FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Commission File No. 0-13375
LSI Industries Inc.
State of Incorporation - - Ohio IRS Employer I.D. No. 31-0888951
10000 Alliance Road
Cincinnati, Ohio 45242
(513) 793-3200
Indicate by checkmark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ]
Indicate by checkmark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. Large Acceleratef filer [ ] Accelerated filer [X] Non-accelerated filer [ ]
Indicate by checkmark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) YES [ ] NO [X]
As of May 1, 2006 there were 20,019,741 shares of the Registrant’s common stock outstanding.
LSI INDUSTRIES INC. FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2006INDEX
This documentcontains certain forward-looking statements thatare subject to numerous assumptions, risks oruncertainties. The Private Securities Litigation ReformAct of 1995 provides a safe harborfor forward-looking statements. Forward-looking statementsmay be identified by words such as“estimates,” “anticipates,” “projects,”“plans,” “expects,” “intends,”“believes,” “seeks,” “may,”“will,” “should” or the negativeversions of those words and similar expressions,and by the context in which theyare used. Such statements are based uponcurrent expectations of the Company andspeak only as of the date made. Actualresults could differ materially from thosecontained in or implied by such forward-lookingstatements as a result of a varietyof risks and uncertainties. These risks anduncertainties include, but are not limitedto, the impact of competitive products andservices, product demand and market acceptancerisks, reliance on key customers, financialdifficulties experienced by customers, the adequacyof reserves and allowances for doubtfulaccounts, potential asset impairments, fluctuations inoperating results or costs, the outcome ofpending litigation, unexpected difficulties inintegrating acquired businesses, and the abilityto retain key employees of acquiredbusinesses. The Company has no obligation toupdate any forward-looking statements to reflect subsequent events or circumstances.
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LSI INDUSTRIES INC.CONDENSED CONSOLIDATED INCOME STATEMENTS(Unaudited)
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these financial statements.
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LSI INDUSTRIES INC.
CONDENSED CONSOLIDATED BALANCE SHEETS(Unaudited)
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(Unaudited)
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LSI INDUSTRIES INC.NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Unaudited)
NOTE 1: INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation:
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NOTE 3: MAJOR CUSTOMER CONCENTRATIONS
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NOTE 4: BUSINESS SEGMENT INFORMATION
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NOTE 5: EARNINGS PER COMMON SHARE
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NOTE 6: BALANCE SHEET DATA
NOTE 7: GOODWILL AND OTHER INTANGIBLE ASSETS
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NOTE 8: REVOLVING LINES OF CREDIT AND LONG-TERM DEBT
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NOTE 9: CASH DIVIDENDS
NOTE 10: EQUITY COMPENSATION
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NOTE 11: LOSS CONTINGENCY RESERVE
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Refer to “Safe Harbor” statement following the index in front of this Form 10-Q.
Net Sales by Business Segment (In thousands, unaudited)
Net sales of $64,504,000 in the third quarter of fiscal 2006 decreased 5% from fiscal 2005 third quarter net sales of $67,814,000. Lighting Segment net sales increased 14% to $45,897,000 and Graphics Segment net sales decreased 33% to $18,607,000 as compared to the prior year. Sales to the petroleum / convenience store market represented 24% and 21% of fiscal 2006 and 2005 third quarter net sales, respectively. Net sales to this, the Company’s largest market, are reported in both the Lighting and Graphics Segments, depending upon the product or service sold, and were up 10% in the third quarter from last year’s same period to $15.7 million. The petroleum / convenience store market has been, and will continue to be, a very important niche market for the Company; however, if sales to other markets and customers increase more than net sales to this market, then the percentage of net sales to the petroleum / convenience store market would be expected to decline.
The $5.7 million increase in Lighting Segment net sales is primarily the result of an aggregate increase of $4.7 million of lighting sales to our niche markets of petroleum / convenience stores, automotive dealerships, quick service restaurants, and retail national accounts (including sales to Wal-Mart Stores, Inc.), as well as a $0.7 million increase in commissioned net sales to the commercial and industrial lighting market. Net sales to Wal-Mart Stores, Inc. were approximately $7.3 million or 11% of the Company’s total net sales in the third quarter of fiscal 2006.
The $9.0 million decrease in Graphics Segment net sales is primarily the result of the effect of decreased sales related to a national drug store retailer for its re-branding program that was completed in the fourth quarter of fiscal 2005 ($5.0 million) and decreased sales related to a quick service restaurant for its menu board enhancement program that was substantially completed in the fourth quarter of fiscal 2005 ($3.5 million). The decrease in net sales related to both of these programs means that these large roll out graphics programs have been completed (in fiscal 2005) and sales are now reflective of the ongoing business level with those two customers.
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Image and brand programs, whether full conversions or enhancements, are important to the Company’s strategic direction. Image programs include situations where our customers refurbish their retail sites around the country by replacing some or all of the lighting, graphic elements, menu board systems and possibly other items they may source from other suppliers. These image programs often take several quarters to complete and involve both our customers’ corporate-owned sites as well as their franchisee-owned sites, the latter of which involve separate sales efforts by the Company with each franchisee. The Company may not always be able to replace net sales immediately when a large image conversion program has concluded. Brand programs typically occur as new products are offered or new departments are created within an existing retail store. Relative to net sales to a customer before and after an image or brand program, net sales during the program are typically significantly higher, depending upon how much of the lighting, graphics or menu board business is awarded to the Company. Sales related to a customer’s image or brand program are reported in either the Lighting Segment and/or the Graphics Segment, depending upon the product and/or service provided.
Gross profit of $15,053,000 in the third quarter of fiscal 2006 decreased 2% from last year, but increased as a percentage of net sales to 23.3% in fiscal 2006 as compared to 22.7% in the same period last year. The decrease in amount of gross profit is due primarily to the net effects of the 5% net decrease in net sales (made up of a 14% increase in the Lighting Segment and a 33% decrease in the Graphics Segment), product mix resulting in a lower content of material in cost of sales and higher labor and manufacturing overhead content, substantially improved performance in the Company’s New York facility, and lower margins on installation revenue. While the Company’s fiscal 2005 sales price increases on select lighting products improved the third quarter fiscal 2006 gross profit, the following items also influenced the Company’s gross profit margin: net increased manufacturing wages, incentives and benefit costs ($0.9 million), competitive pricing pressures, unabsorbed manufacturing costs in the Company’s New York facility, and other manufacturing expenses ($0.2 million of increased utilities, and $0.3 million reduction of supplies, maintenance and depreciation expense).
Selling and administrative expenses in the third quarter of fiscal year 2006 decreased $1.2 million and remained at 17.9% as a percentage of net sales. The Company recorded a non-cash charge of $85,000 in the third quarter of fiscal 2006 for stock option expense, whereas in the third quarter of fiscal 2005 the Company disclosed its stock option expense as there was no requirement to record it in the financial statements. Expense related to stock options will continue in future periods through the end of the vesting periods of stock options currently outstanding. Otherwise, employee compensation and benefits expense decreased $0.5 million in the third quarter of fiscal 2006 as compared to the same period last year. Increased sales commissions ($0.4 million) and increased legal fees ($0.4 million, primarily associated with patent litigation) were partially offset by decreased product warranty expense ($0.2 million, primarily in the Lighting Segment) and reductions of other expenses in the third quarter of fiscal 2006. The fiscal 2005 third quarter included a $370,000 gain on recovery of a bad debt from the K-mart bankruptcy, while fiscal 2006 had a much smaller recovery of $99,000 related to the K-mart bankruptcy.
The Company reported interest income of $163,000 in the third quarter of fiscal 2006 from short term cash and other investments. There was no debt outstanding during the third quarter of fiscal 2006. The Company was in a borrowing position in the third quarter of fiscal 2005 and recorded $32,000 of net interest expense in that period of fiscal 2005. The effective tax rate in the third quarter of fiscal 2006 was 34.2% and in the third quarter of fiscal 2005 was 23.9%, with both rates reflective of favorable adjustment of the Company’s expected effective income tax rate for the full fiscal year.
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Net income decreased 0.3% in the third quarter of fiscal 2006 to $2,415,000 as compared to $2,422,000 in the same period last year. The decrease is primarily the result of decreased gross profit on decreased net sales and increased income taxes, partially offset by decreased operating expenses, and net interest income as compared to net interest expense last year. Diluted earnings per share was $0.12 in the third quarter of fiscal 2006, level with diluted earnings per share in the same period last year. The weighted average common shares outstanding for purposes of computing diluted earnings per share in the third quarter of fiscal 2006 were 20,393,000 shares as compared to 20,109,000 shares in the same period last year.
Net sales of $208,726,000 in the first nine months of fiscal 2006 decreased 1% from fiscal 2005 nine month net sales of $210,448,000. Lighting Segment net sales increased 10% to $145,065,000 and Graphics Segment net sales decreased 19% to $63,661,000 as compared to the prior year. Sales to the petroleum / convenience store market represented 25% of net sales in the first nine months of both fiscal 2006 and 2005. Net sales to this, the Company’s largest market, are reported in both the Lighting and Graphics Segments, depending upon the product or service sold, and were down 1% in the first nine months of fiscal 2006 to $52.6 million as compared to last year’s same period. The petroleum / convenience store market has been, and will continue to be, a very important niche market for the Company; however, if sales to other markets and customers increase more than net sales to this market, then the percentage of net sales to the petroleum / convenience store market would be expected to decline.
The $13.2 million increase in Lighting Segment net sales is primarily the result of an aggregate increase of $9.4 million of lighting sales to our niche markets of petroleum / convenience stores, automotive dealerships, quick service restaurants, and retail national accounts (including increased sales to Wal-Mart Stores, Inc.), as well as a $4.0 million increase in commissioned net sales to the commercial and industrial lighting market. Net sales to Wal-Mart Stores, Inc. were approximately $21.9 million or 10% of the Company’s total net sales in the first nine months of fiscal 2006.
The $14.9 million decrease in Graphics Segment net sales is primarily the result of decreased graphics net sales to the petroleum / convenience store market ($0.4 million), decreased net sales to a national drug store retailer for its re-branding program that was completed in the fourth quarter of fiscal 2005 (approximately $8.5 million) and decreased net sales to a quick service restaurant customer as a menu board enhancement program was substantially completed in fiscal 2005 ($4.0 million). Decreases in net sales to these customers generally means that large roll out graphics programs have been completed and sales are now reflective of ongoing business levels with such customers.
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Gross profit of $52,602,000 in the first nine months of fiscal 2006 decreased 1% from last year, and decreased as a percentage of net sales to 25.2% in fiscal 2006 as compared to 25.3% in the same period last year. The decrease in amount of gross profit is due primarily to the net effects of the 1% decrease in net sales (made up of a 10% increase in the Lighting Segment and a 19% decrease in the Graphics Segment), product mix resulting in a lower content of material in cost of sales and higher labor and manufacturing overhead content, and substantially improved performance in the Company’s New York facility. The reduction in Graphics Segment net sales (which historically have carried higher profit margins than Lighting Segment sales), and resulting lower production and manufacturing absorption had a larger negative influence on the Company’s gross profit than the increase in Lighting Segment volume had on the positive side. While the Company’s fiscal 2005 sales price increases on select lighting products improved gross profit in the first nine months fiscal 2006, the following items also influenced the Company’s gross profit margin: net increased manufacturing wages, incentives and benefit costs ($1.8 million), competitive pricing pressures, unabsorbed manufacturing costs in the Company’s New York facility, and other manufacturing expenses ($0.6 million of increased utilities, and $1.0 million reduction of supplies, maintenance and depreciation expense).
Selling and administrative expenses in the first nine months of fiscal year 2006 increased $0.4 million and increased as a percentage of net sales to 17.8% from 17.5% in the same period last year. The first nine months of fiscal 2006 had two new non-cash charges: (1) a $573,000 first quarter expense related to variable accounting treatment for the Deferred Compensation Plan; and (2) stock option expense, which will be ongoing in future periods, of $340,000 as the Company implemented Statement of Financial Accounting Standards No. 123(R) on Share Based Payments. Expense related to stock options will continue in future periods through the end of the vesting periods of stock options currently outstanding. Other employee compensation and benefits expense decreased $1.1 million in the first nine months of fiscal 2006 as compared to the same period last year. Increased sales commissions ($1.2 million) and increased professional and legal fees ($0.9 million, primarily for legal costs related to patent litigation) were partially offset by a decreased provision for uncollectible accounts ($0.2 million), decreased expenses associated with advertising and trade shows ($0.2 million), decreased product warranty expense ($0.2 million, primarily in the Lighting Segment) and reductions of other expenses in the first nine months of fiscal 2006. The first nine months of fiscal 2005 included a $370,000 gain on recovery of a bad debt from the K-mart bankruptcy, while the first nine months of fiscal 2006 had a much smaller recovery of $99,000 related to the K-mart bankruptcy. The fiscal 2005 nine months also had a $186,000 expense related to goodwill impairment, for which there was no similar expense in fiscal 2006 (see Note 7 to the financial statements for additional information).
The Company reported interest income of $358,000 in the first nine months of fiscal 2006 from short term cash and other investments. There was no debt outstanding during the first nine months of fiscal 2006. The Company was in a borrowing position in fiscal 2005 and recorded $195,000 of interest expense in the first nine months of fiscal 2005. The effective tax rate in the first nine months of fiscal 2006 and 2005 was 36.4% and 34.4%, respectively.
Net income decreased 5% in the first nine months of fiscal 2006 to $9,990,000 as compared to $10,530,000 in the same period last year. The decrease is primarily the result of decreased gross profit on decreased net sales, and increased operating expenses and income taxes, partially offset by net interest income in fiscal 2006 as compared to net interest expense last year. Diluted earnings per share was $0.49 in the first nine months of fiscal 2006 as compared to $0.53 per share in the same period last year. The weighted average common shares outstanding for purposes of computing diluted earnings per share in the first nine months of fiscal 2006 were 20,400,000 shares as compared to 20,043,000 shares in the same period last year.
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The Company considers its level of cash on hand, its borrowing capacity, 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 March 31, 2006 the Company had working capital of $72.7 million, compared to $67.2 million at June 30, 2005. The ratio of current assets to current liabilities was 3.56 to 1 as compared to a ratio of 3.13 to 1 at June 30, 2005. The increase in working capital was primarily related to a significant increase in cash and short-term investments ($7.3 million), increased inventories ($0.2 million), increased other current assets ($0.6 million), and decreased accrued expenses ($3.4 million), partially offset by decreased accounts receivable ($5.6 million) and increased accounts payable ($0.2 million). The $5.6 million decrease in accounts receivable is due to higher fourth quarter fiscal 2005 net sales as compared to third quarter fiscal 2006 and a reduction in the Company’s DSO (days sales outstanding), which was 52 days at March 31, 2006 as compared to 59 days at June 30, 2005. As a result of the various customer programs the Company is currently working on, inventory increased in the nine months of fiscal 2006 by $0.2 million.
The Company generated $17.7 million of cash from operating activities in the first nine months of fiscal 2006 as compared to $17.0 million in the same period last year. The $0.7 million increase in net cash flows from operating activities in the first nine months of fiscal 2006 is primarily the net result of decreased net income ($0.5 million unfavorable), a larger decrease in accounts receivable (favorable change of $5.0 million), an increase in inventories rather than a decrease (unfavorable change of $3.4 million), a net decrease in accounts payable and accrued expenses rather than a net increase (unfavorable change of $6.9 million), a larger increase in net deferred income tax liabilities ($0.8 million favorable), and a favorable change of $1.1 million related to non-cash charges for the Company’s non-qualified deferred compensation plan and stock option expense.
Net accounts receivable were $41.1 million and $46.7 million at March 31, 2006 and June 30, 2005, respectively. The 12% decrease in net receivables is due to the net result of decreased sales in the third quarter of fiscal 2006 as compared to the fourth quarter of fiscal 2005 as well as the timing of customer payments. The Company believes that its receivables are ultimately collectible or recoverable, net of certain reserves, and that aggregate allowances for doubtful accounts are adequate.
Inventories at March 31, 2006 increased $0.2 million from June 30, 2005 levels. An inventory increase occurred in the Graphics Segment of approximately $1.3 million, while the Lighting Segment had an approximate $1.1 million decrease. The $3.2 million decrease in accounts payable and accrued expenses from June 30, 2005 to March 31, 2006 is primarily related to reductions in accrued compensation and benefits, as well as accrued income taxes, both of which experienced significant payment activity in the nine months of the fiscal year.
Cash generated from operations and borrowing capacity under a line of credit agreement are the Company’s primary source of liquidity. The Company has an unsecured $50 million revolving line of credit with its bank group, all of which was available as of May 1, 2006. This line of credit consists of a $30 million three year committed credit facility expiring in fiscal 2009 and a $20 million credit facility expiring in the third quarter of fiscal 2007. The Company
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believes that the total of available lines of credit plus cash flows from operating activities is adequate for the Company’s fiscal 2006 operational and capital expenditure needs. The Company is in compliance with all of its loan covenants.
The Company used $12.1 million of cash related to investing activities in the first nine months of fiscal 2006 as compared to $2.7 million in the same period last year. Capital expenditures of $3.1 million in the first nine months of fiscal 2006 compare to $2.9 million in the same period of fiscal 2005. Spending in both periods is primarily for tooling and equipment. The Company intends to begin an expansion of its graphics facility in Rhode Island in fiscal 2007, thereby increasing expected fiscal 2007 capital expenditures from what otherwise would occur, exclusive of business acquisitions. The Company used $9.0 million of cash in the first nine months of fiscal 2006 to make a short term investment in high grade government backed bonds. This investment is tax free (federal), has interest rates that reset weekly, and the Company has a seven day put option.
The Company used $7.3 million of cash related to financing activities in the first nine months of fiscal 2006 as compared to $12.9 million in the same period of fiscal 2005. The $5.6 million change between years is primarily the net result of no borrowings or payments on the Company’s line of credit in fiscal 2006 (favorable $8.6 million), increased cash dividend payments (unfavorable $4.0 million), and increased net cash flow from the exercise of stock options and issuance or purchase of common shares pursuant to compensation programs (favorable $1.0 million).
On April 26, 2006 the Board of Directors declared a regular quarterly cash dividend of $0.12 per share (approximately $2,401,000) payable May 16, 2006 to shareholders of record on May 9, 2006. During the first nine months of fiscal 2006, the Company paid cash dividends of $8,777,000, as compared to $4,825,000 in the same period last year. The declaration and amount of dividends will be determined by the Company’s Board of Directors, in its discretion, based upon its evaluation of earnings, cash flow, capital requirements and future business developments and opportunities, including acquisitions.
Carefully selected acquisitions have long been an important part of the Company’s strategic growth plans. The Company continues to seek out, screen and evaluate potential acquisitions that could add to the lighting or graphics product lines or enhance the Company’s position in selected markets. The Company believes adequate financing for any such investments or acquisitions will be available through future borrowings or through the issuance of common or preferred shares in payment for acquired businesses.
The Company is required to make estimates and judgments in the preparation of its financial statements that affect the reported amounts of assets, liabilities, revenues and expenses, and related footnote disclosures. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. The Company continually reviews these estimates and their underlying assumptions to ensure they remain appropriate. The Company believes the items discussed below are among its most significant accounting policies because they utilize estimates about the effect of matters that are inherently uncertain and therefore are based on management’s judgment. Significant changes in the estimates or assumptions related to any of the following critical accounting policies could possibly have a material impact on the financial statements.
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The Company recognizes revenue in accordance with Securities Exchange Commission Staff Accounting Bulletin No. 104, “Revenue Recognition.” Revenue is recognized when title to goods and risk of loss have passed to the customer, there is persuasive evidence of a purchase arrangement, delivery has occurred or services have been rendered, and collectibility is reasonably assured. Revenue is typically recognized at time of shipment. Sales are recorded net of estimated returns, rebates and discounts. Any cash received from customers prior to the recognition of revenue is accounted for as a customer pre-payment and is included in accrued expenses.
The Company has four sources of revenue: revenue from product sales; revenue from the installation of product; service revenue generated from providing integrated design, project and construction management, site engineering, and site permitting; and revenue from shipping and handling. Product revenue is recognized on product-only orders at the time of shipment. Product revenue related to orders where the customer requires the Company to install the product is typically recognized when the product is installed. In a few isolated situations or programs, product revenue is recognized when the product is shipped rather than after it has been installed, because by signed agreement the customer has taken title to and risk of ownership for the product at the time of shipment. Other than normal product warranties or the possibility of installation, the Company has no post-shipment responsibilities. Installation revenue is recognized when the products have been fully installed. The Company is not always responsible for installation of products it sells and has no post-installation service contracts or responsibilities. Service revenue from integrated design, project and construction management, site engineering and permitting is recognized at the completion of the contract with the customer. With larger customer contracts involving multiple sites, the customer may require progress billings for completion of identifiable, time-phased elements of the work, in which case revenue is recognized at the time of the progress billing, which coincides with the revenue recognition criteria. Shipping and handling revenue coincides with the recognition of revenue from sale of the product.
The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109 (SFAS No. 109); accordingly, deferred income taxes are provided on items that are reported as either income or expense in different time periods for financial reporting purposes than they are for income tax purposes. Deferred income tax assets and liabilities are reported on the Company’s balance sheet. Significant management judgment is required in developing the Company’s income tax provision, including the determination of deferred tax assets and liabilities and any valuation allowances that might be required against deferred tax assets. Management has determined that no valuation allowances are required.
The Company operates in multiple taxing jurisdictions and is subject to audit in these jurisdictions. The Internal Revenue Service and other tax authorities routinely review the Company’s tax returns. These audits can involve complex issues which may require an extended period of time to resolve. The impact of these examinations on the Company’s liability for income taxes cannot be presently determined. In management’s opinion, adequate provision has been made for potential adjustments arising from these examinations.
As of June 30, 2005 the Company recorded a deferred New York state income tax asset in the amount of $769,000 related to the approximate $16 million state net operating loss carryover generated by the Company’s LSI Lightron subsidiary. Additionally, as of June 30, 2005 the Company recorded a deferred New York state income tax asset in the amount of $566,000 related to LSI Lightron’s impaired goodwill that was written off in fiscal 2003. In order to fully
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recognize these deferred assets recorded on its financial statements, the Company must generate taxable income sufficient to utilize the net operating loss carry over on LSI Lightron’s New York income tax return before they expire on a layered basis in the period of fiscal 2016 to fiscal 2021. The Company has determined that a valuation reserve is not required as of March 31, 2006 because the Company has determined in accordance with Statement of Financial Accounting Standards No. 109 (SFAS No. 109) that the net operating loss tax benefit will, more likely than not, be realized. The Company will continue to monitor the operations of this subsidiary to evaluate any potential need for a valuation reserve.
Carrying values of goodwill and other intangible assets with indefinite lives are reviewed at least annually for possible impairment in accordance with Statement of Financial Accounting Standards No. 142 (SFAS No. 142), “Goodwill and Other Intangible Assets,” which was adopted on July 1, 2002. The Company’s impairment review involves the estimation of the fair value of goodwill and indefinite-lived intangible assets using a discounted cash flow approach, at the reporting unit level that requires significant management judgment with respect to revenue and expense growth rates, changes in working capital and the selection and use of an appropriate discount rate. The estimates of fair value of reporting units are based on the best information available as of the date of the assessment. The use of different assumptions would increase or decrease estimated discounted future operating cash flows and could increase or decrease an impairment charge. Company management uses its judgment in assessing whether assets may have become impaired between annual impairment tests. Indicators such as adverse business conditions, economic factors and technological change or competitive activities may signal that an asset has become impaired. A goodwill impairment charge of $186,000 was recorded in fiscal 2005 resulting from the Company’s fiscal 2005 SFAS No. 142 annual review. See Note 7 to the financial statements for further discussion.
Carrying values for long-lived tangible assets and definite-lived intangible assets, excluding goodwill, are reviewed for possible impairment as circumstances warrant in connection with Statement of Financial Accounting Standards No. 144 (SFAS No. 144), “Accounting for the Impairment or Disposal of Long-Lived Assets,” which was adopted on July 1, 2002. Impairment reviews are conducted at the judgment of Company management when it believes that a change in circumstances in the business or external factors warrants a review. Circumstances such as the discontinuation of a product or product line, a sudden or consistent decline in the forecast for a product, changes in technology or in the way an asset is being used, a history of negative operating cash flow, or an adverse change in legal factors or in the business climate, among others, may trigger an impairment review. The Company’s initial impairment review to determine if a potential impairment charge is required is based on an undiscounted cash flow analysis at the lowest level for which identifiable cash flows exist. The analysis requires judgment with respect to changes in technology, the continued success of product lines and future volume, revenue and expense growth rates, and discount rates. There have been no impairment charges related to long-lived tangible assets or definite-lived intangible assets recorded by the Company.
The Company maintains allowances for doubtful accounts receivable for estimated losses resulting from either customer disputes or the inability of its customers to make required payments. If the financial condition of the Company’s customers were to deteriorate, resulting in their inability to make the required payments, the Company may be required to record additional allowances or charges against income. The Company determines its allowance for doubtful accounts by first considering all known collectibility problems of customers’ accounts, and then applying certain percentages against the various aging categories of the remaining
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receivables. The resulting allowance for doubtful accounts receivable is an estimate based upon the Company’s knowledge of its business and customer base, and historical trends. The Company also establishes allowances, at the time revenue is recognized, for returns and allowances, discounts, pricing and other possible customer deductions. These allowances are based upon historical trends.
In March 2005, the Financial Accounting Standards Board issued FASB Interpretation No. 47 (FIN 47), “Accounting for Conditional Asset Retirement Obligations.” FIN 47 interprets the accounting treatment related to companies’ obligations to perform an asset retirement activity whereby a liability may need to be established for the fair value of the obligation in advance of the asset’s actual retirement. This Interpretation shall be effective no later than the end of fiscal years ending after December 15, 2005, or in the Company’s case, on June 30, 2006. The Company is currently evaluating the impact of FIN 47, but does not expect any significant impact on its financial condition or results from operations when it is implemented.
In May 2005, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 154, “Accounting Changes and Error Corrections.” This statement replaces Accounting Principles Board (APB) Opinion No. 20, “Accounting Changes” and SFAS No. 3, “Reporting Accounting Changes in Interim Financial Statements,” and changes the requirement for the accounting for and reporting of a direct effect of a voluntary change in accounting principle. It also applies to changes required by an accounting pronouncement in the instance that the pronouncement does not include specific transition provisions. SFAS No. 154 requires retrospective application to prior periods’ financial statements of changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. This statement also requires that a change in depreciation, amortization, or depletion method for long-lived, non-financial assets be accounted for as a change in accounting estimate affected by a change in accounting principle. This statement is effective for accounting changes and error corrections made in fiscal years beginning after December 15, 2005, or the Company’s first quarter of fiscal year 2007 which begins July 1, 2006. The Company will comply with the provisions of this statement for any accounting changes or error corrections that occur after June 30, 2006.
Nothing to report.
An evaluation was performed as of March 31, 2006 under the supervision and with the participation of the Registrant’s management, including its principal executive officer and principal financial officer, of the effectiveness of the design and operation of the Registrant’s disclosure controls and procedures pursuant to Rule 13a-15(b) and 15d-15(b) promulgated under the Securities Exchange Act of 1934. Based upon this evaluation, the Registrant’s Chief Executive Officer and Chief Financial Officer concluded that the Registrant’s disclosure controls and procedures were effective, in all material respects, to ensure that information required to be disclosed in the reports the Registrant files and submits under the Exchange Act are recorded, processed, summarized and reported as and when required.
There have been no changes in the Registrant’s internal control over financial reporting that occurred during the most recently ended fiscal period of the Registrant or in other factors that have materially affected or are reasonably likely to materially affect the Registrant’s internal control over financial reporting.
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ISSUER PURCHASES OF EQUITY SECURITIES
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Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
May 4, 2006