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SECURITIES AND EXCHANGE COMMISSION
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WASHINGTON, D.C. 20549
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FORM 10-K
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X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
- ---
ACT OF 1934 FOR THE FISCAL YEAR ENDED JUNE 30, 2002.
OR
____ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ________ TO ________.
Commission File No. 0-13375
LSI Industries Inc.
State of Incorporation - Ohio
IRS Employer I.D. No. 31-0888951
10000 Alliance Road
Cincinnati, Ohio 45242
(513) 793-3200
Securities Registered Pursuant to Section 12(b) of the Act:
None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Shares
(No par value)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No____
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Aggregate market value of the voting stock held by non-affiliates of the
registrant at September 4, 2002 was approximately $145,874,000, based on a
closing price of $10.00. At September 4, 2002 there were 15,765,705 shares of no
par value Common Shares issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
-----------------------------------
Portions of the Registrant's Proxy Statement filed with the Commission for its
2001 annual meeting are incorporated by reference in Part III, as specified.
LSI INDUSTRIES INC.
2002 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
Begins on
Page
----
PART I
ITEM 1. BUSINESS ............................................................... 1
ITEM 2. PROPERTIES ............................................................. 3
ITEM 3. LEGAL PROCEEDINGS ...................................................... 4
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS .......................................................... 4
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND
RELATED SHAREHOLDERS' MATTERS .................................... 4
ITEM 6. SELECTED FINANCIAL DATA ................................................ 5
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS .............................. 5
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ............. 5
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ............................ 5
ITEM 9. DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE ............................................. 6
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT ..................... 6
ITEM 11. EXECUTIVE COMPENSATION ................................................. 6
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT ................................................... 6
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ......................... 6
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K ........................................................ 7
SIGNATURES ....................................................................... 9
CERTIFICATIONS OF PRINCIPAL EXECUTIVE OFFICER AND PRINCIPAL FINANCIAL OFFICER 10
"Safe Harbor" Statement under the Private Securities Litigation Reform Act of
1995
This Form 10-K contains forward-looking statements regarding the earnings and
projected business, among other things. These are forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934 that involve substantial risks and
uncertainties that could cause actual results to differ materially from those
expected. These risks and uncertainties include, but are not limited to, the
impact of competitive products and services, product demand and market
acceptance risks, reliance on key customers, financial difficulties experienced
by customers, the adequacy of reserves and allowances for doubtful accounts,
fluctuations in operating results or costs, unexpected difficulties in
integrating acquired businesses, and the ability to retain key employees of
acquired businesses. The Company has no obligation to update any forward-looking
statements to reflect subsequent events or circumstances.
i
PART I
ITEM 1. BUSINESS
The Company's two business segments are the Image Segment and the
Commercial / Industrial Lighting Segment. Net sales by segment are as follows
(in thousands):
2002 2001 2000
---- ---- ----
Image Segment $164,405 $147,021 $159,257
Commercial / Industrial
Lighting Segment 94,856 86,919 80,725
-------- -------- --------
Total Net Sales $259,261 $233,940 $239,982
======== ======== ========
The Image Segment manufactures and sells exterior and interior visual
image elements (lighting, graphics, and menu board systems) for the petroleum /
convenience store market and for multi-site retail operations. The Image Segment
includes the operations of LSI Petroleum Lighting, LSI Automotive, LSI Images,
LSI Metal Fabrication, SGI Integrated Graphic Systems, Grady McCauley, LSI
Retail Graphics and LSI Adapt. The Commercial / Industrial Lighting Segment
manufactures and sells outdoor, indoor, and landscape lighting for the
commercial / industrial and multi-site retail markets. The Commercial /
Industrial Lighting Segment includes the operations of LSI Lighting Systems,
Courtsider Sports Lighting, Greenlee Lighting, LSI Marcole, LSI MidWest Lighting
and LSI Lightron. The Company's most significant market is the petroleum /
convenience store market with approximately 34%, 35% and 38% of net sales
concentrated in this market in the fiscal years ended June 30, 2002, 2001, and
2000, respectively. See Note 3 of Notes to Consolidated Financial Statements
beginning on page S-17 of this Form 10-K for additional information on business
segments.
The increase in Image Segment net sales is the net result of several
factors. The Company participated (products and installation) in two image
conversion programs, one significant in sales volume, of major oil companies.
These programs were strong in the first half of the fiscal year, but were
stopped by the customers in the fourth quarter. The Company believes that this
slow down is temporary and that the re-imaging programs will start back up in
the second half of fiscal 2003. Another element of the Image Segment increase
was net sales of menu board systems, related installation, and lighting fixtures
to Burger King and various of its franchisees. This program exceeded $23 million
in fiscal 2002 and is expected to run at a strong, but somewhat lower pace in
the first half of fiscal 2003 as the program in North America concludes. These
increased net sales of the Image Segment were partially offset by general
softness in the petroleum / convenience store market, the Company's largest
niche market.
The increase in net sales of the Commercial / Industrial Lighting Segment
is primarily related to the Company's participation in a new store program of a
national retailer, and to a full year of sales of LSI Lightron versus only seven
months last year. General economic softness in the commercial / industrial
market was present in fiscal 2002 and did impact sales in this Segment.
The Company believes that it is a low-cost producer for its types of
products, and as such, is in a position to promote its product lines with
substantial marketing and sales activities. The Company is not dependent on any
one supplier for any of its component parts.
-1-
The Company's sales are partially seasonal as installation of outdoor
lighting and graphic systems in the northern states lessens during the harshest
winter months. The Company had a backlog of orders, believed by it to be firm,
of $18.8 million and $29.1 million at June 30, 2002 and 2001, respectively. All
orders are believed to be shippable within twelve months.
The Company has approximately 1,500 full-time and 50 temporary employees
as of June 30, 2002. The Company has a comprehensive compensation and benefit
program for most employees, including competitive wages, a discretionary bonus
plan, a profit-sharing plan and retirement plan, a 401(k) savings plan, a
non-qualified deferred compensation plan (for certain employees), a stock option
plan, and medical and dental insurance.
The Company sells its products primarily throughout the United States and
Canada.
LSI Industries encounters strong competition in all markets served by the
Company's product lines. The Company has many competitors, some of which have
greater financial and other resources. The Company considers product quality and
performance, price, customer service, prompt delivery, and reputation to be
important competitive factors.
The Company has several product and process patents which it has obtained
in the normal course of business. The Company in general does not believe that
patent protection is critical to its business, however it does believe that
patent protection is important for a few select products.
ITEM 2. PROPERTIES
The Company has sixteen facilities:
Description Size Location Status
----------- ---- -------- ------
1) LSI Industries Corporate 243,000 sq. ft., Cincinnati, OH Owned
Headquarters, and (includes 66,000
lighting fixture and sq. ft. of office
graphics manufacturing space)
2) LSI Industries pole 122,000 sq. ft. Cincinnati, OH Owned
manufacturing and dry
powder-coat painting
3) LSI Metal Fabrication 96,000 sq. ft. Independence, KY Owned
and LSI Images manu- (includes 5,000
facturing and dry sq. ft. of office
powder-coat painting space)
4) SGI Integrated Graphic 210,000 sq. ft. Houston, TX Leased
Systems office; screen (includes 34,000
printing manufacturing; sq. ft. of office space)
and architectural graphics
manufacturing
-2-
5) Greenlee Lighting office 40,000 sq. ft. Dallas, TX Leased
and manufacturing (includes 4,000 sq. ft.
of office space)
6) Grady McCauley office 212,000 sq. ft. North Canton, OH Owned
and manufacturing (includes 20,000
sq. ft. of office space)
7) LSI Marcole office and 61,000 sq. ft. Manchester, TN Owned
manufacturing of electrical (includes 5,000 sq. ft.
wire harnesses; contract of office space)
assembly services
8) LSI MidWest Lighting 145,000 sq. ft. Kansas City, KS Owned
office and manufacturing (includes 6,000 sq. ft.
of office space and
8,000 sq. ft. of leased
warehouse space)
9) LSI Retail Graphics office 29,000 sq. ft. Woonsocket, RI Owned
and manufacturing (includes 5,000 sq. ft.
of office space and
9,000 sq. ft. of leased
warehouse space)
10) LSI Lightron office 179,000 sq. ft. (includes New Windsor, NY Owned*
and manufacturing 12,000 sq. ft. of office
space and 7,000 sq. ft.
of leased warehouse space)
11) LSI West Coast 25,000 sq. ft. Anaheim, CA Leased
Distribution Center
12) LSI Adapt offices 12,000 sq. ft. Westlake, OH Leased
Atlanta, GA Leased
Seattle, WA Leased
Portland, OR Leased
Fort Mill, SC Leased
*The land at this facility is leased.
The Company considers these facilities (total of 1,374,000 square feet) adequate
for its current level of operations.
ITEM 3. LEGAL PROCEEDINGS
None
-3-
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
SHAREHOLDERS' MATTERS
Common share information appears in Note 13 - SUMMARY OF
QUARTERLY RESULTS (UNAUDITED) under "Range of share prices" on
page S-26 of this Form 10-K. Information related to "Earnings
per share from continuing operations" and "Cash dividends paid
per share" appears in SELECTED FINANCIAL DATA on page S-28 of
this Form 10-K.
The Company's policy with respect to dividends is to pay a
quarterly cash dividend representing a payout ratio of between
10% and 20% of the then current fiscal year net income forecast.
In addition to the four quarterly dividend payments, the Company
may declare a special year-end cash and/or stock dividend that,
in conjunction with the regular quarterly cash dividends, would
achieve a target payout ratio of between 20% and 40% of reported
net income. The Company has paid annual dividends since fiscal
1987 and quarterly dividends since fiscal 1995.
At August 22, 2002, there were 413 shareholders of record. The
Company believes this represents approximately 3,000 beneficial
shareholders. The Company's common shares are traded on the
Nasdaq National Market under the symbol LYTS.
ITEM 6. SELECTED FINANCIAL DATA
"Selected Financial Data" appears on page S-28 of this Form
10-K.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
"Management's Discussion and Analysis of Financial Condition and
Results of Operations" appears on pages S-1 through S-6 of this
Form 10-K.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See ITEM 1. BUSINESS on page 1 and MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
beginning on page S-1 of this Form 10-K. In addition, see the
information set forth in NOTE 1 under "Fair value of financial
instruments" on page S-15 of this Form 10-K.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Begins
Index to Financial Statements on Page
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Financial Statements:
Report of Independent Certified Public Accountants S-7
Report of Independent Public Accountants S-8
Consolidated Income Statements for the years
ended June 30, 2002, 2001, and 2000 S-9
Consolidated Balance Sheets at June 30, 2002 and 2001 S-10
Consolidated Statements of Shareholders' Equity for
the years ended June 30, 2002, 2001, and 2000 S-12
-4-
Consolidated Statements of Cash Flows for the
years ended June 30, 2002, 2001, and 2000 S-13
Notes to Consolidated Financial Statements S-14
Financial Statement Schedules:
II - Valuation and Qualifying Accounts for the S-29
years ended June 30, 2002, 2001, and 2000
Schedules other than those listed above are omitted for the reason(s)
that they are either not applicable or not required or because the
information required is contained in the financial statements or notes
thereto. Selected quarterly financial data appears on page S-26 in NOTE
13 of the accompanying consolidated financial statements.
ITEM 9. DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None
Change of Independent Accountants During Fiscal Year
On April 8, 2002, the Company dismissed Arthur Andersen LLP as its
independent public accountant. In selecting a new independent public accountant,
the Board of Directors solicited bids from and met with representatives from
Deloitte & Touche LLP, Ernst & Young LLP, Grant Thornton LLP, and
PricewaterhouseCoopers LLP. The Audit Committee of the Company's Board of
Directors, after reviewing audit proposals from all four firms, approved the
selection of Grant Thornton as the Company's independent accountants to replace
Arthur Andersen, effective April 8, 2002.
Arthur Andersen's report on the Company's financial statements for each
of the last two fiscal years did not contain an adverse opinion or a disclaimer
of opinion, nor was it qualified or modified as to uncertainty, audit scope, or
accounting principles. During the Company's two most recent fiscal years and the
subsequent interim period preceding the replacement of Arthur Andersen, there
were no disagreements with Arthur Andersen on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure, which disagreement(s), if not resolved to the satisfaction of Arthur
Andersen, would have caused them to make a reference to the subject matter of
the disagreement(s) in connection with its report. The Company has authorized
Arthur Andersen to respond fully to any inquiries by Grant Thornton.
Arthur Andersen did not advise the Company either during the Company's
two most recent fiscal years or during the subsequent interim period preceding
the Company's decision not to extend Arthur Andersen's engagement:
. that the internal controls necessary for the Company to develop
reliable financial statements did not exist;
. that information had come to its attention that had led it to no longer
be able to rely on management's representations, or that had made it
unwilling to be associated with the financial statements prepared by
management;
-5-
. of the need to expand significantly the scope of its audit, or that
information had come to its attention during the two most recent fiscal
years or any subsequent interim period that if further investigated
might (i) materially have impacted the fairness or reliability of
either: a previously issued audit report or the underlying financial
statements, or the financial statements issued or to be issued covering
the fiscal period(s) subsequent to the date of the most recent
financial statements covered by an audit report, or (ii) have caused it
to be unwilling to rely on management's representations or be
associated with the Company's financial statements; or
. that information had come to its attention that it had concluded
materially impacts the fairness or reliability of either (i) a
previously issued audit report or the underlying financial statements,
or (ii) the financial statements issued or to be issued covering the
fiscal periods subsequent to the date of the most recent financial
statements covered by an audit report, including information that,
unless resolved to the accountant's satisfaction, would prevent it from
rendering an unqualified audit report in those financial statements.
During the two most recent fiscal years and during the interim period
prior to engaging Grant Thornton, neither the Company nor anyone on its behalf
consulted Grant Thornton regarding either:
. the application of accounting principles to a specified transaction
(either completed or proposed) or the type of audit opinion that might
be rendered on the Company's financial statements, and no written
report or oral advice was provided to the Company that Grant Thornton
concluded was an important factor considered by the Company in reaching
a decision as to an accounting, auditing or financial reporting issue;
or
. any matter that was the subject of either a disagreement or a
reportable event.
In its letter dated April 12, 2002 to the Office of the Chief
Accountant of the Securities and Exchange Commission, Arthur Andersen stated
that it agreed with the statements in the four preceding paragraphs. The letter
was filed as Exhibit 16 to the Company's Form 8-K dated April 8, 2002.
PART III
ITEMS 10, 11, 12 and 13 of Part III are incorporated by reference to the LSI
Industries Inc. Proxy Statement for its Annual Meeting of Shareholders to be
held November 14, 2002, as filed with the Commission pursuant to Regulation 14A.
With respect to Item 12 (Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters), also see the information presented
below.
The following table presents information about the Company's equity compensation
plans (LSI Industries Inc. 1995 Stock Option Plan and the LSI Industries Inc.
1995 Directors' Stock Option Plan) as of June 30, 2002.
-6-
- -------------------------------------------------------------------------------------------------------------------
Number of securities to be Weighted average exercise
issued upon exercise of price of outstanding Number of securities
outstanding options, options, warrants and remaining available for
Plan category warrants and rights rights future grants
- -------------------------------------------------------------------------------------------------------------------
Equity compensation plans
approved by security holders 643,919 $11.59 775,981
- -------------------------------------------------------------------------------------------------------------------
Equity compensation plans not
approved by security holders -- -- --
- -------------------------------------------------------------------------------------------------------------------
Total 643,919 $11.59 775,981
- -------------------------------------------------------------------------------------------------------------------
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
(1) Financial Statements
Appear as part of Item 8 of this Form 10-K.
(2) Financial Statement Schedules
Appear as part of Item 8 of this Form 10-K.
(3) Exhibit list - listing of exhibits required to be filed with Form 10-K
incorporated by reference to Exhibit(s) filed as part of:
8-K (02) = Form 8-K filed April 2002
10K-96 = Annual Report on Form 10-K for the fiscal year ended June
30, 1996
10K-01 = Annual Report on Form 10-K for the fiscal year ended June
30, 2001
10Q-9/99 = Quarterly Report on Form 10-Q for the quarter ended
September 30, 1999
S-3 (96) = Form S-3 Registration Statement No. 33-65043
S-8 (03-1) = Form S-8 Registration Statement No. 333-100038 for the
LSI Industries Inc. 1995 Directors' Stock Option Plan
S-8 (03-2) = Form S-8 Registration Statement No. 333-100039 for the
LSI Industries Inc. 1995 Stock Option Plan
or filed herewith where so noted.
-7-
EXHIBIT INDEX
Current
Form 10-K Report/ Exhibit
Exhibit No. Description of Exhibit Document Number
- ----------- ---------------------- -------- ------
3.1 Articles of Incorporation of LSI Industries Inc. S-3 (96) 3.1
3.2 Code of Regulations of LSI Industries Inc. S-3 (96) 3.2
10.1 CREDIT AGREEMENT By and Among LSI 10K-01 4
INDUSTRIES INC. as the Borrower, THE
BANKS PARTY HERETO as the Lenders hereunder,
PNC BANK NATIONAL ASSOCIATION as the
Administrative Agent and the Syndication Agent,
Dated as of March 30, 2001
10.2 Amendment to Credit Agreement Filed herewith
(Dated March 28, 2002)
10.3* LSI Industries Inc. Retirement Plan 10Q-9/99 10.1
(Amended and Restated as of October 1, 1999)
10.4* LSI Industries Inc. 1995 Directors' Stock
Option Plan (Amended as of December 6, 2001) S-8 (03-1) 10
10.5* LSI Industries Inc. 1995 Stock Option Plan S-8 (03-2) 10
(Amended as of December 6, 2001)
10.6* LSI Industries Inc. Nonqualified Deferred 10K-96 10.5
Compensation Plan, and Rabbi Trust
Agreement
16 Letter from Arthur Andersen LLP to the 8-K (02) 16
Securities and Exchange Commission,
dated April 12, 2002, regarding its agreement
with statements made in the current report
on Form 8-K
22 Subsidiaries of the Registrant Filed herewith
23 Consent of Independent Public Certified
Accountants Filed herewith
24 Powers of Attorney (4) Filed herewith
*Management Compensatory Agreements
(b) Form 8-K:
There have been no reports on Form 8-K filed during the last quarter of
fiscal year 2002.
-8-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
LSI INDUSTRIES INC.
September 24, 2002 BY: /s/ Robert J. Ready
- ----------------------------------- -----------------------------------
Date Robert J. Ready
Chairman of the Board and President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title
/s/ Robert J. Ready Chairman of the Board, Chief Executive
- ----------------------------------- Officer, and President
Robert J. Ready Principal Executive Officer)
Date: September 24, 2002
----------------------
/s/ Ronald S. Stowell Vice President, Chief Financial
- ----------------------------------- Officer, and Treasurer
Ronald S. Stowell Principal Financial and Accounting
Date: September 24, 2002 Officer)
----------------------
/s/ *Allen L. Davis Director
- -----------------------------------
Allen L. Davis
/s/ Gary P. Kreider Director
- -----------------------------------
Gary P. Kreider
/s/ *Dennis B. Meyer Director
- -----------------------------------
Dennis B. Meyer
/s/ *Wilfred T. O'Gara Director
- -----------------------------------
Wilfred T. O'Gara
/s/ *James P. Sferra Secretary; Executive Vice President
- ----------------------------------- - Manufacturing; and Director
James P. Sferra
*The undersigned, by signing his name hereto, executed this Annual Report on
Form 10-K on September 24, 2002, pursuant to Powers of Attorney executed by the
above named Directors of the Registrant and filed with the Securities and
Exchange Commission as Exhibit 24 hereto.
September 24, 2002 By: /s/ Ronald S. Stowell
- ------------------------ -----------------------------------
Date Attorney-in-Fact
-9-
Certification of Principal Executive Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
and Securities and Exchange Commission Release 34-46427
I, Robert J. Ready, the principal executive officer of LSI Industries Inc.,
certify that:
1. I have reviewed this annual report on Form 10-K of LSI Industries Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by the report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date
of this annual report (the "Evaluation Date"); and pesented in this annual
report our conclusions about the effectiveness of the disclosure controls
and procedures based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for
the registrant's auditors any material weaknesses in internal controls;
(b) and any fraud, whether or not material, that involves management
or other employees who have a significant role in the registrant's internal
controls; and
-10-
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: September 24, 2002
/s/ Robert J. Ready
------------------------------------
Principal Executive Officer
-11-
Certification of Principal Financial Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
and Securities and Exchange Commission Release 34-46427
I, Ronald S. Stowell, the principal financial officer of LSI Industries
Inc., certify that:
1. I have reviewed this annual report on Form 10-K of LSI Industries Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by the report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date
of this annual report (the "Evaluation Date"); and
(c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for
the registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
-12-
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: September 24, 2002
/s/ Ronald S. Stowell
--------------------------------------------
Principal Financial Officer
-13-
CERTIFICATION OF ROBERT J. READY
Pursuant to 18 U.S.C. (S) 1350, as adopted pursuant to
(S) 906 of the Sarbanes-Oxley Act of 2002
In connection with the filing with the Securities and Exchange Commission of the
Annual Report of LSI Industries Inc. (the "Company") on Form 10-K for the fiscal
year ended June 30, 2002 (the "Report"), I, Robert J. Ready, Principal Executive
Officer of the Company, certify, pursuant to 18 U.S.C. (S) 1350, as adopted
pursuant to (S) 906 of the Sarbanes-Oxley Act of 2002, that to the best of my
knowledge:
(1) The Report fully complies with the requirements of section 13(a)
or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of
the Company.
/s/ Robert J. Ready
- --------------------------
Robert J. Ready
Chairman of the Board, Chief Executive Officer and President
September 24, 2002
-14-
CERTIFICATION OF RONALD S. STOWELL
Pursuant to 18 U.S.C. (S) 1350, as adopted pursuant to
(S) 906 of the Sarbanes-Oxley Act of 2002
In connection with the filing with the Securities and Exchange Commission of the
Annual Report of LSI Industries Inc. (the "Company") on Form 10-K for the fiscal
year ended June 30, 2002 (the "Report"), I, Ronald S. Stowell, Principal
Financial Officer of the Company, certify, pursuant to 18 U.S.C. (S) 1350, as
adopted pursuant to (S) 906 of the Sarbanes-Oxley Act of 2002, that to the best
of my knowledge:
(1) The Report fully complies with the requirements of section 13(a)
or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of
the Company.
/s/ Ronald S. Stowell
- ---------------------------------
Ronald S. Stowell
Vice President, Chief Financial Officer, and Treasurer
September 24, 2002
-15-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Sales by Business Segment
(In thousands) 2002 2001 2000
-------- -------- --------
Image Segment $164,405 $147,021 $159,257
Commercial / Industrial
Lighting Segment 94,856 86,919 80,725
-------- -------- --------
$259,261 $233,940 $239,982
======== ======== ========
Results of Operations
Results of the Commercial / Industrial Lighting Segment in fiscal 2002 and in
several months of fiscal 2001 include the operations of LSI Lightron (acquired
November 2000), and results of the Image Segment include the operations of LSI
Adapt (acquired January 2001). All share and per share data reflect the 3-for-2
stock split which was effective November 29, 2001.
2002 COMPARED TO 2001
Net sales of $259,261,000 in fiscal 2002 increased 11% from fiscal 2001 net
sales of $233,940,000. Commercial / Industrial Lighting Segment net sales
increased 9% and Image Segment net sales increased 12% in fiscal 2002 as
compared to the prior year. The increase in Commercial / Industrial Lighting
Segment is attributed to the Company's participation in a new store program of a
national retailer, and to a full year of sales of LSI Lightron versus only seven
months last year, partially offset by economic softness in the commercial /
industrial market. The increase in Image Segment net sales is primarily
attributed to growth related to some image conversion programs, partially offset
by general softness in the petroleum / convenience store market. Net sales of
menu board systems and related installation revenue increased due to the
roll-out program with Burger King Corporation. Net sales to Burger King and
various of its franchisees represented the single largest program for the
Company in fiscal 2002. This program is expected to be substantially completed
by December 31, 2002. No comparable menu board program has been identified to
replace this business. Additionally, the Company experienced an increase in
graphics business and related installation revenue related to roll out image
conversion programs for customers in the petroleum / convenience store market.
Net sales of the Image Segment to the petroleum / convenience store market
represented 34% and 35% of total net sales in fiscal 2002 and fiscal 2001,
respectively. Sales to this market increased 5% in fiscal 2002 as compared to
last year entirely on the strength of two image conversion programs for two
major oil companies, particularly in the first half of the year. The Company
believes these programs stopped in the fourth quarter of fiscal 2002 primarily
due to concerns about the Middle East and cash flow demands related to some
large acquisitions that these major oil companies entered into. The Company
believes this slow down is temporary and that the re-imaging programs will start
back up in the second half of fiscal 2003. The petroleum / convenience store
market has been, and will continue to be a very important niche market for the
Company. While sales prices in some markets that the Company serves were
increased, inflation did not have a significant impact on sales in fiscal 2002
as competitive pricing pressures held price increases to a minimum.
S-1
Gross profit of $72,419,000 in fiscal 2002 increased 11% from last year's
gross profit of $65,411,000. The increase in amount of gross profit is due
primarily to the 11% increase in net sales. Selling and administrative expenses
increased 2% to $49,039,000 from $48,175,000. The increase was primarily
attributed to the additional selling and administrative expenses from companies
acquired during fiscal 2001, partially offset by lower selling costs associated
with the increased sales volume of menu board systems, non-recurring settlement
of two patent lawsuits ($925,000 or $0.04 per share, diluted), and to the
positive effects of cost containment programs. As a percentage of net sales,
selling and administrative expenses were at 18.9% in the fiscal 2002 as compared
to 20.6% last year. The Company continued the task of converting its business
operating software system company-wide. Total implementation costs expensed were
$696,000 ($0.03 per share, diluted) in fiscal 2002, as compared to expense of
$960,000 ($0.04 per share, diluted) in fiscal 2001. Expenditures are expected to
continue into calendar year 2004. See additional discussion in Liquidity and
Capital Resources regarding depreciation of this business operating system.
The Company reported interest income of $51,000 in fiscal 2002 as compared
to $630,000 in fiscal 2001. The change between years is primarily reflective of
reduced interest rates and the Company being in a net cash investment position
in the first half of fiscal 2001, and a net borrowing position since November
2001. Interest expense of $575,000 in fiscal 2002 is down from $607,000 in the
prior year due to reduced interest rates, and the capitalization of $92,000 of
interest expense associated with construction of a manufacturing facility,
partially offset by more than double the amount of average borrowings on the
Company's line of credit. The Company's effective tax rate decreased to 37.9% in
fiscal 2002 as compared to 38.8% last year primarily due to research and
development income tax credits in 2002, partially offset by increased state and
federal effective rates.
Income from continuing operations of $14,186,000 in fiscal 2002 increased
34% from $10,601,000. The increase is primarily the result of increased gross
profit from increased sales, partially offset by increased operating expenses,
increased net interest expense, and increased income taxes. Diluted earnings per
share of $0.88 in fiscal 2002 increased 31% from $0.67 per share reported in
fiscal 2001. The weighted average common shares outstanding for purposes of
computing diluted earnings per share increased 2% in fiscal 2002 to 16,047,000
shares from 15,785,000 shares in 2001 as a result of common shares issued for
the exercise of stock options and common shares issued for an acquisition during
fiscal 2001.
Net income of $14,186,000 ($0.88 per share) in fiscal 2002 increased 44%
from last year's net income of $9,878,000 ($0.63 per share). The increase is the
result of increased income from continuing operations and a fiscal 2001 $723,000
expense related to discontinued operations with no corresponding expense in
fiscal 2002.
2001 COMPARED TO 2000
Net sales of $233,940,000 in fiscal 2001 decreased 3% compared to fiscal
2000 net sales of $239,982,000. Results of the Commercial / Industrial Lighting
Segment in fiscal 2001 include the operations of LSI Lightron (acquired November
2000), and results of the Image Segment in fiscal 2001 include the operations of
LSI Adapt (acquired January 2001). Commercial / Industrial Lighting Segment net
sales increased 8% and Image Segment net sales decreased 8% in fiscal 2001 as
compared to the prior year. The increase in Commercial / Industrial Lighting
Segment is attributed to the November 2000 acquisition of LSI Lightron
(approximately 14% of net sales of this Segment). Excluding the acquisition of
LSI Lightron,
S-2
net sales in this segment decreased approximately 8% due to competitive markets
and down economic conditions in the North American market. The decrease in Image
Segment net sales is attributed to several factors. Net sales to the petroleum /
convenience store market continued to be adversely impacted by the temporary
affects of mergers of major petroleum companies. The Company reported decreased
menu board business in fiscal 2001 as compared to last year as a significant
roll out program in fiscal 2000 with one customer neither repeated nor was it
replaced with a program with another customer in fiscal 2001. These decreases
were partially offset by increased interior graphics business in other markets,
and by the inclusion of the results of LSI Adapt, acquired in January 2001 and
representing approximately 2% of Image Segment net sales. Significant customers
in the petroleum / convenience store market and a menu board system customer in
the quick service restaurant market have indicated their intent to reimage their
retail sites over a multi-year time period and have released some orders in the
fourth quarter of fiscal 2001 to initiate roll out of their re-image programs.
Net sales of the Image Segment to the petroleum / convenience store market
represented 35% and 38% of total net sales in fiscal 2001 and fiscal 2000,
respectively. Sales to this market declined 9% in fiscal 2001 as compared to
last year. While sales prices were increased, inflation did not have a
significant impact on sales in fiscal 2001 as competitive pricing pressures held
price increases to a minimum.
Gross profit of $65,411,000 decreased 11% from last year's gross profit of
$73,775,000, and decreased as a percentage of net sales to 28.0% in fiscal year
2001 as compared to 30.7% in the prior year. The decrease in amount of gross
profit is due primarily to the Company's lighting product lines that experienced
lower sales volumes, related under absorbed manufacturing overhead and
competitive pricing pressures. This decrease was partially offset by the added
gross profit related to the two FY 2001 acquisitions. Selling and administrative
expenses increased 7% to $48,175,000 from $45,219,000. The increase was caused
primarily by the additions of LSI Lightron and LSI Adapt. As a percentage of net
sales, selling and administrative expenses were at 20.6% in fiscal 2001 as
compared to 18.8% in the prior year. The Company continued the task of
converting its business operating software and systems company-wide. Total
implementation costs expensed were $960,000 ($0.06 per share, diluted) in fiscal
2001 as compared to $1,030,000 ($0.06 per share, diluted) in fiscal 2000.
The Company reported interest income of $630,000 in fiscal 2001 as compared
to interest income of $1,057,000 in fiscal 2000 primarily reflective of the
Company being in a net borrowing position through the second half of fiscal
2001. Due to the cash acquisition of LSI Lightron, the Company became a net
borrower and reported $607,000 of interest expense in fiscal 2001 as compared to
$189,000 in the prior year. The Company's effective tax rate increased to 38.8%
in fiscal 2001 as compared to 37.8% in fiscal 2000 primarily due to the tax
treatment of goodwill and other items.
Income from continuing operations of $10,601,000 in fiscal 2001 decreased
42% from $18,279,000 last year. The decreased net income resulted from decreased
gross profit on decreased net sales, increased selling and administrative
expenses, increased interest expense and decreased interest income, partially
offset by decreased income tax expense in fiscal 2001 as compared to 2000.
Diluted earnings per share of $0.67 in fiscal 2001 decreased 43% from $1.18 per
share reported in fiscal 2000. The weighted average common shares outstanding
for purposes of computing diluted earnings per share increased 2% in fiscal 2001
to 15,785,000 shares from 15,531,000 shares in 2000 as a result of common shares
issued both for the exercise of stock options and for an acquisition during the
year.
S-3
The Company recorded a $0.7 million ($0.04 per share) discontinued
operations charge, net of taxes, in the fourth quarter of fiscal 2001 to
increase its loss contingency related to a lease guaranty in connection with its
European operations which were discontinued in 1992. A settlement agreement was
signed releasing the Company from all remaining obligations. Payment of the loss
contingency of approximately $1.1 million was made in the first quarter of
fiscal 2002. A similar discontinued operations charge of $1.0 million ($0.07 per
share), net of taxes, was recorded in the fourth quarter of fiscal 2000 in
connection with the lease guaranty.
Net income of $9,878,000 ($0.63 per share) in fiscal 2001 compares to net
income of $17,279,000 ($1.11 per share) in fiscal 2000. The reduction was
primarily the result of decreased income from continuing operations, partially
offset by a decreased charge to discontinued operations in fiscal 2001.
Liquidity and Capital Resources
The Company considers its level of cash on hand, its current ratio and
working capital levels to be its most important measures of short-term
liquidity. For long-term liquidity indicators, the Company believes its ratio of
long-term debt to equity and its historical levels of net cash flows from
operating activities to be the most important measures.
At June 30, 2002 the Company had working capital of $55.8 million, compared
to $62.1 million at June 30, 2001. The ratio of current assets to current
liabilities decreased to 2.84 to 1 from 3.09 to 1. The decreased working capital
is primarily attributed to decreased accounts receivable, and increased accrued
expenses, partially offset by increased inventories, and decreased notes payable
to bank. The reduction in accounts receivable is attributed to both lower fourth
quarter net sales in fiscal 2002 as compared to last year's fourth quarter and
to a reduction in the days sales outstanding.
The Company generated $27.2 million of cash from operating activities in
fiscal 2002 as compared to a use of $2.8 million in fiscal 2001. The increase in
net cash flows from operating activities in fiscal 2002 is primarily the net
result of increased net income, a reduction rather than an increase in accounts
receivable, increased accrued expenses, and increased depreciation and
amortization expense, partially offset by increased inventories.
As of June 30, 2002, the Company's days sales outstanding were at
approximately 64 days, decreased from 73 days at June 30, 2001. Net accounts and
notes receivables were $42.3 million and $51.6 million at June 30, 2002 and June
30, 2001, respectively. Collection cycles from a few large customers in the
Image Segment, as well as several other customers, have been very slow due to a
combination of factors, including customer cash availability and economic
conditions. The majority of one such open customer account (petroleum /
convenience store customer) was converted into a collateralized note receivable
during fiscal 2002, with the balance of the note at $2.8 million and the
unsecured receivable at $0.3 million as of June 30, 2002. This note provides for
scheduled payments and is to be paid in full by October 31, 2002. This customer
continues to make payments on the note, but was behind as compared to scheduled
payments, thereby causing the maturity date to be extended. The Company also has
unsecured accounts receivable, as well as dedicated inventory, from Kmart, the
large national retailer that filed Chapter 11 bankruptcy in January 2002. The
Company's total exposure is approximately $1.7 million. Subject to continual
review, shipments to Kmart have resumed on a limited basis on open account. The
two customers above represent
S-4
approximately 10% of the Company's total net accounts and notes receivable. The
Company believes that the receivables and inventory discussed above are
ultimately collectible or recoverable, net of certain reserves, and that
aggregate allowances for doubtful accounts are adequate.
Cash generated from operations is the Company's primary source of
liquidity. In addition, the Company has an unsecured $50 million revolving line
of credit with its bank group. This line of credit was renewed in the third
quarter of fiscal 2002 with no change in terms and conditions. As of August 23,
2002 there was approximately $33.8 million available on this line of credit.
This line of credit is composed of a $30 million three year committed credit
facility expiring in fiscal 2005 and a $20 million credit facility with an
annual renewal in the third quarter of fiscal 2003. The Company believes that
the total of available lines of credit plus cash flows from operating activities
is adequate for the Company's fiscal 2003 operational and capital expenditure
needs. The Company is in compliance with all of its loan covenants.
Capital expenditures of $16.8 million in fiscal 2002 compare to $6.5
million in fiscal 2001. The primary cause of the increased spending is the new
192,000 square foot manufacturing facility that LSI Lightron moved into in New
Windsor, New York late in June 2002. Capital expenditures in fiscal 2003 are
expected to be approximately $8 million, exclusive of business acquisitions.
The Company used $8.8 million in financing activities in fiscal 2002 as
compared to a generation of $16.6 million in fiscal 2001. The change is the net
result of a net $6.5 million repayment of funded debt in fiscal 2002 as compared
to a net borrowing of $20.1 million of funded debt last year, and the difference
between years in the amount of stock options exercised.
The Company has been implementing a fully integrated enterprise resource
planning / business operating system over the past three fiscal years, and will
continue to do so into fiscal 2004. A certain portion of the $7.1 million of
software expenditures that are capitalized to date are being depreciated by the
subsidiary companies currently using the software. More of this capitalized
asset will be depreciated as additional companies implement this software, with
scheduled full write-off to occur in fiscal 2008. Some additional capitalization
of this internal-use software is expected.
On August 14, 2002 the Board of Directors declared a regular quarterly cash
dividend of $0.06 per share (approximately $947,000), payable September 10, 2002
to shareholders of record on September 3, 2002. During the fiscal 2002, the
Company paid cash dividends in the amount of $3.7 million, as compared to $4.0
million in fiscal 2001.
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 141, "Business Combinations," and
issued SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141
eliminates the pooling-of-interests method of accounting for business
combinations and requires that all business combinations be accounted for as
purchases. In addition, SFAS No. 141 establishes new rules concerning
recognition of intangible assets arising in a purchase business combination and
requires enhanced disclosure of information in the period in which a business
combination is completed. SFAS No. 142 establishes new rules on accounting for
goodwill whereby goodwill will no longer be amortized to expense, but rather
will be subject to impairment review. SFAS No. 141 is effective for all business
combinations initiated after June 30, 2001, and the Company had the
S-5
option of adopting SFAS No. 142 either July 1, 2001 or July 1, 2002. The Company
will adopt SFAS No. 142 effective July 1, 2002 and is currently evaluating the
impact to its financial statements, financial position, results of operations
and cash flows. Goodwill amortization expense will be reduced to zero in fiscal
2003 when SFAS No. 142 is adopted.
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 143, "Accounting for Asset Retirement
Obligations," and in August 2001 issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 143 establishes standards
of accounting for asset retirement obligations (i.e., legal obligations
associated with the retirement of long-lived assets that result from the
acquisition, construction, development and/or the normal operation of a
long-lived asset, except for certain obligations of lessees) and the associated
asset retirement costs. SFAS No. 144 replaces existing accounting pronouncements
related to impairment or disposal of long-lived assets. Both SFAS No. 143 and
No. 144 are effective July 1, 2002.
In June 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS No. 146 addresses financial accounting
and reporting for costs associated with exit or disposal of facilities, and must
be implemented not later than December 31, 2002. The Company is currently
evaluating the impact of these statements, but does not expect any significant
impact on its financial condition or results of operations when they are
implemented.
The Company continues to seek opportunities to invest in new products and
markets, and in acquisitions which fit its strategic growth plans in the
lighting and graphics markets. The Company believes that adequate financing for
any such investments or acquisitions will be available through future borrowings
or through the issuance of common or preferred shares in payment for acquired
businesses.
S-6
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To LSI Industries Inc.:
We have audited the accompanying consolidated balance sheet of LSI Industries
Inc. (an Ohio Corporation) and subsidiaries as of June 30, 2002, and the related
consolidated statements of income, shareholders' equity, and cash flows for the
year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit. The consolidated financial statements
of LSI Industries Inc. and subsidiaries as of June 30, 2001 and for the years
ended June 30, 2001 and 2000, were audited by other auditors who have ceased
operations. Those auditors, whose report was dated August 15, 2001, expressed an
unqualified opinion on those financial statements.
We conducted our audit of the consolidated financial statements in accordance
with auditing standards generally accepted in the United States of America.
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 audit provides a reasonable basis for our opinion on the
consolidated financial statements.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of LSI Industries Inc.
and subsidiaries as of June 30, 2002, and the results of their operations and
their cash flows for the year then ended, in conformity with accounting
principles generally accepted in the United States of America.
/s/ Grant Thornton LLP
Cincinnati, Ohio
August 16, 2002
S-7
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of LSI Industries Inc.:
We have audited the accompanying consolidated balance sheet of LSI
Industries Inc. (an Ohio Corporation) and subsidiaries as of June 30, 2001 and
2000, and the related consolidated statements of income, shareholders' equity
and cash flows for each of the three years in the period ended June 30, 2001.
These financial statements and the schedule referred to below are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of LSI Industries Inc. and
subsidiaries as of June 30, 2001 and 2000, and the results of their operations
and their cash flows for each of the three years in the period June 30, 2001 in
conformity with accounting principles generally accepted in the United States.
Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index to the
financial statements is presented for purposes of complying with the Securities
and Exchange Commission's rules and is not part of the basic financial
statements. This schedule has been subjected to the auditing procedures applied
in the audit of the basic financial statements and, in our opinion, fairly
states in all material respects the financial data required to be set forth
therein in relation to the basic financial statements taken as a whole.
Arthur Andersen LLP
Cincinnati, Ohio
August 15, 2001
Notes:
1. This report is a copy of the previously issued report.
2. Arthur Andersen LLP has not reissued this report.
S-8
LSI INDUSTRIES INC.
CONSOLIDATED INCOME STATEMENTS
For the years ended June 30, 2002, 2001, and 2000
(In thousands, except per share)
2002 2001 2000
---- ---- ----
Net sales $ 259,261 $ 233,940 $ 239,982
Cost of products sold 186,842 168,529 166,207
--------- --------- ---------
Gross profit 72,419 65,411 73,775
Selling and administrative expenses 49,039 48,175 45,219
--------- --------- ---------
Operating income 23,380 17,236 28,556
Interest (income) (51) (630) (1,057)
Interest expense 575 607 189
Other (income) expense (4) (58) 15
--------- --------- ---------
Income from continuing operations
before income taxes 22,860 17,317 29,409
Income tax expense 8,674 6,716 11,130
--------- --------- ---------
Income from continuing operations 14,186 10,601 18,279
Discontinued operations, net of tax
benefit of $387 and $538, respectively -- 723 1,000
--------- --------- ---------
Net income $ 14,186 $ 9,878 $ 17,279
========= ========= =========
Earnings per common share from
continuing operations
Basic earnings per share $ .90 $ .68 $ 1.20
========= ========= =========
Diluted earnings per share $ .88 $ .67 $ 1.18
========= ========= =========
Earnings per common share
Basic earnings per share $ .90 $ .64 $ 1.13
========= ========= =========
Diluted earnings per share $ .88 $ .63 $ 1.11
========= ========= =========
Weighted average common shares outstanding
Basic 15,715 15,537 15,293
========= ========= =========
Diluted 16,047 15,785 15,531
========= ========= =========
The accompanying notes are an
integral part of these financial statements.
S-9
LSI INDUSTRIES INC.
CONSOLIDATED BALANCE SHEETS
June 30, 2002 and 2001
(In thousands, except shares)
2002 2001
---- ----
ASSETS
Current Assets
Cash and cash equivalents $ 357 $ 340
Accounts and notes receivable, less
allowance for doubtful accounts of
$1,644 and $1,745, respectively 42,273 51,609
Inventories 38,846 35,079
Refundable income taxes 1,989 854
Other current assets 2,711 3,898
--------- ---------
Total current assets 86,176 91,780
Property, Plant and Equipment, at cost
Land 4,553 3,967
Buildings 23,102 22,992
Machinery and equipment 41,854 35,874
Construction in progress 17,752 7,820
--------- ---------
87,261 70,653
Less accumulated depreciation (32,436) (28,412)
--------- ---------
Net property, plant and equipment 54,825 42,241
Goodwill, net 41,825 41,572
Other Assets, net 7,016 6,166
--------- ---------
$ 189,842 $ 181,759
========= =========
The accompanying notes are an
integral part of these financial statements.
S-10
2002 2001
---- ----
LIABILITIES & SHAREHOLDERS' EQUITY
Current Liabilities
Notes payable to bank $ -- $ 552
Current maturities of long-term debt 365 352
Accounts payable 14,910 15,268
Accrued expenses 15,108 12,778
Net liabilities from discontinued operations -- 711
-------- --------
Total current liabilities 30,383 29,661
Long-Term Debt 17,688 23,638
Deferred Income Taxes 2,422 1,267
Shareholders' Equity
Preferred shares, without par value;
Authorized 1,000,000 shares, none issued -- --
Common shares, without par value;
Authorized 30,000,000 shares;
Outstanding 15,776,702 and 15,657,550
shares, respectively 52,497 50,808
Retained earnings 86,852 76,385
-------- --------
Total shareholders' equity 139,349 127,193
-------- --------
$189,842 $181,759
======== ========
S-11
LSI INDUSTRIES INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the years ended June 30, 2002, 2001, and 2000
(In thousands, except per share)
Common Shares
----------------------
Number of Retained
Shares Amount Earnings Total
--------- --------- --------- ---------
Balance at June 30, 1999 15,228 $ 45,588 $ 57,164 $ 102,752
Net income -- -- 17,279 17,279
Purchase of treasury shares (22) (349) -- (349)
Deferred stock compensation -- 338 -- 338
Stock options exercised, net 232 2,142 -- 2,142
Dividends - $.26 per share -- -- (3,950) (3,950)
--------- --------- --------- ---------
Balance at June 30, 2000 15,438 47,719 70,493 118,212
Net income -- -- 9,878 9,878
Purchase of treasury shares (22) (305) -- (305)
Deferred stock compensation -- 248 -- 248
Stock options exercised, net 72 821 -- 821
Common shares issued for
acquisitions 170 2,325 -- 2,325
Dividends - $.26 per share -- -- (3,986) (3,986)
--------- --------- --------- ---------
Balance at June 30, 2001 15,658 50,808 76,385 127,193
Net income -- -- 14,186 14,186
Purchase of treasury shares (13) (256) -- (256)
Deferred stock compensation -- 267 -- 267
Stock options exercised, net 132 1,678 -- 1,678
Dividends - $.24 per share -- -- (3,719) (3,719)
--------- --------- --------- ---------
Balance at June 30, 2002 15,777 $ 52,497 $ 86,852 $ 139,349
========= ========= ========= =========
The accompanying notes are an integral part
of these financial statements.
S-12
LSI INDUSTRIES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended June 30, 2002, 2001, and 2000
(In thousands)
2002 2001 2000
---- ---- ----
Cash Flows From Operating Activities
Net income $ 14,186 $ 9,878 $ 17,279
Non-cash items included in income
Depreciation and amortization 6,096 5,558 5,511
Deferred income taxes 2,191 1,023 (566)
Deferred compensation plan 267 248 338
(Gain) loss on disposition of fixed assets (4) (58) 15
Change (excluding effects of acquisitions) in
Accounts and notes receivable 9,336 (12,107) 4,206
Inventories (3,767) (5,450) (32)
Refundable income taxes (1,135) 306 (1,003)
Accounts payable (358) 504 (2,279)
Accrued expenses and other 1,144 (1,581) (4,966)
Net liabilities from discontinued operations (711) (1,072) 1,292
-------- -------- --------
Net cash flows from operating activities 27,245 (2,751) 19,795
-------- -------- --------
Cash Flows From Investing Activities
Purchase of property, plant, and equipment (16,846) (6,492) (8,977)
Proceeds from sale of fixed assets 7 155 3
Acquisition of businesses, net of cash received (1,603) (29,163) --
-------- -------- --------
Net cash flows from investing activities (18,442) (35,500) (8,974)
-------- -------- --------
Cash Flows From Financing Activities
Increase (decrease) of borrowings under line of credit (552) 552 (379)
Proceeds from issuance of long-term debt -- 22,000 --
Payment of long-term debt (5,937) (2,457) (200)
Cash dividends paid (3,719) (3,986) (3,950)
Exercise of stock options 1,678 821 2,142
Purchase of treasury shares (256) (305) (349)
-------- -------- --------
Net cash flows from financing activities (8,786) 16,625 (2,736)
-------- -------- --------
Increase (decrease) in cash and cash equivalents 17 (21,626) 8,085
Cash and cash equivalents at beginning of year 340 21,966 13,881
-------- -------- --------
Cash and cash equivalents at end of year $ 357 $ 340 $ 21,966
======== ======== ========
The accompanying notes are an
integral part of these financial statements.
S-13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation:
The consolidated financial statements include the accounts of LSI Industries
Inc. (an Ohio corporation) and its subsidiaries, all of which are wholly owned.
All significant intercompany transactions and balances have been eliminated.
Revenue recognition:
Revenue is recognized when the customer accepts title and the resultant risks
and rewards of ownership. Generally this occurs upon shipment of goods or
shortly thereafter. Amounts received from customers prior to the recognition of
revenue are accounted for as customer pre-payments and are included in accrued
expenses.
Cash and cash equivalents:
The cash balance includes cash and cash equivalents which have original
maturities of less than three months. At June 30, 2002 the balance included
$2,308,000 in excess of FDIC insurance limits.
Inventories:
Inventories are stated at the lower of cost or market. Cost is determined on the
first-in, first-out basis.
Property, plant and equipment and related depreciation:
Property, plant and equipment are stated at cost. Major additions and
betterments are capitalized while maintenance and repairs are expensed. For
financial reporting purposes, depreciation is computed on the straight-line
method over the estimated useful lives of the assets as follows:
Buildings 31 - 40 years
Machinery and equipment 3 - 10 years
Computer software 5 - 8 years
Intangible assets:
Intangible assets consisting of customer lists, trade names, patents and
trademarks are recorded on the Company's balance sheet and are being amortized
to expense over periods ranging between two and seventeen years. The excess of
cost over fair value of assets acquired ("goodwill") is amortized to expense
over periods ranging between fifteen and forty years. See additional information
about goodwill and intangibles in Note 6. The Company periodically evaluates
intangible assets, goodwill and other long-lived assets for permanent
impairment. To date no impairments have been recorded.
S-14
Fair value of financial instruments:
The Company has financial instruments consisting primarily of cash and cash
equivalents, revolving lines of credit, and long-term debt. The fair value of
these financial instruments approximates carrying value because of their
short-term maturity and/or variable, market-driven interest rates. The Company
has no financial instruments with off-balance sheet risk.
Contingencies:
The Company is party to various negotiations and legal proceedings arising in
the normal course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's financial position, results of operations, cash flows or liquidity.
Employee benefit plans:
The Company has a defined contribution retirement plan and a discretionary
profit sharing plan covering substantially all of its employees, a second
discretionary profit sharing plan covering employees of one subsidiary, and a
non-qualified deferred compensation plan covering certain employees. The costs
of employee benefit plans are charged to expense and funded annually. Total
costs were $1,876,000 in 2002, $1,581,000 in 2001, and $2,052,000 in 2000.
Income taxes:
Deferred income taxes are provided on items reported in income in different
periods for financial reporting and tax purposes.
Earnings per common share:
The computation of basic earnings per common share is based on the weighted
average common shares outstanding for the period. The computation of diluted
earnings per share includes common share equivalents. Common share equivalents
include the dilutive effect of stock options, contingently issuable shares (for
which issuance has been determined to be probable), and common shares to be
issued under a deferred compensation plan, all of which totaled 332,000 shares
in 2002, 248,000 shares in 2001, and 238,000 shares in 2000. See also Notes 4
and 8.
Recent pronouncements:
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 141 (SFAS No. 141), "Business Combinations,"
and issued Statement of Financial Accounting Standards No. 142 (SFAS No. 142),
"Goodwill and Other Intangible Assets." SFAS No. 141 eliminates the
pooling-of-interests method of accounting for business combinations and requires
that all business combinations be accounted for as purchases. In addition, SFAS
No. 141 establishes new rules concerning recognition of intangible assets
arising in a purchase business combination and requires enhanced disclosure of
information in the period in which a business combination is completed. SFAS No.
142 establishes new rules on accounting for goodwill whereby goodwill will no
longer be amortized to expense, but rather will be subject to impairment review.
SFAS No. 141 is effective for all business combinations initiated after June 30,
2001, and the Company had the option of adopting SFAS No. 142 either July 1,
2001 or July 1, 2002. The Company will adopt SFAS No.
S-15
142 effective July 1, 2002 and is currently evaluating the impact to its
financial statements, financial position, results of operations and cash flows
related to the implementation of this Statement.
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 143, "Accounting for Asset Retirement
Obligations," and in August 2001 issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 143 establishes standards
of accounting for asset retirement obligations (i.e., legal obligations
associated with the retirement of long-lived assets that result from the
acquisition, construction, development and/or the normal operation of a
long-lived asset, except for certain obligations of lessees) and the associated
asset retirement costs. SFAS No. 144 replaces existing accounting pronouncements
related to impairment or disposal of long-lived assets. Both SFAS No. 143 and
No. 144 are effective July 1, 2002.
In June 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." (SFAS) No. 146 addresses financial accounting
and reporting for costs associated with exit or disposal of facilities, and must
be implemented not later than December 31, 2002. The Company is currently
evaluating the impact of these statements, but does not expect any significant
impact on its financial condition or results of operations when they are
implemented.
Reclassification:
Certain reclassifications may have been made to prior year amounts in order to
be consistent with the presentation for the current year.
Use of estimates:
The preparation of the financial statements in conformity with generally
accepted accounting principles requires the Company to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
NOTE 2 - DISCONTINUED OPERATIONS
In 1992 the Company sold the assets and operations of its subsidiary in the
United Kingdom (U.K.), Duramark, to its management and reported a loss from
discontinued operations. Consideration received included cash and assumption of
liabilities by management. The remaining liabilities, including those associated
with the lease on the U.K. facility, which were not assumed by the management
buy-out group of the discontinued operations, net of related taxes, were
retained by the Company. The lease on the now vacant facility was guaranteed by
the Company through its expiration in March 2001. For the past several years the
Company has been involved in both litigation and negotiations related to lease
payments (unpaid since 1995), to maintenance of the facility, and to the
remaining lease obligation through March 2001 with the various entities
associated with this lease. In the fourth quarter of fiscal year 2000 the
Company settled all outstanding lease matters with a sublessee at less than
amounts previously anticipated. The $608,000 settlement payment received by the
Company was added to the reserve for discontinued operations.
In the fourth quarter of fiscal year 2000 the Company recorded a charge to
discontinued operations of $1.5 million ($1.0 million net of income taxes or
$0.07 per share) to increase its
S-16
reserve for remaining liabilities associated with the lease. During the fourth
quarter of fiscal year 2001 the Company concluded lengthy negotiations related
to the maintenance and repairs of the facility and recorded a charge to
discontinued operations of $1.1 million ($0.7 million net of income taxes or
$0.04 per share). The resultant reserve balance of $1.1 million as of June 30,
2001 was adequate to cover all remaining obligations of the Company with respect
to this facility. Payment of these obligations occurred primarily in the first
quarter of fiscal year 2002.
A summary of the activity in the reserve for discontinued operations during
fiscal years 2002 and 2001 is as follows:
(In thousands) 2002 2001
---- ----
Balance beginning of year $ 1,091 $ 2,745
less: Payments made (1,091) (2,764)
plus: Charge to discontinued
operations -- 1,110
------- -------
Balance end of year $ -- $ 1,091
======= =======
The Company's reserve for discontinued operations, net of related taxes, is
included in current liabilities in the amount of $711,000 as of June 30, 2001.
NOTE 3 - BUSINESS SEGMENT INFORMATION
LSI operates in two business segments - the Image Segment and the Commercial /
Industrial Lighting Segment. The Image Segment manufactures and sells exterior
and interior visual image elements (lighting, graphics, and menu board systems)
for the petroleum / convenience store market and for multi-site retail
operations. The Image Segment includes the operations of LSI Petroleum Lighting,
LSI Automotive Lighting, LSI Images, LSI Metal Fabrication, LSI SGI Integrated
Graphic Systems, LSI Grady McCauley, LSI Retail Graphics, and LSI Adapt. The
Commercial / Industrial Lighting Segment manufactures and sells primarily
outdoor, indoor, and landscape lighting for the commercial / industrial and
multi-site retail markets. The Commercial / Industrial Lighting Segment includes
the operations of LSI Lighting Systems, LSI Courtsider Lighting, LSI Greenlee
Lighting, LSI Marcole, LSI MidWest Lighting and LSI Lightron. The Company's most
significant market, which is included in the Image Segment, is the petroleum /
convenience store market with approximately 35%, 36% and 38% of net sales
concentrated in this market in fiscal 2002, 2001, and 2000, respectively.
The following information is provided for the following periods:
(In thousands) 2002 2001 2000
---- ---- ----
Net sales:
Image Segment $164,405 $147,021 $159,257
Commercial / Industrial Lighting Segment 94,856 86,919 80,725
-------- -------- --------
$259,261 $233,940 $239,982
======== ======== ========
S-17
Operating income:
Image Segment $ 19,991 $ 14,690 $ 21,024
Commercial / Industrial Lighting Segment 3,389 2,546 7,532
-------- -------- --------
$ 23,380 $ 17,236 $ 28,556
======== ======== ========
Identifiable assets:
Image Segment $ 98,707 $105,072 $ 84,513
Commercial / Industrial Lighting Segment 88,960 75,416 38,588
-------- -------- --------
187,667 180,488 123,101
Corporate 2,175 1,271 23,682
-------- -------- --------
$189,842 $181,759 $146,783
======== ======== ========
Capital expenditures:
Image Segment $ 3,842 $ 3,926 $ 6,279
Commercial / Industrial Lighting Segment 13,004 2,566 2,698
-------- -------- --------
$ 16,846 $ 6,492 $ 8,977
======== ======== ========
Depreciation and amortization:
Image Segment $ 3,470 $ 3,139 $ 3,687
Commercial / Industrial Lighting Segment 2,626 2,419 1,824
-------- -------- --------
$ 6,096 $ 5,558 $ 5,511
======== ======== ========
Operating income of the business segments includes net sales less all operating
expenses, including allocations of corporate expense. Sales between business
segments are immaterial.
Identifiable assets are those assets used by each segment in its operations,
including allocations of shared assets. Corporate assets consist primarily of
cash and cash equivalents, and refundable income taxes. The increase in
identifiable assets in fiscal 2001 is primarily related to the two acquisitions
made during the year (see footnote 12) and to increased levels of accounts
receivable and inventories.
NOTE 4 - EARNINGS PER COMMON SHARE
The following table presents the amounts used to compute earnings per common
share and the effect of dilutive potential common shares on net income and
weighted average shares outstanding:
(In thousands, except per share) 2002 2001 2000
---- ---- ----
BASIC EARNINGS PER SHARE
- ------------------------
Income from continuing operations $ 14,186 $ 10,601 $ 18,279
========== ========== ========
Net income $ 14,186 $ 9,878 $ 17,279
========== ========== ========
Weighted average shares outstanding
during the period, net
of treasury shares 15,715 15,537 15,293
========== ========== ========
Basic earnings per share from continuing
operations $ 0.90 $ 0.68 $ 1.20
========== ========== ========
S-18
Basic earnings per share $ 0.90 $ 0.64 $ 1.13
========= ========= =========
DILUTED EARNINGS PER SHARE
- --------------------------
Income from continuing operations $ 14,186 $ 10,601 $ 18,279
========= ========= =========
Net income $ 14,186 $ 9,878 $ 17,279
========= ========= =========
Weighted average shares outstanding
during the period, net of treasury shares 15,715 15,537 15,293
Effect of dilutive securities (A):
Impact of common shares to be
issued under stock option plans,
a deferred compensation plan,
and contingently issuable shares 332 248 238
--------- --------- ---------
Weighted average shares
outstanding (B) 16,047 15,785 15,531
========= ======== =========
Diluted earnings per share from
continuing operations $ 0.88 $ 0.67 $ 1.18
========= ========= =========
Diluted earnings per share $ 0.88 $ 0.63 $ 1.11
========= ========= =========
(A) Calculated using the "Treasury Stock" method as if dilutive
securities were exercised and the funds were used to purchase common
shares at the average market price during the period.
(B) Options to purchase 2,062 common shares, 74,726 common shares, and
54,158 common shares at June 30, 2002, 2001, and 2000, respectively,
were not included in the computation of diluted earnings per share
because the exercise price was greater than the average fair market
value of the common shares.
NOTE 5 - BALANCE SHEET DATA
The following information is provided as of June 30:
(In thousands) 2002 2001
---- ----
Inventories:
Raw materials $17,316 $16,485
Work-in-process and
finished goods 21,530 18,594
------- -------
$38,846 $35,079
======= =======
Accrued Expenses:
Compensation and benefits $ 8,136 $ 6,119
Customer prepayments 1,505 1,729
Other accrued expenses 5,467 4,930
------- -------
$15,108 $12,778
======= =======
S-19
NOTE 6 - GOODWILL AND INTANGIBLE ASSETS
The following tables present information about the Company's goodwill and
intangible assets on the dates or for the periods indicated. The fiscal year
2002 increase in goodwill of $1,603,000 relates to past acquisitions and is the
net result of an adjustment related to deferred income taxes, and to purchase
price adjustments or earn out payments pursuant to the purchase agreements.
(in thousands) As of June 30, 2001 As of June 30, 2002
---------------------------------- -----------------------------------
Carrying Accumulated Carrying Accumulated
Amount Amortization Net Amount Amortization Net
------ ------------ --- ------ ------------ ---
Goodwill $ 44,421 $ 2,849 $ 41,572 $ 46,024 $ 4,199 $ 41,825
======== ======= ======== ======== ======= ========
Intangible Assets $ 6,450 $ 284 $ 6,166 $ 6,450 $ 771 $ 5,679
======== ======= ======== ======== ======= ========
Amortization Expense
------------------------------------
Intangible
Fiscal Year Goodwill Assets Total
----------- -------- ---------- -----
2002 $ 1,350 $ 487 $ 1,837
======= ======= =======
2001 $ 1,022 $ 284 $ 1,306
======= ======= =======
2000 $ 689 $ -- $ 689
======= ======= =======
NOTE 7 - REVOLVING LINES OF CREDIT AND LONG-TERM DEBT
The Company has an unsecured $50 million revolving line of credit with its bank
group. As of June 30, 2002 the available portion of this line of credit was
$33.6 million. A portion of this credit facility is a $20 million line of credit
that expires in the third quarter of fiscal 2003. The remainder of the credit
facility is a $30 million three year committed line of credit that expires in
fiscal 2005. Annually in the third quarter, the credit facility is renewable
with respect to adding an additional year of commitment to replace the year just
ended. Interest on the revolving lines of credit is charged based upon an
increment over the LIBOR rate as periodically determined, an increment over the
Federal Funds Rate as periodically determined, or at the bank's base lending
rate, at the Company's option. The increment over the LIBOR borrowing rate, as
periodically determined, fluctuates between 50 and 75 basis points depending
upon the ratio of indebtedness to earnings before interest, taxes, depreciation
and amortization (EBITDA). The increment over the Federal Funds borrowing rate,
as periodically determined, fluctuates between 150 and 200 basis points, and the
commitment fee on the unused balance of the $30 million committed portion of the
line of credit fluctuates between 15 and 25 basis points based upon the same
leverage ratio. At June 30, 2002 the average interest rate on borrowings under
this revolving line of credit was 2.4%. Under terms of these agreements, the
Company has agreed to a negative pledge of assets, to maintain minimum levels of
profitability and net worth, and is subject to certain maximum levels of
leverage. The Company's borrowings under its bank credit facilities during
fiscal year 2002 averaged approximately $17.2 million at an approximate average
borrowing rate of 3.2%.
S-20
The Company has an Industrial Revenue Development Bond (IRB) borrowing in the
amount of $780,000 associated with its facility in Northern Kentucky. The term
of this IRB is 15 years with semi-annual interest payments and annual principal
payments for retirement of bond principal in increasing amounts over the term of
the bonds through fiscal 2010. The IRB interest rate, which is reestablished
semi-annually, is currently 1.85%, plus a 75 basis point letter of credit fee.
The IRB is secured by the Company's Kentucky real estate, which has a net
carrying value of $1.7 million.
The Company has equipment loans outstanding totaling $851,000 with monthly
principal and interest payments extending through fiscal 2006. The weighted
average interest rate of these loans is 4.8% and they are secured by specified
equipment which has a net carrying value of $1.4 million. With one of these
loans the Company is committed to specified job growth in its facility in
Northeast Ohio.
During fiscal 2002, $92,000 of interest expense related to construction of a new
manufacturing facility was capitalized and is included in construction in
progress at June 30, 2002. No interest expense was capitalized in fiscal 2001 or
2000.
Long-term debt: (In thousands) 2002 2001
---- ----
Revolving Line of Credit (3 year committed line) $ 16,422 $ 22,552
Industrial Revenue Development Bond at 1.85% 780 860
Equipment loans (average rate of 4.8%) 851 1,130
-------- --------
18,053 24,542
Less notes payable to bank -- 552
-------- --------
Total long-term debt 18,053 23,990
Less current maturities of long-term debt 365 352
-------- --------
Long-term debt $ 17,688 $ 23,638
======== ========
Future maturities of long-term debt at June 30, 2002 are as follows (in
thousands):
2003 2004 2005 2006 2007 2008 and after
---- ---- ---- ---- ---- --------------
$365 $384 $16,672 $202 $100 $330
NOTE 8 - SHAREHOLDERS' EQUITY
The Company has stock option plans which cover all of its full-time employees
and has a plan covering all non-employee directors. The options granted pursuant
to these plans are granted at fair market value at date of grant. Options
granted to non-employee directors are immediately exercisable and options
granted to employees generally become exercisable 25% per year (cumulative)
beginning one year after the date of grant. The number of shares reserved for
issuance is 1,426,950, of which 780,618 shares were available for future grant
as of June 30, 2002. The plans allow for the grant of both incentive stock
options and non-qualified stock options.
Statement of Financial Accounting Standards No. 123 (SFAS No. 123) requires, at
a minimum, pro forma disclosures of expense for stock-based awards based on
their fair values. The fair value of each option on the date of grant has been
estimated using the Black-Scholes option
S-21
pricing model. The following weighted average assumptions were used for grants
in fiscal 2002, 2001, and 2000.
2002 2001 2000
---- ---- ----
Dividend yield 1.38% 1.81% 1.25%
Expected volatility 35% 40% 42%
Risk-free interest rate 2.16% - 3.62% 4.54% - 6.50% 6.14% - 6.90%
Expected life 3-7 yrs. 4-8 yrs. 4-8 yrs.
At June 30, 2002, the 201,838 options granted during fiscal 2002 to employees
and non-employee directors had, at June 30, 2002, exercise prices ranging from
$14.60 to $19.80, fair values ranging from $2.99 to $6.38 per option, and
remaining contractual lives of four to nine years. The 330,450 options granted
during fiscal 2001 to employees and non-employee directors have exercise prices
ranging from $10.29 to $14.70, fair values ranging from $2.83 to $5.95 per
option, and remaining contractual lives of four to nine years. The 28,200
options granted during fiscal 2000 to employees and non-employee directors have
exercise prices ranging from $11.79 to $15.50, fair values ranging from $4.99 to
$7.89 per option, and remaining contractual lives of four to nine years.
If the Company had adopted the expense recognition provisions of SFAS No. 123,
net income and earnings per share for the years ended June 30, 2002, 2001, and
2000 would have been as follows:
(In thousands except earnings per share) 2002 2001 2000
---- ---- ----
Net income
As reported $14,186 $9,878 $17,279
Pro forma $13,652 $9,380 $17,035
Earnings per common share
Basic
As reported $ 0.90 $ 0.64 $ 1.13
Pro forma $ 0.87 $ 0.61 $ 1.11
Diluted
As reported $ 0.88 $ 0.63 $ 1.11
Pro forma $ 0.85 $ 0.61 $ 1.10
Since SFAS No. 123 has not been applied to options granted prior to December 15,
1994, the resulting compensation cost shown above may not be representative of
that expected in future years.
Information involving the stock option plans for the years ended June 30, 2002,
2001, and 2000 is shown in the table below:
S-22
2002 2001 2000
--------------------- -------------------- --------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
(Shares in thousands) Shares Price Shares Price Shares Price
------ ----------- ------ ---------- ------ ---------
Outstanding at beginning of year 605 $ 10.92 363 $ 10.75 613 $ 9.61
Granted 202 $ 14.77 331 $ 10.73 28 $ 14.49
Terminated (29) $ 11.35 (16) $ 10.46 (10) $ 10.69
Exercised (134) $ 10.30 (73) $ 9.33 (268) $ 8.53
---- ----- -----
Outstanding at end of year 644 $ 12.23 605 $ 10.92 363 $ 10.75
==== ===== =====
Exercisable at end of year 185 $ 11.59 164 $ 10.93 163 $ 10.00
==== ===== =====
The Company implemented a non-qualified deferred compensation plan in fiscal
1997. All Plan investments are in common shares of the Company. The deferred
compensation plan provides for both Company contributions and participant
deferrals of compensation. As of June 30, 2002 there were 41 participants with
either partially or fully vested account balances. A total of 124,478 and
111,392 common shares were held in the Plan as of June 30, 2002 and 2001,
respectively, and, accordingly, have been recorded as treasury shares.
On the dates indicated, the Company issued the following amounts of common
shares as a portion of the purchase price for acquired businesses (see further
discussion in Note 12):
(In thousands, except shares)
Number of Stated
Date Common Shares Value
---- ------------- -----
1/10/01 164,145 $ 2,250
6/8/01 5,654 $ 75
On August 14, 2002, the Board of Directors declared a cash dividend of $0.06 per
share to be paid September 10, 2002 to shareholders of record on September 3,
2002. Annual cash dividend payments made during fiscal years 2002, 2001, and
2000 were $0.24, $0.26, and $0.26 per share, respectively.
NOTE 9 - LEASES
The Company leases certain of its facilities and equipment under operating lease
arrangements. Rental expense was $1,875,000 in 2002, $1,536,000 in 2001, and
$1,385,000 in 2000. Minimum annual rental commitments under non-cancelable
operating leases are: $1,541,000 in 2003, $1,282,000 in 2004, $1,137,000 in
2005, $1,074,000 in 2006, $1,005,000 in 2007, and $1,117,000 in 2008 and beyond.
S-23
NOTE 10 - INCOME TAXES
The following information is provided for the years ended June 30:
(In thousands) 2002 2001 2000
---- ---- ----
Provision (benefit) for income taxes:
Current federal $ 5,633 $ 5,190 $ 10,773
Current state and local 850 588 923
Deferred 2,191 938 (566)
------- -------- --------
$ 8,674 $ 6,716 $ 11,130
======= ======== ========
Reconciliation to federal statutory rate:
Federal statutory tax rate 35.0% 34.8% 35.0%
State and local taxes, net of federal benefit 2.8 2.2 2.0
Goodwill and other .1 1.8 .8
------- -------- --------
Effective tax rate 37.9% 38.8% 37.8%
======= ======== ========
The components of deferred income tax assets and (liabilities) at June 30, 2002
and 2001 are as follows:
(In thousands) 2002 2001
---- ----
Reserves against current assets $ 1,040 $ 1,054
Prepaid expenses (2,035) (1,241)
Accrued expenses 1,110 960
Depreciation (3,186) (1,944)
Goodwill and acquisition costs 148 160
Deferred compensation 617 516
Net liabilities from discontinued operations -- 380
------- -------
Net deferred income tax asset (liability) $(2,306) $ (115)
======= =======
Reconciliation to the balance sheets as of June 30, 2002 and 2001:
(In thousands) 2002 2001
---- ----
Deferred income tax asset (liability) included in:
Other current assets $ 116 $ 772
Net liabilities from discontinued operations -- 380
Long-term deferred income tax liability (2,422) (1,267)
-------- --------
Net deferred income tax asset (liability) $ (2,306) $ (115)
======== ========
S-24
NOTE 11 - SUPPLEMENTAL CASH FLOW INFORMATION
(In thousands) 2002 2001 2000
---- ---- ----
Cash payments:
Interest $ 714 $ 526 $ 160
Income taxes $ 8,003 $ 5,124 $ 12,520
Non-cash investing and financing activities:
Value of common shares issued for
acquisitions $ -- $ 2,325 $ --
======= ======== ========
Details of acquisitions:
Working capital, less cash $ -- $ 2,948 $ --
Property, plant & equipment -- 2,976 --
Other assets, net -- 5,551 --
Excess of purchase price paid over estimated
net assets of acquired businesses 1,603 20,013 --
------- -------- --------
1,603 31,488 --
Less fair value of common shares issued -- (2,325) --
------- -------- --------
Cash paid for acquisitions $ 1,603 $ 29,163 $ --
======= ======== ========
NOTE 12 - ACQUISITIONS
The Company acquired substantially all of the net assets of Lightron of
Cornwall, Inc. on November 21, 2000. The purchase price, exclusive of
acquisition costs, was $25.9 million, a portion of which is subject to
achievement of certain financial objectives over the first thirteen months
subsequent to acquisition. The new subsidiary, LSI Lightron Inc., continues to
operate in the New Windsor, New York area in the business of designing,
manufacturing, and selling a line of high-end fluorescent, metal halide,
halogen, recessed, surface, and high bay lighting fixtures, and LED exit signs
for the commercial, industrial and retail markets. With the completion of
construction of a new facility in the fourth quarter of fiscal year 2002, the
manufacturing assets, inventory, and remaining related acquired liabilities of
Lightron of Cornwall were transferred to LSI Lightron. Until such transfer of
assets, a portion of the purchase price remained in escrow and Lightron of
Cornwall was exclusively a manufacturer of light fixtures and products for LSI
Lightron. Results of LSI Lightron are included in the Company's Commercial /
Industrial Lighting Segment. The acquisition has been accounted for as a
purchase, effective on the date of acquisition. An additional approximate $3
million of cash was used immediately following the acquisition to reduce
acquired liabilities. The purchase price exceeded the estimated fair value of
net assets acquired by approximately $16.4 million, which is recorded as
goodwill and is being amortized over forty years.
The Company acquired substantially all of the net assets of ADaPT Engineering,
Inc. effective January 1, 2001. The initial consideration for this purchase,
exclusive of acquisition costs, was $4.5 million, consisting of $2.25 million in
cash and 164,145 common shares of LSI Industries valued at $2.25 million, plus
the assumption of certain liabilities related to ADaPT Engineering's business.
In addition, a contingent "earn-out" having a maximum value of $2.0 million,
payable in cash, could be earned during the first eighteen months after
acquisition based upon achievement of certain financial performance. The
performance in the first earn-out period ended June 30, 2001 was above the
target and an earn-out payment of $0.5 million was made in the first quarter of
fiscal year 2002. The performance in the second earn-out period was above a
minumum target and an earn-out payment of $0.9 million will be made in the first
S-25
quarter of fiscal year 2003. The new subsidiary, LSI Adapt Inc., is a
multi-discipline service firm primarily focused on the retail petroleum /
convenience store branded image programs, as well as other national retail
customers. LSI Adapt specializes in integrated design, site engineering,
permitting, project and construction management of national retail sites.
Results of LSI Adapt are included in the Company's Image Segment. The
acquisition has been accounted for as a purchase, effective on the date of
acquisition. The initial purchase price, plus the earn-out consideration,
exceeded the estimated fair value of net assets acquired by approximately $4.0
million, which has been recorded as goodwill and is being amortized over fifteen
years.
NOTE 13 - SUMMARY OF QUARTERLY RESULTS (UNAUDITED)
(In thousands except per share data)
Quarter Ended
--------------------------------------- Fiscal
Sept. 30 Dec. 31 March 31 June 30 Year
-------- ------- -------- ------- ----
2002
Net sales $ 67,049 $76,694 $ 58,261 $57,257 $259,261
Gross profit 19,084 21,740 15,897 15,698 72,419
Income from continuing
operations 3,702 4,607 2,549 3,328 14,186
Earnings per share from
continuing operations
Basic $ .24 $ .29 $ .16 $ .21 $ .90
Diluted $ .23 $ .29 $ .16 $ .21 $ .88(a)
Range of share prices
High $ 18.43 $ 18.25 $ 22.39 $ 20.80 $ 22.39
Low $ 12.97 $ 14.13 $ 16.30 $ 14.30 $ 12.97
2001
Net sales $ 53,609 $59,839 $ 53,935 $66,557 $233,940
Gross profit 15,399 17,040 13,975 18,997 65,411
Income from continuing
operations 2,981 3,028 1,225 3,367 10,601
Earnings per share from
continuing operations
Basic $ .19 $ .20 $ .08 $ .22 $ .68(a)
Diluted $ .19 $ .19 $ .08 $ .21 $ .67
Range of share prices
High $ 15.29 $ 14.67 $ 14.67 $ 17.97 $ 17.97
Low $ 9.67 $ 11.00 $ 11.83 $ 12.01 $ 9.67
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2000
Net sales $64,967 $64,221 $53,396 $57,398 $239,982
Gross profit 20,115 20,348 15,934 17,378 73,775
Income from continuing
operations 5,357 5,646 3,170 4,106 18,279
Earnings per share from
continuing operations
Basic $ .35 $ .37 $ .21 $ .27 $ 1.20
Diluted $ .34 $ .37 $ .20 $ .26 $ 1.18(a)
Range of share prices
High $ 16.83 $ 17.00 $ 14.37 $ 14.77 $ 17.00
Low $ 15.09 $ 17.00 $ 9.79 $ 8.33 $ 8.33
(a) The total of the earnings per share for each of the four quarters does not
equal the total earnings per share for the full year because the
calculations are based on the average shares outstanding during each of the
individual periods.
At August 22, 2002, there were 413 shareholders of record. The Company believes
this represents approximately 3,000 beneficial shareholders.
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LSI INDUSTRIES INC.
SELECTED FINANCIAL DATA
(In thousands except per share)
The following data has been selected from the Consolidated Financial Statements
of the Company for the periods and dates indicated:
Income Statement Data:
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Net sales $ 259,261 $ 233,940 $ 239,982 $ 231,722 $ 193,439
Cost of products sold 186,842 168,529 166,207 159,145 132,872
Operating expenses 49,039 48,175 45,219 45,349 40,373
--------- --------- --------- --------- ---------
Operating income 23,380 17,236 28,556 27,228 20,194
Interest (income) (51) (630) (1,057) (477) (143)
Interest expense 575 607 189 224 106
Other (income) expense (4) (58) 15 95 108
--------- --------- --------- --------- ---------
Income from continuing opera-
tions before income taxes 22,860 17,317 29,409 27,386 20,123
Income taxes 8,674 6,716 11,130 10,285 7,536
--------- --------- --------- --------- ---------
Income from continuing
operations $ 14,186 $ 10,601 $ 18,279 $ 17,101 $ 12,587
========= ========= ========= ========= =========
Net income $ 14,186 $ 9,878 $ 17,279 $ 17,101 $ 12,587
========= ========= ========= ========= =========
Earnings per common share from
continuing operations
Basic $ .90 $ .68 $ 1.20 $ 1.15 $ .88
Diluted $ .88 $ .67 $ 1.18 $ 1.13 $ .86
Cash dividends paid per share $ .24 $ .26 $ .26 $ .22 $ .19
Weighted average common shares
Basic 15,715 15,537 15,293 14,825 14,339
Diluted 16,047 15,785 15,531 15,132 14,685
Balance Sheet Data:
(At June 30) 2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Working capital $ 55,793 $ 62,119 $ 61,139 $ 49,615 $ 40,237
Total assets 189,842 181,759 146,783 137,714 110,316
Long-term debt,
including current
maturities 18,053 23,990 1,701 1,901 1,195
Shareholders' equity 139,349 127,193 118,212 102,752 78,657
S-28
LSI INDUSTRIES INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED JUNE 30, 2002, 2001, AND 2000
(In Thousands)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
-------- -------- -------- -------- --------
Additions
Balance Charged to Balance
Beginning Costs and (a) End of
Description of Period Expenses Deductions Period
- ----------- --------- -------- ---------- ------
Allowance for Doubtful Accounts:
Year Ended June 30, 2002 $1,745 $ 772 $ (873) $1,644
Year Ended June 30, 2001 $1,239 $ 996 (b) $ (490) $1,745
Year Ended June 30, 2000 $1,213 $ 97 $ (71) $1,239
Inventory Obsolescence Reserve:
Year Ended June 30, 2002 $1,050 $ 783 $ (476) $1,357
Year Ended June 30, 2001 $ 794 $ 608 (c) $ (352) $1,050
Year Ended June 30, 2000 $1,083 $ 194 $ (483) $ 794
Liabilities from Discontinued Operations:
Year Ended June 30, 2002 $1,091 $ -- $(1,091) $ --
Year Ended June 30, 2001 $2,745 $1,110 $(2,764) $1,091
Year Ended June 30, 2000 $ 755 $1,538 $ 452 (d) $2,745
(a) For Allowance for Doubtful Accounts, deductions are uncollectible accounts
charged off, less recoveries.
(b) Includes $274 resulting from net assets purchased in fiscal year 2001.
(c) Includes $83 resulting from net assets purchased in fiscal year 2001.
(d) Represents settlement received of $608 less payments made of $156.
S-29