<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------------------------------------------
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
----- OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 31, 1998
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______
--------------------------------------------------------
Commission File Number: 33-9464
LOWRANCE ELECTRONICS, INC.
------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
Delaware 44-0624411
- ---------------------- -------------------------
State of Incorporation IRS Identification Number
12000 East Skelly Drive
Tulsa, Oklahoma 74128
----------------------------------------
(Address of Principal Executive Offices)
Registrant's telephone number, including area code: (918) 437-6881
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
----- -----
At October 31, 1998, there were 3,768,796 shares of Registrant's $0.10 par value
Common Stock outstanding.
<PAGE>
LOWRANCE ELECTRONICS, INC.
--------------------------
FORM 10-Q
---------
INDEX
-----
PAGE
----
PART I. FINANCIAL INFORMATION
ITEM 1. Condensed Consolidated Balance Sheets -
October 31, 1998, 1997, and July 31, 1998............. 3
Condensed Consolidated Statements of Operations -
Three Months Ended October 31, 1998 and 1997.......... 4
Condensed Consolidated Statements of Cash Flows -
Three Months Ended October 31, 1998 and 1997.......... 5
Notes to Condensed Consolidated Financial Statements..... 6- 8
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations......... 9-10
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings........................................ 11
ITEM 2. Changes in Securities.................................... 11
ITEM 3. Defaults Upon Senior Securities.......................... 11
ITEM 4. Submission of Matters to a Vote of Security Holders...... 11
ITEM 5. Other Information........................................ 11
ITEM 6. Exhibits and Reports on Form 8-K......................... 11
SIGNATURES......................................................... 12
-2-
<PAGE>
LOWRANCE ELECTRONICS, INC.
--------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
-------------------------------------
(Unaudited)
<TABLE>
<CAPTION>
Oct. 31, Oct. 31, July 31,
1998 1997 1998
----------- ----------- ---------
(In thousands)
ASSETS
------
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 423 $ 1,376 $ 637
Accounts receivable, less allowances 13,015 14,057 13,742
Inventories (Note 2) 21,632 24,777 25,224
Prepaid expenses 492 674 610
Current deferred income taxes 1,457 1,587 1,457
------- ------- -------
Total current assets $37,019 $42,471 $41,670
PROPERTY, PLANT, AND EQUIPMENT, net (Note 2) 9,367 10,636 9,891
OTHER ASSETS 209 506 277
DEFERRED INCOME TAXES 1,221 1,015 409
------- ------- -------
$47,816 $54,628 $52,247
======= ======= =======
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C> <C> <C>
CURRENT LIABILITIES:
Current maturities of long-term debt (Note 3) $ 3,186 $ 4,468 $ 3,498
Accounts payable 11,799 14,364 15,026
Accrued liabilities 3,884 4,054 3,513
------- ------- -------
Total current liabilities $18,869 $22,886 $22,037
LONG-TERM DEBT, less current
maturities (Note 3) 22,938 22,651 23,038
Series "A" Redeemable Preferred Stock, $.50 par
value, 70,000 shares authorized and issued - - -
STOCKHOLDERS' EQUITY:
Preferred stock, 230,000 authorized, none issued - - -
Common stock, $.10 par value,
10,000,000 shares authorized, 3,768,796 shares
issued at July 31 and October 31, 1998, and
3,352,458 shares issued at October 31, 1997 $ 377 $ 335 $ 377
Paid-in capital 7,073 5,600 7,073
Retained earnings (1,089) 3,376 219
Foreign currency translation adjustment (352) (220) (497)
------- ------- -------
Total stockholders' equity $ 6,009 $ 9,091 $ 7,172
------- ------- -------
$47,816 $54,628 $52,247
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
balance sheets.
-3-
<PAGE>
LOWRANCE ELECTRONICS, INC.
--------------------------
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
-----------------------------------------------
(Unaudited)
Three Months Ended
-----------------------
Oct. 31, Oct. 31,
1998 1997
------- -------
(in thousands)
NET SALES $16,208 $20,039
COST OF SALES 11,275 14,698
------- -------
Gross profit $ 4,933 $ 5,341
OPERATING EXPENSES:
Selling and administrative $ 4,859 $ 4,796
Severance Costs 527 -
Research and development 617 790
------- -------
Total operating expenses $ 6,003 $ 5,586
------- -------
Operating loss $(1,070) $ (245)
------- -------
OTHER EXPENSES:
Interest expense $ 742 $ 741
Other, net 264 304
------- -------
Total other expenses $ 1,006 $ 1,045
------- -------
LOSS BEFORE
INCOME TAXES $(2,076) $(1,290)
BENEFIT FOR
INCOME TAXES (768) (452)
------- -------
NET LOSS $(1,308) $ (838)
======= =======
LOSS PER BASIC AND DILUTED COMMON SHARE:
NET LOSS PER BASIC AND DILUTED SHARE $ (.35) $ (.25)
======= =======
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING (BASIC AND DILUTED) 3,768 3,352
======= =======
DIVIDENDS NONE NONE
======= =======
The accompanying notes are an integral part of these condensed consolidated
statements.
-4-
<PAGE>
LOWRANCE ELECTRONICS, INC.
--------------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
-----------------------------------------------
(Unaudited) (Note 5)
Three Months Ended
-----------------------
October 31, October 31,
1998 1997
--------- ----------
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $ (1,308) $ (838)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 747 764
Loss on retirement of fixed assets 12 (1)
Changes in operating assets and liabilities:
Decrease in accounts receivable 727 2,289
Decrease in inventories 3,592 3,103
Decrease (increase) in prepaids, deferred
income taxes, and other assets (694) 1,215
Decrease in liabilities and other (2,711) (7,694)
-------- --------
Net cash (used in) provided by operating activities $ 365 $ (1,162)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures $ (167) $ (122)
-------- --------
Net cash used in investing activities $ (167) $ (122)
CASH FLOWS FROM FINANCING ACTIVITIES (Note 3):
Borrowings under lines of credit $ 16,702 $ 21 655
Repayments of borrowings under lines of credit (16,538) (23,503)
Borrowings under new term loan agreement - 4,000
Principal payments on term loans and capital
lease obligations (576) (358)
-------- --------
Net cash (used in) provided by financing
activities $ (412) $ 1,794
-------- --------
Net (decrease) increase in cash and cash
equivalents $ (214) $ 510
CASH AND CASH EQUIVALENTS - beginning of period 637 866
-------- --------
CASH AND CASH EQUIVALENTS - end of period $ 423 $ 1,376
======== ========
The accompanying notes are an integral part of these condensed
consolidated statements.
-5-
<PAGE>
LOWRANCE ELECTRONICS, INC.
--------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
(Unaudited)
(1) PRINCIPLES OF PREPARATION
The financial statements included herein have been prepared by the Company,
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to
such rules and regulations, although the Company believes that the
disclosures contained herein are adequate to make the information presented
not misleading. Accounting policies for the three months ended October 31,
1998, are the same as those outlined in the Annual Report on Form 10-K
filed relative to the year ended July 31, 1998. In the opinion of
management, all adjustments necessary for a fair presentation of interim
results of operations have been made to the interim statements. All such
adjustments were of a normal, recurring nature. Certain reclassifications
have been made to the October 31, 1997, consolidated financial statements
to conform to the October 31, 1998, consolidated financial statements.
These reclassifications had no impact on the net loss. The condensed
consolidated financial statements should be read in conjunction with the
consolidated financial statements and the notes thereto included in the
Company's Annual Report filed with the Securities and Exchange Commission
on Form 10-K.
(2) BALANCE SHEET DETAIL
Inventories -
-----------
Inventories are priced at the lower of cost (first-in, first-out) or market
and consist of the following:
Oct. 31, Oct. 31, July 31,
1998 1997 1998
------- ------- -------
(in thousands)
Raw materials $ 5,818 $ 9,053 $ 6,127
Work-in-process 3,278 5,568 4,820
Finished goods 14,098 11,299 15,887
Excess, obsolete, and realization reserves (1,562) (1,143) (1,610)
------- ------- -------
Total inventories $21,632 $24,777 $25,224
======= ======= =======
Property, Plant, and Equipment, Net -
-----------------------------------
Land $ 557 $ 557 $ 557
Building and improvements 4,498 4,470 4,354
Machinery and equipment 24,962 23,736 24,990
Office furniture and equipment 3,500 5,146 5,141
------- ------- -------
$33,517 $33,909 $35,042
Less - accumulated depreciation 24,150 23,273 25,151
------- ------- -------
Net property, plant, and equipment $ 9,367 $10,636 $ 9,891
======= ======= =======
-6-
<PAGE>
(3) LONG-TERM DEBT AND REVOLVING CREDIT LINE
Long-term debt and revolving credit line are summarized below:
Oct. 31, Oct. 31, July 31,
1998 1997 1998
-------- -------- --------
(in thousands)
Revolving credit line $17,568 $16,773 $17,404
Term loan 5,207 6,418 5,410
Capitalized equipment lease obligations,
payable in monthly installments of approx-
imately $124,000 including interest at rates
from 7% to 11%, with final payments ranging
from January 1999 through November 2001 3,349 3,928 3,722
------- ------- -------
$26,124 $27,119 $26,536
Less - current maturities 3,186 4,468 3,498
------- ------- -------
Total long-term debt $22,938 $22,651 $23,038
======= ======= =======
Future maturities of the above debt obligations at October 31, 1998, are
$3,186,000, $2,476,000, $20,433,000, and $29,000 for the years ending
October 31, 1999 through 2002, respectively.
At July 31, 1998, the Company had a $33.9 million financing package which
consisted of $7.4 million in term loans together with a $26.5 million
revolving credit line. The revolving credit line provides for borrowings up
to $26.5 million based on varying percentages of qualifying categories of
receivables and inventories and carried an interest rate of prime plus
1.5%. Borrowing against inventories are limited to $13 million in total.
During September and November 1998, the Company's financing package was
amended. Significant provisions of the amendments included 1) an additional
advance of $1.8 million on an existing term loan. The Company has two
repayment options; (A) repayment of the $1.8 million advance in February
1999, or (B) amortize the entire $4.8 million term loan (including the $1.8
million advance) over 60 months beginning in March 1999 with a due date of
December 2000. Under either option, principal payments of $80,000 per month
are required beginning in March 1999, and 2) changes in certain financial
covenants.
Current maturities for the revolving credit line are estimated based on
future results and collateral limitations. The terms of the foregoing
agreement include a commitment fee based on the unused portion of the bank
credit line in lieu of compensating balances.
The agreement requires, among other things, that the Company maintain a
minimum tangible net worth, limits the ratio of total liabilities to
tangible net worth and requires the Company to maintain a minimum fixed
charge ratio. Additionally, the agreement limits capital expenditures and
capital leases. Violation of any of these provisions would constitute an
event of default which, if not cured, would empower the lender to declare
all amounts immediately payable.
The Company's indebtedness is collateralized by substantially all of the
Company's assets.
(4) STOCKHOLDERS' EQUITY
During the three months ended October 31, 1998, stockholders' equity
changed for the following items: Net loss of $1,308,000 and a $145,000
decrease in the negative Foreign Currency translation adjustment.
-7-
<PAGE>
(5) CONSOLIDATED STATEMENTS OF CASH FLOWS
During the three months ended October 31, 1998, and October 31, 1997, the
Company paid interest of approximately $716,000 and $740,000, respectively.
(6) SEVERANCE COSTS
During the first quarter of fiscal 1999, the Company recognized $527,000 in
severance costs related to Tulsa workforce reductions. The efforts are
aimed at reducing costs through headcount elimination as well as the
transferring of certain production related jobs to the Company's Mexico
manufacturing facility. The total number of employees effected was sixty
nine. Through October 31, approximately thirty employees had been
terminated and payments of $152,000 had been made. The remaining severance
benefits are anticipated to be paid throughout the remainder of fiscal
1999.
(7) REPORTING COMPREHENSIVE INCOME
As of August 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130 (SFAS 130), "Reporting Comprehensive Income." SFAS 130
establishes new rules for the reporting and display of comprehensive income
and its components; however, the adoption of this Statement had no impact
on the Company's net income or stockholder's equity.
SFAS 130 requires foreign currency translation adjustments and certain
other items, which prior to adoption were reported separately in
stockholders' equity, to be included in other comprehensive income (loss).
Total comprehensive loss amounted to ($1,163) and ($861) for the three
months ended October 31, 1998 and 1997, respectively. The only components
of other comprehensive loss for the Company are foreign currency
translation adjustments.
(8) FOOTNOTES INCORPORATED BY REFERENCE
Certain footnotes are applicable to the consolidated financial statements
but would be substantially unchanged from those presented on Form 10-K
filed with the Securities and Exchange Commission on November 13, 1998.
Accordingly, reference should be made to the Company's Annual Report filed
with the Securities and Exchange Commission on Form 10-K for the following:
Note Description
---- -------------------------------------------------------
1 Business and Summary of Significant Accounting Policies
4 Capital Leases
5 Stockholders' Equity and Related Items
6 Retirement Plans
7 Income Taxes
-8-
<PAGE>
PART I, ITEM 2
- --------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS
- ----------------------
Net sales for the three months ended October 31, 1998, decreased 19% compared to
the same period the previous year. Unit sales which include sonar units,
combination sonar/GPS navigation units and stand alone GPS navigation units
decreased by approximately 10,000 units (11.8%) and the average price per unit
decreased by 1.6%
Unit sales decreased primarily in the low-cost permanent mount and portable GPS
products. Sales of these products were unusually high during the first quarter
of fiscal 1998 due to the carrryover of unfilled orders from the fourth quarter
of fiscal 1997 when the Company experienced production delays and announced
price increases on these same models. The higher prices took effect during the
first quarter of fiscal 1998.
Gross profit as a percentage of net sales increased 3.7% for the three months
ended October 31, 1998, compared to the same period last year. This margin
increase offsets the volume decrease discussed above which resulted primarily
from the Company's honoring of lower prices in fiscal 1998 on certain products
which were ordered by customers at the end of fiscal 1997, but not shipped until
the first quarter of fiscal 1998. The prices on these models were increased in
the first quarter of fiscal 1998. Additionally, the mix of products sold during
the first quarter of fiscal 1999 was more heavily weighted to the Company's
higher margin units.
Operating expenses, excluding severance costs, as a percentage of net sales for
the three months ended October 31, 1998, were 34% compared to 28% for the same
period in fiscal 1998. Total costs decreased by $110,000. The increase as a
percentage of net sales relates to variable operating expenses, namely, products
returns costs.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company's primary sources of liquidity are cash flow from operations and an
accounts receivable and inventory line of credit. The line of credit allows the
Company to borrow certain percentages of its qualifying accounts receivable and
inventories. Borrowings from inventories, however, are limited to $13 million
in total. The terms of the line of credit are described in Notes to Condensed
Consolidated Financial Statements contained elsewhere in this report.
Traditionally, the Company's near-term liquidity is at its lowest during the
period August through December due to the limits on borrowings against
inventories, cash outlays required to purchase tooling to manufacture new
products, extended payment terms offered to customers to stimulate sales during
the seasonally slow period. This year's liquidity is tighter than normal
because of losses incurred during the previous two fiscal years. It is during
this period that the Company begins to manufacture and build-up inventory levels
in anticipation of product demands for the peak sales months. By the end of the
second quarter sales historically increase and the Company's sources of
liquidity begin to improve.
During fiscal 1997, the Company began relocating certain of its manufacturing
operations to its new plant in Mexico. The start-up of the new facility in
Mexico was substantially on schedule. However, record low unemployment rates in
Tulsa resulted in excessive turnover of production workers and an inability to
maintain sufficient trained staff to support the Company's substantially
increased production schedule intended to support record demand for its GPS
products. This problem was magnified by management's focus on the start-up of
the new Mexico facility and production delays of the Company's six new sonar
models. These problems caused an excessive build-up of raw material and work-in
process inventories that the Company could not convert to finished goods until
after the peak selling season. These factors resulted in inventories remaining
well above historical levels throughout fiscal 1997. During fiscal 1998, first
and second quarter sales exceeded 1997 levels for the same periods, however,
sales unexpectedly declined
-9-
<PAGE>
during the third and fourth quarters. The timing of the sales decline did not
allow for reductions of shipments of raw materials from vendors. As a result,
inventory levels during 1998 continued to be higher than historical levels.
Inventory is expected to gradually decline throughout fiscal 1999.
In November 1998, the Company's financing package was amended, giving the
Company additional term borrowings of $1.8 million under an existing term loan
and deferring principal payments until March 1, 1999 on an aggregate total term
loan of $4.8 million (including the additional $1.8 million borrowing). This
amended term loan contains two payment options; 1) repay the $1.8 million
advance in February 1999, then make monthly principal payments of $80,000
beginning March 1, 1999 or 2.) amortize the entire $4.8 million term loan with
monthly principal payments of $80,000 beginning March 1, 1999.
Management expects the sources discussed above to satisfy the Company's current
financing needs and expects to be at maximum borrowing limits throughout fiscal
1999. Because the line of credit will be at its maximum during this period, the
Company will be required to delay payments to vendors as it has historically
done. Management does not expect any significant long-term effect from these
delayed payments as most vendors have supplied the Company for many years.
Additionally, because of the additional financing noted above, overall lower
projected inventory levels and an expected return to profitability in fiscal
1999, the Company expects its level of past due payments to remain below the
levels experienced in either fiscal 1997 or 1998.
Capital expenditures were $167,000 during the first three months of fiscal 1999
compared to $122,000 for fiscal 1998.
OUTLOOK
- -------
Current backlog is approximately $8.4 million compared to approximately $11
million at the same time last year. It should be noted that fall and winter
backlog numbers are not necessarily indicative of sales trends for the year.
Also, while the backlog numbers are supported by purchase orders from customers,
cancellations and/or delays of requested delivery times can, and often do,
occur.
During fiscal 1997 and 1998, the Company incurred significant operating losses
and for the last three fiscal years has had net cash outflows from operations.
In response to the operating results, the Company has addressed operational
problems related to the start-up of it's Mexico manufacturing facility and
related manufacturing operations which are still located in Tulsa, Oklahoma.
The Company has refocused its sales and marketing efforts to, 1) minimize
restrictions on the distribution of some of its more popular products under the
Lowrance brand name, and 2) increase expenditures for print advertising and boat
show attendance which had decreased significantly in fiscal 1998. In addition,
as discussed above, the Company and its primary lender amended the credit
agreement to provide for an additional $1.8 million advance under an existing
loan to meet short-term vendor requirements related to past due payables.
The Company currently anticipates a return to profitability for fiscal 1999,
primarily as the result of continuing favorable economic and market conditions,
market acceptance of the Company's 1999 product offering, the availability of
the entire product line for a full year, lower costs resulting from a full year
of production in the Company's Mexico facility and lower selling and
administrative costs. It should be noted that the earnings history of the
Company has been sporadic including several years in which the Company incurred
a net loss. Additionally, because of the dynamic environment in which the
Company operates, any one of several factors, including but not limited to
perceived general economic conditions, weather conditions, raw material
availability and new product introductions by competitors, could rapidly
deteriorate, any one of which would have an adverse affect on expected results
for the remainder of the year.
-10-
<PAGE>
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
Not applicable
Item 2. Changes in Securities
---------------------
Not applicable
Item 3. Defaults upon Senior Securities
-------------------------------
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
Not applicable
Item 5. Other Information
-----------------
Not applicable
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
Not applicable
-11-
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LOWRANCE ELECTRONICS, INC.
By: /s/ Mark C. Wilmoth
---------------------------------
Mark C. Wilmoth
Vice President Finance &
Chief Financial Officer
Dated: December 15, 1998
-----------------------
-12-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> OCT-31-1998 OCT-31-1997
<PERIOD-START> AUG-01-1998 AUG-01-1997
<PERIOD-END> OCT-31-1998 OCT-31-1997
<CASH> 423 1,376
<SECURITIES> 0 0
<RECEIVABLES> 13,710 14,543
<ALLOWANCES> (695) (486)
<INVENTORY> 21,632 24,777
<CURRENT-ASSETS> 37,019 42,471
<PP&E> 33,517 33,909
<DEPRECIATION> 24,150 23,273
<TOTAL-ASSETS> 47,816 54,628
<CURRENT-LIABILITIES> 18,869 22,886
<BONDS> 0 0
0 0
0 0
<COMMON> 377 335
<OTHER-SE> 5,632 8,756
<TOTAL-LIABILITY-AND-EQUITY> 47,816 54,628
<SALES> 16,208 20,039
<TOTAL-REVENUES> 16,208 20,039
<CGS> 11,275 14,698
<TOTAL-COSTS> 17,278 20,284
<OTHER-EXPENSES> 264 304
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 742 741
<INCOME-PRETAX> (2,076) (1,290)
<INCOME-TAX> (768) (452)
<INCOME-CONTINUING> (1,308) (838)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (1,308) (838)
<EPS-PRIMARY> (.35) (.25)
<EPS-DILUTED> (.35) (.25)
</TABLE>
