 1994.
The Settlement Agreement called for four payments beginning January 10,
1995, and ending June 30, 1995, totaling $1,000,000 in exchange for a
mutual release and settlement of the lawsuit. All required payments were
made by the Company in fiscal 1995.
The Company also entered into a License Agreement with Computrol, Inc., and
paid a one-time license fee of $100,000. The License Agreement allows the
Company to use the Computrol patent on any new products or the existing
product which was the subject of the lawsuit.
At this time, the Company has no current products that utilize the
technologies covered by this License Agreement and has no immediate plans
to produce and market such products. Accordingly, the $100,000 license fee
along with the $1 million settlement amount has been expensed in full
fiscal 1995.
F-14
LOWRANCE ELECTRONICS, INC.
-------------------------
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
-----------------------------------------------
FOR THE YEARS ENDED JULY 31, 1993, 1994, AND 1995
-------------------------------------------------
(in thousands)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- ---------------------------- ---------- --------------- --------------- ----------
Net (write-offs)
Balance at recoveries Balance at
beginning Charged to charged against end of
Classification of period expense reserve period
- ---------------------------- ---------- --------------- --------------- ----------
Reserve for Doubtful
- --------------------
Accounts and Sales Returns
--------------------------
Year Ended July 31, 1993 $727 $ 24 $ (18) $733
Year Ended July 31, 1994 $733 $(103) $(147) $483
Year Ended July 31, 1995 $483 $ 58 $ (61) $480
Excess, Obsolete, and
- ---------------------
Realizability Reserves
----------------------
Year Ended July 31, 1993 $327 $ 300 $(228) $399
Year Ended July 31, 1994 $399 $ 375 $(326) $448
Year Ended July 31, 1995 $448 $ 465 $(123) $790
F-15