1 SECURITIES AND EXCHANGE COMMISSION ---------------------------------- WASHINGTON, D.C. 20549 ---------------------- FORM 10-K --------- X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED JUNE 30, 1999. OR __TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _________ TO _________. Commission File No. 0-13375 LSI Industries Inc. State of Incorporation - Ohio IRS Employer I.D. No. 31-0888951 10000 Alliance Road Cincinnati, Ohio 45242 (513) 793-3200 Securities Registered Pursuant to Section 12(b) of the Act: None Securities Registered Pursuant to Section 12(g) of the Act: Common Shares (No par value) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] Aggregate market value of the voting stock held by non-affiliates of the registrant at September 10, 1999 was approximately $214,544,000, based on a closing price of $23.25. At September 10, 1999 there were 10,175,306 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 1999 annual meeting are incorporated by reference in Part III, as specified.
2 LSI INDUSTRIES INC. 1999 FORM 10-K ANNUAL REPORT TABLE OF CONTENTS ----------------- <TABLE> <CAPTION> Begins on Page ---- PART I <S> <C> ITEM 1. BUSINESS........................................................................ 1 ITEM 2. PROPERTIES...................................................................... 2 ITEM 3. LEGAL PROCEEDINGS............................................................... 3 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................................................................. 3 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDERS' MATTERS........................................... 4 ITEM 6. SELECTED FINANCIAL DATA......................................................... 4 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS..................................... 4 ITEM 7A. QUANTATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK........................ 4 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA..................................... 4 ITEM 9. DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.................................................... 5 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.............................. 5 ITEM 11. EXECUTIVE COMPENSATION.......................................................... 5 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.......................................................... 5 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................................. 5 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, REPORTS ON FORM 8-K................................................................ 5 SIGNATURES............................................................................... 7 </TABLE> i
3 PART I ------ ITEM 1. BUSINESS The Company's two business segments are the Image Group and the Commercial / Industrial Lighting Group. Sales by segment are as follows (in thousands): 1999 1998 1997 ---- ---- ---- Image Group $159,277 $138,886 $101,562 Commercial / Industrial Lighting Group 68,512 50,253 43,180 -------- -------- -------- Total $227,789 $189,139 $144,742 ======== ======== ======== The Image Group manufactures and sells exterior and interior visual image elements (lighting, graphics, and menu board systems) for the petroleum / convenience store market and for multi-site retail operations. The Image Group includes the operations of LSI Petroleum Lighting, LSI Automotive, LSI Images, LSI Metal Fabrication, SGI Integrated Graphic Systems, Grady McCauley, and LSI Retail Graphics (acquired in the fourth quarter of fiscal year 1999). The Commercial / Industrial Lighting Group manufactures and sells outdoor, indoor, and landscape lighting for the commercial / industrial and multi-site retail markets. The Commercial / Industrial Lighting Group includes the operations of LSI Lighting Systems, Courtsider Lighting, Greenlee Lighting, LSI Marcole, and LSI MidWest Lighting (acquired in the third quarter of fiscal year 1999). The Company's most significant market is the petroleum / convenience store market with approximately 43%, 49% and 50% of net sales concentrated in this market in the fiscal years ended June 30, 1999, June 30, 1998, and June 30, 1997, respectively. See Note 3 of Notes to Consolidated Financial Statements beginning on page S-13 of this Form 10-K for additional information on business segments. The Company completed the acquisition of Mid-West Chandelier Company and Fairfax Lighting, Inc., two privately owned manufacturers of interior fluorescent lighting fixtures, effective January 1, 1999. For financial statement purposes these acquisitions were accounted for as purchases with operating results of LSI MidWest Lighting first included in the Company's third quarter fiscal 1999 results in the Commercial / Industrial Lighting Group. The total purchase price for the two companies was $16,000,000, exclusive of acquisition costs, consisting of $8,000,000 in cash and 357,143 common shares of the Company (valued at $8,000,000). The acquisition provides for a contingent "earn-out" having a maximum value of $1 million in cash and $1 million in stock which could be earned during the three years subsequent to the merger providing certain minimum earnings thresholds are exceeded. An additional approximate $1 million was used immediately following the acquisition to reduce acquired liabilities. The purchase price exceeded the estimated fair value of net assets acquired by $7.7 million, which is recorded as goodwill. On April 9, 1999, the Company acquired substantially all assets and assumed certain liabilities of Retail Graphics, Inc., a privately owned manufacturer of interior graphics primarily for the retail store market. For financial statement purposes the acquisition was accounted for as a purchase with operating results of LSI Retail Graphics first included in the Company's fourth quarter fiscal 1999 results in the Image Group. The total purchase price for the business, exclusive of acquisition costs, was $3,300,000, consisting of $2,475,000 in cash and 47,578 common shares of the Company (valued at $825,000). The acquisition provides for a contingent "earn-out" having a maximum value of $600,000, payable in similar percentages of cash and common shares, which could be earned during the first two years after acquisition -1-
4 providing certain minimum net sales and earnings thresholds are exceeded. An additional approximate $1 million was used immediately following the acquisition to reduce acquired liabilities. The purchase price exceeded the estimated fair value of net assets acquired by $3.2 million, which is recorded as goodwill. See Note 11 of Notes to Consolidated Financial Statements beginning on page S-20 of this Form 10-K for additional information on these acquisitions. The Company believes that it is a low-cost producer for its types of products, and as such, is in a position to promote its product lines with substantial marketing and sales activities. The Company is not dependent on any one supplier for any of its component parts. The Company's sales are partially seasonal as installation of outdoor lighting and graphic systems in the northern states lessens during the harshest winter months. The Company had a backlog of orders, believed by it to be firm, of $27.2 million and $13.9 million at June 30, 1999 and 1998, respectively. All orders are believed to be shippable within twelve months. The Company has approximately 1,500 full-time and 200 temporary employees. The Company has a comprehensive compensation and benefit program for most employees, including competitive wages, a discretionary bonus plan, a profit-sharing plan and retirement plan, a 401(k) savings plan, a non-qualified deferred compensation plan (for certain employees), a stock option plan, and medical and dental insurance. The Company sells its products throughout the United States and Canada. LSI Industries encounters strong competition in all markets served by the Company's product lines. The Company has many competitors, some of which have greater financial and other resources. The Company considers product quality and performance, price, customer service, prompt delivery, and reputation to be important competitive factors. The Company has several product and process patents which it has obtained in the normal course of business. The Company in general does not believe that patent protection is critical to its business, however it does believe that patent protection is important for a few select products. ITEM 2. PROPERTIES The Company has nine facilities: <TABLE> <CAPTION> Description Size Location Status ----------- ---- -------- ------ <S> <C> <C> <C> 1) LSI Industries Corporate 225,000 sq. ft., Cincinnati, OH Owned Headquarters, and (includes 38,000 lighting fixture and sq. ft. of office graphics manufacturing space) 2) LSI Industries pole 131,000 sq. ft. Cincinnati, OH Owned manufacturing and dry powder-coat painting </TABLE> -2-
5 <TABLE> <CAPTION> <S> <C> <C> <C> 3) LSI Metal Fabrication 99,000 sq. ft. Independence, KY Owned and LSI Images manu- (includes 5,000 facturing and dry sq. ft. of office powder-coat painting space) 4) SGI Integrated Graphic 198,000 sq. ft. Houston, TX Leased Systems office; screen (includes 34,000 printing manufacturing; sq. ft. of office space) and architectural graphics manufacturing 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 132,000 sq. ft. North Canton, OH Owned and manufacturing (includes 20,000 sq. ft. of office space and 12,000 sq. ft. of leased warehouse space) 7) LSI Marcole office and 38,000 sq. ft. Manchester, TN Owned manufacturing of electrical (includes 4,000 sq. ft. wire harnesses; contract of office space) assembly services 8) LSI MidWest Lighting 137,000 sq. ft. Kansas City, KS Owned office and manufacturing (includes 6,000 sq. ft. of office space) 9) LSI Retail Graphics office 27,000 sq. ft. Woonsocket, RI Owned and manufacturing (includes 5,000 sq. ft. of office space and 6,000 sq. ft. of leased warehouse space) </TABLE> The Company considers these facilities adequate for its current level of operations, however it plans to expand two facilities in Ohio and its Kentucky facility in fiscal 2000 to add capacity for future growth. ITEM 3. LEGAL PROCEEDINGS None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders, through the solicitation of proxies or otherwise, during the fourth quarter of the year covered by this report. -3-
6 PART II ------- ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDERS' MATTERS Common share information appears in Note 12 - SUMMARY OF QUARTERLY RESULTS (UNAUDITED) under "Range of share prices" on page S-22 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-23 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 regularly 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. During the quarterly period ended June 30, 1999, the Company issued 47,578 Common Shares to the owner of a company which was acquired. This issuance was exempt from the registration requirements of the Securities Act of 1933 as a private offering pursuant to Section 4(2) of that Act. At August 21, 1999, there were 395 shareholders of record. The Company believes this represents approximately 3,800 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-23 of this Form 10-K. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS "Management's Discussion and Analysis of Financial Condition and Results of Operations" appears on pages S-1 through S-4 of this Form 10-K. ITEM 7A. QUANTATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 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, the information set forth in NOTE 1 under "Fair value of financial instruments" beginning on page S-11 of this Form 10-K in the Company's fiscal year 1999 consolidated financial statements is incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Begins Index to Financial Statements on Page ------- Financial Statements: Report of Independent Public Accountants S-5 -4-
7 Consolidated Income Statements for the years ended June 30, 1999, 1998 and 1997 S-6 Consolidated Balance Sheets at June 30, 1999 and 1998 S-7 Consolidated Statements of Shareholders' Equity for the years ended June 30, 1999, 1998 and 1997 S-9 Consolidated Statements of Cash Flows for the years ended June 30, 1999, 1998 and 1997 S-10 Notes to Consolidated Financial Statements S-11 Financial Statement Schedules: II - Valuation and Qualifying Accounts for the S-24 years ended June 30, 1999, 1998 and 1997 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-22 in NOTE 12 of the accompanying consolidated financial statements. ITEM 9. DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None PART III -------- ITEMS 10, 11, 12 and 13 of Part III are incorporated by reference to the LSI Industries Inc. Proxy Statement for its Annual Meeting of Shareholders to be held November 11, 1999, as filed with the Commission pursuant to Regulation 14A. PART IV ------- ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this report: (1) Financial Statements Appear as part of Item 8 of this Form 10-K. (2) Financial Statement Schedules Appear as part of Item 8 of this Form 10-K. (3) Exhibit list - listing of exhibits required to be filed with Form 10-K incorporated by reference to Exhibit(s) filed as part of: Proxy-89 = Proxy statement for 1989 Annual Shareholders' Meeting 10K-89 = Annual Report on Form 10-K for the fiscal year ended June 30, 1989 10K-95 = Annual Report on Form 10-K for the fiscal year ended June 30, 1995 10K-96 = Annual Report on Form 10-K for the fiscal year ended June 30, 1996 -5-
8 S-3 (96) = Form S-3 Registration Statement No. 33-65043 S-8 (95-1) = Form S-8 Registration Statement No. 33-64721 for the LSI Industries Inc. 1995 Stock Option Plan S-8 (95-2) = Form S-8 Registration Statement No. 33-64723 for the LSI Industries Inc. 1995 Directors' Stock Option Plan or filed herewith where so noted. EXHIBIT INDEX ------------- <TABLE> <CAPTION> Current Form 10-K Report/ Exhibit Exhibit No. Description of Exhibit Document Number - ----------- ---------------------- -------- ------ <S> <C> <C> <C> 3.1 Articles of Incorporation of LSI Industries Inc. S-3 (96) 3.1 3.2 Code of Regulations of LSI Industries Inc. S-3 (96) 3.2 4 Instruments Defining the Rights of - Security Holders Management Compensatory Agreements ---------------------------------- 10.1 LSI Industries Inc. Retirement Plan 10K-95 10.4 and Trust 10.2 1985 Stock Option Plan 10K-89 10.1 10.3 LSI Industries Inc. 1995 Stock Option Plan S-8 (95-1) 4.1 10.4 LSI Industries Inc. 1995 Directors' Stock Option Plan S-8 (95-2) 4.1 10.5 LSI Industries Inc. Nonqualified Deferred 10K-96 10.5 Compensation Plan, and Rabbi Trust Agreement 22 Subsidiaries of the Registrant Filed herewith 23 Consent of Independent Public Accountants Filed herewith 24 Powers of Attorney (5) Filed herewith 27 Financial Data Schedule Filed herewith </TABLE> - The Company has no outstanding issue or indebtedness exceeding 10% of the Company's assets on a consolidated basis. A copy of the instruments defining the right of security holders will be furnished to the Commission upon request. (b) Form 8-K: There have been no reports on Form 8-K filed during the last quarter of fiscal year 1999. -6-
9 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, 1999 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. <TABLE> <CAPTION> Signature Title - --------- ----- <S> <C> /s/ Robert J. Ready Chairman of the Board, Chief Executive - ----------------------------------- Officer, and President Robert J. Ready (Principal Executive Officer) Date: September 24, 1999 ----------------------- /s/ Ronald S. Stowell Vice President, Chief Financial Officer, and - ----------------------------------- Treasurer Ronald S. Stowell (Principal Financial and Accounting Officer) Date: September 24, 1999 ----------------------- *Michael J. Burke Director - ----------------------------------- Michael J. Burke *Allen L. Davis Director - ----------------------------------- Allen L. Davis *Wilfred T. O'Gara Director - ----------------------------------- Wilfred T. O'Gara *James P. Sferra Secretary; Executive Vice President - ----------------------------------- - Manufacturing; and Director James P. Sferra *John N. Taylor, Jr. Director - ----------------------------------- John N. Taylor, Jr. </TABLE> *The undersigned, by signing his name hereto, executed this Annual Report on Form 10-K on September 24, 1999, 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, 1999 By: /s/ Ronald S. Stowell - ----------------------------- ---------------------- Date Attorney-in-Fact -7-
10 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SALES BY BUSINESS SEGMENT (In thousands) 1999 1998 1997 -------- -------- -------- Image Group $159,277 $138,886 $101,562 Commercial / Industrial Lighting Group 68,512 50,253 43,180 -------- -------- -------- $227,789 $189,139 $144,742 ======== ======== ======== RESULTS OF OPERATIONS 1999 COMPARED TO 1998 Net sales of $227,789,000 in fiscal 1999 increased 20% over fiscal 1998 net sales of $189,139,000. Results of the Image Group in fiscal 1999 include the operations of LSI Retail Graphics (acquired April 1999; less than 1% of net sales in fiscal 1999). Results of the Commercial / Industrial Lighting Group include the operations of LSI MidWest Lighting (acquired January 1999; approximately 4% of net sales in fiscal 1999). Commercial / Industrial Lighting Group net sales increased 36% and Image Group net sales increased 15% in fiscal 1999 as compared to the prior year. The increase in the Commercial / Industrial Lighting Group net sales resulted from growth in substantially all markets and from inclusion of the results of LSI MidWest Lighting. The increase in Image Group net sales is attributed to growth in substantially all markets and products, particularly petroleum lighting, quick service restaurant, and interior graphics, as well as to the inclusion of the results of LSI Retail Graphics. Net sales of the Image Group to the petroleum / convenience store market represented 43% and 49% of net sales in fiscal 1999 and fiscal 1998, respectively. While sales prices were increased, inflation did not have a significant impact on sales in 1999 as competitive pricing pressures held price increases to a minimum. Gross profit of $77,108,000 increased 20% over last year's gross profit of $64,480,000, and decreased as a percentage of net sales to 33.9% in fiscal year 1999 as compared to 34.1% in the prior year. The increase in amount of gross profit is due primarily to the 20% increase in net sales. The decrease in gross profit percentage is primarily related to slightly lower margins from businesses acquired in fiscal 1999. Selling and administrative expenses increased to $49,880,000 from $44,286,000 primarily as a result of increased sales volume and the addition of the acquired businesses. As a percentage of net sales, selling and administrative expenses were at 21.9% in fiscal 1999 as compared to 23.4% in the prior year. The Company reported net interest income of $253,000 in fiscal 1999 as compared to net interest income of $37,000 in fiscal 1998 primarily reflective of an increased amount of short-term cash investments. The Company's effective tax rate increased to 37.6% in fiscal 1999 as compared to 37.5% in fiscal 1998 primarily due to increased amortization of goodwill which is not deductible for tax purposes. S-1
11 Net income of $17,101,000 increased 36% over $12,587,000 in fiscal 1998. The increased net income resulted from increased gross profit on higher net sales, and from the reporting of a larger amount of net interest income in fiscal 1999 as compared to 1998, partially offset by increased operating expenses and income taxes. Diluted earnings per share of $1.70 increased 32% in fiscal 1999 from $1.29 per share in fiscal 1998. The weighted average common shares outstanding for purposes of computing diluted earnings per share increased 3% in fiscal 1999 to 10,088,000 shares from 9,790,000 shares in 1998 primarily as a result of common shares issued to acquire businesses and the exercise of stock options during the year. Certain recently issued accounting pronouncements will affect the Company's future financial statements and / or disclosures. See Note 1 to the accompanying consolidated financial statements for additional discussion. 1998 COMPARED TO 1997 Net sales of $189,139,000 in 1998 increased 31% over 1997 net sales of $144,742,000. Results of the Image Group in fiscal 1998 include the operations of the Company's new graphics subsidiary, Grady McCauley, which was acquired June 30, 1997. Results of the Commercial / Industrial Lighting Group include the operations of the Company's newest subsidiary, LSI Marcole, which was acquired February 6, 1998. Image Group net sales increased 37% and Commercial / Industrial Lighting Group net sales increased 16% in fiscal 1998 as compared to the prior year primarily as a result of growth in the multi-site retail market. The increase in Image Group sales is attributed to growth in substantially all markets and products, particularly graphics, petroleum lighting, and quick service restaurant, as well as to the inclusion of Grady McCauley in the operating results in fiscal 1998. Net sales of the Image Group to the petroleum / convenience store market represented 49% and 50% of net sales in fiscal 1998 and fiscal 1997, respectively. While sales prices were increased, inflation did not have a significant impact on sales in 1998 as competitive pricing pressures held price increases to a minimum. Gross profit of $64,480,000 increased 33% over last year's gross profit of $48,542,000, and increased as a percentage of net sales to 34.1% in fiscal year 1998 as compared to 33.5% in the prior year. The increase in amount of gross profit is due primarily to the 31% increase in net sales. The increase in gross profit percentage is primarily related to the Company's graphics operations reporting an improved aggregate gross profit percentage, to changes in lighting product mix to higher margin products, and to improved manufacturing operating efficiencies in the Company's lighting business. Selling and administrative expenses increased to $44,286,000 from $34,833,000 primarily as a result of increased sales volume and the addition of Grady McCauley. As a percentage of net sales, selling and administrative expenses were at 23.4% in fiscal 1998 as compared to 24.1% in the prior year. The Company reported net interest income of $37,000 in fiscal 1998 as compared to net interest income of $487,000 in fiscal 1997 reflective of the significantly reduced amount of short-term cash investments during the year. Cash which had been invested was used at the end of fiscal 1997 for the acquisition of Grady McCauley. The Company's effective tax rate increased to 37.5% in fiscal 1998 as compared to 37.0% in fiscal 1997 primarily due to an increase in the rate of federal income tax. S-2
12 Net income of $12,587,000 in fiscal 1998 increased 42% over $8,872,000 in fiscal 1997. The increased net income resulted from increased gross profit on higher net sales, partially offset by increased operating expenses, increased income taxes, and from the reporting of a larger amount of net interest income in fiscal 1997 as compared to fiscal 1998. Diluted earnings per share of $1.29 increased 33% in fiscal 1998 from $.97 per share in fiscal 1997. The weighted average common shares outstanding for purposes of computing diluted earnings per share increased 7% in 1998 to 9,790,000 shares from 9,188,000 shares in 1997 primarily as a result the common shares used in the acquisition of Grady McCauley in June 1997. 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, 1999 the Company had working capital of $49.6 million, compared to $40.2 million at June 30, 1998. The ratio of current assets to current liabilities increased to 2.56 to 1 from 2.37 to 1. The increased working capital is primarily attributed to increased cash and receivables, partially offset by increases in accounts payable and accrued expenses. The Company generated $21.9 million of cash from operating activities in fiscal 1999 as compared to $14.3 million fiscal 1998. The Company generated more net cash flows from operating activities in fiscal 1999 primarily due to increased net income, reduction of inventories, and a lesser increase in accounts receivable, partially offset by a decrease in accounts payable and less of an increase in accrued expenses, net of effects of acquisitions. As of June 30, 1999, the Company's days sales outstanding were at approximately 54 days, decreased from the June 30, 1998 statistic of 55 days. Essentially all current assets and current liabilities increased as of June 30, 1999 as compared to June 30, 1998 due to growth of the business and due to the two acquisitions made in the second half of fiscal 1999. In addition to cash generated from operations, the Company's primary source of liquidity continues to be its lines of credit. The Company has two unsecured revolving lines of credit totaling $32 million, all of which was available as of August 24, 1999. A $12 million line of credit expires in the fourth quarter of fiscal 2000. The primary line of credit in the amount of $20 million is a three year committed credit facility expiring in fiscal 2002 with an annual renewal in the fourth quarter of fiscal 2000. The Company believes that the total of available lines of credit plus cash flows from operating activities is adequate for the Company's fiscal 2000 operational and capital expenditure needs. The Company is in compliance with all of its loan covenants. Excluding the acquisitions of LSI MidWest Lighting and LSI Retail Graphics in fiscal 1999 and LSI Marcole in fiscal 1998, capital expenditures of $4.5 million in fiscal 1999 compare to $4.1 million in the prior year. Spending in fiscal year 1999 was primarily related to expansion of the Company's graphics capabilities, initial capitalization of Company-wide enterprise resource planning software, and tooling for new products. Capital expenditures totaling approximately $8 million are planned for fiscal 2000, exclusive of business acquisitions. On August 18 1999 the Board of Directors declared a cash dividend of $0.1475 per share (approximately $1,500,000), comprised of a $0.0675 per share regular quarterly dividend and a $0.08 per share special year-end dividend, to be paid September 14, 1999 to S-3
13 shareholders of record on September 7, 1999. During fiscal 1999, the Company paid cash dividends each quarter. Cash paid for dividends in fiscal 1999 was $3.2 million, a 17% increase over the $2.8 million paid in fiscal 1998. On April 9, 1999, the Company acquired substantially all assets and assumed certain liabilities of Retail Graphics, Inc., a privately owned manufacturer of interior graphics primarily for the retail market. For financial statement purposes the acquisition was accounted for as a purchase with operating results of LSI Retail Graphics first included in the Company's fourth quarter fiscal 1999 results in the Image Group. The total purchase price for the business, exclusive of acquisition costs, was $3,300,000, consisting of $2,475,000 in cash and 47,578 common shares of the Company (valued at $825,000). The acquisition provides for a contingent "earn-out" having a maximum value of $600,000, payable in similar percentages of cash and common shares, which could be earned during the first two years after acquisition providing certain minimum net sales and earnings thresholds are exceeded. An additional approximate $1 million was used immediately following the acquisition to reduce acquired liabilities. The purchase price exceeded the estimated fair value of net assets acquired by $3.2 million, which is recorded as goodwill and is being amortized over twenty years. The Company completed the acquisition of Mid-West Chandelier Company and Fairfax Lighting, Inc., two privately owned manufacturers of interior fluorescent lighting fixtures, effective January 1, 1999. For financial statement purposes these acquisitions were accounted for as purchases with operating results of LSI MidWest Lighting first included in the Company's third quarter fiscal 1999 results in the Commercial / Industrial Lighting Group. The total purchase price for the two companies was $16,000,000, exclusive of acquisition costs, consisting of $8,000,000 in cash and 357,143 common shares of the Company (valued at $8,000,000). The acquisition provides for a contingent "earn-out" having a maximum value of $1 million in cash and $1 million in stock which could be earned during the three years subsequent to the merger providing certain minimum earnings thresholds are exceeded. An additional approximate $1 million was used immediately following the acquisition to reduce acquired liabilities. The purchase price exceeded the estimated fair value of net assets acquired by $7.7 million, which is recorded as goodwill and is being amortized over forty years. The Company has completed its review of its business systems, office support systems, and its facilities and equipment with respect to year 2000 programming deficiencies. No systems or equipment critical to operation of the business have been identified as having a year 2000 deficiency, and therefore the Company has not yet developed any contingency plans. The review has extended to major suppliers and customers, and this element of the review is expected to be completed by September 30, 1999. The Company does not anticipate material costs to be incurred to modify or replace any affected systems. The Company anticipates completion of this process prior to September 30, 1999. The Company has not to date developed any contingency plans related to its major suppliers. Such plans will depend upon the responses from major suppliers in the event any of them should indicate that they will not be year 2000 compliant. The Company continues to seek opportunities to invest in new products and markets, and in acquisitions which fit its strategic growth plans in the lighting and graphics markets. The Company believes that adequate financing for any such investments or acquisitions will be available through future borrowings or through the issuance of common or preferred shares in payment for acquired businesses. S-4
14 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ---------------------------------------- To the Board of Directors of LSI Industries Inc.: We have audited the accompanying consolidated balance sheets of LSI Industries Inc. (an Ohio corporation) and subsidiaries as of June 30, 1999 and 1998, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended June 30, 1999. 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 based on our audit. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of LSI Industries Inc. and subsidiaries as of June 30, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 1999 in conformity with generally accepted accounting principles. Our audit was made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed in the index to the financial statements is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. 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. /s/ Arthur Andersen LLP Arthur Andersen LLP Cincinnati, Ohio August 13, 1999 S-5
15 LSI INDUSTRIES INC. CONSOLIDATED INCOME STATEMENTS FOR THE YEARS ENDED JUNE 30, 1999, 1998, AND 1997 (In thousands, except per share) 1999 1998 1997 ---- ---- ---- Net sales $ 227,789 $ 189,139 $ 144,742 Cost of products sold 150,681 124,659 96,200 --------- --------- --------- Gross profit 77,108 64,480 48,542 Selling and administrative expenses 49,880 44,286 34,833 --------- --------- --------- Operating income 27,228 20,194 13,709 Interest (income) (477) (143) (528) Interest expense 224 106 41 Other expense 95 108 114 --------- --------- --------- Income before income taxes 27,386 20,123 14,082 Income tax expense 10,285 7,536 5,210 --------- --------- --------- Net income $ 17,101 $ 12,587 $ 8,872 ========= ========= ========= Earnings per common share Basic earnings per share $ 1.73 $ 1.32 $ .99 ========= ========= ========= Diluted earnings per share $ 1.70 $ 1.29 $ .97 ========= ========= ========= The accompanying notes are an integral part of these financial statements. S-6
16 LSI INDUSTRIES INC. CONSOLIDATED BALANCE SHEETS JUNE 30, 1999 AND 1998 (In thousands, except shares) 1999 1998 ---- ---- ASSETS Current Assets Cash and cash equivalents $ 13,881 $ 9,338 Accounts receivable, less allowance for doubtful accounts of $1,213 and $560, respectively 39,630 33,184 Inventories 25,261 24,958 Refundable income taxes 157 157 Other current assets 2,530 1,911 --------- --------- Total current assets 81,459 69,548 Property, Plant and Equipment, at cost Land 3,863 3,459 Buildings 18,477 15,458 Machinery and equipment 30,642 25,874 --------- --------- 52,982 44,791 Less accumulated depreciation (19,997) (17,056) --------- --------- Net property, plant and equipment 32,985 27,735 Goodwill, net 23,270 12,921 Other Assets -- 112 --------- --------- $ 137,714 $ 110,316 ========= ========= The accompanying notes are an integral part of these financial statements. S-7
17 1999 1998 ---- ---- LIABILITIES & SHAREHOLDERS' EQUITY Current Liabilities Notes payable to bank $ 379 $ -- Current maturities of long-term debt 196 190 Accounts payable 14,628 13,689 Accrued expenses 16,641 15,432 -------- -------- Total current liabilities 31,844 29,311 Long-Term Debt 1,705 1,005 Other Long-Term Liabilities -- 112 Deferred Income Taxes 1,413 1,231 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 10,151,690 and 9,634,608 shares, respectively 45,588 35,368 Retained earnings 57,164 43,289 -------- -------- Total shareholders' equity 102,752 78,657 -------- -------- $137,714 $110,316 ======== ======== S-8
18 LSI INDUSTRIES INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE YEARS ENDED JUNE 30, 1999, 1998, AND 1997 (In thousands, except per share) <TABLE> <CAPTION> Common Shares --------------------- Number of Retained Shares Amount Earnings Total ---------- --------- --------- --------- <S> <C> <C> <C> <C> BALANCE AT JUNE 30, 1996 8,964 $ 28,082 $ 26,655 $ 54,737 Net income -- -- 8,872 8,872 Purchase of treasury shares (21) (233) -- (233) Deferred stock compensation -- 346 -- 346 Stock options exercised, net 80 321 -- 321 Common shares issued for acquisition 476 6,000 -- 6,000 Dividends - $.23 per share -- -- (2,075) (2,075) --------- --------- --------- --------- BALANCE AT JUNE 30, 1997 9,499 34,516 33,452 67,968 Net income -- -- 12,587 12,587 Purchase of treasury shares (12) (233) -- (233) Deferred stock compensation -- 209 -- 209 Stock options exercised, net 136 676 -- 676 Common shares issued for acquisition 12 200 -- 200 Dividends - $.29 per share -- -- (2,750) (2,750) --------- --------- --------- --------- BALANCE AT JUNE 30, 1998 9,635 35,368 43,289 78,657 NET INCOME -- -- 17,101 17,101 PURCHASE OF TREASURY SHARES (12) (224) -- (224) DEFERRED STOCK COMPENSATION -- 334 -- 334 STOCK OPTIONS EXERCISED, NET 124 1,285 -- 1,285 COMMON SHARES ISSUED FOR ACQUISITION 405 8,825 -- 8,825 DIVIDENDS - $.33 PER SHARE -- -- (3,226) (3,226) --------- --------- --------- --------- BALANCE AT JUNE 30, 1999 10,152 $ 45,588 $ 57,164 $ 102,752 ========= ========= ========= ========= </TABLE> The accompanying notes are an integral part of these financial statements. S-9
19 LSI INDUSTRIES INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED JUNE 30, 1999, 1998 AND 1997 (In thousands) <TABLE> <CAPTION> 1999 1998 1997 ---- ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES <S> <C> <C> <C> Net income $ 17,101 $ 12,587 $ 8,872 Non-cash items included in income Depreciation and amortization 4,813 4,375 2,975 Deferred income taxes (84) (401) (74) Deferred compensation plan 334 209 346 Loss on disposition of fixed assets 95 108 75 Change (excluding effects of acquisitions) in Accounts receivable (4,075) (5,326) (73) Inventories 2,273 (1,569) (564) Refundable income taxes 117 -- 188 Accounts payable (262) 1,086 92 Accrued expenses and other 1,646 3,235 44 Change in liability for discontinued operations (70) (21) (17) -------- -------- -------- Net cash flows from operating activities 21,888 14,283 11,864 -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES Purchase of property, plant, and equipment (4,455) (4,120) (2,587) Proceeds from sale of fixed assets 14 30 3 Acquisition of businesses, net of cash received (8,657) (712) (15,639) -------- -------- -------- Net cash flows from investing activities (13,098) (4,802) (18,223) -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES Payment of long-term debt (2,082) (448) (180) Cash dividends paid (3,226) (2,750) (2,075) Exercise of stock options 1,285 676 321 Purchase of treasury shares (224) (233) (233) -------- -------- -------- Net cash flows from financing activities (4,247) (2,755) (2,167) -------- -------- -------- Increase (decrease) in cash and cash equivalents 4,543 6,726 (8,526) Cash and cash equivalents at beginning of year 9,338 2,612 11,138 -------- -------- -------- Cash and cash equivalents at end of year $ 13,881 $ 9,338 $ 2,612 ======== ======== ======== </TABLE> The accompanying notes are an integral part of these financial statements. S-10
20 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONSOLIDATION: The consolidated financial statements include the accounts of LSI Industries Inc. and its subsidiaries, all of which are wholly owned. All significant intercompany transactions 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 under accrued expenses. CASH AND CASH EQUIVALENTS: The cash balance includes cash and cash equivalents which have original maturities of less than three months. INVENTORIES: Inventories are stated at the lower of cost or market. Cost is determined on the first-in, first-out basis. PROPERTY, PLANT AND EQUIPMENT AND RELATED DEPRECIATION: Property, plant and equipment are stated at cost. Major additions and betterments are capitalized while maintenance and repairs are expensed. For financial reporting purposes, depreciation is computed on the straight-line method over the estimated useful lives of the assets as follows: Buildings 31 - 40 years Machinery and equipment 3 - 10 years GOODWILL: The excess of cost over fair value of assets acquired ("goodwill") is amortized over periods ranging between twenty and forty years. As of June 30, 1999 and 1998, accumulated amortization of goodwill was $1,138,000 and $662,000, respectively. The Company periodically evaluates goodwill and other long-lived assets for permanent impairment based upon anticipated cash flows. To date no impairments have been recorded, nor are any anticipated. FAIR VALUE OF FINANCIAL INSTRUMENTS: The Company has financial instruments consisting primarily of cash and cash equivalents, revolving lines of credit, and long-term debt. The fair value of these financial instruments S-11
21 approximates carrying value because of their short-term maturity and variable, market-driven interest rates. The Company has no financial instruments with off-balance sheet risk. EMPLOYEE BENEFIT PLANS: The Company has a defined contribution retirement plan and a discretionary profit sharing plan covering substantially all of its employees, 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 $1,937,000 in 1999, $1,641,000 in 1998, and $1,399,000 in 1997. 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 205,000 shares in 1999, 231,000 shares in 1998, and 184,000 shares in 1997. See also Notes 4 and 7. RECENT PRONOUNCEMENTS: In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130 (SFAS No. 130), "Reporting Comprehensive Income," which establishes standards for reporting and display of comprehensive income and its components (revenues, expenses, gains, and losses) in a full set of general-purpose financial statements. SFAS No. 130 is effective for financial statements for annual periods beginning after December 15, 1997 (fiscal 1999 for the Company). The financial statements of the Company were not impacted by adoption of this new standard. In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 131 (SFAS No. 131), "Disclosures About Segments of an Enterprise and Related Information." This Statement requires disclosure related to each segment into which a company is organized by the chief operating decision maker for the purpose of making operating decisions and assessing performance. Reportable segments are based on products and services, geography, legal structure, management structure and any manner in which management disaggregates a company. The Company adopted SFAS No. 131 during fiscal 1999. This Statement, which requires expansion or modification to existing disclosures, had no impact on the Company's reported consolidated financial position, results of operations or cash flows. See Note 3 for business segment information. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133 (SFAS No. 133), "Accounting for Derivative Instruments and for S-12
22 Hedging Activities," which establishes standards for reporting and disclosure of derivative and hedging instruments. SFAS No. 133 is effective for fiscal years beginning after June 15, 2000. The Company will not be affected by this new standard because the Company has no derivative or hedging financial instruments. RECLASSIFICATION: Certain reclassifications have been made to prior year amounts in order to be consistent with the presentation for the current year. USE OF ESTIMATES: The preparation of the financial statements in conformity with generally accepted accounting principles requires the Company to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. NOTE 2 - DISCONTINUED OPERATIONS In 1992 the Company sold the assets and operations of its U.K. subsidiary, Duramark, to its management and reported a loss from discontinued operations. Consideration received included cash and assumption of liabilities by management. The remaining liabilities which were not assumed by the management buy-out group of the discontinued operations, net of related taxes, are included in accrued expenses in the amounts of $491,000 and $562,000 as of June 30, 1999 and 1998, respectively. NOTE 3 - BUSINESS SEGMENT INFORMATION LSI operates in two business segments - the Image Group and the Commercial / Industrial Lighting Group. The Image Group manufactures and sells exterior and interior visual image elements (lighting, graphics, and menu board systems) for the petroleum / convenience store market and for multi-site retail operations. The Image Group includes the operations of LSI Petroleum Lighting, LSI Automotive, LSI Images, LSI Metal Fabrication, SGI Integrated Graphic Systems, Grady McCauley, and LSI Retail Graphics. The Commercial / Industrial Lighting Group manufactures and sells primarily outdoor, indoor, and landscape lighting for the commercial / industrial and multi-site retail markets. The Commercial / Industrial Lighting Group includes the operations of LSI Lighting Systems, Courtsider Lighting, Greenlee Lighting, LSI Marcole, and LSI MidWest Lighting. The Company's most significant market is the petroleum / convenience store market with approximately 43%, 49%, and 50% of net sales concentrated in this market in fiscal 1999, 1998, and 1997, respectively. The following information is provided for the following periods: 1999 1998 1997 ---- ---- ---- (In thousands) NET SALES: Image Group $159,277 $138,886 $101,562 Commercial / Industrial Lighting Group 68,512 50,253 43,180 -------- -------- -------- $227,789 $189,139 $144,742 ======== ======== ======== S-13
23 OPERATING INCOME: Image Group $ 19,848 $ 15,056 $ 9,055 Commercial / Industrial Lighting Group 7,380 5,138 4,654 -------- -------- -------- $ 27,228 $ 20,194 $ 13,709 ======== ======== ======== IDENTIFIABLE ASSETS: Image Group $ 86,011 $ 79,487 $ 74,284 Commercial / Industrial Lighting Group 37,645 20,730 17,734 -------- -------- -------- 123,656 100,217 92,018 Corporate 14,058 10,099 3,171 -------- -------- -------- $137,714 $110,316 $ 95,189 ======== ======== ======== CAPITAL EXPENDITURES: Image Group $ 3,214 $ 3,029 $ 1,902 Commercial / Industrial Lighting Group 1,241 1,091 685 -------- -------- -------- $ 4,455 $ 4,120 $ 2,587 ======== ======== ======== DEPRECIATION AND AMORTIZATION: Image Group $ 3,425 $ 3,410 $ 2,085 Commercial / Industrial Lighting Group 1,388 965 890 -------- -------- -------- $ 4,813 $ 4,375 $ 2,975 ======== ======== ======== Operating income of the business segments includes sales less all operating expenses including allocations of corporate expense, but excluding interest expense. Sales between business segments are immaterial. Identifiable assets are those assets used by each segment in its operations, including allocations of shared assets. Corporate assets consist primarily of cash and cash equivalents, and refundable income taxes. NOTE 4 - EARNINGS PER COMMON SHARE The following table presents the amounts used to compute earnings per common share and the effect of dilutive potential common shares on net income and weighted average shares outstanding: (In thousands, except per share) 1999 1998 1997 ---- ---- ---- BASIC EARNINGS PER SHARE - ------------------------ Net income $ 17,101 $ 12,587 $8,872 ========== ========== ====== Weighted average shares outstanding during the period, net of treasury shares 9,883 9,559 9,004 ========== ========== ====== Basic earnings per share $ 1.73 $ 1.32 $ .99 ========== ========== ====== S-14
24 DILUTED EARNINGS PER SHARE - -------------------------- Net income $17,101 $12,587 $ 8,872 ======= ======= ======= Weighted average shares outstanding during the period, net of treasury shares 9,883 9,559 9,004 Effect of dilutive securities (A): Impact of common shares to be issued under stock option plans, a deferred compensation plan, and contingently issuable shares 205 231 184 ------- ------- ------- Weighted average shares outstanding (B) 10,088 9,790 9,188 ======= ======= ======= Diluted earnings per share $ 1.70 $ 1.29 $ .97 ======= ======= ======= (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 14,359 common shares, 4,390 common shares, and 15,385 common shares at June 30, 1999, 1998, and 1997, 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: 1999 1998 ---- ---- (In thousands) INVENTORIES: Raw materials $12,485 $12,192 Work-in-process and finished goods 12,776 12,766 ------- ------- $25,261 $24,958 ======= ======= ACCRUED EXPENSES: Compensation and benefits $ 8,659 $ 6,405 Customer prepayments $ 1,662 $ 3,945 NOTE 6 - REVOLVING LINES OF CREDIT, AND LONG-TERM DEBT The Company has two unsecured revolving lines of credit with its banks in the aggregate amount of $32 million. As of June 30, 1999 the Company had borrowed $0.4 million against its revolving lines of credit and $31.6 million was available. A $12 million line of credit expires in S-15
25 the fourth quarter of fiscal 2000. The primary line of credit in the amount of $20 million is a three year committed credit facility expiring in fiscal 2002, with an annual renewal for the third year of commitment in the fourth quarter of fiscal 2000. Interest on the revolving lines of credit is charged based upon an increment over the LIBOR rate as periodically determined, or at the bank's base lending rate less an increment, at the Company's option. The increment over the LIBOR borrowing rate, as periodically determined, on the Company's primary line of credit fluctuates between 50 and 95 basis points and the commitment fee on the unused balance fluctuates between 15 and 25 basis points depending upon the ratio of indebtedness to earnings before interest, taxes, depreciation and amortization (EBITDA). The increment over the LIBOR borrowing rate, as periodically determined, on the Company's secondary line of credit fluctuates between 50 and 125 basis points depending upon the ratio of indebtedness to tangible net worth. The increment under the bank's base lending rate on both lines of credit fluctuates between 150 and 75 basis points depending upon the same performance ratios as under LIBOR borrowings. At June 30, 1999 the interest rate on the Company's outstanding borrowings on its revolving line of credit was 5.75%. 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 incurred average borrowings under its revolving lines of credit of approximately $163,000 during fiscal year 1999. The average interest rate paid on these average outstanding borrowings was 6.6%. The Company has an Industrial Revenue Development Bond (IRB) borrowing in the amount of $1,005,000 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 4.5%, 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 $1.6 million. The Company has equipment loans outstanding totaling $896,000 with a bank and a governmental agency. The loans are for terms of seven years through fiscal 2006 at a weighted average interest rate of 4.9% and are secured by specified equipment which has a net carrying value of $993,000. The Company makes monthly principal and interest payments and is committed to specified job growth in its facility in Northeast Ohio. LONG-TERM DEBT: 1999 1998 ---- ---- (In thousands) Industrial Revenue Development Bond at 5.2% $1,005 $1,070 Equipment loans (average rate of 4.9%) 896 125 ------ ------ 1,901 1,195 Less current maturities 196 190 ------ ------ $1,705 $1,005 ====== ====== Future maturities of long-term debt at June 30, 1999 are as follows (in thousands): 2000 2001 2002 2003 2004 2005 and after ---- ---- ---- ---- ---- -------------- $196 $202 $209 $211 $218 $865 S-16
26 NOTE 7 - 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 890,126, of which 340,800 shares were available for future grant as of June 30, 1999. 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 pricing model. The following weighted average assumptions were used for grants in fiscal 1999, 1998, and 1997. 1999 1998 1997 ---- ---- ---- Dividend yield 1.25% 2% 2% Expected volatility 44% 49% 43% Risk-free interest rate 4.45%-6.24% 5.56%-6.54% 6.17%-6.28% Expected life 4-8 YRS. 4-8 yrs. 4-8 yrs. At June 30, 1999, the 56,900 options granted during fiscal 1999 to employees and non-employee directors have exercise prices ranging from $16.88 to $23.00, fair values ranging from $8.49 to $11.89 per option, and remaining contractual lives of four to nine years. The 154,400 options granted during fiscal 1998 to employees and non-employee directors had, as of June 30, 1998, exercise prices ranging from $14.00 to $19.00, fair values ranging from $6.16 to $9.44, and remaining contractual lives of four to nine years. The 6,900 options granted during fiscal 1997 to employees and non-employee directors had, as of June 30, 1997, exercise prices ranging from $11.25 to $13.66, fair values ranging from $4.91 to $5.26, and remaining contractual lives of four to nine years. If the Company had adopted the expense recognition provisions of SFAS No. 123, net income and earnings per share for the years ended June 30, 1999, 1998, and 1997 would have been as follows: 1999 1998 1997 ---- ---- ---- (In thousands except earnings per share) Net income As reported $ 17,101 $ 12,587 $ 8,872 Pro forma $ 16,629 $ 12,225 $ 8,646 Earnings per share Basic As reported $ 1.73 $ 1.32 $ .99 Pro forma $ 1.68 $ 1.28 $ .96 S-17
27 Diluted As reported $ 1.70 $ 1.29 $ .97 Pro forma $ 1.66 $ 1.26 $ .95 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, 1999, 1998 and 1997 is shown in the table below: <TABLE> <CAPTION> 1999 1998 1997 ------------------ ---------------- ----------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise (Shares in thousands) Shares Price Shares Price Shares Price ------ -------- ------ -------- ------ -------- <S> <C> <C> <C> <C> <C> <C> Outstanding at beginning of year 500 $ 12.70 518 $ 9.89 619 $ 9.04 Granted 57 19.82 154 15.31 7 11.68 Terminated (8) 16.23 (17) 13.86 (21) 12.95 Exercised (141) 10.33 (155) 5.79 (87) 3.23 ---- ---- ---- Outstanding at end of year 408 $ 14.41 500 $ 12.70 518 $ 9.89 ==== ==== ==== Exercisable at end of year 129 $ 12.92 128 $ 9.40 180 $ 6.10 ==== ==== ==== </TABLE> The Company implemented a non-qualified Deferred Compensation Plan in fiscal 1997. All Plan investments are in common shares of the Company. A total of 45,030 and 33,723 common shares were held in the Plan as of June 30, 1999 and 1998, 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 11): Number of Stated Date Common Shares Value ---- ------------- ----- 6/30/97 475,700 $6,000,000 2/6/98 12,000 $ 200,000 1/1/99 357,143 $8,000,000 4/9/99 47,578 $ 825,000 On August 18, 1999, the Board of Directors declared a cash dividend of $0.1475 per share, comprised of a $0.0675 regular quarterly dividend and a $0.08 special year-end dividend, to be paid September 14, 1999 to shareholders of record on September 7, 1999. Annual cash dividend payments made during fiscal years 1999, 1998, and 1997 were $0.33, $0.29, and $0.23 per share, respectively. S-18
28 NOTE 8 - LEASES The Company leases certain of its facilities and equipment under operating lease arrangements. Rental expense was $1,174,000 in 1999, $1,094,000 in 1998, and $920,000 in 1997. Minimum annual rental commitments under non-cancelable operating leases are: $1,023,000 in 2000, $922,000 in 2001, $276,000 in 2002, and $1,000 in 2003. NOTE 9 - INCOME TAXES The following information is provided for the years ended June 30: 1999 1998 1997 ---- ---- ---- (In thousands) PROVISION (BENEFIT) FOR INCOME TAXES: Current federal $ 9,466 $ 7,143 $ 4,705 Current state and local 903 794 579 Deferred (84) (401) (74) --------- -------- -------- $ 10,285 $ 7,536 $ 5,210 ========= ======== ======== RECONCILIATION TO FEDERAL STATUTORY RATE: Federal statutory tax rate 35.0% 35.0% 34.3% State and local taxes 2.1 2.6 2.7 Goodwill and other .5 (.1) -- --------- -------- -------- Effective tax rate 37.6% 37.5% 37.0% ========= ======== ======== The components of deferred income tax assets and liabilities at June 30, 1999 and 1998 are as follows: 1999 1998 ---- ---- (In thousands) CURRENT ASSETS (LIABILITIES): Reserves against current assets $ 862 $ 515 Prepaid expenses (410) (256) Accrued expenses 953 842 ------- ------- Deferred income tax asset included in Other Current Assets on the Consolidated Balance Sheets $ 1,405 $ 1,101 ======= ======= NONCURRENT (ASSETS) LIABILITIES: Depreciation $ 1,853 $ 1,573 Goodwill and acquisition costs (129) (144) Deferred compensation (311) (198) ------- ------- $ 1,413 $ 1,231 ======= ======= S-19
29 NOTE 10 - SUPPLEMENTAL CASH FLOW INFORMATION (In thousands) <TABLE> <CAPTION> 1999 1998 1997 ---- ---- ---- <S> <C> <C> <C> Cash payments: Interest $ 148 $ 126 $ 109 Income taxes $ 10,034 $ 7,184 $ 4,786 Non-cash investing and financing activities: Common shares issued for acquisitions $ 8,825 $ 200 $ 6,000 Details of acquisitions: Working capital, less cash $ 2,417 $ 59 $ 2,377 Property, plant & equipment 5,241 647 7,245 Other assets, net (947) (4) 232 Excess of purchase price paid over estimated net assets of acquired businesses 10,771 210 11,785 -------- -------- -------- 17,482 912 21,639 less fair value of common shares issued (8,825) (200) (6,000) -------- -------- -------- Cash paid for acquisitions $ 8,657 $ 712 $ 15,639 ======== ======== ======== </TABLE> NOTE 11 - ACQUISITIONS On April 9, 1999, the Company acquired substantially all assets and assumed certain liabilities of Retail Graphics, Inc., a privately owned manufacturer of interior graphics primarily for the retail store market. For financial statement purposes the acquisition was accounted for as a purchase with operating results of LSI Retail Graphics first included in the Company's fourth quarter fiscal 1999 results in the Image Group. The total purchase price for the business, exclusive of acquisition costs, was $3,300,000, consisting of $2,475,000 in cash and 47,578 common shares of the Company (valued at $825,000). The acquisition provides for a contingent "earn-out" having a maximum value of $600,000, payable in similar percentages of cash and common shares, which could be earned during the first two years after acquisition providing certain minimum net sales and earnings thresholds are exceeded. An additional approximate $1 million was used immediately following the acquisition to reduce acquired liabilities. The purchase price exceeded the estimated fair value of net assets acquired by $3.2 million, which is recorded as goodwill and is being amortized over twenty years. The Company completed the acquisition of Mid-West Chandelier Company and Fairfax Lighting, Inc., two privately owned manufacturers of interior fluorescent lighting fixtures, effective January 1, 1999. For financial statement purposes these acquisitions were accounted for as purchases with operating results of LSI MidWest Lighting first included in the Company's third quarter fiscal 1999 results in the Commercial / Industrial Lighting Group. The total purchase price for the two companies was $16,000,000, exclusive of acquisition costs, consisting of $8,000,000 in cash and 357,143 common shares of the Company (valued at $8,000,000). The acquisition provides for a contingent "earn-out" having a maximum value of $1 million in cash and $1 million in stock which could be earned during the three years subsequent to the merger providing certain minimum earnings thresholds are exceeded. An additional approximate $1 million was used immediately following the acquisition to reduce acquired liabilities. The purchase price exceeded the estimated fair value of net assets S-20
30 acquired by $7.7 million, which is recorded as goodwill and is being amortized over forty years. The purchase price allocations of both LSI Retail Graphics and LSI MidWest Lighting were based on preliminary estimates of fair value of assets acquired and may be revised at a later date pending the completion of other analysis. On February 6, 1998, the Company acquired the outstanding common shares of Marcole, Inc., a privately owned manufacturer of electrical wiring harnesses primarily for the appliance industry. For financial statement purposes the acquisition was accounted for as a purchase with operating results of Marcole first included in the Company's fiscal 1998 third quarter financial statements in the Commercial / Industrial Lighting Group. The purchase price was 12,000 common shares of the Company (valued at $200,000) plus $712,000 in cash. The purchase price exceeded the estimated fair value of net assets acquired by $210,000, which is recorded as goodwill and is being amortized over forty years. On June 30, 1997, the Company acquired substantially all assets and assumed certain liabilities of Grady McCauley, Incorporated, a privately owned manufacturer of custom interior graphics primarily for the retail market. For financial statement purposes the acquisition was accounted for as a purchase with operating results of Grady McCauley first included in the Company's fiscal 1998 financial statements in the Image Group. The purchase price was 475,700 common shares of the Company (valued at $6,000,000) plus $15.2 million in cash, exclusive of acquisition costs. The purchase price exceeded the estimated fair value of net assets acquired by $11.8 million, which is recorded as goodwill and is being amortized over forty years. The following unaudited pro forma consolidated results give effect to the above acquisition of Grady McCauley, Incorporated as though it had been acquired at the beginning of the fiscal year in which it was acquired. Neither the acquisition price of any of the four companies acquired in fiscal years 1998 and 1999 nor their individual operating results are material to the Company. Therefore these four companies are not included in the pro forma results presented below. The pro forma information has been presented for comparative purposes only and does not purport to be indicative of the results of operations which actually would have resulted had the acquisition been made at the beginning of the earliest period presented, or of results which may occur in the future. 1997 ---- (In thousands except earnings per share; unaudited) Net sales $ 159,082 Income from continuing operations $ 8,901 Net income $ 8,901 Earnings per share Basic Continuing operations $ .94 Total $ .94 Diluted Continuing operations $ .92 Total $ .92 S-21
31 NOTE 12 - SUMMARY OF QUARTERLY RESULTS (UNAUDITED) <TABLE> <CAPTION> Quarter Ended -------------------------------------------- Fiscal Sept. 30 Dec. 31 March 31 June 30 Year -------- ------- -------- ------- ---- <S> <C> <C> <C> <C> <C> 1999 Net sales $ 53,414 $ 56,059 $ 53,408 $ 64,908 $ 227,789 Gross profit 18,234 19,759 17,009 22,106 77,108 Net income 3,912 4,668 3,083 5,438 17,101 Earnings per share Basic $ .41 $ .48 $ .31 $ .54 $ 1.73(a) Diluted $ .40 $ .47 $ .30 $ .53 $ 1.70 Range of share prices High $ 22.00 $ 23.00 $ 22.75 $ 24.38 $ 24.38 Low $ 17.25 $ 15.75 $ 15.88 $ 17.25 $ 15.75 1998 Net sales $ 43,957 $ 47,754 $ 43,386 $54,042 $ 189,139 Gross profit 15,519 17,120 13,717 18,124 64,480 Net income 2,975 3,680 1,917 4,015 12,587 Earnings per share Basic $ .31 $ .39 $ .20 $ .42 $ 1.32 Diluted $ .31 $ .38 $ .20 $ .41 $ 1.29(a) Range of share prices High $ 17.38 $ 19.38 $ 22.75 $ 24.00 $ 24.00 Low $ 13.50 $ 15.75 $ 16.75 $ 18.38 $ 13.50 </TABLE> (a) The total of the earnings per share for each of the four quarters does not equal the total earnings per share for the full year because the calculations are based on the average shares outstanding during each of the individual periods. At August 21, 1999, there were 395 shareholders of record. The Company believes this represents approximately 3,800 beneficial shareholders. S-22
32 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: <TABLE> <CAPTION> 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- <S> <C> <C> <C> <C> <C> Net sales $ 227,789 $ 189,139 $ 144,742 $ 152,733 $ 119,927 Cost of products sold 150,681 124,659 96,200 104,221 80,156 Operating expenses 49,880 44,286 34,833 35,101 29,509 --------- --------- --------- --------- --------- Operating income 27,228 20,194 13,709 13,411 10,262 Interest (income) (477) (143) (528) (154) (39) Interest expense 224 106 41 498 498 Other expense 95 108 114 62 160 --------- --------- --------- --------- --------- Income from continuing opera- tions before income taxes 27,386 20,123 14,082 13,005 9,643 Income taxes 10,285 7,536 5,210 4,735 3,469 --------- --------- --------- --------- --------- Income from continuing operations $ 17,101 $ 12,587 $ 8,872 $ 8,270 $ 6,174 ========= ========= ========= ========= ========= Net income $ 17,101 $ 12,587 $ 8,872 $ 6,770 $ 6,174 ========= ========= ========= ========= ========= Earnings per share from continuing operations Basic $ 1.73 $ 1.32 $ .99 $ 1.02 $ .82 Diluted $ 1.70 $ 1.29 $ .97 $ .98 $ .79 Cash dividends paid per share $ .33 $ .29 $ .23 $ .21 $ .15 Weighted average common shares Basic 9,883 9,559 9,004 8,096 7,515 Diluted 10,088 9,790 9,188 8,456 7,802 BALANCE SHEET DATA: (At June 30) 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- Working capital $ 49,615 $ 40,237 $ 30,192 $ 36,146 $ 17,788 Total assets 137,714 110,316 95,189 79,496 62,553 Long-term debt, including current maturities 1,901 1,195 1,382 1,562 8,099 Shareholders' equity 102,752 78,657 67,968 54,737 29,453 </TABLE> S-23
33 LSI INDUSTRIES INC. AND SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED JUNE 30, 1998, 1997 AND 1996 (IN THOUSANDS) <TABLE> <CAPTION> 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: <S> <C> <C> <C> <C> Year Ended June 30, 1999 $560 $1,133 (B) $(480) $1,213 Year Ended June 30, 1998 $401 $ 465 $(306) $ 560 Year Ended June 30, 1997 $358 $ 11 (C) $ 32 $ 401 INVENTORY OBSOLESCENCE RESERVES: Year Ended June 30, 1999 $841 $ 982 $(740) $1,083 Year Ended June 30, 1998 $551 $ 688 $(398) $ 841 Year Ended June 30, 1997 $694 $ 525 (D) $(668) $ 551 </TABLE> (A) For allowance for doubtful accounts, deductions are uncollectible accounts charged off, less recoveries. (B) Includes $190 resulting from net assets purchased in fiscal year 1999. (C) Includes $50 resulting from net assets purchased on June 30, 1997. (D) Includes $100 resulting from net assets purchased on June 30, 1997. S-24